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Speaker 1: Welcome to the Bloomberg Penel Podcast. I'm Paul swing you.

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Speaker 1: Along with my co host Lisa Brahma Waits. Each day

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

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Speaker 1: you and your money. Whether at the grocery store or

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Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple

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Speaker 1: podcast or wherever you listen to podcasts, as well as

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Speaker 1: at Bloomberg dot com. Apple shares surging today up about

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Speaker 1: seven percent, the biggest game at one point since April

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Speaker 1: two tho fourteen. The shares now currently at the highest

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Speaker 1: levels since November. The question is, did they deliver something

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Speaker 1: so fabulous yesterday after the bell that this is a

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Speaker 1: worthwhile rally? And here too, uh, perhaps cast little skepticism

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Speaker 1: in sua ovida Bloomberg opinion columnists nobody covering all things

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Speaker 1: tech and perhaps deservedly, let's hear what's going on here?

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Speaker 1: So what's your take on this rally? Why our investors

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Speaker 1: so excited? Well, the short explanation is the Apple's results

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Speaker 1: are less bad than people and maybe Apple it's thought

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Speaker 1: a few months ago. So that's good news. Um, but look,

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Speaker 1: it's still not great conditions for Apple. So look iPhone

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Speaker 1: sales declined. I think it was seven revenue from iPhones

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Speaker 1: decline in the March quarter. The company forecast implies that

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Speaker 1: revenue growth might be more or less flat from a

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Speaker 1: year ago, so not great. And you've seen from what

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Speaker 1: the company has done that it's doing things like discounting

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Speaker 1: iPhones in China, offering aggressive prices on trade ins of

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Speaker 1: older phones throughout many of their markets, so you know,

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Speaker 1: there are effectively subsidizing UM iPhones to compensate for what

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Speaker 1: has been declining unit sales of those devices. So I

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Speaker 1: guess the question one of the questions I heard from investors,

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Speaker 1: you know, kind of on the call last night, was

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Speaker 1: trying to get a sense of this iPhone business. How

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Speaker 1: much of it is a temporary weakness and I phone

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Speaker 1: sales or is this just a fundamental change in their

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Speaker 1: phone business? You know, I actually think this is a

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Speaker 1: significant failure of Wall Street two force Apple to answer

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Speaker 1: the to me what to me is the most fundamental

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Speaker 1: question about Apple's business. Smartphone sales globally are declining, and

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Speaker 1: they have been declining for eighteen months to two years,

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Speaker 1: depending on or maybe longer, depending on whose numbers you

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Speaker 1: look at. And if your Apple and you make the

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Speaker 1: majority of your revenue from selling iPhones. That change in

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Speaker 1: the market is an existential problem, and the company has

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Speaker 1: never really had to address that question. Look, the market

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Speaker 1: is declining. The market for your most important product is declining.

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Speaker 1: Do you think it's temporary? If not, what are you

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Speaker 1: doing about it? And the company really hasn't tackled that

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Speaker 1: question head on, And again I think that's a failure

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Speaker 1: by investors. Although you could say, in fairness, Apple has

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Speaker 1: been emphasizing their services and Internet products side of the business,

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Speaker 1: and that was one of the actual positives and surprisingly

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Speaker 1: positive aspects of their earnings report was that they showed

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Speaker 1: bigger than expected gains in those areas, So uh to

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Speaker 1: some degree, couldn't you say that that's what they're trying

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Speaker 1: to do, is to offset some of the concerns about

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Speaker 1: the slowing smartphone UH cycle by emphasizing these other areas. Yeah,

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Speaker 1: and I think that's a fair point that and that's

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Speaker 1: certainly what Apple bowls have been focused on, is this

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Speaker 1: growing pile of revenue and high profit revenue generally from

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Speaker 1: things like you know, um Apple's commission on App Store

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Speaker 1: downloads or Apple Music subscriptions or they're coming Apple Television

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Speaker 1: Service or Apple Care warranties. So that is good news,

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Speaker 1: but look, that cannot fully fill the whole left by

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Speaker 1: declining iPhone sales. So once that I had in my

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Speaker 1: column was in the first half of Apple's fiscal year,

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Speaker 1: iPhone revenue declined by sixteen billion dollars, and the gains

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Speaker 1: of everything else, every other business at Apple was eight

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Speaker 1: and a half billion dollars, right, so you can see

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Speaker 1: that there is still a mismatch between the declining main

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Speaker 1: business and the growth of their other businesses. And look,

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Speaker 1: I also feel like eventually you sort of run out.

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Speaker 1: You know, it's like the coyote that I'm sorry, the yeah,

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Speaker 1: that you're running out over the canyon and eventually kind

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Speaker 1: of lost track of my cartoon metaphor. But anyway, you know,

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Speaker 1: you're you're you're running, your legs are running, and eventually

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Speaker 1: you run out over the canyon and you fall. That

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Speaker 1: at some point, if Apple doesn't grow the number of

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Speaker 1: new iPhone users, it is losing opportunities to sell you know,

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Speaker 1: apps and Apple Music subscriptions and Apple TV subscriptions to

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Speaker 1: that pool of people who own Apple devices, and so

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Speaker 1: far to their credit, They've managed to keep growing that

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Speaker 1: revenue even as the pool of new iPhone buyers levels off.

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Speaker 1: But I can't imagine that last forever, particularly if Apple

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Speaker 1: doesn't make a more concerted effort to sell those services

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Speaker 1: to people who don't own their devices. It's billions of

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Speaker 1: people at Apple's ignoring. So is there what do you

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Speaker 1: think they need to do to maybe recharge the growth

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Speaker 1: of this company? Is is it something as big and

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Speaker 1: existential and changing as a big acquisition, or is this

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Speaker 1: just trying to build up their services business. I don't know,

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Speaker 1: and I think part of it is what kind of

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Speaker 1: company does Apple want to be in the future. If

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Speaker 1: it wants to be, let's say, a load a load

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Speaker 1: of no growth company that generates revenue growth from squeezing

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Speaker 1: its existing customers for more money. And my colleague Sarah

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Speaker 1: Hallzac and I compared this basically to like Starbucks and McDonald's. Right,

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Speaker 1: that restaurant traffic has been declining, but restaurants like McDonald's

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Speaker 1: has been making up for it by price increases. So

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Speaker 1: if Apple wants to do that, if this is an

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Speaker 1: r poo play, you generate more revenue from a stagnant

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Speaker 1: base of users. Fine, but that's not the apple that

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Speaker 1: people have come to expect, and that's not the That's

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Speaker 1: exactly right. They've been to such a great growth story

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Speaker 1: and new product after new product, and you know where's

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Speaker 1: the next new product? Sure of a day. Thank you

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Speaker 1: so much for joining us. Shares of Technology, Calumness for

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Speaker 1: Bloomberg Opinion. You can attach to any number of superlatives

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Speaker 1: to Shopify, the Canadian e commerce retailer. If you take

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Speaker 1: a look at its shares, they have more than doubled

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Speaker 1: since Christmas Eve. They're the best performance performing shares on

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Speaker 1: the S and P TSX Composite Index after a pot stock.

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Speaker 1: Joining us here to talk about the company is Harley Finkelstein,

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Speaker 1: chief operating officer of Shopify, Joining us here in our

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Speaker 1: Bloomberger Active Brokers Studios and Harley. Before we get into

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Speaker 1: all the superlatives, can you just give us a sense

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Speaker 1: of what Shopify exactly is. Yeah, it's a great question.

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Speaker 1: I think what we're best known for is is helping

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Speaker 1: small businesses build beautiful online stores. We've been doing that

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Speaker 1: now for over fifteen years, and people know us best

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Speaker 1: for that. But I think actually today which shop play

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Speaker 1: is truly as we are a retail operating system. And

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Speaker 1: what I mean by that is you can come to

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Speaker 1: Shopify because you want to build a great online store,

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Speaker 1: or maybe you want to sell offline in a brick

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Speaker 1: and mortar store and use our point of sell product,

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Speaker 1: or maybe you want to cross sell on Amazon or

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Speaker 1: eBay or something like Instagram or Facebook. But the idea

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Speaker 1: is that it all feeds back into one centralized back office,

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Speaker 1: and that Shopify. It's the first thing you open in

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Speaker 1: the morning, lasting you close. That's where you have your inventory,

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Speaker 1: your customer information, your marketing data, that where you process

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Speaker 1: shipping and payments, and that really is is your business um.

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Speaker 1: And so we're doing that now for about eight twenty

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Speaker 1: thousand merchants who have sold more than a hundred billion

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Speaker 1: dollars on Shopify. UM. But I would say retail operating

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Speaker 1: system is probably a better, uh definition of what we

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Speaker 1: are today. So obviously you're benefiting from this tremendous secular

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Speaker 1: move from bricks and mortars to e commerce, and people

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Speaker 1: think of that and they think of Amazon obviously. So

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Speaker 1: aside from that great secular wind, that's that's at the

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Speaker 1: back of your sales, What really are the growth drivers

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Speaker 1: for your company. Here a couple of things. First of all,

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Speaker 1: we make it really really easy to start a brand

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Speaker 1: new business. So most of the most of the merchants

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Speaker 1: that are on shop if these are first time entrepreneurs

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Speaker 1: that are just getting started. In fact, every minute or

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Speaker 1: so a new business gets their first sale on Shopify,

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Speaker 1: which is really exciting. Remember the first time that I

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Speaker 1: had my first sale, I was an early Shopify merchant

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Speaker 1: before I joined the company about it was called Smoother.

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Speaker 1: It was a T shirt company. I had to support

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Speaker 1: myself in law school and didn't have any money. My

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Speaker 1: parents couldn't pay for school, so I built a Shopify

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Speaker 1: store back in two thousand six, ended up selling T

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Speaker 1: shirts and paying my law school tuition. Um. And getting

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Speaker 1: that first sale was it changed everything. It meant that

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Speaker 1: I had freedom and I had autonomy and all of

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Speaker 1: a sudden, now I can pursue my life's work and

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Speaker 1: that happens now almost every minute on Shopify. UM. So

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Speaker 1: I would say that making it really easy for people

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Speaker 1: to start me and so not only we're growing our

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Speaker 1: piece of the pie, but we're going the pie itself

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Speaker 1: from a total usable market perspective, and the ones that

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Speaker 1: are successful on Shopify stay with us for a very

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Speaker 1: long time, and in that journey we try to find

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Speaker 1: them all the things they need to run their business.

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Speaker 1: So we created Shopify Payments to give them economies a

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Speaker 1: scale on payment rates. We gave them shop by shipping rates,

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Speaker 1: meaning they can get better rates to give you bigger companies.

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Speaker 1: We now give capital. We've given out about over five

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Speaker 1: million dollars of capital to these small businesses. So the

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Speaker 1: idea is to find all the pain points that an

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Speaker 1: entrepreneur may have and make it easier for them. And actually,

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Speaker 1: if you aggregate all of our stores all in one,

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Speaker 1: pretend that we are a retailer, we would be the

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Speaker 1: third largest US eclom retailer. So we are able now

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Speaker 1: to go to the shipping companies and the payment companies

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Speaker 1: and negotiate rates as if we were the third largest

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Speaker 1: of US online retailer. But then give all these economies

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Speaker 1: a scale to someone just starting at their mom's kitchen table.

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Speaker 1: Really interesting And just to sort of give some more context,

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Speaker 1: after your ported earnings yesterday, uh, your second quarter revenue

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Speaker 1: forecast did beat estimate, so that was one five above estimates,

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Speaker 1: So it seems like things are going well. One question

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Speaker 1: that I have though, is we talk about Amazon and

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Speaker 1: its dominance and its effort to create its own products.

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Speaker 1: We talk about Walmart, We talk about, you know, sort

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Speaker 1: of how the big behemoths are getting bigger. How do

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Speaker 1: small businesses compete with those? How do people find these

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Speaker 1: sites given how much big, big, big store competition there is. Yeah,

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Speaker 1: and it's a great question. So one of the things

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Speaker 1: we also have as part of our retail operating system

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Speaker 1: is a marketing UH marketing section, a place where a

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Speaker 1: small business can go and easily able to buy ads

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Speaker 1: and things like Google or Facebook. And on Monday we

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Speaker 1: announce a partnership with Snapchat, so now they can easily

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Speaker 1: buy ads directly on Snapchat to Traditionally, if a small

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Speaker 1: business want to go ahead and buy ads on Facebook

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Speaker 1: or Google or Snapchet, they would have to go to

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Speaker 1: three different sites navigate the complexities of those ad platforms.

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Speaker 1: And now we simplify it for them and we can

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Speaker 1: go to those companies to ensure they're getting the best

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Speaker 1: rates possible. I think most people assume that, um So,

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Speaker 1: right now e commerce globally is about one point nine

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Speaker 1: trillion dollars. That's gonna go to about four trillion dollars

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Speaker 1: in the next few years. I think a lot of

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Speaker 1: people automatically jump to Amazon, owning a majority of that.

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Speaker 1: I think Amazon ultimately will be the place where you go.

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Speaker 1: You go to buy the stuff that you need as

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Speaker 1: a consumer, your toilet paper, your shampoo, your your paper towel.

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Speaker 1: But I think for most consumers today, they actually like

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Speaker 1: buying stuff from the people that make it. So you

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Speaker 1: look at some of our favorite stores like Bombas Socks

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Speaker 1: or Tommy john Underwear, or All Birds Shoes, or Kylie

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Speaker 1: Cosmetics or Fashion Nova. These are all small businesses that

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Speaker 1: are really large on Shopify, and they're able to sell

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Speaker 1: direct to the end consumer in a way that they

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Speaker 1: haven't been able to do before. I see on my

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Speaker 1: handy Bloomber terminal here that Shopify gets about seventy percent

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Speaker 1: revenue in the US. So talk to us about kind

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Speaker 1: of how you view some of the opportunities outside of

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Speaker 1: the US and maybe North America broadly. Yeah, So it's

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Speaker 1: it's a great point you make. Um So, traditionally we've

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Speaker 1: really focused on North America, Australia, New Zealand, and the UK.

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Speaker 1: About a year ago, almost to the day, we decided

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Speaker 1: that it was time for us to expand to an

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Speaker 1: international market. We knew we had merchants elsewhere that wanted

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Speaker 1: to use our products, but we didn't feel we had

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Speaker 1: the right product fit yet, and so we began the

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Speaker 1: journey to find product market fit internationally. And so we've

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Speaker 1: now translated the Shopify dashboard into more than seven languages.

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Speaker 1: We now have partners on the ground and in most

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Speaker 1: of those countries as priority countries that can help you

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Speaker 1: build an online store. And also we have the right

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Speaker 1: payment gateways. So for example, in a place like Germany,

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Speaker 1: credit card penetration is not as used as like debit

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Speaker 1: cards are. So we had to begin the journey to

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Speaker 1: find product market fit internationally. But I would say that,

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Speaker 1: um the future, in the future, international will be a

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Speaker 1: huge part of our story. We're just getting started with

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Speaker 1: that right now. Do you still sell T shirts? Uh,

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Speaker 1: you can go to my T shirt shop. It's uh,

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Speaker 1: it's smoofered out my shopify dot com. It's still up there,

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Speaker 1: but but unfortunately I've disabled to check it because I

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Speaker 1: don't have time to shift the products out anymore myself.

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Speaker 1: But um, but actually it's it's it's really great. In fact,

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Speaker 1: Toby or our CEO and founder. He started Shopify because

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Speaker 1: he wants sell snowboards on the internet in two thousand

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Speaker 1: four and didn't like the software that was available throughout

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Speaker 1: his own piece of software, and that software to sell

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Speaker 1: those snowboards has become Shopify. That's a great story. That

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Speaker 1: is a great story. Harley Finalstein, thank you so much

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Speaker 1: for joining us. Harley as the chief operating officer of Shopify.

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Speaker 1: There based in Ottawa, Ontario, kind of, but he joins

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Speaker 1: us here in our Bloomberg Interactor Brokers studio. President Trump

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Speaker 1: and a group of leading Democrats announced a promise of

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Speaker 1: two trillion dollar infrastructure plan. To get a sense of

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Speaker 1: what this means, we welcome Michael Jay's. Michael is the

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Speaker 1: chief US Public Policy AMANUS WILL strategist at Morgan Stanley. Michael,

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Speaker 1: thanks so much for joining us. So what is your

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Speaker 1: take on this plan that was announced after the Democrats

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Speaker 1: met with President Trump? Yeah, and thanks for having me

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Speaker 1: on UM. I would say that until someone can identify

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Speaker 1: what two trillion dollar tax i can fund this, that

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Speaker 1: you should be deeply skeptical that something like this can happen.

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Speaker 1: And in our view, we don't think you're going to

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Speaker 1: see an infrastructure package before one because of it. I mean,

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Speaker 1: there's just a couple of numbers to put it in perspective,

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Speaker 1: because there's a lot of different taxes that have been

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Speaker 1: floated out there is potentially pay for us. Right, So

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Speaker 1: if you increase the gas tax, that would get you

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Speaker 1: about four hundred billion dollars. If you're rolled back the

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Speaker 1: corporate tax rate by five points, that gets you about

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Speaker 1: five hundred billion dollars. If you took the two top

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Speaker 1: two tax brackets up by a percentage each that gets

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Speaker 1: you a d and twenty billion. Those are all extremely

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Speaker 1: politically sensitive, and if you at all of them, you'd

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Speaker 1: still have a trillion dollars left to go. So I

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Speaker 1: think fair to say, can color us pretty skeptical about

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Speaker 1: this going forward? So, Michael, there is a question though,

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Speaker 1: of the private intervention here, the private involvement in some

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Speaker 1: sort of infrastructure plan. To Lane show, the Transportation Secretary

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Speaker 1: saying telling Bloomberg Television at the Melican Institute Global Conference

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Speaker 1: in Los Angeles that there are private pension funds as

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Speaker 1: well as damnment funds that would love to play to

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Speaker 1: the opportunity to invest in public infrastructure. Do you see

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Speaker 1: that materializing something on that front. Yeah. Yeah, it's a

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Speaker 1: really interesting idea. And obviously we we've dealt with this

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Speaker 1: for uh ten twenty years now, the sort of the

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Speaker 1: talk of their being a tremendous amount of interest from

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Speaker 1: private capital and investing and owning and operating public infrastructure assets.

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Speaker 1: But uh, you know, from my perspective, as I mean

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Speaker 1: it's poll analysts, I can tell you that I don't

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Speaker 1: feel confident that the supply of those assets is there.

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Speaker 1: And what I mean by that is that you know,

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Speaker 1: state local government's own about eighty eight percent of all

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Speaker 1: infrastructure assets in the US, but they're sort of highly

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Speaker 1: incentivized to keep them right, so it's a revenue producing asset. Generally,

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Speaker 1: state lowe garments don't give them up unless they are

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Speaker 1: somewhat desperate for money. And uh, the cost of financing, uh,

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Speaker 1: the construction of new assets is frankly just a lot

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Speaker 1: cheaper through the tax exem bond market than giving up

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Speaker 1: the cost of capital seven to eight percent returns for

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Speaker 1: the private sector. So um, while you know P three's

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Speaker 1: are generally the rule rather than the exception in other countries,

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Speaker 1: largely because of the federalist system, we've set up here

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Speaker 1: in the availability of tax exam financing. They're more the

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Speaker 1: exceptions in the rule, and I would expect that to continue.

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Speaker 1: So I think it's a bad idea to do what

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Speaker 1: you can to incentivize private capital come in, but I

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Speaker 1: wouldn't expect that to be the thing that catalyzes the

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Speaker 1: major infrastructure investment that the US needs to get back

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Speaker 1: up to speed. So, Michael, if there's two trillion dollar

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Speaker 1: number that was thrown out by the Democrats and President

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Speaker 1: Trump is not, you know, necessarily that realistic, what do

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Speaker 1: you think can actually get done from the federal level. Yeah, Well, unfortunately,

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Speaker 1: think on this issue where grid locked until the next

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Speaker 1: election because um, frankly, what you need is one party

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Speaker 1: in control of both the White House and Congress and

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Speaker 1: for them to make this their top priority. And it's

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Speaker 1: probably because if you if you know, you go through

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Speaker 1: the list of tax revenues that we just talked about,

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Speaker 1: there's probably not a politically friendly way to completely fund this,

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Speaker 1: and so you need one party or the other to

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Speaker 1: kind of frame this as um a deficit financed investment, UM,

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Speaker 1: but in sort of politically friendly terms, right, as an

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Speaker 1: economic investment or or something some other way that's consistent

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Speaker 1: with their ideology. Uh So in the meantime between now

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Speaker 1: and then, UM, I think unfortunately you're gridlocked. And even

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Speaker 1: if you do the exercise of thinking about, well, what

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Speaker 1: if we're wrong again, what if they actually could do

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Speaker 1: a funded infrastructure plan, maybe slim it down to a

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Speaker 1: trillion dollars over ten years. Um. You know, for investors,

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Speaker 1: I don't know that that necessarily sends clear signals on

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Speaker 1: what to do. Right. If it's funded, it's not a

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Speaker 1: technically a fiscal stimulus, so over the next six to

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Speaker 1: twelve months, it doesn't necessarily translate into a GDP boost. Uh.

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Speaker 1: You know, there are companies that should benefit from this,

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Speaker 1: but if you're rolling back the corporate tax rate, that

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Speaker 1: cuts against them, right, or if you're increasing the gas

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Speaker 1: tax that hurts autos and freight transportation. So just a

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Speaker 1: lot of mixed signals on what investors can take away

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Speaker 1: from this. I'm curious from your perspective, what's the most

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Speaker 1: pressing infrastructure project that the federal government uh could finance

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Speaker 1: or push along that that localities cannot. Well, you know,

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Speaker 1: I don't know that there's one project in particular. I mean,

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Speaker 1: they're Obviously there are several critical infrastructure projects UH in

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Speaker 1: major urban hubs around the country. I think this is

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Speaker 1: a situation where there just needs to be more federal

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Speaker 1: money brought to bear in the aggregate and that sort

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Speaker 1: of priority number one as opposed to being specific and surgical.

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Speaker 1: But the reason why I ask is because we've been

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Speaker 1: talking about the record volume of cash flooded into the

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Speaker 1: municipal bond market, and we've talked about how, yes, these

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Speaker 1: are slow moving freight trains when you talk about local governments,

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Speaker 1: But why couldn't they take that private money and pump

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Speaker 1: it into projects that they need. Well, they can, but

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Speaker 1: I think the question of whether or not municipalities are

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Speaker 1: willing to access the taxics a market to undertake new

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Speaker 1: money financing. Right, So it's not that the money isn't there,

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Speaker 1: it's a question of whether or not the willingness is there.

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Speaker 1: And the constraint that state and local governments faces kind

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Speaker 1: of a It's a combined political and fiscal constraint. And

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Speaker 1: what I mean by that is that there's generally reticence

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Speaker 1: to um increased taxes to help finance borrowing UM and

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Speaker 1: budgets are already constrained from a combination of factors high

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Speaker 1: operating leverage for one UM as well as pension overhanging

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Speaker 1: a lot of different areas. So you have a system

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Speaker 1: where state and local governments spend about the money on

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Speaker 1: infrastructure in this country, UM, but for a combination of

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Speaker 1: political and fiscal reasons, are constrained. So they have been increasing,

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Speaker 1: in particular over the last two years, they have been

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Speaker 1: increasing their infrastructure spend, but just not to the degree

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Speaker 1: that gets you the sort of catch up the potential

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Speaker 1: that we need to to be at. And that's where

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Speaker 1: the the federal government's role, UM hypothetically then should be

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Speaker 1: to really come in induce that entire process with more money. So, Michael,

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Speaker 1: I'm a resident of New Jersey. I take the train

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Speaker 1: every day back and forth under the Hudson River tunnels,

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Speaker 1: and I fully expect them to cave in on me

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Speaker 1: one day. Let's talk about the Gateway project. What is

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Speaker 1: the status of that? Because that is going to be

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Speaker 1: a state and federal partnership to get that done. What's

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Speaker 1: the status of that? Yeah, also a resident of New Jersey. Uh, So,

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Speaker 1: I understand where you're coming from. UM. I think this

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Speaker 1: is a situation where the need for that projects largely

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Speaker 1: already been improved. Um, it's been somewhat delayed over the

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Speaker 1: last couple of budget rounds uh and what appears to

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Speaker 1: be sort of a personal disagreement between the President and

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Speaker 1: Chuck Schumer. Uh. So, I think there's a situation where

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Speaker 1: the money, because it's already been approved, will eventually make

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Speaker 1: it to its target, but it's being delayed for largely

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Speaker 1: reasons of politics, which is not particularly comforting understand. But um,

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Speaker 1: this appears to be a situation where the money has

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Speaker 1: already approved for it. Yeah. Um, we're speaking with Michael

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Speaker 1: Z's chief US public policy I mean strategist at Morgan Stanley.

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Speaker 1: I want to just let you know that William Barr,

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Speaker 1: Attorney General, is currently giving his opening statement in front

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Speaker 1: of the Senate, discussing, of course, the Robert Mueller report

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Speaker 1: that he did release UH with with redactions and did summarize.

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Speaker 1: There is obviously a concern on the part of Robert Muller,

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Speaker 1: is expressed by I letter released earlier today that it

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Speaker 1: was not fully represented in the summary. We will bring

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Speaker 1: you all of that when we get it. Michael. We

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Speaker 1: want to continue the conversation here because as much as

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Speaker 1: perhaps a two trillion dollar infrastructure spending plan is not

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Speaker 1: realistic or feasible politically, there is a question of the

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Speaker 1: municipal markets right now, and given how much money has

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Speaker 1: gone in and I'm wondering from your perspective, especially where

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Speaker 1: we are in the economic cycle, and given the tax cuts,

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Speaker 1: I'm wondering from your perspective, which areas do you see

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Speaker 1: as the strongest and the weakest right now from an

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Speaker 1: investing standpoint. Yeah, Well, for us that we think the

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Speaker 1: opportunity still lies more in the enterprise segments of the

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Speaker 1: municipal market as opposed to the state and local government

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Speaker 1: segments of the municipal market. Right. So that's uh, the

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Speaker 1: public enterprises like airports and toll roads and not for

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Speaker 1: profit hospitals and higher education institutions. UM. And that not

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Speaker 1: necessarily because there's more yield to be captured in those areas,

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Speaker 1: but more because we remain concerned the the overhang of

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Speaker 1: liabilities UH that continue to pressure state and local governments. Uh,

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Speaker 1: and that the next time we have a recession, we

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Speaker 1: think will exert a fair amount of pressure on budgets. Right.

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Speaker 1: So that is deferred capital needs that is underfunded, retiree liabilities,

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Speaker 1: the types of things that in good economic times, uh

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Speaker 1: you have you know, strong and growing tax revenues and

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Speaker 1: so you can kind of deal with the cost of

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Speaker 1: those things as they come. But when tax revenues are

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Speaker 1: declining in a recession, that financial leverage becomes operating leverage,

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Speaker 1: which creates a budget deficit and forces some really tough choices.

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Speaker 1: We don't think the market is properly a uh priced

431
00:22:49,320 --> 00:22:53,280
Speaker 1: in that segment for that. But the key there is,

432
00:22:53,320 --> 00:22:55,840
Speaker 1: if you're looking for the market to weaken on that

433
00:22:56,040 --> 00:23:00,720
Speaker 1: future dynamic, it requires you to place a high probability

434
00:23:01,080 --> 00:23:03,359
Speaker 1: on there being a recession, and that's just not in

435
00:23:03,440 --> 00:23:06,120
Speaker 1: our base case right now. And obviously I think investors

436
00:23:06,160 --> 00:23:08,040
Speaker 1: don't really have that in their base case right now.

437
00:23:08,080 --> 00:23:10,239
Speaker 1: So the market um in our view, even though it's

438
00:23:10,240 --> 00:23:13,320
Speaker 1: pretty rich, can keep coming, keep humming along. Michael Jesus,

439
00:23:13,359 --> 00:23:14,960
Speaker 1: thank you so much for spending the time with us.

440
00:23:15,119 --> 00:23:18,880
Speaker 1: Michael Z's chief US public policy and municipal strategist for

441
00:23:18,960 --> 00:23:37,680
Speaker 1: Morgan Stanley joining us in New York. Switching gears, Let's

442
00:23:37,680 --> 00:23:40,280
Speaker 1: go back to the financial markets. You know, we think

443
00:23:40,320 --> 00:23:43,400
Speaker 1: about the melt up in the financial markets so far

444
00:23:43,480 --> 00:23:46,760
Speaker 1: in one sector that has certainly participated has been the

445
00:23:46,840 --> 00:23:50,280
Speaker 1: US high old market. We welcome Ken Monahana Mundy, pioneer

446
00:23:50,359 --> 00:23:52,240
Speaker 1: co director of hi Yield Ken, thanks so much for

447
00:23:52,320 --> 00:23:55,480
Speaker 1: joining us here in our Bloomberg Interactor Brooker studio. What

448
00:23:55,520 --> 00:23:58,000
Speaker 1: are you seeing in the high old market so far

449
00:23:58,080 --> 00:23:59,920
Speaker 1: this year? It's been a great rebound off of that

450
00:24:00,000 --> 00:24:02,840
Speaker 1: December low Thank you for having me again. And a

451
00:24:02,960 --> 00:24:04,960
Speaker 1: melt up is the correct phrase for this, because we've

452
00:24:04,960 --> 00:24:08,439
Speaker 1: certainly had a dramatic rally. Spreads have tightened in dramatically

453
00:24:08,560 --> 00:24:12,920
Speaker 1: since um they're there their wives of December when we

454
00:24:12,920 --> 00:24:15,440
Speaker 1: were trading in about five and fifty basis points over

455
00:24:15,520 --> 00:24:17,760
Speaker 1: and we're now down to about three seventy five. And

456
00:24:17,840 --> 00:24:20,560
Speaker 1: that means that high yields made almost nine percent year

457
00:24:20,600 --> 00:24:23,400
Speaker 1: to day. It's been a big year. Like equities. Yeah,

458
00:24:23,440 --> 00:24:24,920
Speaker 1: so it's made almost nine percent of this year. That

459
00:24:25,000 --> 00:24:26,760
Speaker 1: is the best return for the first four months of

460
00:24:26,760 --> 00:24:29,959
Speaker 1: a year since two thousand and nine, when the market

461
00:24:30,000 --> 00:24:32,680
Speaker 1: was rebounding from the worst financial crisis since the Great Recession.

462
00:24:32,720 --> 00:24:34,560
Speaker 1: I'm just wondering, what do you think the full year

463
00:24:34,600 --> 00:24:36,760
Speaker 1: twenty nine total return is going to be for US

464
00:24:36,800 --> 00:24:38,760
Speaker 1: hild bonds. Well, I think that if you look at

465
00:24:39,119 --> 00:24:42,760
Speaker 1: the prognosticators out there right now, they're talking about a

466
00:24:42,800 --> 00:24:45,440
Speaker 1: double digit return for the year, and that makes sense.

467
00:24:45,480 --> 00:24:47,960
Speaker 1: If you kind of layer in four percent plus current

468
00:24:48,040 --> 00:24:51,240
Speaker 1: yield for high yield UH for the remaining eight months

469
00:24:51,240 --> 00:24:53,200
Speaker 1: of the year, it can get up to a double return.

470
00:24:53,280 --> 00:24:57,560
Speaker 1: Double digits could be, it could be what are you

471
00:24:57,640 --> 00:25:00,919
Speaker 1: talking about? Forties? Hard? It's really hard to get to

472
00:25:01,280 --> 00:25:04,280
Speaker 1: twelve to thirteen is is certainly within the range. That's

473
00:25:04,320 --> 00:25:06,840
Speaker 1: that's certainly, and that's assuming we can straight line it.

474
00:25:07,080 --> 00:25:10,880
Speaker 1: And obviously markets don't generally move in a straight line UM.

475
00:25:10,920 --> 00:25:12,600
Speaker 1: But so I'm not saying that there's not going to

476
00:25:12,640 --> 00:25:14,560
Speaker 1: be any disruption between now and the end of the year,

477
00:25:14,560 --> 00:25:17,520
Speaker 1: but it's certainly achievable. So given that great performance, almost

478
00:25:17,600 --> 00:25:19,920
Speaker 1: nine percent off of the low, where are you seeing

479
00:25:20,000 --> 00:25:22,000
Speaker 1: value today in the HOW market? Well, you know, it's

480
00:25:22,040 --> 00:25:23,960
Speaker 1: it's it's harder to find value. So if we look

481
00:25:23,960 --> 00:25:26,480
Speaker 1: at double B s, which is a significant portion of

482
00:25:26,520 --> 00:25:30,600
Speaker 1: the market, UH spreads are only about sixteen basis points

483
00:25:30,680 --> 00:25:34,240
Speaker 1: or so wider than they were at their October troughs,

484
00:25:34,280 --> 00:25:37,560
Speaker 1: which is when early October we hit the post recession

485
00:25:37,560 --> 00:25:40,680
Speaker 1: trough UH and we're a little wider, but not dramatically so.

486
00:25:41,000 --> 00:25:43,919
Speaker 1: Triple c's, on the other hand, are significantly wider and

487
00:25:44,000 --> 00:25:47,120
Speaker 1: is one of your reporters has written recently written, Um

488
00:25:47,200 --> 00:25:49,720
Speaker 1: that there are opportunities perhaps in the triple D spay

489
00:25:49,760 --> 00:25:52,399
Speaker 1: a triple C space where one of those who's looking

490
00:25:52,440 --> 00:25:56,760
Speaker 1: for value there. That doesn't mean that we're we're buying them, uh,

491
00:25:56,800 --> 00:26:00,760
Speaker 1: you know, without any um selectivity at all, Um, you're

492
00:26:00,760 --> 00:26:02,679
Speaker 1: having to kind of really go and look for that

493
00:26:02,720 --> 00:26:06,040
Speaker 1: proverbial needle in the haystack. And the market's very bifurcated

494
00:26:06,040 --> 00:26:08,640
Speaker 1: between triple ceas we wouldn't touch with a ten foot pole,

495
00:26:09,000 --> 00:26:11,560
Speaker 1: and those that look more attractive, and those are harder

496
00:26:11,600 --> 00:26:14,600
Speaker 1: to find. Yesterday we were speaking with Bearing CEO Tom Fink,

497
00:26:14,680 --> 00:26:17,040
Speaker 1: and he said that he is seeing the pendulum switch

498
00:26:17,080 --> 00:26:20,679
Speaker 1: a little bit up more towards leveraged loans over hiled bonds,

499
00:26:20,720 --> 00:26:23,400
Speaker 1: given how much highled that is rallied and the loans

500
00:26:23,400 --> 00:26:25,800
Speaker 1: that kind of lagged behind. Do you agree, Well, you've

501
00:26:25,800 --> 00:26:27,680
Speaker 1: certainly seen a pick up and returns to her for

502
00:26:27,760 --> 00:26:30,040
Speaker 1: loans as well, because they had gotten beaten up. Having

503
00:26:30,080 --> 00:26:33,679
Speaker 1: said that, there is a much higher percentage of the marketplace.

504
00:26:33,760 --> 00:26:37,520
Speaker 1: That's leverage loans that are training above par right now. Uh.

505
00:26:37,560 --> 00:26:39,360
Speaker 1: And with leverage loans, you don't have a whole lot

506
00:26:39,400 --> 00:26:41,720
Speaker 1: further to go than par because that's what they're gonna

507
00:26:41,720 --> 00:26:44,600
Speaker 1: pay you back, and there's no prepayment penalty. UM, So

508
00:26:44,800 --> 00:26:48,639
Speaker 1: that's the problem. And uh, leverage loans particularly look particularly cheap.

509
00:26:49,119 --> 00:26:51,000
Speaker 1: UH in the fourth quarter of last year when they

510
00:26:51,080 --> 00:26:52,960
Speaker 1: got beaten up, is did HI yield bonds. And I

511
00:26:53,000 --> 00:26:55,760
Speaker 1: know that there are a lot of structured products or

512
00:26:55,760 --> 00:26:59,359
Speaker 1: cello managers that were quite excitedly picking up loans at

513
00:26:59,400 --> 00:27:02,440
Speaker 1: that point, and and and and banking them for new

514
00:27:02,480 --> 00:27:04,560
Speaker 1: transactions that have been priced this year, which ought to

515
00:27:04,560 --> 00:27:08,679
Speaker 1: do quite well. But I think leverage loans, your upside

516
00:27:08,720 --> 00:27:11,200
Speaker 1: is limited, and that's the problem. So we're we're ten

517
00:27:11,280 --> 00:27:14,640
Speaker 1: years into this economic cycle. How is when you take

518
00:27:14,680 --> 00:27:16,359
Speaker 1: a look at your portfolio or some of the issues

519
00:27:16,359 --> 00:27:18,920
Speaker 1: that you're looking at, how was a credit quality given

520
00:27:18,920 --> 00:27:21,199
Speaker 1: where we are in the cycle right now. Well, you know,

521
00:27:21,240 --> 00:27:23,080
Speaker 1: it's interesting if you if you look at it, um,

522
00:27:24,040 --> 00:27:27,280
Speaker 1: you're not seeing the types of things at least yet

523
00:27:27,800 --> 00:27:30,560
Speaker 1: that you would typically see that are aggressive behaviors. So

524
00:27:30,640 --> 00:27:34,080
Speaker 1: you talk about zero coupon bonds paying kind bonds, a

525
00:27:34,160 --> 00:27:37,879
Speaker 1: large number of dividend transactions where companies are borrowing money

526
00:27:38,200 --> 00:27:41,040
Speaker 1: just to repay the private equity sponsor. Now there are

527
00:27:41,040 --> 00:27:42,920
Speaker 1: some of those in the offing. It's clearly because we're

528
00:27:42,920 --> 00:27:45,720
Speaker 1: hearing some rumors of some of them right now. And uh,

529
00:27:45,760 --> 00:27:48,600
Speaker 1: that may indicate that, you know, we're kind of closer

530
00:27:48,640 --> 00:27:50,280
Speaker 1: to the ninth ending and than we are the sixth

531
00:27:50,359 --> 00:27:53,080
Speaker 1: or seventh. This recovery has certainly gone on for a

532
00:27:53,119 --> 00:27:55,240
Speaker 1: long period of time, where one in the hundred and

533
00:27:55,400 --> 00:27:59,359
Speaker 1: seventeenth or eighteenth month at this point, um since the

534
00:28:00,080 --> 00:28:03,000
Speaker 1: end of the recession in online um. But as we know,

535
00:28:03,160 --> 00:28:06,520
Speaker 1: recessions don't, excuse me, recoveries don't die of old age.

536
00:28:06,800 --> 00:28:08,440
Speaker 1: So you said that there are some deals on tap

537
00:28:08,520 --> 00:28:13,080
Speaker 1: dividend payment payment deals right there are, yeah, and I've announced.

538
00:28:13,119 --> 00:28:16,439
Speaker 1: But the deals that they're out there also pick toggle deals.

539
00:28:16,480 --> 00:28:18,359
Speaker 1: I haven't seen any pick toggles yet. That would be

540
00:28:18,400 --> 00:28:20,240
Speaker 1: an interesting one to see come back. I'm not saying

541
00:28:20,280 --> 00:28:22,720
Speaker 1: that won't, but you know, that kind of is the

542
00:28:22,800 --> 00:28:25,760
Speaker 1: kind of aggressive transaction structure you tend to see at

543
00:28:25,760 --> 00:28:27,159
Speaker 1: the end of the cycle where people are trying to

544
00:28:27,200 --> 00:28:28,920
Speaker 1: figure out how do I make a little bit extra

545
00:28:28,960 --> 00:28:32,920
Speaker 1: return in my portfolio. Yeah, just before whatever. Everything's glowed

546
00:28:33,720 --> 00:28:37,400
Speaker 1: and I'm not suggesting that either, but don't worry. Uh well,

547
00:28:37,560 --> 00:28:39,560
Speaker 1: we've tried on to to push with that. Ken Monahan,

548
00:28:39,560 --> 00:28:41,480
Speaker 1: thank you so much. As always, we love your insights.

549
00:28:41,640 --> 00:28:44,320
Speaker 1: Ken Monahan, I'm aun new Pioneer, co director of High Yield.

550
00:28:45,160 --> 00:28:47,360
Speaker 1: Thanks for listening to the Bloomberg P and L podcast.

551
00:28:47,520 --> 00:28:50,160
Speaker 1: You can subscribe and listen to interviews at Apple Podcasts

552
00:28:50,240 --> 00:28:53,320
Speaker 1: or whatever podcast platform you prefer. Paul Sweeney, I'm on

553
00:28:53,360 --> 00:28:56,000
Speaker 1: Twitter at pt Sweeney. I'm Lisa abram Woids. I'm on

554
00:28:56,000 --> 00:28:58,880
Speaker 1: Twitter at Lisa A. Bramwod's one before the podcast. You

555
00:28:58,920 --> 00:29:05,040
Speaker 1: can always catch us worldwide on Bloomberg Radio m