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Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside

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Speaker 1: my co host Matt Miller.

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Speaker 2: Every business day, we bring you interviews from CEOs, market pros,

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Speaker 2: and Bloomberg experts, along with essential market moving news.

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Speaker 1: Find the Bloomberg Markets Podcast on Apple Podcasts or wherever

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Speaker 1: you listen to podcasts, and at Bloomberg dot com slash podcast. Now, Matt,

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Speaker 1: we're gonna get some some smart conversation about Treasury refunding,

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Speaker 1: Federal Reserve, all that kind of stuff.

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Speaker 3: We can do that with Campbell Harvey.

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Speaker 1: He's a professor of finance at the Fucal School of

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Speaker 1: Business at Duke University, my former professor, and I can

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Speaker 1: vouch that I did pass his Futures and Options class.

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Speaker 1: I can't say I did more than pass, but pass

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Speaker 1: is good enough back in the day, Hey, Cam, thanks

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Speaker 1: so much for joining us here. Matt really wants to

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Speaker 1: get smart on this Treasury refunding today.

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Speaker 3: What are your takeaways from what they announced?

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Speaker 4: So I think we need to look kind of beyond

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Speaker 4: the refunding that was announced and just in general. So

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Speaker 4: right now, the amount of debt service is about six

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Speaker 4: hundred and thirty billion dollars a year, and the average

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Speaker 4: interest rate on that is two point eight percent. Okay,

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Speaker 4: so we know that rates are like four point eight

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Speaker 4: percent or are up into the fives with the short term.

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Speaker 4: So it's reasonable to assume that, given the needs and

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Speaker 4: given the two trillion dollar deficet, that the debt service

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Speaker 4: will explode. Indeed, it will in twenty twenty four be

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Speaker 4: the second largest spending category. Right now, again, it's two

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Speaker 4: hundred and thirty billion dollars a year, and that will

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Speaker 4: will definitely go up to probably nine hundred over the

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Speaker 4: next year. Just the deficit of.

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Speaker 2: Nine hundred billion dollars that's going to be the interest costs.

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Speaker 4: Yeah, so right now it's six hundred and thirty trillion.

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Speaker 2: Dollars a year in interest costs.

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Speaker 3: That is insane.

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Speaker 2: I mean, we talk about big numbers, professor all the

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Speaker 2: time here, but that's just bonkers. I mean, didn't like

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Speaker 2: Treasury understand what was happening when we were at zero.

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Speaker 2: Why didn't they just put out one hundred year bonds

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Speaker 2: like the Austrians.

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Speaker 4: Well, you know, I advocated that take advantage of the

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Speaker 4: super low rates, and obviously when you do that the

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Speaker 4: rates go up. But still it's not normal to have

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Speaker 4: one percent rate on a ten year treasury given what inflation.

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Speaker 2: Was we hit on a thirty year in twenty twenty.

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Speaker 4: Yeah, so again you could argue you should take advantage

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Speaker 4: of that, but look, the problem is a structural problem.

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Speaker 4: So when we have reasonably good growth and to a

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Speaker 4: trillion dollar deficit, you know that that's a big problem.

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Speaker 4: And again that.

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Speaker 5: So the the six hundred and thirty is carefully calculated,

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Speaker 5: So for example, we need to be careful with the

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Speaker 5: Fed balance sheet and stuff like that, which is kind

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Speaker 5: of left pocket the right pocket for the government.

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Speaker 4: But if you carefully calculate that, it's about six hundred

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Speaker 4: and thirty billion dollars and that's at two point eight percent,

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Speaker 4: it's reasonable to expect that rate will go up. And

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Speaker 4: when it goes up, it'll be the second largest spending

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Speaker 4: category just paying interest. That that is not a good situation,

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Speaker 4: and especially if we have slower growth. So we had

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Speaker 4: a great print, and this is kind of consumers running

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Speaker 4: down their savings and if you look at kind of

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Speaker 4: the leading data, you can see that those savings are

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Speaker 4: pretty well depleted. The consumer is not going to bail

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Speaker 4: out the economy in twenty twenty four like it did

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Speaker 4: in twenty twenty three.

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Speaker 3: Hey, Cam, when we hear from the FED Chairman J.

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Speaker 1: Palace Effternoon, he's probably going to come out with the

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Speaker 1: language that, as it relates to inflation, we have.

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Speaker 3: A long way to go to defeat inflation. Do you

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Speaker 3: buy that?

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Speaker 6: No?

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Speaker 4: And we've talked about this before. So if you calculate

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Speaker 4: the inflation rate with kind of real time prices for

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Speaker 4: housing and rents, the inflation rate is below two percent. Really,

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Speaker 4: the only reason it's above three is we've got that

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Speaker 4: lagged effect from rental and housing inflation that happened last year,

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Speaker 4: so in real time we're below two percent. I have

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Speaker 4: no idea what they're talking about and making policy based

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Speaker 4: upon data from last year, that doesn't make any sense.

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Speaker 4: You make policy based upon data today and what you

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Speaker 4: anticipate will happen in the future.

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Speaker 2: Isn't it frustrating to watch this happen? I mean, if

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Speaker 2: you advocated for you know, longer term debt when we

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Speaker 2: were at zero inustrate policy, I can't imagine who would

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Speaker 2: push back against that. Why would the Treasury Secretary not

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Speaker 2: do that? And then if you think the FED is

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Speaker 2: using you know, clearly bad data in order to drive policy.

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Speaker 2: That should I imagine annoy you too, like is it

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Speaker 2: difficult to move around in this world?

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Speaker 4: Yeah? I think annoying us the right word. This is

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Speaker 4: not rocket science. Just look at the data. It's very

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Speaker 4: clear of what's happening, especially with the housing inflation. So

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Speaker 4: the housing inflation, if you believe the CPI is running

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Speaker 4: at a rate over seven percent year over year, and

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Speaker 4: that just doesn't squear with the data. It doesn't where

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Speaker 4: with a year over year rents, it doesn't square with

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Speaker 4: year over year housing prices. It's because it's reflecting what

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Speaker 4: happened last year. So I think that there is a problem.

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Speaker 4: We need to use data that is real time data.

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Speaker 4: Housing inflation is not over seven percent, and that is

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Speaker 4: the reason most of the print that we get, the

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Speaker 4: prints that have been over three percent, is being driven

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Speaker 4: by stale data on housing and that just doesn't seem right.

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Speaker 4: And also we've seen the long rates increase pretty dramatically,

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Speaker 4: and this is kind of flattening the yell curve, but

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Speaker 4: in a very bad way. So usually what happens before

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Speaker 4: kind of recessions that you've got a yield curve inversion

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Speaker 4: where the long rates are below the short rates, but

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Speaker 4: then it becomes normal. And usually what happens is that

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Speaker 4: the short rates decrease to cause the normal yokur, that's

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Speaker 4: not what we're seeing. We're seeing the long rates go up.

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Speaker 4: That's very bad. That increases the cost of capital, and

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Speaker 4: that serves to slow the economy. So this is not

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Speaker 4: a good situation in any dimension. And don't be fooled

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Speaker 4: by that GDP print?

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Speaker 7: Yep?

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Speaker 3: So does is the risk here, professor?

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Speaker 1: That the Fed is overdoing it and will in fact

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Speaker 1: push us into recession?

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Speaker 2: GDP will fall off a cliff. Plus, our interest payments

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Speaker 2: are ballooning at a level that's going to make it

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Speaker 2: hard to invest in things like solving diseases and funding

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Speaker 2: the military.

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Speaker 3: That's not not bueno. So is that the recession risk?

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Speaker 6: Yeah?

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Speaker 4: So the Fed should have stood down in January of

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Speaker 4: this year. So I agree that they've made things worse.

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Speaker 4: And it's especially bad given what we've seen happened to

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Speaker 4: the long term rate that ripples through and just think of,

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Speaker 4: you know, the these firms with commercial real estate loans

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Speaker 4: and things like that, where that market is already cretered,

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Speaker 4: and what's going to happen so we saw kind of

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Speaker 4: a mini banking crisis in March and then as hush hush, Well,

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Speaker 4: I'd like to see what's going to happen in the

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Speaker 4: next few months, because we're not going to have four

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Speaker 4: plus GDP growth. That consumer spending has been depleted, savings

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Speaker 4: have been drawn down, and on the investment side, we've

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Speaker 4: already seen that decrease in twenty twenty three. So I

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Speaker 4: do believe that the FED has overdone it, unnecessarily shot

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Speaker 4: themselves in the foot and the economy at the same time.

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Speaker 1: All right, Cam, thanks so much for joining us. A

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Speaker 1: bunch of us class at ninety one. We're coming down

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Speaker 1: to Fuqua next weekend, so watch out. Cam Harvey, Professor Finance,

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Speaker 1: a Fucal School of Business at Duke University that can

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Speaker 1: vouch he has no basketball game, but he's a genius

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Speaker 1: on the world of finance and economics and all that

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Speaker 1: kind of stuff.

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Speaker 6: You're listening to the team. Can's our live program, Bloomberg

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Speaker 6: Markets weekdays at ten am Eastern on Bloomberg dot Com,

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Speaker 6: the iHeartRadio app, and the Bloomberg Business app, or listen

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Speaker 6: on demand wherever you get your podcasts.

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Speaker 1: Jen Reed joins us here. George Ferguson joins us via

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Speaker 1: the Princeton office. The camera there.

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Speaker 3: Why we have.

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Speaker 1: Jenery and George Ferguson here together. They're from Bloomberg Intelligence

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Speaker 1: because we want to talk about Spirit and Jet Blue.

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Speaker 3: Those airlines are trying to merge or one by the other.

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Speaker 3: Matt doesn't believe in mergers. One is buying the other.

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Speaker 2: Obviously Jet Blue is trying to buy Spirit, but.

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Speaker 3: The Department of Justice is saying, whoa whoa, whoa whoa whoa.

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Speaker 1: Wo Yeah, George. He follows the airlines for Bloomberg Intelligence.

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Speaker 1: Jen follows all the anti trustuff for Bloomberg Intelligence. Jen,

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Speaker 1: let's start with you, sir, why can't we these two

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Speaker 1: little ittybity airlines get together? I mean, it's not United

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Speaker 1: in Delta here.

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Speaker 8: You know, it is exactly the way you look at it.

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Speaker 8: So this is what Jeff Blue says. We're two little,

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Speaker 8: itty bitty airlines right Nationally, we're tiny, maybe eight percent

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Speaker 8: combined share. But from an anti trust perspective, that isn't

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Speaker 8: how you look at it. When you look at the

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Speaker 8: way antitrust might impact a consumer, you look at it

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Speaker 8: from a consumer's viewpoint. So when you're looking at it.

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Speaker 8: You don't look at airlines nationally. You look at them

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Speaker 8: city to city. You look at routes that consumers buy

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Speaker 8: to travel, right, and if you reduce the options in

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Speaker 8: a route from let's say New York to Los Angeles,

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Speaker 8: a consumer can't choose some different route because the prices

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Speaker 8: went up. So you're looking route to route much more

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Speaker 8: narrowly and in route to route. This is a different

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Speaker 8: kind of merger than the way you'd look at it nationally.

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Speaker 1: Hey, George, how important is this merger for either of

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Speaker 1: these companies if it doesn't happen?

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Speaker 9: I don't know, right. I guess we'll see, right because

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Speaker 9: right now both these up. But he's are losing money,

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Speaker 9: so clearly, I think the fares that gen is concerned about,

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Speaker 9: they aren't enough to support even profitability. And I think

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Speaker 9: that the Jet Blue CEO is going to have to

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Speaker 9: figure out soon how bad he really wants to spirit airlines,

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Speaker 9: because he's gonna have to raise three and a half

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Speaker 9: four billion dollars to buy it at interest rates that

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Speaker 9: are probably going to be above eight percent, and again

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Speaker 9: in a marketplace that looks like it has too much

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Speaker 9: capacity and fares can't support profitability.

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Speaker 2: Hang on, I assumed that Jet Blue had that money

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Speaker 2: stashed aside already, aren't they No, I.

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Speaker 9: Don't see it's I don't see it's dashing.

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Speaker 3: Okay.

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Speaker 8: The other thing I find it they may not need it, George.

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Speaker 2: The other thing I wonder about is, you know Jet

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Speaker 2: Blue yesterday George said there's basically a dearth of travelers,

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Speaker 2: or said differently, in the airline industry, there are way

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Speaker 2: too many empty seats in the domestic US. But then

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Speaker 2: somebody tweeted at me the TSA checkpoint travel numbers and

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Speaker 2: looks pretty pretty healthy to me. I mean, we're last

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Speaker 2: week we had two point three million, the week before

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Speaker 2: that two point five million, much better than we had

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Speaker 2: in twenty twenty two or twenty twenty one or twenty twenty.

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Speaker 2: It's it's basically up there with twenty nineteen.

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Speaker 9: So I would say, you can't always judge airline health

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Speaker 9: by numbers.

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Speaker 7: Right.

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Speaker 9: So in the new world of airline revenue management, you

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Speaker 9: know load factors, we're seeing eighty five ninety percent, right,

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Speaker 9: These are really high load factors. Those revenue managers, they

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Speaker 9: don't let an airplane go down the runway without it

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Speaker 9: being almost full The secret, though, is you got to

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Speaker 9: get people to pay the price that's going to cover

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Speaker 9: the cost of the airline. And what we're seeing right

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Speaker 9: now in the marketplace is that the low end is

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Speaker 9: that you know, that consumer that may not be as

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Speaker 9: well healed, they they're seeing softness and their fares are

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Speaker 9: going down. We saw yield at Jeff Blue fall a

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Speaker 9: thirteen percent since the year prior, right, So that's not

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Speaker 9: I mean, that's not a healthy environment.

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Speaker 1: So Jen, when does his trial start? You're going to

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Speaker 1: go to this trial. You're going to attend this trial.

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Speaker 1: Where is it, When is it and what do you expect.

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Speaker 8: So it's in Boston. It started yesterday. I reviewed that

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Speaker 8: transcript from yesterday, which was mostly opening statements. I'm heading

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Speaker 8: out today. I'll be there the rest of this week

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Speaker 8: and next week it will go to December fifth, non

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Speaker 8: consecutive days. I think we'll probably get a decision in January.

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Speaker 8: The judge said he may try to do something by

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Speaker 8: the end of December, but that was when the trial

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Speaker 8: was supposed to start in early October, so I think

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Speaker 8: January is more likely. And I just have to one

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Speaker 8: comment about what George said. I mean, this judge is

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Speaker 8: concerned actually about the health of the airlines, which is

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Speaker 8: unusual in an anti trust case. He has asked not

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Speaker 8: about Jeff Blue, but actually about Spirit and Spirit survive

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Speaker 8: if this merger doesn't go through. And you know, we're

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Speaker 8: just getting in, but we'll see what the documents look

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Speaker 8: like with back to Spirits growth plans.

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Speaker 1: Well, it was just looking I mean at George's common

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Speaker 1: I went to the FA function for both.

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Speaker 3: Spirit Airlines and Jet Blue.

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Speaker 1: Neither company is making money. What extent historically do the

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Speaker 1: courts think about that kind of stuff?

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Speaker 8: Well, you know, there's a history here. So we've had

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Speaker 8: a lot of consolidation in the airlines and there's a

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Speaker 8: lot of concern about that from the DOJ, and they're

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Speaker 8: going to be using that to their benefit and trial.

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Speaker 8: But we've also had a lot of bankruptcies, right, and

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Speaker 8: bankruptcies aren't good for consumers either, and the judge is

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Speaker 8: going to be looking at that and thinking about that.

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Speaker 8: But the bottom line is the most difficult part about

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Speaker 8: this trial for Spirit and Jet Blue is that they themselves,

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Speaker 8: They Spirit have argued that this is an anti competitive

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Speaker 8: deal when they preferred Frontier as a buyer and there

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Speaker 8: was a fight. So these documents have already been admitted

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Speaker 8: by the judge against the objections of the lawyers, and

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Speaker 8: they're going to have to explain those away.

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Speaker 1: Hey, George, if the judge put you on the stand

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Speaker 1: as an expert witness of you know, Wall Street analysts,

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Speaker 1: would you testify that if these guys don't merge, neither

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Speaker 1: of them is going to make it, or one of

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Speaker 1: them is not going to make it, what would your

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Speaker 1: forecast be?

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Speaker 9: I guess I would testify that the market clearly appears

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Speaker 9: to be overcapacitized, if that's a word, and that it

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Speaker 9: needs some rationalization, and putting these two together could rationalize

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Speaker 9: that and would improve their potential to create profits. So

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Speaker 9: that's I would argue that.

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Speaker 8: And I will say that the DJ opened an investigation

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Speaker 8: of the airlines just for saying exactly that, because rationalization

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Speaker 8: in the anti tryst world is a bad thing. It

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Speaker 8: means let's reduce demand to increase prices, and antitrust don't

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Speaker 8: doesn't want that.

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Speaker 1: Right, So can't they just say, all right, on a

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Speaker 1: couple of these routes where we're going to overlap or

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Speaker 1: we'd have too much pricing power, We'll just divest these routes.

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Speaker 3: Can't we do that?

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Speaker 8: That's exactly what they're trying to do. And you know what,

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Speaker 8: the judge might accept that. You know, it's it's this

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Speaker 8: is just the beginning of trial. It's not a done deal.

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Speaker 8: The judge might say, these divestriss are good enough. You

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Speaker 8: go ahead, merge, that's the healthier option. The issue is

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Speaker 8: that DJ is also concerned about routes where they do

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Speaker 8: not overlap, because they believe that blues fares are higher

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Speaker 8: than spirits fares in those routes and it'll take out

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Speaker 8: that lower cost option.

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Speaker 2: I mean, none of this is low cost compared to

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Speaker 2: what I experienced living in Germany for the past six years.

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Speaker 3: You can point for.

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Speaker 2: Ninety dollars, yes, and somehow that just keeps going. You know,

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Speaker 2: that's been happening for at least a decade, right, low

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Speaker 2: cost airlines in Europe. I don't know states that the

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Speaker 2: that the industry would be good for the industry to

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Speaker 2: have that here? Probably not. But can we get that?

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Speaker 9: So you're asking me that, yes, George, I mean, look,

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Speaker 9: I think you can. You know, I think that when

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Speaker 9: when you know, we look at a lot of analysis

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Speaker 9: of these ultra low cost carriers and the low cost carriers,

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Speaker 9: and even the full service carriers. When you take all

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Speaker 9: that ancillary cost that they unbundle and try to put

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Speaker 9: back on top of you when you get to the

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Speaker 9: airport and check your bags, blah blah blah, the fares

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Speaker 9: aren't a lot different than full service carriers. And so

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Speaker 9: I think the whole thing is, you know, it's sometimes

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Speaker 9: it seems a little bit bait and switches, right, because

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Speaker 9: you sign up for like a fifty or seventy dollars fare,

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Speaker 9: and next thing you know, there's all these added costs.

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Speaker 9: And so I think that we can have the industry

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Speaker 9: because they are getting fares that again are probably as

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Speaker 9: good as some of the big full service carriers. What

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Speaker 9: I will say, though, there's an extraordinary challenge I think

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Speaker 9: in the US, and that is that we just gave

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Speaker 9: away some really large pay increases to the pilots. And

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Speaker 9: what you didn't see under that pilot headline was that

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Speaker 9: everyone else got paying increases to the flight attendants are

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Speaker 9: looking for theirs, but line maintenance, all those folks have

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Speaker 9: gotten increases. That's going to drive up the average cost

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Speaker 9: of fares, right. And when you drive up the price

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Speaker 9: of something less needs to be consumed, right because because

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Speaker 9: you just can't offer as much. So that's one of

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Speaker 9: the major challenges in the US market right now.

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Speaker 1: All right, George, thanks so much for joining us. George

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Speaker 1: Ferguson covers the airlines for Bloomberg Intelligence and generally senior

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Speaker 1: legal analysts covering an android trust for Bloomberg Intelligence.

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Speaker 6: You're listening to the tape Can's our live program Bloomberg

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Speaker 6: Markets weekdays at ten am Eastern on Bloomberg Radio, the

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Speaker 6: tune in app, Bloomberg dot Com, and the Bloomberg Business App.

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Speaker 6: flagship New York station. Just say Alexa, play Bloomberg eleven thirty.

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Speaker 1: The story of the day, and that is interest rates,

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Speaker 1: the Federal Reserve, the US Treasury refunding that balance you

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Speaker 1: all that good stuff. Tim Dewey joins is chief US

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Speaker 1: Economists from SGH Macro Advisors. Tim, thanks so much for

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Speaker 1: taking the time here to join us here. What do

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Speaker 1: you expect to hear from our Federal Reserve this afternoon?

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Speaker 7: I think the Fed's going to sound very much like

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Speaker 7: we've seen in recent comments, particularly in Sairman Paul's speech.

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Speaker 7: Basically they think that they might have to raise rates again,

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Speaker 7: but they're more and more confident they're near the top

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Speaker 7: peak of the cycle.

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Speaker 2: So I'll ask you the same question I was just

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Speaker 2: asking Tim Fiori. Do you see some kind of cliff

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Speaker 2: here that we're about to fall off? As there some

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Speaker 2: way that we go into recession? You know in Q four,

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Speaker 2: Q one, Q two from five percent Q three.

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Speaker 7: You know, I would be I would be surprised. Really

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Speaker 7: is the economy and the GDP almost certainly has to

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Speaker 7: slow from the third quarter pace. I mean, it was

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Speaker 7: probably it doesn't really represent the true underlying pace to

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Speaker 7: the economy. However, there's not really a lot of signs

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Speaker 7: out there that the economy is about to roll over hard,

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Speaker 7: that we're about to walk off the cliff. And so

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Speaker 7: I'm you know, I'm still skeptical we're going to see

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Speaker 7: that sort of in the fourth quarter, because we're already

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Speaker 7: in it, but you know, before the first the second

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Speaker 7: half of the next year. So trying to try to

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Speaker 7: pin down the exact time of a recession is really

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Speaker 7: a very very difficult.

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Speaker 2: Well, but there seemed to be look drunken. Miller was

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Speaker 2: on stage with Paul Tudor Jones last week. That's an

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Speaker 2: All Star conference already, right, he says, he's he says

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Speaker 2: he started to get really nervous. He says he has

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Speaker 2: massive bullish positions in two year notes leveraged. So he

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Speaker 2: says there's too much risk in the world. And Bill

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Speaker 2: Ackman's saying this similar thing. Bill Gross was saying something

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Speaker 2: similar to these big albeit old names are worried about something.

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Speaker 3: What is it?

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Speaker 7: Well, I honestly don't know why. The way the enhancedphere,

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Speaker 7: I mean, there's a good reason to think that you're

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Speaker 7: near you know, you're near peak heels, so, you know,

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Speaker 7: putting aside any worry about you know, the broader economy.

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Speaker 7: You know, we are at a point where the FED

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Speaker 7: is close to being done hiking. The more it looks

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Speaker 7: like that's that's going to happen. Traditionally, long yield eventually

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Speaker 7: fall after that point. So from from from a strategic perspective,

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Speaker 7: thinking about this as a peage is certainly not not

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Speaker 7: crazy at all. As far as the warning signs. You know,

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Speaker 7: remember a year ago in October, everyone thought the chance

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Speaker 7: of recession in the US economy over the next year

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Speaker 7: was one hundred percent, and that obviously did not work

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Speaker 7: out that way. So the world has changed, the world

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Speaker 7: is different. It is in some sense risk here. Is

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Speaker 7: it any risk yer than it was, you know, during

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Speaker 7: the Cuban missile crisis? I don't know about that.

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Speaker 3: So it's interesting, Tim.

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Speaker 1: We just had Cam Harvey on financial professor at the

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Speaker 1: Fucal School of Business at Duke.

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Speaker 3: He was really bear.

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Speaker 1: He thinks the FED has gone way, way too far,

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Speaker 1: and he thinks inflation, if you really look at current data,

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Speaker 1: not historical data, inflation is already below two percent. How

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Speaker 1: do you respond to that?

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Speaker 7: Well, so I didn't did see the interview. If you

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Speaker 7: if you look at the the recent core PC numbers,

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Speaker 7: it's not below two percent. Yeah, so I think, you know,

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Speaker 7: depending you know what you use as your inflation metric,

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Speaker 7: you probably can find one that's below two percent.

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Speaker 2: He was taking out housing, he was taking out rent

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Speaker 2: and home ownership. I think so.

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Speaker 7: Yeah, so you can strip it down and get to

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Speaker 7: something that slow. And you know that this is a

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Speaker 7: feature of the policy, right, is that the Fed intended

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Speaker 7: to raise interest rates until we got interest rates above inflation.

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Speaker 7: They're above inflation. They're waiting for evidence to slow. The

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Speaker 7: economy is slow. You know, they are seeing that evidence,

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Speaker 7: which is why we've been paused since you know, July. Here,

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Speaker 7: I would like you remain paused. Yeah, has the Fed

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Speaker 7: reached its peak? Have they gone too far? I don't

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Speaker 7: know because one of the one of the counteracting issues

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Speaker 7: here is we've had plenty of fiscal policy to help

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Speaker 7: counteract some of the momentary tightening.

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Speaker 3: So I guess.

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Speaker 6: I guess.

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Speaker 1: The question is if it's higher for longer, how much

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Speaker 1: longer do you think?

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Speaker 7: So funny thing you usually people will say, you know

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Speaker 7: the Fed is going to cut, you know, roughly six

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Speaker 7: months after the first rate the last rate hike. You know,

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Speaker 7: the last rate hike could have been in July, which

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Speaker 7: means by the time in the December meeting, if they

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Speaker 7: don't hike in December, they'll have got five months without

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Speaker 7: right hike. So you know, the sort of traditional metrics

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Speaker 7: would put you in January in sense, I don't think

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Speaker 7: that that's likely. I don't think they're ready to cut

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Speaker 7: in July. I think the economy will show enough strength

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Speaker 7: that they don't. I do think that they are. They

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Speaker 7: are determined to be very confident that inflation is on

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Speaker 7: track to two percent before they cut. Really, what we

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Speaker 7: need to see is a little bit more weakness in

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Speaker 7: in in the real economy data.

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Speaker 2: What are you watching for? Where are you going to

438
00:24:10,440 --> 00:24:13,400
Speaker 2: see that weakness?

439
00:24:13,880 --> 00:24:17,600
Speaker 7: So that's a great question. If you started to see

440
00:24:18,400 --> 00:24:22,040
Speaker 7: job growth really running below one hundred thousand every month,

441
00:24:22,760 --> 00:24:26,080
Speaker 7: I think that would be a key, key signal.

442
00:24:27,720 --> 00:24:30,760
Speaker 2: I think that which we're not expecting, by the way,

443
00:24:30,760 --> 00:24:33,320
Speaker 2: on Friday. I mean I'm just looking at expecting them

444
00:24:33,359 --> 00:24:33,840
Speaker 2: on Friday.

445
00:24:33,880 --> 00:24:36,159
Speaker 7: Yet it's just not it's it's not in the cars

446
00:24:36,160 --> 00:24:38,720
Speaker 7: if you look at so look at say the Jolts

447
00:24:39,320 --> 00:24:43,400
Speaker 7: report this morning. We're hiring's basically at pre pandemic levels, right,

448
00:24:43,520 --> 00:24:47,080
Speaker 7: and quits ray was basically pre pandemic levels. Openings was

449
00:24:47,119 --> 00:24:49,879
Speaker 7: still arguably a little elevated, but not that much different

450
00:24:49,920 --> 00:24:52,119
Speaker 7: than trend and the fence looking at the saying this

451
00:24:52,160 --> 00:24:54,640
Speaker 7: is this is a labor market that's more in balance. Right.

452
00:24:55,000 --> 00:24:58,680
Speaker 7: You need to see something really trip up investments, spending,

453
00:24:58,840 --> 00:25:02,800
Speaker 7: trimp mob hire and those are the things that generally

454
00:25:02,840 --> 00:25:06,280
Speaker 7: are precursors to recession. And you need to get firms

455
00:25:06,480 --> 00:25:09,840
Speaker 7: much much more pessimistic on the outlook than we're seeing, right, now,

456
00:25:10,040 --> 00:25:12,119
Speaker 7: so again, where i'd see that is is in the

457
00:25:12,200 --> 00:25:16,679
Speaker 7: jobs numbers, in the initial claims data. I'd expect to

458
00:25:16,680 --> 00:25:20,800
Speaker 7: see it more in durable goods orders than we've seen

459
00:25:20,920 --> 00:25:22,280
Speaker 7: somelf aren't.

460
00:25:22,240 --> 00:25:25,400
Speaker 3: Are you surprised by this labor marketing, Tim? I sure am.

461
00:25:25,440 --> 00:25:27,359
Speaker 1: I you know, it's just we have such a shock

462
00:25:27,400 --> 00:25:30,960
Speaker 1: to the system, and people are concerned about the economy,

463
00:25:31,000 --> 00:25:34,280
Speaker 1: even though again that good three three q GD print

464
00:25:34,359 --> 00:25:36,119
Speaker 1: that Matt was mentioned, But it just seems like this

465
00:25:36,160 --> 00:25:37,720
Speaker 1: market is just incredibly strong.

466
00:25:37,760 --> 00:25:39,760
Speaker 3: I'm not really sure why.

467
00:25:40,280 --> 00:25:43,639
Speaker 7: You know, It's a bunch of factors. I think people

468
00:25:43,840 --> 00:25:48,800
Speaker 7: estimated just the the you know, the the underlying strength

469
00:25:48,840 --> 00:25:53,720
Speaker 7: that or the momentum that the economy received from the

470
00:25:53,760 --> 00:25:57,480
Speaker 7: fiscal stimulus and the low monitory leasing monetary policy. I

471
00:25:57,480 --> 00:26:00,760
Speaker 7: think that just had bigger lays during the from the

472
00:26:00,840 --> 00:26:05,040
Speaker 7: from the pandemic era policy. Then people anticipated just too

473
00:26:05,160 --> 00:26:07,639
Speaker 7: longer and work some of that through the economy. I

474
00:26:07,640 --> 00:26:09,760
Speaker 7: think the other thing that's out there is that nobody

475
00:26:09,800 --> 00:26:12,760
Speaker 7: really expected fiscal policy to be such a driving force

476
00:26:12,960 --> 00:26:17,560
Speaker 7: this late in the cycle, and we've seen doctors expand

477
00:26:18,119 --> 00:26:21,240
Speaker 7: uh and and I think that's been a real factor

478
00:26:21,280 --> 00:26:24,720
Speaker 7: that people discounted last year and is really starting to

479
00:26:24,720 --> 00:26:28,160
Speaker 7: show up this year. And also, I think fundamentally people

480
00:26:28,359 --> 00:26:32,400
Speaker 7: underestimate the resilience of the US economy. You know, we

481
00:26:32,640 --> 00:26:35,760
Speaker 7: talk a lot more about recessions than we actually have recessions.

482
00:26:36,880 --> 00:26:38,919
Speaker 1: All right, Tim, thanks so much for joining us. As always,

483
00:26:38,920 --> 00:26:41,960
Speaker 1: appreciate getting your thoughts. Tim Dewey, Chief US Economists for

484
00:26:42,160 --> 00:26:44,720
Speaker 1: s g H Macro Advisors.

485
00:26:45,200 --> 00:26:48,320
Speaker 6: You're listening to the tape Can's our live program Bloomberg

486
00:26:48,400 --> 00:26:52,000
Speaker 6: Markets weekdays at ten am Eastern on Bloomberg Radio, the

487
00:26:52,040 --> 00:26:55,280
Speaker 6: tune in app, Bloomberg dot Com, and the Bloomberg Business App.

488
00:26:55,320 --> 00:26:58,119
Speaker 6: You can also listen live on Amazon Alexa from our

489
00:26:58,160 --> 00:27:02,159
Speaker 6: flagship New York station. Just Hey Alexa, playing Bloomberg eleven.

490
00:27:04,640 --> 00:27:06,479
Speaker 3: I'm going to talk to Chris Whalen. He's a shairing

491
00:27:06,640 --> 00:27:08,119
Speaker 3: of Whaling Global Advisors.

492
00:27:08,320 --> 00:27:10,640
Speaker 1: Hey, Chris, I'd love to get your thoughts on what

493
00:27:10,800 --> 00:27:13,600
Speaker 1: you think the FED should do and why.

494
00:27:15,440 --> 00:27:18,360
Speaker 10: Well. I think they should stop hiking FED funds rate

495
00:27:18,480 --> 00:27:21,919
Speaker 10: before we break something. We're pretty close to that point now,

496
00:27:22,480 --> 00:27:26,159
Speaker 10: and I think they need to try and articulate to

497
00:27:26,200 --> 00:27:29,240
Speaker 10: the public and the policy makers what we can expect

498
00:27:29,320 --> 00:27:32,560
Speaker 10: going forward. There was a fascinating letter from the mortgage

499
00:27:32,560 --> 00:27:35,800
Speaker 10: bankers and the home builders and the filters a couple

500
00:27:35,840 --> 00:27:37,719
Speaker 10: of weeks ago that said, can you give us some

501
00:27:37,800 --> 00:27:42,200
Speaker 10: guidance because the guidance of feed gave us before about

502
00:27:42,240 --> 00:27:47,000
Speaker 10: transitory inflation was clearly wrong and a lot of companies

503
00:27:47,119 --> 00:27:51,160
Speaker 10: use that guidance and planning your business. So I think

504
00:27:51,160 --> 00:27:53,320
Speaker 10: the FED has to be very careful what they say

505
00:27:53,720 --> 00:27:58,680
Speaker 10: in the future about inflation and other benchmarks because people

506
00:27:58,720 --> 00:28:00,600
Speaker 10: sometimes take them at its value.

507
00:28:00,920 --> 00:28:02,560
Speaker 2: Well, but they've been saying for a couple of years

508
00:28:02,560 --> 00:28:05,120
Speaker 2: that they're going to hike rates like we've never seen

509
00:28:05,119 --> 00:28:07,760
Speaker 2: it before to try and quash inflation. I mean, they've

510
00:28:07,760 --> 00:28:12,199
Speaker 2: been telling everyone in the market hasn't believed them, you know,

511
00:28:12,359 --> 00:28:15,080
Speaker 2: for two years.

512
00:28:15,440 --> 00:28:18,600
Speaker 10: Well, they've caused a lot of inflation. Though, look at housing.

513
00:28:19,640 --> 00:28:22,439
Speaker 10: We're not going to take that back easily. We're going

514
00:28:22,480 --> 00:28:26,119
Speaker 10: to deflate housing percent. No, we're not going to do

515
00:28:26,200 --> 00:28:30,320
Speaker 10: that because they know that there's a deflationary aspect out

516
00:28:30,320 --> 00:28:33,680
Speaker 10: there still, and it's called bad debt. You know, when

517
00:28:33,720 --> 00:28:36,919
Speaker 10: debts go bad, that's when you get deflation. So I

518
00:28:36,960 --> 00:28:39,320
Speaker 10: think the FED is you know, as Craig Torreus was

519
00:28:39,320 --> 00:28:43,040
Speaker 10: saying this morning, they're in risk management mode now because

520
00:28:43,080 --> 00:28:45,600
Speaker 10: I think they know they can't go any higher without

521
00:28:45,640 --> 00:28:49,480
Speaker 10: really seriously causing something to break.

522
00:28:49,480 --> 00:28:51,560
Speaker 2: In the world of credit, where do you think, by

523
00:28:51,600 --> 00:28:53,600
Speaker 2: the way, we're going to see debt go bad. We've

524
00:28:53,640 --> 00:28:56,320
Speaker 2: been talking all morning with people about high yield and

525
00:28:57,360 --> 00:29:02,800
Speaker 2: no one is concerned. Spread are relatively tight. And the

526
00:29:02,880 --> 00:29:07,320
Speaker 2: answer they tell us is that all these companies, you know,

527
00:29:07,640 --> 00:29:10,120
Speaker 2: we're so much smarter than Janet Yellen. They got all

528
00:29:10,120 --> 00:29:14,040
Speaker 2: their financing under control when rates were zero, and they're

529
00:29:14,080 --> 00:29:15,600
Speaker 2: in a great situation now.

530
00:29:16,400 --> 00:29:20,560
Speaker 10: But it seems hard to believe they're getting the financing done,

531
00:29:20,760 --> 00:29:25,160
Speaker 10: not necessarily on advantageous terms. They're doing a lot of

532
00:29:25,200 --> 00:29:28,880
Speaker 10: discount issues, for example, to keep the coupon down. But

533
00:29:28,960 --> 00:29:31,680
Speaker 10: you issue the bonds at eight now, when the bonds

534
00:29:31,680 --> 00:29:34,800
Speaker 10: get redeemed, that's gonna hurt. So I think there's a

535
00:29:34,800 --> 00:29:37,719
Speaker 10: lot of ways people are adjusting to this. But you know,

536
00:29:37,840 --> 00:29:40,960
Speaker 10: to be honest, you see the carnage now in commercial,

537
00:29:41,320 --> 00:29:45,280
Speaker 10: commercial real estate. You know, I think every day you

538
00:29:45,320 --> 00:29:48,959
Speaker 10: see a headline across in the screen in commercial and

539
00:29:49,040 --> 00:29:52,120
Speaker 10: what you don't see is the other five events. They're private,

540
00:29:52,800 --> 00:29:54,840
Speaker 10: and you won't see them until they hit the courts.

541
00:29:55,360 --> 00:29:58,040
Speaker 10: So believe me, there's a lot of destruction going on

542
00:29:58,120 --> 00:30:01,440
Speaker 10: right now on the commercial side. And it's it's the

543
00:30:01,440 --> 00:30:03,520
Speaker 10: opposite of two thousand and eight. It's the way I

544
00:30:03,680 --> 00:30:07,120
Speaker 10: put it, this is not consumer and you're not seeing

545
00:30:07,160 --> 00:30:11,160
Speaker 10: it yet in consumer facing vehicles like fintech and that

546
00:30:11,240 --> 00:30:14,560
Speaker 10: sort of thing. Yeah, so you know, is this three prices?

547
00:30:14,600 --> 00:30:15,760
Speaker 10: You'll see more? Yeah?

548
00:30:15,760 --> 00:30:17,400
Speaker 1: I want to you know that kind of goes. So

549
00:30:17,480 --> 00:30:19,000
Speaker 1: you think we'll see it in I guess one of

550
00:30:19,040 --> 00:30:20,480
Speaker 1: the areas you think we'll see a break will be

551
00:30:20,680 --> 00:30:21,960
Speaker 1: in commercial real estate.

552
00:30:22,040 --> 00:30:22,200
Speaker 6: Is that?

553
00:30:22,560 --> 00:30:23,840
Speaker 3: Do I understand that right yet?

554
00:30:24,120 --> 00:30:26,840
Speaker 10: Yeah, it's happening now. Okay, look at it this way.

555
00:30:27,080 --> 00:30:31,320
Speaker 10: Most banks have fifty cents worth of equity in commercial loans, Okay,

556
00:30:31,600 --> 00:30:34,080
Speaker 10: So that means I'll wipe out the quote unquote owner

557
00:30:34,720 --> 00:30:37,080
Speaker 10: and then they'll end up boning the asset of fifty

558
00:30:37,080 --> 00:30:40,200
Speaker 10: cents on the dollar. Now, even then, though they may

559
00:30:40,200 --> 00:30:42,360
Speaker 10: not be able to sell it, because you know, in

560
00:30:42,400 --> 00:30:45,560
Speaker 10: a rising great environment, it's hard to sell assets, and

561
00:30:45,600 --> 00:30:48,880
Speaker 10: it's hard to sell dead banks. Usually when the FDIIC

562
00:30:49,160 --> 00:30:52,040
Speaker 10: is taking care of dead banks, the Fed's already dropped

563
00:30:52,080 --> 00:30:54,959
Speaker 10: interest rate. So there's a kind of a synchronization problem

564
00:30:55,040 --> 00:30:58,400
Speaker 10: right now. The FED is trying to address inflation, but

565
00:30:58,480 --> 00:31:01,560
Speaker 10: we still don't have a recession. I mean, whole prices

566
00:31:01,600 --> 00:31:04,040
Speaker 10: in New York State are still going up. For Christ's sake,

567
00:31:04,640 --> 00:31:08,560
Speaker 10: were the weakest state in the US before COVID pricing.

568
00:31:08,800 --> 00:31:14,360
Speaker 2: So do you expect some big financial names to come

569
00:31:14,440 --> 00:31:17,640
Speaker 2: under pressure. They're already sitting on hold of maturity portfolios

570
00:31:17,800 --> 00:31:23,480
Speaker 2: that you know are worth far less than they'd like

571
00:31:23,600 --> 00:31:27,080
Speaker 2: us to know. And commercial real estate we thought was

572
00:31:27,120 --> 00:31:29,160
Speaker 2: the next shoe to drop, Now it looks like it's following.

573
00:31:29,320 --> 00:31:30,240
Speaker 3: Who's going to get hurt?

574
00:31:31,600 --> 00:31:34,800
Speaker 10: It's an earnings problem, Matthew, more than a a you know,

575
00:31:35,200 --> 00:31:37,640
Speaker 10: systemic problem. I don't think the FED will let it

576
00:31:37,680 --> 00:31:42,120
Speaker 10: get that far. But the inflationary implications of say another

577
00:31:42,200 --> 00:31:45,880
Speaker 10: bank failure are huge, because if I can't find another

578
00:31:45,960 --> 00:31:48,760
Speaker 10: bank to buy the dead bank, I have to liquefy

579
00:31:48,800 --> 00:31:51,000
Speaker 10: the whole fan, which is why the FED had to

580
00:31:51,080 --> 00:31:54,880
Speaker 10: lend the FDIC two in a billion dollars. So, you know,

581
00:31:55,240 --> 00:31:57,520
Speaker 10: I think that if we see another problem in the

582
00:31:57,600 --> 00:32:01,280
Speaker 10: credit markets of sized, it's going to have to retriat

583
00:32:01,720 --> 00:32:04,320
Speaker 10: almost immediately. I think that'd be good for a point

584
00:32:04,360 --> 00:32:07,840
Speaker 10: on FED funds, because you can't deal with problems of

585
00:32:07,960 --> 00:32:12,480
Speaker 10: credit unless rates. Aublorady essentially concede. You know what I mean?

586
00:32:13,480 --> 00:32:15,720
Speaker 10: If people think rates are going up, how do I

587
00:32:15,800 --> 00:32:19,160
Speaker 10: sell those assets? Even at a discount. FDIIC you will

588
00:32:19,200 --> 00:32:21,960
Speaker 10: normally give you a thirty percent discount to create new

589
00:32:22,000 --> 00:32:25,240
Speaker 10: equity under the asset, but even then you might have

590
00:32:25,320 --> 00:32:28,400
Speaker 10: a hard time getting buyers in this environment. So the

591
00:32:28,400 --> 00:32:31,400
Speaker 10: funny part is to your point is there's people creating

592
00:32:31,400 --> 00:32:35,720
Speaker 10: the buying assets today at really crazy prices because there's

593
00:32:35,760 --> 00:32:38,120
Speaker 10: cash on the sidelines. There's a huge amount of cash

594
00:32:38,120 --> 00:32:40,800
Speaker 10: on the sidelines. What they're waiting for is a signal

595
00:32:41,040 --> 00:32:43,040
Speaker 10: that we're done, a real signal.

596
00:32:43,320 --> 00:32:46,800
Speaker 2: Yeah, we're done raising rates, And it seems like the

597
00:32:46,840 --> 00:32:51,440
Speaker 2: market feels that way right now. The question is what

598
00:32:51,560 --> 00:32:54,560
Speaker 2: happens with the economy, you know, in Q four in

599
00:32:54,600 --> 00:32:56,760
Speaker 2: twenty twenty four, and then does the Fed have to

600
00:32:56,800 --> 00:33:00,440
Speaker 2: cut rates and not by fifty basis points but maybe more.

601
00:33:01,960 --> 00:33:04,600
Speaker 10: I think they're going to try and keep rates more

602
00:33:04,680 --> 00:33:07,960
Speaker 10: or less where they are because they realize that voluntility

603
00:33:08,400 --> 00:33:11,280
Speaker 10: has not been helpful for a lot of businesses and

604
00:33:11,320 --> 00:33:14,680
Speaker 10: I think they also realize that housing particularly is going

605
00:33:14,720 --> 00:33:18,400
Speaker 10: to get absolutely crunched in the next twelve months. We're

606
00:33:18,400 --> 00:33:21,840
Speaker 10: going to take another third capacity out of the residential

607
00:33:21,880 --> 00:33:25,760
Speaker 10: mortgage level, and you're also going to see capacity coming

608
00:33:25,800 --> 00:33:29,120
Speaker 10: out of commercial too, because there's not much volumes. I

609
00:33:29,200 --> 00:33:32,040
Speaker 10: sit with the loan production team calling in New York.

610
00:33:32,560 --> 00:33:34,960
Speaker 10: They're not busy right now. And the reason is is

611
00:33:34,960 --> 00:33:38,200
Speaker 10: that the buyside investors, who typically are the cash fires

612
00:33:38,240 --> 00:33:41,680
Speaker 10: for commercial loans hotel loans, I kind of think they're

613
00:33:41,680 --> 00:33:44,360
Speaker 10: on the sidelines tope. They're trying to figure out where

614
00:33:44,400 --> 00:33:47,920
Speaker 10: price and where value is today. And most of them

615
00:33:47,920 --> 00:33:51,000
Speaker 10: have already filled up their allocations for this year, so

616
00:33:51,040 --> 00:33:53,440
Speaker 10: they're happy to go into the you know, the end

617
00:33:53,520 --> 00:33:56,560
Speaker 10: of the year flat. That's not helpful to people who

618
00:33:56,560 --> 00:33:59,160
Speaker 10: need to do deals. You know what I mean, Well,

619
00:33:59,640 --> 00:33:59,960
Speaker 10: what is.

620
00:34:00,000 --> 00:34:01,920
Speaker 2: It happened, Chris to those markets?

621
00:34:01,960 --> 00:34:02,600
Speaker 3: I mean.

622
00:34:04,520 --> 00:34:04,880
Speaker 7: Volume.

623
00:34:05,000 --> 00:34:06,760
Speaker 2: No one's going to want to sell. No one's going

624
00:34:06,800 --> 00:34:09,839
Speaker 2: to want to sell a commercial building if they don't

625
00:34:09,840 --> 00:34:12,880
Speaker 2: have to at a sixty percent haircut. Nobody wants to

626
00:34:12,920 --> 00:34:15,719
Speaker 2: sell a residential home right because you don't you're not

627
00:34:15,760 --> 00:34:17,840
Speaker 2: going to remortgage to get someplace else. At eight percent

628
00:34:17,840 --> 00:34:19,960
Speaker 2: when you're in at three sous.

629
00:34:20,000 --> 00:34:23,760
Speaker 10: These different though. You remember commercial for the last seventy

630
00:34:23,800 --> 00:34:26,640
Speaker 10: five years, the assumption has been that the asset would

631
00:34:26,640 --> 00:34:29,680
Speaker 10: go up in price and we could just do interest only,

632
00:34:30,040 --> 00:34:33,160
Speaker 10: and that was very much the style in the commercial

633
00:34:33,200 --> 00:34:36,680
Speaker 10: real estate business. Now you can't because when the lender

634
00:34:36,719 --> 00:34:39,480
Speaker 10: comes to you, if the rent roll is down the building,

635
00:34:39,520 --> 00:34:43,160
Speaker 10: it's worthless. They want equity. You've got to put more

636
00:34:43,200 --> 00:34:46,400
Speaker 10: cash in to roll the mortgage. That's the difference in

637
00:34:46,480 --> 00:34:49,640
Speaker 10: the dynamic today. And as the treasury deficit goes up,

638
00:34:49,680 --> 00:34:52,080
Speaker 10: guess what the Fed has to hold more cash? And

639
00:34:52,200 --> 00:34:55,120
Speaker 10: what do they do with that cash? Matthew, they collateralize

640
00:34:55,200 --> 00:34:58,080
Speaker 10: the treasury box for price sake. It makes no sense.

641
00:34:58,400 --> 00:35:01,640
Speaker 2: So it makes sense, he would get that sounds like

642
00:35:01,680 --> 00:35:02,440
Speaker 2: something ftx S.

643
00:35:02,400 --> 00:35:05,320
Speaker 10: Would have done. Well, Listen, they race at rates already,

644
00:35:05,560 --> 00:35:08,880
Speaker 10: and we're going to make collateral more deal at a

645
00:35:08,920 --> 00:35:11,520
Speaker 10: time when we're producing nothing on the mortgage side. By

646
00:35:11,520 --> 00:35:13,200
Speaker 10: the way, we'll do a trillion and a half this

647
00:35:13,280 --> 00:35:16,600
Speaker 10: year in new coupons, and treasury issuance will be big.

648
00:35:17,280 --> 00:35:19,040
Speaker 10: But still, you know, and they're going to be buying

649
00:35:19,080 --> 00:35:21,400
Speaker 10: back low coupon bonds too while we're doing all the

650
00:35:21,440 --> 00:35:24,520
Speaker 10: rest of this stuff. That's going to be interesting, all.

651
00:35:24,480 --> 00:35:27,080
Speaker 1: Right, Chris as always a really interesting the discussion Chris

652
00:35:27,080 --> 00:35:29,799
Speaker 1: Well and Chairman breaking the whale in Silence, Breaking the

653
00:35:29,840 --> 00:35:32,880
Speaker 1: whaleen silence, which I've heard Tom say that a million times.

654
00:35:32,880 --> 00:35:34,480
Speaker 1: I still not one hundred percent.

655
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Speaker 3: Sure what it is, but that's a Tom keenism, all right.

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Speaker 1: Chris Well and Chairman Whale and Global Advisor, Thanks so

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Speaker 1: much for joining us there.

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Speaker 2: Thanks for listening to the Bloomberg Markets podcast. You can

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Speaker 2: subscribe and listen to interviews at Apple Podcasts or whatever

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Speaker 2: podcast platform you prefer. I'm Matt Miller. I'm on Twitter

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Speaker 2: at Matt Miller nineteen seventy three.

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Speaker 3: And I'm Faull Sweeney.

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Speaker 1: I'm on Twitter at pt Sweeney. Before the podcast, you

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Speaker 1: can always catch us worldwide at bloom or Radio. Yeah,