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Speaker 2: Joining us right now, and this is a timely conversation
Speaker 2: because we're like the stock market, We're all gonna die.
Speaker 2: And maybe we look at gold mac Dasic joins us.
Speaker 2: How to fixed income strategy from Maryland for Bank of
Speaker 2: America private bank? What's the level of sweat among your clients?
Speaker 2: And don't give me the Brian Mooyn and answer blah
Speaker 2: blah blah. Okay, what's the level of panic out there
Speaker 2: on a Friday? Not that bad, Not that bad at all.
Speaker 2: That's what we're here.
Speaker 3: Retail has been surprisingly resilient, looking to put capital to work.
Speaker 2: Week.
Speaker 3: You are not seeing panic, specially they're going to the
Speaker 3: equity markets from most of the two legged Vidiuser clients
Speaker 3: that they're directing very maturely to this market environment.
Speaker 2: Ran listens every morning, So don't sweat. But is it
Speaker 2: just because they think things and systems will adjust? The
Speaker 2: Trump message from the White House and we'll move forward.
Speaker 3: I think they have a very good ability and they
Speaker 3: have out of the past couple of years to sort
Speaker 3: of look through the noise. And at the end of
Speaker 3: the day, there is that's obviously economic uncertainty here, and
Speaker 3: I know outside a certain sectors, certain geographies, there are
Speaker 3: not a lot of massive layoffs. Right the corporate sector
Speaker 3: is still not laying people off.
Speaker 2: So even if there's a.
Speaker 3: Slight uptaket unemployment from the lows, until you actually start
Speaker 3: to let people go into you're afraid of your own job,
Speaker 3: your brother in law loses his job, your wife loses
Speaker 3: their job. Until that happens, people are still relatively sanguine.
Speaker 3: And again we're not seeing any sentiment, significant sentiment changes
Speaker 3: from retail with regards to the equity markets, which is impressive.
Speaker 4: All right, Well, how about in fixed income space here?
Speaker 4: I mean, you can sit there at a two your
Speaker 4: treasure and get darn your four percentiest. Do you do
Speaker 4: that that's not a bad living or do you take
Speaker 4: some credit risk?
Speaker 3: So we don't think you need to take a lot
Speaker 3: of credit risk, but we would like people to certainly
Speaker 3: be longer duration than a sort of two to three
Speaker 3: or on average, right the radio clients should be around
Speaker 3: probably think five to six years. It depends individual client,
Speaker 3: But end of the day, the bomb market average duration
Speaker 3: is just over six. We really don't want clients to
Speaker 3: be too short to whatever their strategic duration target is
Speaker 3: without a good reason. Again, a lot of clients are
Speaker 3: actually still where you do have some concerns from retail
Speaker 3: clients is actually the fixed income side. They get more
Speaker 3: worried about that, having seen that bond bear market, the
Speaker 3: eighteen percent drop twenty twenty one, twenty two from the highs,
Speaker 3: that's concerned, though that's obviously a lot more likely from
Speaker 3: a yield of negative two percent real rates than it
Speaker 3: is at a roughly plus two percent real yields across the.
Speaker 4: Current It's interesting, I mean, over the last couple of years,
Speaker 4: when I look at the Bloomberg fixed income total return screen,
Speaker 4: where I've seen the best returns has been with risk
Speaker 4: high yield leverage loans actually, and those two are actually
Speaker 4: underperforming this year. That's kind of a change, at least
Speaker 4: definitely underperforming.
Speaker 3: Again, not surprising to see credit both high and IG
Speaker 3: underperform the index. With equities, they have a higher correlation
Speaker 3: to equities, But again for the retail client, depends on
Speaker 3: your time frame where you might see some market value
Speaker 3: changing in your corporate bounds relative to treasuries spread widening.
Speaker 3: If you're strategically long credit year in and year out,
Speaker 3: you're getting that extra yel over credit losses, you'll get
Speaker 3: a better portfolio performance. So right now we're actually just
Speaker 3: kind of pulling our horns in on our sector tilts
Speaker 3: neutral across sectors and fixed income.
Speaker 2: Are you throwing a brick? It's some you know advisor
Speaker 2: at Bank of America who goes back to road sixty
Speaker 2: forty strategy. Is it like a dinosaur or is it
Speaker 2: germane today?
Speaker 3: No, no, no, we do not think it's a dinosaur
Speaker 3: at all. Maybe I'm the dinosaur, but we don't think
Speaker 3: it's a dinosaur at all. We had a lot of
Speaker 3: concerns obviously that bonds were no longer doing their jobs.
Speaker 3: You needed something else to replace. Equid to replace bonds
Speaker 3: as diverse for equities, commodities was given as a particularly
Speaker 3: good one. We were never buyers of that at those valuations.
Speaker 3: We had a couple of years back again negative real yields. Yeah,
Speaker 3: it's probably hard for bonds to work the way I've
Speaker 3: described it for a retail client, as you're in a
Speaker 3: former meter race. If you're two percent behind inflation, well
Speaker 3: you're fifty meters behind the starting line versus commodities. Combody
Speaker 3: are gonna track inflation. The bonds are below inflation, you're
Speaker 3: not starting in a good place. You're having fifty yards back.
Speaker 3: You're sitting in the stands. Now, we've got bonds that
Speaker 3: are two percent on average real above inflation. So they're
Speaker 3: already beating inflation, and so they're ahead in the race.
Speaker 3: That's why they're diverse fied. That's why they diverse filed
Speaker 3: in August. That's why they're diversifying. Now they have the
Speaker 3: evaluations where they can come down with any uncertainty.
Speaker 2: What's the biggest mistake high networth retail makes and fixed income.
Speaker 5: Historically?
Speaker 2: Blog? Is it just that simple?
Speaker 3: It's been the opposite. It's been the opposite again for
Speaker 3: the past seven years. The issue has not been yield hoggy,
Speaker 3: it's been afraid of duration. So scarred, so scarred by
Speaker 3: those double digit losses in terms of high quality fixed income.
Speaker 2: That's one of the.
Speaker 4: Rough I mean historically rough. In twenty twenty two.
Speaker 2: It was very rough.
Speaker 3: Again, when you're in when you're negative two percent real yields,
Speaker 3: there are not a lot of good things that can happen, right,
Speaker 3: but that that negative two to two percent move, that
Speaker 3: four hundred basis point move and real rates. Our opinion,
Speaker 3: generally speaking, that was the bond fair market.
Speaker 2: Yep.
Speaker 4: How about I mean mortgage backed securities. I'm seeing some
Speaker 4: of the best returns in fixed income and mortgage backed securities.
Speaker 4: What's going on in that market?
Speaker 3: We like mortage backed securities generally speaking. Again, we're neutral
Speaker 3: cross sectors, but within sectors we do like mortgage backs
Speaker 3: because what's the rest of the mortgage back. You're always
Speaker 3: going to get your principle and your interest payment back.
Speaker 3: You just don't know when. If people prepay, you get
Speaker 3: more cash using your rates are lower. You don't want
Speaker 3: it rates go up. The bonds extend, you get less
Speaker 3: cash flow, and you'd like to reinvest in higher yields.
Speaker 3: The bonds have already extended, hopefully some of you have
Speaker 3: two percent mortgages on whatever properties you have. The bonds
Speaker 3: have extended already, you're still getting a cash flow, so
Speaker 3: you're almost basically a flat yield on mortgage backs to
Speaker 3: investigreate corporate right now, that makes mortgage backs look relatively attractive,
Speaker 3: especially at a alta equity environment.
Speaker 2: With all the politics that's going on, folks, we're waiting
Speaker 2: for a conversation or rehoarded in conversation with a gentleman
Speaker 2: from the Netherlands, mister Routie now at NATO, the new
Speaker 2: leader of NATO, and we're looking forward to that here
Speaker 2: in about four minutes. We hope we're lining up the
Speaker 2: antennae in the satellites starlink Matt Disick with US with
Speaker 2: Bank of America. I look at this and the number
Speaker 2: one thing has been the gift of cash. If you
Speaker 2: believe disinflation's in order, not the fear of deflation. But
Speaker 2: after the sticky inflation, there's a settlement of GDP, we
Speaker 2: get a disinflationary trend. Can you model cash back under
Speaker 2: four percent? I believe you can.
Speaker 3: And if you maintain the idea that the FED is
Speaker 3: focused on getting back to two percent inflation or very
Speaker 3: close to it, well then you know, no matter how
Speaker 3: aggressive fiscal policy is, it can't really change demographics. It's
Speaker 3: very tough to change the population dynamics, and so real
Speaker 3: rates again that they have to be you know, fifty
Speaker 3: base points above inflation. Probably not in that range of
Speaker 3: fifty to one hundred and fifty one percent on average,
Speaker 3: one percent over inflation, right, So then a three percent
Speaker 3: fit of funds right, two percent inflation plus one percent reel.
Speaker 3: Sounds like a reasonable place.
Speaker 2: To be really valuable on a Friday. Thank you so much.
Speaker 2: Mentisic for this will be with us here again. Next
Speaker 2: time we'll talk rugby at University of Pennsylvania.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us Live
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Speaker 2: This is a joy, as we had Sam Stova earlier.
Speaker 2: Now we're really gonna dive into the adjustments of someone
Speaker 2: who's got in the market so right. John Stolfiz in correction,
Speaker 2: half correction, partial correction, has said be comfortable on equities.
Speaker 2: He's chief investment strategists at Oppenheimer. This morning, are you
Speaker 2: still a bull? Yes?
Speaker 5: I am Tom still a bull? Why very much? Because
Speaker 5: when we look at the way business is navigating these waters,
Speaker 5: the earning season that just ended Q four earning season.
Speaker 5: You've got double digit gains and seven out of nine
Speaker 5: sectors only two sectors negative. One was double digit earnings negative.
Speaker 5: That was energy. We're figures because we're a wash in
Speaker 5: oil right now. But the seven sectors that were double
Speaker 5: digit gains, it wasn't just and communications services. It was
Speaker 5: you had good, strong value stocks in there and values
Speaker 5: out performing growth right now. And we think it's you
Speaker 5: know the market is dynamic.
Speaker 2: Okay, well, let's be dynamic. Let's pretend we're on a
Speaker 2: couch forty years ago. I'll do my lur Rukaiser imitation
Speaker 2: and you do your John Stolfi's imitation. It's seven eight
Speaker 2: thirty at night, the world's turned upside down, and Uncle
Speaker 2: Lou's they're having us calm down. How will corporations adapt
Speaker 2: to this Maelstrom? What does securities research at Oppenheimer's say, Well.
Speaker 5: I think what what is generally the thought here is
Speaker 5: that corporations have been under due rest now for over
Speaker 5: sixteen years. In many points we had the great financial writing.
Speaker 2: It has been under duress. Now come out.
Speaker 5: You don't know them recently, but if you look at
Speaker 5: it over the last few years. I mean, it had
Speaker 5: tough times, and some of the other texts did. But
Speaker 5: when you look at the markets and managements, how they've
Speaker 5: operated across the sectors, it's great financial crisis, the pandemic,
Speaker 5: the disruption of the global supply chain, the levels of
Speaker 5: inflation that were hit, the FED policy tightening, no recession.
Speaker 5: The consumer is still spending. It's the resilience Tom, That's
Speaker 5: what gives us the courage of our convictions. At this point.
Speaker 4: Some are concerned about the consumer there, John. We had
Speaker 4: some of the airlines earlier this week take their earnings down.
Speaker 4: We had some retailers like Coals take their guidance down
Speaker 4: here maybe suggesting that all this uncertainty out there in
Speaker 4: the marketplace.
Speaker 5: The news, the noise.
Speaker 4: Maybe impacting the consumer. How do you think about that.
Speaker 5: Well, Paul, without a doubt. You know, we had the
Speaker 5: FED raise eleven times and then on pause at nine
Speaker 5: at the higher end and just started to cut last September.
Speaker 5: Just what fifty bip September, a pair of twenty five
Speaker 5: BIPs in November and December. So very much. It's no
Speaker 5: doubt you're going to feel the slowing because people are
Speaker 5: feeling a pinch but American consumers tend to move towards
Speaker 5: discount stores, private labels. We tend to keep shopping. The
Speaker 5: world criticizes for all life of consuming.
Speaker 2: But what if whatever the percentage is fortif the fancy
Speaker 2: people in America are keeping American consumption going, does Oppenheimer
Speaker 2: think that is dented and that will push into a
Speaker 2: diminished revenue growth. No?
Speaker 5: Not at this point, We're still looking where we.
Speaker 2: Get into, say such a negative error. Come on, I mean,
Speaker 2: I need some negativity from Stolfus.
Speaker 5: Well, to me, it looks like guitar prices are up.
Speaker 2: Actually, you know, you know, hold on, let's stop the show,
Speaker 2: folks right now. We go to Paul Sweeney disciplinarian. Should
Speaker 2: we have a joint guitar purchase this weekend where Stulfus
Speaker 2: and I both purchase separate crutches?
Speaker 4: I think you jump right in there.
Speaker 2: There we go. Okay, continue with John.
Speaker 5: There's a child oil.
Speaker 2: Now there's a challenge.
Speaker 5: But we have seen and what happens if the tariffs
Speaker 5: affect Sitku spruce, you know, coming in from Canada. There's
Speaker 5: all kinds of issues there the one thinks of. But
Speaker 5: the realistic thing is we think that we're moving towards
Speaker 5: a new globalization. We think probably a point where with
Speaker 5: all this pressure that's been put on by the tariffs,
Speaker 5: the fact that we are the consumer of the world
Speaker 5: in size, the rest of the world has over capacity
Speaker 5: because over the last forty years they've been building capacity.
Speaker 5: We think we'll come out of this. Okay, I think
Speaker 5: that you know, Schumer, for all I've heard, there's plenty
Speaker 5: of criticism today, I think he recognizes the fact that
Speaker 5: we need to move together to try to avoid a
Speaker 5: shutdown and come to some kind of negotiation. We're looking
Speaker 5: for cooler heads to prevail, and you know, in this case,
Speaker 5: I think Schuber's showed you a cooler head.
Speaker 2: I mean, Paul, the sophistication of YouTube live chat is
Speaker 2: killing me. Tanner, Good morning epiphones for everyone.
Speaker 4: Oh yeah, there you go here, Hey, John, I know
Speaker 4: at one point you had an SMP target of around
Speaker 4: seventy one hundred, I think the highest on the street.
Speaker 5: You sure know how to hurt a guy.
Speaker 4: So what are we doing here with this call?
Speaker 5: Oh that's a great one, Paul. What we're going to
Speaker 5: do with that is that it's under review at this time,
Speaker 5: but we've got to figure. It's very early in the year. Yep,
Speaker 5: this has been a very the dark pitch book. The
Speaker 5: negative thought really has over been overly projected. Likely, so
Speaker 5: let's take a look. But we'll probably look at it
Speaker 5: and see how we go. And we got into the
Speaker 5: second quarter.
Speaker 2: John Sulfas for this Lapko were thrillies with us. We're
Speaker 2: going to continue with mister Solphus, a lengthy conversation this morning.
Speaker 2: Good morning on your commute. I know it's a Friday.
Speaker 2: People are starting to look at March madness, and Sweeney's
Speaker 2: totally unfocused. What's his name sprained his ankle, Cooper Flag,
Speaker 2: Cooper Flag sprained his ankles. Sweeney had to be medicated
Speaker 2: with a double tang mimosa this morning just to get
Speaker 2: to the show. Oh, there's lots of distractions with John Stolfus.
Speaker 2: There's no distraction, John, I'm going to cut to the
Speaker 2: chase and we're gona do. This is a global Wall
Speaker 2: Street right now. So you got a fan distribution and
Speaker 2: a bull like you extend your X axis. We come down.
Speaker 2: You're going to get back to s and P seventy
Speaker 2: one hundred. I get it. You extend your x axis
Speaker 2: out Everybody in the game understands this. David Costin and
Speaker 2: Goldman Sachs did a fan distribution of outcomes where they
Speaker 2: got down to a low single digit probability a center
Speaker 2: tendency out there. You pushed against that. Do you still
Speaker 2: push against a single digit equity world?
Speaker 5: I do. I'd still push against it. And I think
Speaker 5: that the reason why is where we are today is
Speaker 5: we are at a watershed period of innovation that is
Speaker 5: driving that can drive all sectors here. And it's not
Speaker 5: just about tech. It's about what tech can do for
Speaker 5: the utes. It's what it can do for healthcare. It's
Speaker 5: what it can do for repurposing buildings and real estate,
Speaker 5: for finding resources in consumer staples, designing products for consumer
Speaker 5: discretionary This is a very this is you know, it's
Speaker 5: what is it the Chinese curses. May you live in
Speaker 5: interesting times, but the other side of it, for the optimists,
Speaker 5: interesting times can produce not just risks, but can also
Speaker 5: produce opportunities. And we you know, when we look in hindsight,
Speaker 5: because as you know, I've been in this business for
Speaker 5: over forty years. It's going to be forty two. Sometime
Speaker 5: between Maine and May and July.
Speaker 2: Oh you're a new kid.
Speaker 5: God bless me on that way. The thing is, I've
Speaker 5: been through every boombust and recovery cycle, and generally, when
Speaker 5: we look back hindsight, I perfection says, gosh, if only
Speaker 5: we bought more, if only we backed up the truck.
Speaker 5: When people get so negative.
Speaker 2: Crash of eighty seven, which was, we don't need to
Speaker 2: go into it now, folks, there's too much valuable time here.
Speaker 2: With John Stolfiz Crash of eighty seven. I walked in
Speaker 2: the door and she handed me a triple my.
Speaker 5: There you go.
Speaker 2: She took it, She took it off of a normal
Speaker 2: Martini class and put it in a Rocks class. Yeah.
Speaker 4: October nineteenth, we walked out of ne York Stock Exchange.
Speaker 4: I went to the pig and poke or something.
Speaker 2: Yeah, that's what we did. And guess what, life went on?
Speaker 4: Life went on exactly three months later? Where were we
Speaker 4: exactly back on?
Speaker 5: My aunt had turned eighty that year in August, and
Speaker 5: I learned a lot about investing from her. Her first
Speaker 5: phone call to me was the first words were, Johnny,
Speaker 5: what should we be buying today? So that's that's where
Speaker 5: I come, folks.
Speaker 2: Bronze it what you just heard there. What was her name?
Speaker 2: Mary Stolfer's aunt Mary, Aunt Mary. Okay, in the cannon
Speaker 2: of Bloomberg surveillance bronze it to the memory of Aunt Mary.
Speaker 2: What did she say?
Speaker 5: She said, Johnny, what should we be buying today? That
Speaker 5: was our exact words.
Speaker 4: I'll go to Aunt Mary again, what should we be
Speaker 4: buying here? If? If you feel like the world's not
Speaker 4: coming to an end here?
Speaker 5: Great question was you know ap and I doesn't let
Speaker 5: me talk individual stocks because I managed my the Friday.
Speaker 5: I can give you. I can give you the sectors,
Speaker 5: the worst performance, sectors the worst performance I want to
Speaker 5: own consumer discretionary, infotech, communications services, financials, industrials, those look
Speaker 5: good to me. You know, they are at the bottom
Speaker 5: of performance from the peak coming down there. And you know,
Speaker 5: when it comes to healthcare, the utes, real estate, and staples,
Speaker 5: I think they've had the run. Now they've had it.
Speaker 5: I think it's a little late to get defensive, right.
Speaker 4: I mean, a lot of folks are feeling like this
Speaker 4: pullback in the market is kind of a self inflicted
Speaker 4: problem here with all the talks about tariffs and what
Speaker 4: that means for potentially growth and inflation. But that talk
Speaker 4: in that environment. I don't see that changing anytime soon.
Speaker 5: Well, you know, I think it incrementally it can begin
Speaker 5: to change. I think the first thing is hopefully fingers
Speaker 5: crossed today we don't see a government shutdown when they
Speaker 5: take that vote, that gets taken off the table. Then
Speaker 5: beyond that, you've got to figure that. You know, it
Speaker 5: was Bloomber intelligence that I think about a month ago
Speaker 5: said that if twenty five percent tariffs were put in
Speaker 5: against Mexico and Canada, both of those countries would go
Speaker 5: into recession pretty quickly. And the thing is, the pressure
Speaker 5: of the constituencies here, whether it's from business or the
Speaker 5: consumers in all countries around the world to different effects
Speaker 5: with these tariffs will likely, we think, once again, bring
Speaker 5: cooler heads to the table, some kind of a deal
Speaker 5: to come out of it. And it's it's it's just
Speaker 5: that it's time for it. You know, it's not at
Speaker 5: this moment, but it looks like there's too much at
Speaker 5: stake to let things go to hell?
Speaker 4: Right Valuation? Did this pullback here hasn't made valuation attractive
Speaker 4: or maybe just less egregious for some people?
Speaker 5: Well, I think for those who were thinking it was egregious,
Speaker 5: it's less egregious. And for those who thought that it
Speaker 5: was primarily because demand for stocks had gone up so
Speaker 5: broadly and people, you know, it's no longer bucktail party
Speaker 5: stocks that people that the private investor is doing. They're
Speaker 5: looking to replace what used to come from social security
Speaker 5: and corporate pension plans. Yeah, and with you know, with
Speaker 5: a four oh one K, you just get x amount
Speaker 5: in terms of that contribution that goes into the things.
Speaker 5: So people have to invest like institutions, and that gives
Speaker 5: a lot of support to the market.
Speaker 2: Question. Didn't we have Sam Stovall a couple of times
Speaker 2: this week? John, It's just simple if with things beaten down,
Speaker 2: do you buy things that have gone down less or
Speaker 2: do you buy things that have been beaten up?
Speaker 5: I think it depends upon the quality more than anything else.
Speaker 5: So if it's something that has been really battered, happens
Speaker 5: to be good quality, good management, good prospects for the balance.
Speaker 5: Otherwise one thing you want to really emphasize quality here.
Speaker 5: It's so overused these days, but we do believe that
Speaker 5: quality of leadership and a corporation and ideas, and you
Speaker 5: can find those across market capitalizations, whether it's large, mid
Speaker 5: or small, with the large likely favored by the largest
Speaker 5: investor community.
Speaker 2: I got to get this in. We've got a huge
Speaker 2: response on YouTube this Thank you so much. I mean,
Speaker 2: come on the epiphone for thirty five hundred bucks with
Speaker 2: the P ninety pickups. Explain to Joe Pass what the
Speaker 2: great jazz guitars. Joe Pass explained what P nineties do
Speaker 2: because all these kids out there, they're like Seymour Duncan Rocker, rocker,
Speaker 2: What a P nineties do that give you that sound?
Speaker 5: The P nineties is a single coil a type pickup
Speaker 5: instead of a dual coil, so it'll be more prone
Speaker 5: to buzzing and hum. But that said, it has a
Speaker 5: really good fat tone when he's rolled around us. There's
Speaker 5: a roundness and a very rich sound that you get.
Speaker 5: But I prefer a PAF type pickup, you know, whether
Speaker 5: it was built by DiMarzio or Seymour Duncan.
Speaker 2: John Stoles, thank you so much.
Speaker 1: This is the Bloomberg Surveillance Podcast. Listen live each weekday
Speaker 1: starting at seven am Eastern on Applecarplay and Android Auto
Speaker 1: with the Bloomberg Business app. You can also listen live
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Speaker 1: say Alexa. Play Bloomberg eleven thirty.
Speaker 2: We're gonna squeeze a two hour discussion in here with
Speaker 2: America's giant and Treid Douglas Erwin, his professor at Dartmouth.
Speaker 2: He's absolutely definitive. We mentioned Adam posing yesterday and Sad
Speaker 2: Bone of the Peterson Institute. It's real simple, folks. The
Speaker 2: must read this weekend The Incoherent Case for tariffs Doug Erwin.
Speaker 2: In what way is the White House incoherent?
Speaker 6: Well, in several ways, unfortunately. First is just trying to
Speaker 6: justify what it is they're trying to do. What is
Speaker 6: the mission? What is the goal? What is the end
Speaker 6: game that they want to accomplish. Is it revenue? Is
Speaker 6: it bringing back manufacturing jobs? Is it reducing the traid down?
Speaker 6: Is it national security? It's all the above. And the
Speaker 6: problem is is we just draw on an insight by
Speaker 6: Jon Tinbergen, an old Dutch economist who won the Nobel
Speaker 6: Prize many years ago. We're just saying, if you have
Speaker 6: a policy target that you want to hit, you need
Speaker 6: an instrument that will do that. And the problem is
Speaker 6: terriffs can't achieve multiple objectives in this way without a
Speaker 6: lot of collateral damage, and so it's not clear what
Speaker 6: the administration wants to achieve.
Speaker 2: First and foremost, the Bible on this, folks, this is
Speaker 2: when Blancheflower was younger, Slaughter was younger, Doug Irwin was.
Speaker 2: I got a graduate school against the tide and intellectual
Speaker 2: history of free trade. Here's my book review. Shut up
Speaker 2: and read it, Doug Irwin. This morning, I go to
Speaker 2: John Stuart Mill nineteenth century early and he's arguing about
Speaker 2: infant industries. It is if President Trump wants to bring
Speaker 2: infant manufacturing back to America, can he do that? Is
Speaker 2: because there any tip? Is there a policy's success template
Speaker 2: to work off to bring infant manufacturing industry back to America.
Speaker 6: Well, it's interesting you bring u John Stuart Mill, because
Speaker 6: we're talking about the nineteenth century, and of course he
Speaker 6: refers to William McKinley quite a bit, another nineteenth century
Speaker 6: president who imposed tariffs to try to keep industries here
Speaker 6: in the United States. You know, you can do it sometimes,
Speaker 6: but the cost can be very high. You know, many
Speaker 6: countries around the world try to reshore industries. So Argentina
Speaker 6: has a little bastion of manufacturing in Tierra del Fuego
Speaker 6: of all places that they've inculcated with tax subsidies and
Speaker 6: important tariff tariffs. So you can reshore some industries, but
Speaker 6: the question is at what price, at what cost to
Speaker 6: other sectors of the economy, and is it really worth it?
Speaker 4: So, Professor, depending upon the day, the administration has different
Speaker 4: reasons for imposing terrffs, whether it's to you know, choke
Speaker 4: off drugs come into the country, or immigration or the other.
Speaker 4: Some days it's trade deficits. I'm just not sure. But
Speaker 4: for trade deficits, let's just stick to the economics. If
Speaker 4: the US one is a trade deficit with a particular country,
Speaker 4: is that inherently a problem? And if it is, do
Speaker 4: tariffs address that?
Speaker 2: Well?
Speaker 6: Generally, I mean, we can have a debate about whether
Speaker 6: reducing the trade deficit overall not a particular bilateral balance,
Speaker 6: but the trade deficit overall is a good policy or not,
Speaker 6: or whether we should make that an objective.
Speaker 2: But let's say it is.
Speaker 6: Then the question is you raise, is you know, our
Speaker 6: terraces and a way of achieving that, and generally not,
Speaker 6: because when you impose tariffs, the dollar is going to
Speaker 6: appreciate and imports may go down, but exports are going
Speaker 6: to be hit as well because of the appreciation of
Speaker 6: the dollar. In addition, there's foreign retaliation. So yes, import
Speaker 6: teriffs will reduce imports, but then foreign terff retaliation is
Speaker 6: going to reduce US exports. So what we try to
Speaker 6: point out is that, yes, there are policies that we
Speaker 6: can do as Americans to reduce the trade deficit. First
Speaker 6: and foremost, cut the fiscal deficit, because that is a
Speaker 6: big source of dissaving in the US. It's a big
Speaker 6: source of excess spending. And you might recall Marty Feldstein
Speaker 6: way back in the nineteen eighties had the twin deficit
Speaker 6: hypothesis that the current account deficit is being driven in
Speaker 6: part by the fiscal deficit. And so that's one concrete
Speaker 6: thing we could do to end our alliance on foreign
Speaker 6: capital inflows and help balance our books on both sides
Speaker 6: in terms of the trade accounts and the fiscal accounts.
Speaker 4: Do tariffs raise revenue for the US government for is
Speaker 4: that efficient way to do that?
Speaker 2: Well?
Speaker 6: It can, yes, So we get about two percent of
Speaker 6: the federal government's revenue today has raised through the tariff.
Speaker 6: But The idea that you could balance the budget or
Speaker 6: pay for tax cuts with a big increase in tariffs
Speaker 6: is really not going to work. And one of the
Speaker 6: problems is that imports are very sensitive to tariffs, so
Speaker 6: as you raise tariffs, the volume of imports is going
Speaker 6: to shrink. It's a tax base that's going to shrink
Speaker 6: and disappear the more you tax, so that revenue is
Speaker 6: going to disappear. Once again, there's no alternative really to
Speaker 6: income and corporate taxes as a revenue raising device for
Speaker 6: the US.
Speaker 2: We are honor that Douglas Irwin is with us. I'll
Speaker 2: put out on social his Foreign Affairs article. I'm not
Speaker 2: going to mince words, folks. A subscription to the print
Speaker 2: Foreign Affairs magazine is literally the price of a fancy
Speaker 2: martini in Manhattan, Okay. And it is the bible you
Speaker 2: throw to your kids and say, shut up and read
Speaker 2: Douglas Irwin, shut up and read outam imposing and on
Speaker 2: we go. There's a lot of people out there, Professor
Speaker 2: Irwin that think fancy ivy League professors are talking about
Speaker 2: a rigged system. And one way to start it is
Speaker 2: all the American corporations boosting up real estate in Dublin.
Speaker 2: So even Bono can't afford to live in Dublin anymore.
Speaker 2: Doug Irwin comment on the free launch of tax avoidance
Speaker 2: in Ireland by American corporations.
Speaker 6: This is a really big issue, and you put your
Speaker 6: finger on something. When we try to put use tariffs
Speaker 6: to adjust these things, we're sort of missing the boat.
Speaker 6: I'd recommend to you. Kimberly Clousing of UCLA Law School,
Speaker 6: also affiliated with the Peterson Institute, who has pointed out,
Speaker 6: as many others have as well, that the tax code
Speaker 6: sort of pushes American manufacturers overseas, and so we have
Speaker 6: to resolve our tax system, our tax code problems to
Speaker 6: bring back that economic activity and stop the offshoring of
Speaker 6: intellectual property, receipts, corporate income and things of that sort.
Speaker 6: So just putting on tariffs isn't going to solve that problem,
Speaker 6: but the domestic, the US tax code can.
Speaker 2: Please comment and then the leadership on this, folks, came
Speaker 2: home William Klein, who was hugely influential for me, Douger.
Speaker 2: When the President loves to talk about a bilateral approach
Speaker 2: or even some would say a unilateral approach, William Klein
Speaker 2: would say we live in a multilateral world. Is the
Speaker 2: dreams and hopes of sixteen under Pennsylvania Avenue going to
Speaker 2: discombobulate because we refuse to look at this multilaterally.
Speaker 6: I think it's a shortcoming of their approach. And first
Speaker 6: of all, I mean it has to start with sort
Speaker 6: of foreign passing, recognizing that we have allies and people
Speaker 6: that are democratic, market oriented economies, and we're all sort
Speaker 6: of trying to achieve the same thing. They're not our enemies.
Speaker 2: There's a wonderful.
Speaker 6: YouTube video of Ronald Reagan giving one of his Saturday
Speaker 6: radio addresses which is almost speaking to Trump from the grave.
Speaker 6: It's talking about how our allies are and our trading
Speaker 6: partners are our friends, not our enemies, and we really
Speaker 6: have to work with them if we're going to confront
Speaker 6: the China threat and other threats around the world. So
Speaker 6: you can't alienate everyone and think that everyone's sort of
Speaker 6: taking advantage of you. There are countries with goodwill that
Speaker 6: we could work with cooperatively and improve the trade situation.
Speaker 2: Professor, thank you so much. I'm not going to mince words.
Speaker 2: Just buy against the tide. Just put it on a
Speaker 2: coffee table. You don't have to read it. Just put
Speaker 2: it there at school. It's got a beautiful light blue
Speaker 2: cover and all that. Dougerwin, thank you so much it
Speaker 2: dart Min's this morning.
Speaker 1: This is the Bloomberg Surveillance Podcast. Listen live each weekday
Speaker 1: starting at seven am Eastern on Apple Corplay and Android
Speaker 1: Auto with the Bloomberg Business app. You can also watch
Speaker 1: us live every weekday on YouTube and always on the
Speaker 1: Bloomberg terminal.
Speaker 2: Guess what, folks, this is really the most important discussion
Speaker 2: of the day. Sheila Cagilos with Jeffreys, and she brings
Speaker 2: in bulletproof engineering cred along with their economics. It's on
Speaker 2: the airline industry. We're going to talk about the state
Speaker 2: of the industry now. But Sheila, I'm just going to
Speaker 2: cut to the chase. Every house on the East Coast
Speaker 2: is looking at the Try State area on my place.
Speaker 2: I've got a lovely place, folks. I counted twelve airplanes
Speaker 2: in the sky like a couple of weeks ago, a
Speaker 2: record amount airline safety in Denver the other day. Here
Speaker 2: the other day, the horror of what we saw in Washington.
Speaker 2: People are really falling a part of this. You've got
Speaker 2: engineering cred. Do you believe in the system.
Speaker 7: I do, but I also think this is where our
Speaker 7: airline and defense coverage come into play exactly.
Speaker 2: That's why we're here.
Speaker 7: Yeah, I met with that.
Speaker 2: I can tell you it's a four hour conversation.
Speaker 7: I think it's very important, you know, with the DOGE
Speaker 7: cuts which have impacted defense, whether it's the manufacturers or
Speaker 7: the service names, to realize how important government employees are actually.
Speaker 4: To the system.
Speaker 7: Within the system of the US. I understand a five
Speaker 7: percent headcunt cut that exists at banks all the time,
Speaker 7: but to do it within government employees where we tend
Speaker 7: to be understaffed. The FAA, as an example, air traffic
Speaker 7: controllers in Newark are understaffed and we're flying forty percent
Speaker 7: more passengers through that airport as an example, So to
Speaker 7: fire five percent of them in a blanket, you know,
Speaker 7: layoff does not seem to make sense. And a lot
Speaker 7: of the companies that have been hit, SAI C, Parsons,
Speaker 7: Raytheon Technologies, Litos actually provides systems for the FAA.
Speaker 2: Do those people Paul's got the Gulf Stream, Scott's still here.
Speaker 7: In a couple of days, he'll be fine.
Speaker 2: Out of EWR. Do the flight controllers have the power
Speaker 2: to say we don't have enough people, we can't do
Speaker 2: our job.
Speaker 7: You know, I know both the former administrator Mike Whittaker
Speaker 7: FAA administrator, as well as Dan Elwell under Trump administration
Speaker 7: number one. I do think there's areas where we could
Speaker 7: cut administrator, cut air traffic controllers. Perhaps we don't need
Speaker 7: them from twelve am to six pm when there aren't
Speaker 7: twelve planes in the sky above your backyard. But you know,
Speaker 7: we might have to fulfill more funding and also technology,
Speaker 7: the data. There's a lot of data that the FAA
Speaker 7: as we just need the technology to mine it, and
Speaker 7: so cutting these service contracts don't necessarily make sense.
Speaker 2: Chill.
Speaker 4: Earlier this week, we had a number of the major
Speaker 4: airlines cut their earnings, forecast their guidance Outlook what happened,
Speaker 4: because it seems like I'm thinking back to the earnings
Speaker 4: last season. I didn't hear much talk about that. What happened.
Speaker 7: The drastic change is what's scaring folks, so, you know,
Speaker 7: and it wasn't one thing. That's what I think everybody
Speaker 7: is concerning for folks. So first it was the safety issues.
Speaker 7: So let's close up on that. Whether it was Delta
Speaker 7: or American put these airlines on a marketing hiatus where
Speaker 7: it doesn't make sense to put out a fly for
Speaker 7: free tomorrow. Second, corporate travel, we've seen that tightening, whether
Speaker 7: it's our clients as well, paralyzed by what's going on
Speaker 7: in the markets. They can't leave their desk, so it
Speaker 7: maybe prohibits a work travel trip. So corporates are tightening
Speaker 7: their budget and seeing a pull back. And then third leisure,
Speaker 7: everybody sees what's going on with the stock market, maybe
Speaker 7: pulls back on that last trip. And then fourth federal
Speaker 7: employees as well, traveling less.
Speaker 2: Paul, I just looked at the flight. I always look
Speaker 2: at here and it's down one thousand bucks. Sure, road
Speaker 2: trip over to Paris.
Speaker 4: Yeah, but your the the Euros, you know, not where
Speaker 4: it was a couple.
Speaker 2: That's okay. But I can get tear I can get
Speaker 2: tear free. Moet shunned down.
Speaker 4: There, very good Chila talk. It is about the the
Speaker 4: the airlines. Where are we in terms of capacity? Are
Speaker 4: they at? Are they where they need to be? Where
Speaker 4: they want to be, Because it still feels like every
Speaker 4: plane I get on is full.
Speaker 7: So yeah, I think we're watching the data really closely
Speaker 7: over the next two three weeks, so forty percent of
Speaker 7: airline earnings are in Q two, so it's go time
Speaker 7: for them. Let's see what happens from March fifteenth through
Speaker 7: April fifteenth. April ninth is one delta reports. But capacity,
Speaker 7: to answer your question, TSA, volumes are up about one percent.
Speaker 7: Capacity splatsh. So we've seen capacity tighten. That's been the
Speaker 7: story of the last eight months. But we're seeing capacity
Speaker 7: come in in Q two. Obviously, prices are down, so
Speaker 7: airlines are trying to keep their profit levels adding more capacity.
Speaker 7: That just exasperates the issue.
Speaker 4: What what do airlines typically do if they do see
Speaker 4: a shift down and demand, whether it's just consumer uncertainty
Speaker 4: around tariffs or whatever. What do they do on the
Speaker 4: cost side to adjust for that?
Speaker 7: Typically very difficult. Yeah, you know, you don't have many
Speaker 7: variable costs. A lot of it is fixed. Your planes fix,
Speaker 7: your pilot's fixed, your schedules, your gates, so very little
Speaker 7: you could do. You could maybe add red eye find
Speaker 7: to add incremental opportunities. That's what Southwest is doing. But
Speaker 7: that's what makes airlines trade up five to seven times PE.
Speaker 7: You know, seventy percent discounts to the market. Airlines have
Speaker 7: not been seen as the best investment vehicles because they
Speaker 7: have very little maneuvers.
Speaker 4: They could pull Blue.
Speaker 2: Button Detroit Lions button. Then let's start there. How trothy
Speaker 2: is the business right now? I mean, is it going
Speaker 2: into one of those ugly periods where it's tough to
Speaker 2: maintain free cash flow or even revenue pop?
Speaker 7: I think depends on the carrier.
Speaker 2: Really yeah, it's not an industry thing.
Speaker 7: I think some will be better off. So Atlantic is
Speaker 7: still holding in well, Tom still checking out his flight
Speaker 7: to Paris. I think Atlantic is strong, but how long
Speaker 7: does that last?
Speaker 5: If all of Europe Pacific?
Speaker 2: Right now?
Speaker 7: Pacific is okay as well the very limited capacity. Luckily
Speaker 7: Boeing is not delivering many seven eight sevens. Airbus isn't
Speaker 7: delivering many eight three.
Speaker 5: Fifties single best idea right now.
Speaker 7: I actually think Boeing, despite tariffs, despite Macro, despite everything,
Speaker 7: folks were, you know, the equity offering was oversubscribe when
Speaker 7: Boeing had fifty five billion a debt. Now they're down
Speaker 7: to twenty five billion a net debt stocks at the
Speaker 7: same exact price. Folks have waited six years for planes.
Speaker 7: Air airlines are not going to cancel yet, and then
Speaker 7: the aftermarket put in a ge or an F TI
Speaker 7: F ties a smidcap name I cover it's it's been
Speaker 7: you know, hurt by a short report out there. So
Speaker 7: that's the other one I throw in.
Speaker 2: Well, I'm Boeing. Do American companies, says United, Delta, the
Speaker 2: others you know better than I do. Do they want
Speaker 2: to buy Airbus or is it just like we can't
Speaker 2: buy to lose its un American?
Speaker 5: No, they do.
Speaker 7: I mean, but the US is only twenty to twenty
Speaker 7: five percent of the sky skyline, you know, it's not
Speaker 7: as it's not fifty percent.
Speaker 2: Boeing selling to who? Then who's their dominant? Who's there?
Speaker 4: Is interesting?
Speaker 7: Because this is why I think Boeing's quite interesting as
Speaker 7: well as Airbus. We have one hundred and seventy five
Speaker 7: operators buying planes in twenty twenty five. That is very
Speaker 7: well diverse across the globe.
Speaker 4: Where is Boeing in terms of you know, I've been
Speaker 4: told by a lot of folks what drives this name
Speaker 4: is can be the number of deliverables on the seven
Speaker 4: three seven.
Speaker 7: That's all that matters.
Speaker 4: Okay, So where is the company now and where would
Speaker 4: they like to get to?
Speaker 7: And you have confidence they can get to that seven
Speaker 7: three seven is about fifty to sixty percent of their
Speaker 7: free cash flow. You have to assume Defense holds its
Speaker 7: own and stops losing money. But three seven they were
Speaker 7: at twenty to end the year. We're now in the thirties.
Speaker 7: In terms of production, they're still in the twenty five range.
Speaker 7: They're getting out of inventory, but we have three hundred
Speaker 7: and eighty four deliveries for this year on the max
Speaker 7: for contexts they did six hundred at the peaks that I.
Speaker 2: Got a squeeze, is said, is there financial integrity improved?
Speaker 2: Is the systems analysis of Boeing? I got free cash
Speaker 2: flow negative fourteen gazillion, another year negative fourteen gazillion, now
Speaker 2: negative five kazillion forward and then finally they flipped positive
Speaker 2: in twenty twenty six. What's the integrity of that?
Speaker 7: Guess it's Defense. Defense has lost three billion triple seven
Speaker 7: X has lost four billion development programs. And then of
Speaker 7: course you add the strike, you add DeLay's given you
Speaker 7: gave away free aircraft.
Speaker 2: How's it turned around? How they fix the damn rivets
Speaker 2: that fell out of the airplane?
Speaker 7: It's interesting because I was in Charleston three weeks ago.
Speaker 7: That's where they manufactured eight epens. They do the three
Speaker 7: sevens up in Seattle and rent In got reported by
Speaker 7: a Boeing employee for my shoes not being suitable for
Speaker 7: the factory floor. And I was like, this is a
Speaker 7: very stark change to how it's been. You know, they're
Speaker 7: very the fays integrated into the way.
Speaker 2: We were wearing Christian No I was wearing. I was wearing.
Speaker 7: I was wearing. I won't give the brand, but I
Speaker 7: was wearing. Yeah, No, it was it was it was
Speaker 7: ballet flats.
Speaker 2: And so they wouldn't let you on the floor with.
Speaker 7: Ballet They gave me an exception, but I was, I was, do.
Speaker 2: You buy them? Yeah, okay, do you buy the ballet
Speaker 2: flats on Madison Avenue the store. If you go in
Speaker 2: the store, you can only come out with three boxes.
Speaker 2: I've learned that.
Speaker 4: Yeah.
Speaker 7: But they they.
Speaker 2: Wouldn't let you on the floor in ballet flats.
Speaker 7: Nope, they they they I had a solid talk about
Speaker 7: appropriate you want to see right, So that that comes
Speaker 7: back to my engineering. I gotta gotta step it.
Speaker 5: Up, not Boeing.
Speaker 2: So I could say Shila, Thank you so much. Shia
Speaker 2: with this was Jeffreys. They're managing and I love it.
Speaker 2: The real engineering integrity there on the aviation position.
Speaker 1: This is the Bloomberg Surveillance Podcast, available on Apple, Spotify,
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