Latest / Bloomberg Intelligence / EM Spreads Are Embedded to Sovereign Risk, Sassower Says

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EM Spreads Are Embedded to Sovereign Risk, Sassower Says · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
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  Speaker 1: Along with my co host Lisa Bramowitz. Each day we
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  Speaker 1: Podcast on Apple Podcasts, SoundCloud and Bloomberg dot com. I
• 0:32
  Speaker 1: wanted to want to learn about connections connections between emerging
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  Speaker 1: markets and the energy sector, and here to help us
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  Speaker 1: is Damian Sassaur. He's our fixed income strategist for Bloomberg Intelligence.
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  Speaker 1: Damian always a pleasure, Thanks for being with me. Can
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  Speaker 1: you explain what what exactly are we trying to understand here?
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  Speaker 1: A connection that I didn't really I didn't realize existed. Yeah, sure, So,
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  Speaker 1: I mean emerging markets, especially the debt issued by emerging
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  Speaker 1: market oil and gas companies, tends to be are tightly
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  Speaker 1: correlated to the sovereign parent countries in which they're located, right,
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  Speaker 1: and so one would think it's an oil company. It
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  Speaker 1: produces oil, and so it's business. It's emerging, you know,
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  Speaker 1: it's it's it's the spreads for its for its debt
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  Speaker 1: should be more correlated to the price of oil. But
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  Speaker 1: that's just not the case. What what gives us an
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  Speaker 1: ex I mean, what are you talking about? Brazil? So Brazil, Actually,
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  Speaker 1: Brazil is an interesting case because um, the Natro Petro
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  Speaker 1: Brass is basically owned by the Brazilian government. Yeah about
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  Speaker 1: so you would think that it would um, but nevertheless,
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  Speaker 1: it produces oil. I mean, it's got upstream and downstream businesses.
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  Speaker 1: But Petro Brass for the most part, um and has
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  Speaker 1: historically had a very tight correlation to the price of oil.
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  Speaker 1: But um, you know, it's core the correlation between Petro
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  Speaker 1: Brass bond spreads and that of its of Brazil itself
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  Speaker 1: or just I mean they're upwards of close to although
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  Speaker 1: that's been declining of late um in lieu of all
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  Speaker 1: the political instability that's going on on the ground, right,
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  Speaker 1: So I think what's happening is you might have creditors
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  Speaker 1: a little bit more decenseive ties to the political turmoil
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  Speaker 1: surrounding Michelle Timer and just exhausted by it because that
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  Speaker 1: goes back to the previous administration and then the previous
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  Speaker 1: previous administration in Brazil, and also there was there was
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  Speaker 1: a big corruption scandal at Petro Brass That's that's correct.
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  Speaker 1: So I mean as opposed to perhaps what's going on
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  Speaker 1: in Mexico, right, I mean, what's interesting about pemm X,
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  Speaker 1: which is the large and that is, you know, the
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  Speaker 1: oil company in Mexico. Exactly the spreads of Mexico, of
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  Speaker 1: quite frankly of pem X are more trightly correlated to
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  Speaker 1: that of Mexico and Mexico given what's been going on
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  Speaker 1: with NAFTA renegotiations and trade linkages to the US. What
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  Speaker 1: you're finding is that uh, pem X bond spreads are
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  Speaker 1: more trightly correlated to US financial conditions, the US money
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  Speaker 1: markets right there the front end of the Yolk curve.
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  Speaker 1: So you know, with um with all that's going on here,
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  Speaker 1: with the removal of quantity, quant easing and perhaps you know,
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  Speaker 1: quantightening going forward, and just finding that PEMMIC spreads and
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  Speaker 1: more track lee or more closely tracking that of the
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  Speaker 1: US and of of its sovereign parent is is do
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  Speaker 1: we need to note that this is also because the companies,
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  Speaker 1: these oil and energy companies, they are so closely linked
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  Speaker 1: to the governments of these emerging economies like Mexico, like Brazil.
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  Speaker 1: I mean, it's not as if these are what we
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  Speaker 1: would consider to be private, shareholder owned companies. Well, well,
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  Speaker 1: I mean that's a great point. I mean, Petro Brasse
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  Speaker 1: and Pemas are definitely quasi sovereign entities that are you know,
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  Speaker 1: they're not going to do anything that's the central government,
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  Speaker 1: the government doesn't want them to do. But I can
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  Speaker 1: I can direct your attention to a company um in
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  Speaker 1: Russia by the name of lock Oil, right, and lock
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  Speaker 1: Oil is not owned by the government, and yet it
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  Speaker 1: spreads track that of the Russian sovereign upwards. So it's
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  Speaker 1: not as if it's a public private, quasi sovereign corporate.
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  Speaker 1: You know. Issue here, what you're finding is that emerging
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  Speaker 1: market companies that that the embedded sovereign risk in their
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  Speaker 1: bond spreads it just outweighs the fundamentals. And we've seen that, right,
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  Speaker 1: fundamentals you know, for the most part, I don't want
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  Speaker 1: to say they don't matter anymore, but we've been in
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  Speaker 1: this one way street, this one way environment for e
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  Speaker 1: M debt, and so you know, you're finding that they're
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  Speaker 1: tracking sovereign bond spreads pretty closely. All right, I'm gonna
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  Speaker 1: push back with you on on on Russia because you
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  Speaker 1: mentioned Luke Oil. Okay, very good. It is a private company,
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  Speaker 1: it is not run by the government, but it happens
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  Speaker 1: to be in Russia. And my I mean, you know, uh,
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  Speaker 1: forgive me, but I think that bottom reputing casts a
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  Speaker 1: very wide shadow over every aspect of the Russian economy.
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  Speaker 1: So it's not like Luke Oil is gonna do something
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  Speaker 1: that the Russian energy ministry doesn't like. No, that's absolutely true.
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  Speaker 1: But eighty percent of its revenue is coming from abroad, right,
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  Speaker 1: it's not gas prompts. So look what we have is
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  Speaker 1: you know, um, but you make a good point. I
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  Speaker 1: mean this is that the political context is crucial when
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  Speaker 1: you're looking at a merchant market debt. And that's and
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  Speaker 1: that's the point here. I mean, you just can't ignore
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  Speaker 1: the soueig risk. I mean, anybody who's gonna do a
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  Speaker 1: deep dive and do a fundamental bottom analysis on any
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  Speaker 1: e m issuer, you just can't ignore the political risk
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  Speaker 1: that's embedded within bond spreads. I was gonna say, next
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  Speaker 1: we should go to Venezuela, right, Petasa, Well, Pettis is
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  Speaker 1: an interesting one, right, I mean, now that we've seen
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  Speaker 1: you know, the you know all the talk about you know,
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  Speaker 1: the U stupping sanctions and and everything that's going on
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  Speaker 1: on the ground there. I mean, it's a real crisis.
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  Speaker 1: And so what you've seen there is you've seen credit
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  Speaker 1: the fault swap spreads blowout. And what that's done is
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  Speaker 1: it's increased the implied probability of default from something like
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  Speaker 1: upwards of seventy over the last month. That's a huge move.
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  Speaker 1: And and so doing someone's made a lot of money
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  Speaker 1: on this right because someone has bet that. I mean
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  Speaker 1: obviously someone bought the credit the false swaus when they
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  Speaker 1: were low and people thought there wasn't gonna be a problem.
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  Speaker 1: And this is like you're you're hoping that you're gonna
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  Speaker 1: get into an automobile accident and then you benefit because
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  Speaker 1: the premium skyrocket. Well well just from but that's true
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  Speaker 1: if you're if you're kind of playing, if you're trader
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  Speaker 1: mentality and you're playing the CDs spreads. But if you're
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  Speaker 1: a cash bond holder in petivesa right and you're a
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  Speaker 1: long term investor, you know what you're seeing is people
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  Speaker 1: have kind of been playing the front end because you know,
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  Speaker 1: every time there's you know, they're gonna default, they're gonna default.
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  Speaker 1: They don't default, and so the bonds pay out and
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  Speaker 1: and they and they mature and they were deemed and
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  Speaker 1: you get hundred cents on the dollar. But all those
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  Speaker 1: short end bonds, especially the ones that are coming due
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  Speaker 1: towards the end of the year, that are trading at
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  Speaker 1: svs on the dollar, they've come down quite a bit,
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  Speaker 1: and people are moving further out along the curve simply
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  Speaker 1: because your risk of loss is less. Think about it.
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  Speaker 1: If you're paying eighty cents for a pet of Basia
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  Speaker 1: bond and at the faults you lose eighty cents, but
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  Speaker 1: if you're paying thirty five cents for the twenty seven
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  Speaker 1: or your risk of loss is that much less. So
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  Speaker 1: you're seeing, you know, long term investors moving out along
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  Speaker 1: the curve. And that's what's going on with That's that's
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  Speaker 1: interesting because I mean that really highlights how people are
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  Speaker 1: reacting to try to reduce their risk, but at the
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  Speaker 1: same time they're looking for more yield. Yeah. Yeah, and
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  Speaker 1: pet A Basa Actually I just ran the numbers. It's
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  Speaker 1: actually the only oil and guest issuer in em hard
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  Speaker 1: currency land that is actually down on the year. But
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  Speaker 1: if you look at it over I mean, my goodness,
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  Speaker 1: if you look at it over the last two years,
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  Speaker 1: you know, I think it's up. You know, seventy eight
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  Speaker 1: per chens, you know. So you can't ignore Petivisa if
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  Speaker 1: you're kind of a closet Banta chaser and index tracker,
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  Speaker 1: if you will, you know you have to have it
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  Speaker 1: in the portfolio. It's just where do you want to
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  Speaker 1: pay your points on the curve? Thanks very much for
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  Speaker 1: explaining this very interesting. Thanks so as always. Damian Sasaur
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  Speaker 1: Hughes are fixed income strategist for Bloomberg Intelligence, giving us
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  Speaker 1: some detail about emerging market that in the connection between
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  Speaker 1: the oil companies in those countries and uh the value
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  Speaker 1: of their dead All right, I want to turn our
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  Speaker 1: attention now to the hospitality industry, and as much as
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  Speaker 1: Marriott has released its results and also we'll be getting
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  Speaker 1: a preview of price line, I want to bring in.
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  Speaker 1: Dan was Leaky is the senior equity analyst at morning Star,
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  Speaker 1: and Dan, let's begin with Marriott, because yesterday they said
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  Speaker 1: they've putting together this partnership with Ali Baba Group in
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  Speaker 1: China because of course they want to tap into the
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  Speaker 1: growing market for tourism and travel amongst Chinese individuals. Can
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  Speaker 1: you speak to what you learned from Marriott's report today? Yeah,
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  Speaker 1: you know, I guess with Ali Baba, we didn't find
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  Speaker 1: that too surprising. I think it makes sense for Marriott,
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  Speaker 1: and in the future, I expect other hotel operators to
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  Speaker 1: join a platform like ali Baba. Given that they have
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  Speaker 1: five million active monthly users, that's a platform that you're
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  Speaker 1: going to want shelf space on, especially, you know, given
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  Speaker 1: China is a growing outbound travel market, so this is
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  Speaker 1: something that is should help Marriott's long term growth opportunity
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  Speaker 1: in China. We're currently about eight percent of their total
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  Speaker 1: rooms are from that region. Um. But beyond that, what
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  Speaker 1: we learned out of the quarter was that their brand
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  Speaker 1: continues to be very strong, and also the US corporate
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  Speaker 1: business spent is seems to be pausing a little bit,
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  Speaker 1: and that's a kind of been echoed by some other
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  Speaker 1: competitors in the hotel space over the last week or two.
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  Speaker 1: All right, we'll get to the bigger, the bigger issue.
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  Speaker 1: Just second, I want to ask you about Marriott and
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  Speaker 1: are would how is the that pro that combination coming on,
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  Speaker 1: because didn't they say that they want to cut what
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  Speaker 1: two fifty millions in uh in dollars from the company's budget, right, Yeah,
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  Speaker 1: so everything that appears on track. You know, they acquired
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  Speaker 1: Starwood back in September of last year, is a good
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  Speaker 1: acquisition and that Marriott was more focused on US and
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  Speaker 1: Starwood had more of an international exposure, so that was
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  Speaker 1: a nice marriage from that vantage point. But yeah, everything
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  Speaker 1: appears on track. As far as the synergies that they
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  Speaker 1: expect to strip out of the Starwood UM integration, UM
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  Speaker 1: the two or fifty million and cost savings, they remain
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  Speaker 1: on track to to have that annulyzed sometime next year. Dan,
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  Speaker 1: it's this this is considered an asset light strategy. Is
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  Speaker 1: that correct? Right? Right? And maybe explain how does that
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  Speaker 1: work and why is that of benefit, particularly when it
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  Speaker 1: comes to margins. Yeah, so, um, you know, so they
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  Speaker 1: don't own a lot of their own hotels. They depend
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  Speaker 1: on third parties to really join the platform, and therefore
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  Speaker 1: they don't have a lot of development capital intensity costs
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  Speaker 1: that really that that's all um forwarded by the third
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  Speaker 1: parties that are joining Mariotte. And the reason they're joining
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  Speaker 1: Mariotte is because Maria has a leading loyalty program, they
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  Speaker 1: have strong brands, and they also have a good website
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  Speaker 1: of traffic um So those are the things that a
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  Speaker 1: third party will look to when they're looking, for example,
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  Speaker 1: to franchise under one of the larger brands. And also
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  Speaker 1: Marriott doesn't have to pay for any of the marketing costs.
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  Speaker 1: All that is is again paid for by these third parties.
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  Speaker 1: So the margins are very high versus if you own
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  Speaker 1: the hotels, those costs are going to be associated with
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  Speaker 1: that because those franchise fees as well as the incentive fees,
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  Speaker 1: they continue to increase the revenue at Marriott and doesn't
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  Speaker 1: cost them any more money. Uh yeah, that's that's essentially correct, right,
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  Speaker 1: So there's a lot of there's a lot of leverage
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  Speaker 1: here um as as they continue to sign up and
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  Speaker 1: get unique growth. The costs are very low, and then
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  Speaker 1: they get a percentage of the revenue that's generated by
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  Speaker 1: these franchisees. Is this the model that you think most
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  Speaker 1: hospitality hotel groups should follow? I do, But you know
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  Speaker 1: it's also a matter of scale. So when you're a
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  Speaker 1: smaller hoteler, you really have to kind of invest your
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  Speaker 1: own capital behind the brands in order to get them
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  Speaker 1: to a point where third parties can gain confidence in
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  Speaker 1: in the brand development. UM. So you look at a
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  Speaker 1: company like Hyatt, for example, that is has more of
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  Speaker 1: an owned exposure. They're starting to get to the point
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  Speaker 1: now where they're approaching two thousand total rooms where I
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  Speaker 1: think they're starting to realize that third parties now believe
• 11:32
  Speaker 1: in the in the brands that they've put their own
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  Speaker 1: where to put their own capital behind. So it's kind
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  Speaker 1: of an evolution that a company gets into where it
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  Speaker 1: becomes more asset light as as it builds a certain scale. Now,
• 11:44
  Speaker 1: price Line is set to release its results after the
• 11:46
  Speaker 1: close of trading today. The shaffs of price Line are
• 11:50
  Speaker 1: up nearly forty percent so far this year. Two stock
• 11:55
  Speaker 1: is of a dollar twenty three right now, what do
• 11:58
  Speaker 1: you expect to hear from price Line? Well, first of all,
• 12:01
  Speaker 1: our long held view is that Priceline is the best
• 12:03
  Speaker 1: position company with an online travel um. You know, the
• 12:06
  Speaker 1: question now is is it the best stock? We think
• 12:08
  Speaker 1: that it's actually near fair value or fair values two
• 12:11
  Speaker 1: thousand and thirty dollars essentially where the stock is training
• 12:13
  Speaker 1: right now. But you know, as far as the report,
• 12:15
  Speaker 1: we expected to be solid um Expedia reported their results
• 12:18
  Speaker 1: two weeks ago. They saw a pretty solid macro environment globally.
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  Speaker 1: Um Expedia's room nights also saw some acceleration versus the
• 12:27
  Speaker 1: prior quarter, and then even though there's been some mention
• 12:30
  Speaker 1: of US corporate pause with the hotelers uh. They also
• 12:35
  Speaker 1: point out that the leisure market, which is more of
• 12:37
  Speaker 1: price lines um um forte that the leisure market is
• 12:41
  Speaker 1: quite strong, so we think that the quarter probably is
• 12:44
  Speaker 1: going to be quite quite solid for Priceline. Can you
• 12:47
  Speaker 1: speak about this idea of you know, the competition from
• 12:50
  Speaker 1: air b and b so vacation rentals, how does that
• 12:54
  Speaker 1: play into a Priceline strategy. Yeah, vacation rentals is a
• 12:59
  Speaker 1: growing market with online travel, and one of the reasons
• 13:01
  Speaker 1: why we like price Line is because Priceline actually has
• 13:03
  Speaker 1: a really strong vacation rental um platform. So price Line
• 13:08
  Speaker 1: has about one point two million properties and twenty five
• 13:11
  Speaker 1: million rooms on booking dot com um and of those
• 13:14
  Speaker 1: twenty five million rooms, about eight million or so our
• 13:16
  Speaker 1: vacation rentals or alternative accommodations, which would compare with Airbnb,
• 13:20
  Speaker 1: which probably you know has around three or four million
• 13:24
  Speaker 1: UM rooms itself on its platform. So price Line actually
• 13:27
  Speaker 1: has a very competitive offer into air Airbnb. And we
• 13:30
  Speaker 1: think that of the total bookings, vacation rentals probably represent
• 13:34
  Speaker 1: a low double digit of price lines total bookings. And
• 13:37
  Speaker 1: you think that at fair value? What is the alternative
• 13:40
  Speaker 1: if you don't like the price of Priceline. What should
• 13:43
  Speaker 1: you do? Well? Trip Advisor? Uh, you know, I think
• 13:47
  Speaker 1: trip the market, it's greatly probably discounting Trip Advisor that
• 13:50
  Speaker 1: also has a pretty good platform. Uh, there's a lot
• 13:54
  Speaker 1: of traffic that goes to trip Advisor. A trip advisor
• 13:57
  Speaker 1: has a lot of content. Um, you know they'll be
• 13:59
  Speaker 1: renowned seeing their results at the close of trading today.
• 14:02
  Speaker 1: As yes, thanks very much. Dan Wassleck, he is a
• 14:06
  Speaker 1: senior equity analyst at The morning Star talking about the
• 14:10
  Speaker 1: hospitality industry. Well, what are the characteristics that a money
• 14:26
  Speaker 1: manager looks for in an investment? Here to tell us
• 14:28
  Speaker 1: is David Coudla. He is the chief executive and the
• 14:31
  Speaker 1: chief investment strategist for Mainstay Capital Management, helping to manage
• 14:35
  Speaker 1: more than two billion dollars based in Grand Blank, Michigan,
• 14:39
  Speaker 1: and he can be followed on Twitter at David Underscore Kudla.
• 14:43
  Speaker 1: That's k U D. L A. Alright, David underscore coudla.
• 14:48
  Speaker 1: What are the characteristics? What are you looking for in
• 14:50
  Speaker 1: an investment right now? Right now, we're looking for investments
• 14:56
  Speaker 1: that can do well in a slow growth economy, and
• 14:58
  Speaker 1: those are the actors that are more dependent on secular
• 15:03
  Speaker 1: a second or growth story than they are the economy
• 15:06
  Speaker 1: and cyclical forces. The economy is doing okay, but it's
• 15:10
  Speaker 1: really just sputtering along at about two gdp growth. So
• 15:14
  Speaker 1: we've seen value stocks have really suffered this year. Growth
• 15:18
  Speaker 1: stocks have done very well, namely technology. Are you going
• 15:23
  Speaker 1: to stick with that or is it time to rebalance?
• 15:26
  Speaker 1: We're going to stick with technology and we're gonna stick
• 15:28
  Speaker 1: with big cap technology. Uh. We We are in the
• 15:32
  Speaker 1: ninth year of a bull market, and there will be
• 15:35
  Speaker 1: a point where, uh, this market finally cracks after the
• 15:40
  Speaker 1: over eight years of the second longest bull bull market
• 15:43
  Speaker 1: in the history of US stocks, where we'll see a
• 15:47
  Speaker 1: problem with a flat or down market and all stocks
• 15:53
  Speaker 1: will suffer at that time until that time when we
• 15:56
  Speaker 1: look at where do we want to be in this
• 15:57
  Speaker 1: market right now past six months in right now, it's
• 16:01
  Speaker 1: still with technology and even healthcare that tends to be
• 16:05
  Speaker 1: economically insensitive. Well, David, how do you how do you
• 16:08
  Speaker 1: know when to get out? I mean the NASDAC is
• 16:10
  Speaker 1: up nearly this year, the SMP is higher by more
• 16:14
  Speaker 1: than eleven. You know, no one's gonna ring a bell
• 16:17
  Speaker 1: for you when you know when it's time. But how
• 16:20
  Speaker 1: do you avoid that downturn on? How do you mitigate
• 16:22
  Speaker 1: the effects? Yeah, no one's gonna ring a bell, although
• 16:25
  Speaker 1: there are some people acting like the ringing bells UH
• 16:28
  Speaker 1: at Oakmark Capital H. Jeffrey Gunlock are have words of caution,
• 16:33
  Speaker 1: and we know that that market has stock market has
• 16:37
  Speaker 1: to have pessimist has to climb a wall of wory.
• 16:40
  Speaker 1: But when we look at market fundamentals, primarily earnings, earnings
• 16:44
  Speaker 1: are very strong and expected to be strong through. So
• 16:49
  Speaker 1: we think you stay with stocks for now. We're probably
• 16:52
  Speaker 1: UH quite a bit more careful within the bond sector,
• 16:55
  Speaker 1: staying away from those interest rate sensitive bond sectors. Well,
• 17:00
  Speaker 1: let's take one of the sort of tech join as
• 17:02
  Speaker 1: an example. Apple, Uh, the earnings that they are recently
• 17:07
  Speaker 1: posted better than estimated, also looking into the future saying
• 17:11
  Speaker 1: that they think they're going to do better than analysts
• 17:13
  Speaker 1: had previously thought. Is Apple characteristic of the kind of
• 17:17
  Speaker 1: company one to own it is. We saw iPhone sales
• 17:21
  Speaker 1: come through very strong in the most recent quarter. Uh.
• 17:24
  Speaker 1: They're continuing really to perform well with still a low
• 17:29
  Speaker 1: pe relative to a lot of their peers. And when
• 17:32
  Speaker 1: we look at the tax reform, that may becoming one
• 17:35
  Speaker 1: of the primary UH ingredients in that is a way
• 17:39
  Speaker 1: for those big companies like Apple to repatriate dollars. And
• 17:43
  Speaker 1: that will be good whether it comes in the form
• 17:45
  Speaker 1: of further investment or in financial engineering, stock buybacks, higher
• 17:52
  Speaker 1: dividend payout. So how do you respond to people that say, gee,
• 17:55
  Speaker 1: you know, David, You're just you're a momentum trader. You're
• 17:58
  Speaker 1: you're going with the momentum. You're adding to the positions
• 18:01
  Speaker 1: that are doing well. Uh, as you just said, eventually,
• 18:05
  Speaker 1: that's not going to work forever. Eventually it won't work forever.
• 18:09
  Speaker 1: But then then we look for as technical assid allocators,
• 18:14
  Speaker 1: where do we want to be in the next market environment.
• 18:17
  Speaker 1: You know, right now, if people who are Warren Buffet
• 18:20
  Speaker 1: or Graham Dodd type investors that have looked at value
• 18:23
  Speaker 1: because it's undervalue, that's simply been a value trap. So
• 18:26
  Speaker 1: momentum has worked very well this year. We think it
• 18:29
  Speaker 1: continues to work well and it will take us to
• 18:32
  Speaker 1: other sectors. Uh as as the market chiefs well. Is
• 18:36
  Speaker 1: a company like Tesla, do you consider that to be
• 18:39
  Speaker 1: a technology company, an automobile manufacturer, a solar company? How
• 18:45
  Speaker 1: would you parse Tesla all the above? Uh? You know,
• 18:49
  Speaker 1: it's a consumer. You know, we'd put it in the
• 18:52
  Speaker 1: consumer cyclical category as an auto manufacturer primarily, but also
• 18:58
  Speaker 1: you'll see it held in a lot uh tech funds,
• 19:01
  Speaker 1: technology stock funds because of the technology incorporated in the
• 19:05
  Speaker 1: overall business model in their products. You know what Elon
• 19:09
  Speaker 1: Musk is all about. But it's a it's a technology
• 19:13
  Speaker 1: stock that quite quite frankly, concerns is quite a bit
• 19:16
  Speaker 1: now and that's because we have this Model three production
• 19:20
  Speaker 1: ramp that we see a lot of. We have a
• 19:22
  Speaker 1: lot of concerns with a cash burn rate. We were
• 19:24
  Speaker 1: concerned about until um a couple of days ago when
• 19:29
  Speaker 1: it was announced that there would be another bar or
• 19:32
  Speaker 1: a bond offering to raise another one point five billion.
• 19:35
  Speaker 1: But you know, that's that's a company we can look at,
• 19:39
  Speaker 1: not like Apple at a low pe that's making a
• 19:42
  Speaker 1: lot of money. Tesla is a company with no Pe.
• 19:45
  Speaker 1: They have no earnings and it's a question of when
• 19:49
  Speaker 1: and if they will ever be a profitable company. So
• 19:52
  Speaker 1: we think owners of Tesla we called a story stock,
• 19:54
  Speaker 1: and they've given Elon Musk and Tesla path on a
• 19:57
  Speaker 1: lot of things because they believe in the future. But
• 20:00
  Speaker 1: we think there's a lot of reality to set in
• 20:02
  Speaker 1: in the next six to nine months for Tesla. Well,
• 20:04
  Speaker 1: it certainly hasn't stopped the stock because the shares are
• 20:08
  Speaker 1: up more than seventy percent so far this year. Do
• 20:11
  Speaker 1: you think that one point five billion dollar bond offering
• 20:14
  Speaker 1: that they're talking about, is that just an effort. They've
• 20:16
  Speaker 1: got to raise the money somehow, but they just don't
• 20:18
  Speaker 1: feel they can dilute the current shareholders. Yeah, and it's
• 20:21
  Speaker 1: it's a good time if you're going to capital markets
• 20:23
  Speaker 1: a lot of companies. There's companies that are going uh
• 20:26
  Speaker 1: in issuing debt to buy back their stock because capital
• 20:30
  Speaker 1: is so cheap right now, so now it's a good
• 20:32
  Speaker 1: time to do it. But they also we think it's
• 20:35
  Speaker 1: a good time for Tesla to do it because they've
• 20:36
  Speaker 1: had the rollout of the Model three. The press has
• 20:39
  Speaker 1: been very good. It was really superb rollout, but if
• 20:42
  Speaker 1: they get a production encounter, some of those production problems
• 20:45
  Speaker 1: the next year's service problems. UH, it'll be a little
• 20:48
  Speaker 1: tougher to go to capital markets. Given that their cash
• 20:50
  Speaker 1: burn rate throughout the money in two in two to
• 20:52
  Speaker 1: three quarters. I think it was very wise for them
• 20:54
  Speaker 1: to do that at this time. As far as this, uh,
• 20:57
  Speaker 1: this effort on on what you hall secular growth healthcare,
• 21:04
  Speaker 1: what what characterizes because I mean health care is abroad,
• 21:06
  Speaker 1: you know, a broad section of the of the market,
• 21:10
  Speaker 1: what particular areas of healthcare, pharmaceuticals, health insurance, health insurance,
• 21:16
  Speaker 1: healthcare providers. We saw a lot of revenue generated for
• 21:20
  Speaker 1: those companies with Obamacare, and we've seen as the different
• 21:25
  Speaker 1: packages have been put forwards legislation and proposals by the
• 21:28
  Speaker 1: Health and then the Senate. Uh. There there within are
• 21:34
  Speaker 1: the factors that the healthcare providers can continue to do well.
• 21:37
  Speaker 1: So healthcare being a non cyclical typically non cyclical a
• 21:44
  Speaker 1: a uh, A non economically sensitive sector that has been
• 21:50
  Speaker 1: on a growth tear, and we think that still a
• 21:53
  Speaker 1: good place to be. What would you say is the
• 21:55
  Speaker 1: one question that you get most often now from investors,
• 22:00
  Speaker 1: When will the other shoe drop? When? What do you
• 22:03
  Speaker 1: what do you tell this bull market end? We know it,
• 22:06
  Speaker 1: we know it will, right, we know it will. And
• 22:09
  Speaker 1: the further it goes, the more chances are quite frankly,
• 22:13
  Speaker 1: that it that that it ends badly. But uh, you know,
• 22:16
  Speaker 1: I think that some of these these uh well and
• 22:20
  Speaker 1: people that have gone to cash or short at this
• 22:22
  Speaker 1: market over the past year, two years, three years, four years,
• 22:26
  Speaker 1: they have definitely not done well and it is not
• 22:28
  Speaker 1: it is not got worked out for them, Thank you
• 22:30
  Speaker 1: very much that David coudla. He is the chief executive
• 22:33
  Speaker 1: and the chief investment strategist for Mainstake Capital Management, helping
• 22:36
  Speaker 1: to manage two billion dollars more than two billion dollars
• 22:39
  Speaker 1: in Grand Blank Michigan. Chairs of Ralph Lauren and Michael
• 22:55
  Speaker 1: Cores all moving higher today. Ralph Lauren up eight and
• 22:58
  Speaker 1: a half percent, Michael Corps is higher by twenty Who
• 23:01
  Speaker 1: says retail is dead, well, maybe my next guest. Daniel
• 23:04
  Speaker 1: DeMartino Booth is the founder of Money Strong and economic
• 23:07
  Speaker 1: consulting firm, former advisor the Dallas Federal Reserve, and a
• 23:11
  Speaker 1: Bloomberg profit. Bloomberg profits are professionals who offer actionable insights
• 23:15
  Speaker 1: on markets. The economy and monetary policy, and the contributors
• 23:19
  Speaker 1: may have a stake in the areas that they write about. Well,
• 23:22
  Speaker 1: Daniel DeMartino bootha, do you have a stake in Ralph Lauren?
• 23:26
  Speaker 1: Meaning do you have things in your closet that maybe
• 23:28
  Speaker 1: you're not going to throw away? Now? Well, I certainly
• 23:31
  Speaker 1: have plenty of Jimmy choose, So I personally stand behind
• 23:36
  Speaker 1: and endorsed the Michael Core's news. All right, well, very good.
• 23:39
  Speaker 1: So Michael Core is one point two billion for Jimmy Choo.
• 23:42
  Speaker 1: What what do you make of today's retail report from
• 23:45
  Speaker 1: Ralph Lauren and Michael Cores? Well, I mean it's not
• 23:49
  Speaker 1: terribly surprising. There's going to be there will be continued
• 23:53
  Speaker 1: pockets of of loyalty out there. I'm a perfect representative
• 23:57
  Speaker 1: representative thereof that being said, I'm complete lately, uh, price
• 24:02
  Speaker 1: sensitive outside of my my little sphears of loyalty, if
• 24:06
  Speaker 1: you will, And I think that we continue to see
• 24:08
  Speaker 1: that come out in the aggregate data. Him So, this
• 24:11
  Speaker 1: idea that people will pay whatever, they whatever, this being
• 24:15
  Speaker 1: asked for the things they really want, but everything else
• 24:19
  Speaker 1: is just sort of up for grabs. It's all price
• 24:21
  Speaker 1: driven it's kind of it's a lot of retail, if
• 24:25
  Speaker 1: you will, has been commoditized, and that commoditization has happened
• 24:29
  Speaker 1: via Amazons, as we all know and talk about until
• 24:32
  Speaker 1: we're blue in the face. Well, you've written a column
• 24:34
  Speaker 1: that says back to school means more retail agony. Describe
• 24:38
  Speaker 1: why you you believe that to be? So, you know,
• 24:41
  Speaker 1: I think that that we saw an acceleration of the
• 24:44
  Speaker 1: decline and brick and mortar retailers over the holiday season.
• 24:48
  Speaker 1: It's surprised even the most pessimistic analysts when it came
• 24:52
  Speaker 1: down to the trajectory of store closures. And because I
• 24:55
  Speaker 1: think many retailers, of course, as we've seen today, not all,
• 24:59
  Speaker 1: but because I think many retailers are in a vulnerable position.
• 25:03
  Speaker 1: I think it's it's feasible that we actually see some
• 25:05
  Speaker 1: more bloodshed around the back to school season, which is
• 25:08
  Speaker 1: the second most important time of the year for retailers
• 25:12
  Speaker 1: after after the holiday season. All right, and do we
• 25:14
  Speaker 1: is it worth while making a distinction between the retail
• 25:18
  Speaker 1: the retail corporations that only sell online versus those that have,
• 25:24
  Speaker 1: you know, substantial store locations, because I think, for example,
• 25:27
  Speaker 1: Michael Course has over like eight hundred and thirty stores
• 25:30
  Speaker 1: right now, you know exactly. In fact I was. I
• 25:34
  Speaker 1: was in a mall recently at gunpoint. My children had
• 25:37
  Speaker 1: taken me to see an animated feature, and you know,
• 25:40
  Speaker 1: out of the corner of my eyes, I noticed a
• 25:42
  Speaker 1: Michael Core store. I don't go into malls if I
• 25:44
  Speaker 1: don't have to, but you are right. Their footprint is enormous,
• 25:49
  Speaker 1: and that will that will come back to haunt them
• 25:51
  Speaker 1: at some point as more of the second and third
• 25:55
  Speaker 1: to yer malls begin to close down. Do you think
• 25:58
  Speaker 1: that that's reflected in the Chinese trade number US with
• 26:00
  Speaker 1: the United States That trade with China continues to be robust,
• 26:05
  Speaker 1: and indeed the sale of and demand of Chinese products
• 26:08
  Speaker 1: continues to rise, You know it does. I was fishing
• 26:12
  Speaker 1: over the weekend in Maine with Leland Miller, who's the
• 26:15
  Speaker 1: China Age book, who runs the China based book, and
• 26:18
  Speaker 1: he gave me you know that he always says, you
• 26:22
  Speaker 1: use an eye dropper full of of skepticism when you
• 26:24
  Speaker 1: see these data. I'm not so sure that five months
• 26:27
  Speaker 1: in a row of a growing surplus in China is
• 26:30
  Speaker 1: reflective as much of true underlying improvement or or Chinese
• 26:35
  Speaker 1: politicians trying to make a statement to President Trump about
• 26:39
  Speaker 1: some of the hard talk that he has on on trade.
• 26:41
  Speaker 1: I just I don't know if we can parish this
• 26:43
  Speaker 1: as being a true trend or or being more game
• 26:47
  Speaker 1: theory at play, because Trump continues to threaten trade wars
• 26:51
  Speaker 1: expand on that. If you can about the this potential
• 26:54
  Speaker 1: for the conversation really being political rather than economic, well again,
• 27:00
  Speaker 1: you know, I don't. I don't think that anybody in
• 27:01
  Speaker 1: the world, especially given with what's going on in North Korea,
• 27:04
  Speaker 1: wants to see the outbreak of a trade war. On
• 27:06
  Speaker 1: the other hand, we saw just last week that the
• 27:09
  Speaker 1: Japanese have indeed moved forward with tariffs on importing beef,
• 27:15
  Speaker 1: so it might be once in from the United States,
• 27:19
  Speaker 1: from me and from other countries as well. Uh So
• 27:23
  Speaker 1: these are small steps. But but we've not seen any
• 27:26
  Speaker 1: backing down in terms of threats of of of tariffs
• 27:29
  Speaker 1: on steel imports into the United States, and these things
• 27:33
  Speaker 1: never tend to end well. And again, you know, there's
• 27:37
  Speaker 1: been a lot of weakness out of the Chinese trade data.
• 27:40
  Speaker 1: I would put more stock in it than I otherwise would.
• 27:43
  Speaker 1: I do say it's more than just political given the
• 27:46
  Speaker 1: deeper disappointment that we saw overnight coming out of Germany
• 27:49
  Speaker 1: and its trade numbers, followed by weakness the night before
• 27:52
  Speaker 1: in its manufacturing industrial production figures. All right, now, if
• 27:56
  Speaker 1: we if we sort of combine that with what is
• 27:59
  Speaker 1: happening to the US consumer and how they're managing to
• 28:02
  Speaker 1: pay for all of the products that come from these countries,
• 28:05
  Speaker 1: maybe just to tell us more about that, well, you know,
• 28:08
  Speaker 1: what we have seen is extreme stickiness in services inflation
• 28:14
  Speaker 1: in this country, and whenever we see that. In fact,
• 28:17
  Speaker 1: a recent survey showed that parents are going to be
• 28:19
  Speaker 1: spending more money on after school activities those are services
• 28:24
  Speaker 1: than they will be spending on products to get their
• 28:27
  Speaker 1: kids ready for for for the back to school season,
• 28:30
  Speaker 1: which which brings us back to my column from last week.
• 28:33
  Speaker 1: But the more we see in terms of sticky service
• 28:35
  Speaker 1: price inflation, the less wherewithal the average household has to
• 28:39
  Speaker 1: spend on any goods. So you'll see that continued tug
• 28:43
  Speaker 1: of war moving forward as household strains continue to grow.
• 28:47
  Speaker 1: Of course, we saw news out of Discover Financial last
• 28:50
  Speaker 1: week before that Capital One Financial that we've we've seen
• 28:53
  Speaker 1: credit card defaults continue to tick up well and also
• 28:57
  Speaker 1: revolving credit which obviously credit cards. You say is at
• 29:01
  Speaker 1: a record? Is that a record right now? Well, that's
• 29:04
  Speaker 1: what Bloomberg reported last night. Yes, no, we we we
• 29:07
  Speaker 1: have indeeded indeed seen uh that prior peak taken out.
• 29:12
  Speaker 1: At the same time, though the Fed Senior Loan Officer
• 29:15
  Speaker 1: Survey data tell us that the standards are tightening, I
• 29:20
  Speaker 1: have to I'm just gonna sit back and and try
• 29:22
  Speaker 1: and figure out how this dynamic is going to play out,
• 29:25
  Speaker 1: because it's apparent that households are reaching to their credit
• 29:28
  Speaker 1: cards not to cover discretionary Ralph Lauren, Michael Corese type
• 29:32
  Speaker 1: of spending, but rather to cover spending on necessities. If
• 29:37
  Speaker 1: lenders are pulling back at the same time tightening standards,
• 29:41
  Speaker 1: you have to start to wonder if we're going to
• 29:42
  Speaker 1: see that play out in an increase in mortgage defaults,
• 29:45
  Speaker 1: in a continued rise in automobile loan defaults. We mentioned
• 29:50
  Speaker 1: Titan standards. What about tightening interest rates? Do you believe
• 29:53
  Speaker 1: that the increase in interest rates that is foretold by
• 29:56
  Speaker 1: the Federal Reserve will have a dramatic effect? You know,
• 30:00
  Speaker 1: I do. It's it's interesting. We have we we have
• 30:03
  Speaker 1: the ongoing battle between the hawks and the doves and
• 30:06
  Speaker 1: Bullard overnight saying there's not another rate increase. I think
• 30:09
  Speaker 1: that if the Fed manages to follow through on its
• 30:12
  Speaker 1: theory of balance sheet UH shrinking being on autopilot and
• 30:17
  Speaker 1: a non event for the market, it wouldn't surprise me
• 30:19
  Speaker 1: PIM if we were to see them follow that with
• 30:22
  Speaker 1: a rate hike in December, and at some point these
• 30:26
  Speaker 1: these continued rate hikes, one on top of the other,
• 30:29
  Speaker 1: will make a difference in conjunction with live or going
• 30:33
  Speaker 1: away for the average US household. I want to thank
• 30:35
  Speaker 1: you very much for joining us. Danielle di Martino Booth
• 30:39
  Speaker 1: is the founder of money Strong, former advisor at the
• 30:41
  Speaker 1: Dallas Federal Reserved, a Bloomberg profit, and you can follow
• 30:45
  Speaker 1: her on Twitter at di Martino Booth, which is also
• 30:49
  Speaker 1: the author of fed Up, This is Bloomberg. Thanks for
• 30:55
  Speaker 1: listening to the Bloomberg P and L podcast. You can
• 30:58
  Speaker 1: subscribe and listen to interview use at Apple Podcasts, SoundCloud,
• 31:02
  Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm
• 31:05
  Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa
• 31:09
  Speaker 1: Abramowits one before the podcast. You can always catch US
• 31:12
  Speaker 1: worldwide on Bluebirg Radio,