Latest / Bloomberg Intelligence / Time to Keep Reducing Risk, Particularly EM, Some Stocks: Tchir

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Time to Keep Reducing Risk, Particularly EM, Some Stocks: Tchir · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
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• 0:32
  Speaker 1: It was a choppy response to the consumer price Index
• 0:37
  Speaker 1: as well as the retail sales number. Uh. Here to
• 0:40
  Speaker 1: kind of have us shape our idea of how to
• 0:43
  Speaker 1: view these two numbers is Peter Sheer, head of macro
• 0:46
  Speaker 1: strategy at Academy Securities based in Connecticut. Peter, thank you
• 0:50
  Speaker 1: so much for joining us. So Uh, the initial response
• 0:53
  Speaker 1: was to sell stocks, sell bonds, gold Who knows? People
• 0:58
  Speaker 1: just wringing their hands. What don't you ache of this?
• 1:00
  Speaker 1: I mean, was this a good report given the CPI
• 1:03
  Speaker 1: accelerating fast more than people expected, or was it a
• 1:05
  Speaker 1: bad report given the retail sales coming in in an
• 1:08
  Speaker 1: underwhelming way. I think it is a bad report. Um.
• 1:13
  Speaker 1: I think this retail sales is very problematic, and when
• 1:16
  Speaker 1: I look back at some of the recent data we had,
• 1:19
  Speaker 1: I think it was the Richmond said, the New York said,
• 1:21
  Speaker 1: a lot of the regional feds have missed on their reports.
• 1:24
  Speaker 1: I look at the city Economic Surprise Index that's been
• 1:26
  Speaker 1: turning down. So the one thing that helps this market
• 1:30
  Speaker 1: through all this volatility is this real belief that the
• 1:33
  Speaker 1: fundamentals are okay. I'm wondering if this is going to
• 1:35
  Speaker 1: call it some of that into question. So Pete, what's
• 1:38
  Speaker 1: the trade? I think you continue to sell risk. We
• 1:42
  Speaker 1: bounced off that low on Friday. We have an opportunity
• 1:45
  Speaker 1: to take off some risks. I think you want to
• 1:47
  Speaker 1: be careful here. It's still very volatile, it's still very
• 1:50
  Speaker 1: uncertain what's going on. And if there is anything that
• 1:53
  Speaker 1: starts to show weakness in the economy or some of
• 1:57
  Speaker 1: the trade negotiations start turning bad, I think there's just
• 1:59
  Speaker 1: some more downside and going back to those glows. Okay,
• 2:02
  Speaker 1: So what risk do you sell? Do you sell riskier
• 2:06
  Speaker 1: credit in the US? Do you sell emerging markets? Do
• 2:08
  Speaker 1: you sell stocks? I think you saw a little bit
• 2:11
  Speaker 1: of stocks here. I think emerging markets. I would not
• 2:14
  Speaker 1: be selling high yield here, although people are selling that
• 2:17
  Speaker 1: again today, only because I think that has become a
• 2:19
  Speaker 1: very crowded short position. For some reason, people in the
• 2:22
  Speaker 1: credit markets state high yield. If you're a macro player,
• 2:24
  Speaker 1: you hate high yield. Everyone's kind of stixated on high
• 2:27
  Speaker 1: yield as a short, and it's very costly to short
• 2:30
  Speaker 1: that right now. So I think there's better opportunities, So
• 2:33
  Speaker 1: I'd be probably shorting some em and more likely even
• 2:36
  Speaker 1: some US equities of here. So with emerging markets, how
• 2:39
  Speaker 1: should people be trying to either go short UH emerging
• 2:43
  Speaker 1: markets or should they just sell? Because I was looking
• 2:45
  Speaker 1: this morning at UH spreads, extra yield over benchmarks on
• 2:49
  Speaker 1: high yield bonds in the US versus high old bonds
• 2:52
  Speaker 1: and emerging markets, and right now you're getting no premium
• 2:56
  Speaker 1: whatsoever for going into emerging markets high yield bonds or
• 3:00
  Speaker 1: US high old bonds. How do people play that? I
• 3:03
  Speaker 1: think you could take a look at something like e
• 3:04
  Speaker 1: m B, which is a emerging market bond ets. It's
• 3:08
  Speaker 1: not going to quite capture what you're looking at there,
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  Speaker 1: but I think close enough. And I think that's what
• 3:12
  Speaker 1: people are going to start doing, is they're gonna look
• 3:13
  Speaker 1: at high heels and say, wow, my high heeld bonds
• 3:16
  Speaker 1: are down three points or four points and my e
• 3:18
  Speaker 1: M bonds only down one point, Maybe I should sell those.
• 3:21
  Speaker 1: So I think that is a relative value transformation that
• 3:24
  Speaker 1: tends to occur. So, Peter, why you're not fixing it
• 3:27
  Speaker 1: on the consumer Price Index? It's been so volatile. They
• 3:33
  Speaker 1: have told us, you know, time and time again to
• 3:35
  Speaker 1: focus on PC. Anyways, it's one number and of anything.
• 3:39
  Speaker 1: If I really want to fixate on this, you start
• 3:41
  Speaker 1: getting nervous that we're seeing from signs of stagflation. Right,
• 3:43
  Speaker 1: we're finally creating inflation without the underlying growth. Maybe there
• 3:47
  Speaker 1: that needs to be Again, it's premature to look at
• 3:50
  Speaker 1: it like that, but I think we're gonna start testing
• 3:52
  Speaker 1: this whole economic fundamental is great theory in the next
• 3:56
  Speaker 1: week or so in terms of data. So what does
• 3:58
  Speaker 1: this do for the FED? I mean, right now the
• 4:00
  Speaker 1: market is pricing chance of a March rate hike. Does
• 4:04
  Speaker 1: this mean that they have more ammunition to increase rates
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  Speaker 1: faster because of some inflationary pressure, or does that mean
• 4:11
  Speaker 1: that they're going to hold back because there's sort of
• 4:14
  Speaker 1: a questionable dynamic underlying the growth story. My view is
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  Speaker 1: that they will hike in March. I think that's still
• 4:20
  Speaker 1: on the table, and you know the CPI lets them
• 4:22
  Speaker 1: do that, but I think they will give us some
• 4:24
  Speaker 1: cautionary tales that they want to watch what's going on
• 4:27
  Speaker 1: with the consumer. You know, this is now not just
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  Speaker 1: this month number is bad, but they revised down last month.
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  Speaker 1: You've seen an uptick and credit card delinquencies. You've also
• 4:36
  Speaker 1: seen all these bizarre stories. To me, I in mind
• 4:39
  Speaker 1: of people not being allowed to buy bitcoin on their
• 4:41
  Speaker 1: credit cards, which cause into questions who is buying bitcoin
• 4:44
  Speaker 1: on credit cards? So I think they're going to be
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  Speaker 1: cautious and say, hey, we've risen rates a lot, let's
• 4:49
  Speaker 1: see what this does to the consumer. Pete, what about
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  Speaker 1: stag inflation? What would have to happen for you to
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  Speaker 1: make that a headline for you? I think we need
• 4:57
  Speaker 1: to really believe that inflation is here, and I just
• 5:02
  Speaker 1: questioned that. And we're starting to see, you know, things
• 5:04
  Speaker 1: like oil rolled over a little bit, so a lot
• 5:06
  Speaker 1: of the inflationary pressures that were there. I think we'll
• 5:09
  Speaker 1: go down. We will see maybe there are going to
• 5:13
  Speaker 1: be all these way chikes related to tax reform and
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  Speaker 1: that could help and really drive some pressure. But right
• 5:17
  Speaker 1: now we're just seeing more one time bonuses rather than
• 5:21
  Speaker 1: big wage increases and there's no inflation number that would
• 5:26
  Speaker 1: get you to change your mind. Yeah, I think it's
• 5:29
  Speaker 1: discontinues in its persistent. I would become concerned then that
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  Speaker 1: we really created inflation, and hopefully, if we've created that,
• 5:36
  Speaker 1: these bad retail sales numbers will be an anomaly. So
• 5:38
  Speaker 1: I guess I'm looking for probably another month or so
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  Speaker 1: that starts confirming or at least the sneaking suspicion that
• 5:43
  Speaker 1: inflation has increased while growth is flowing. All right, well,
• 5:46
  Speaker 1: we're gonna check in with you then. Of course. Peter
• 5:49
  Speaker 1: Cheer is the head of macro strategy at Academy Securities.
• 5:53
  Speaker 1: He's based in Connecticut, giving this giving us his thoughts
• 5:56
  Speaker 1: about inflation, but also really sparing uh no effort when
• 6:01
  Speaker 1: he looks at those retail sales numbers. The future of
• 6:18
  Speaker 1: infrastructure in the United States calls for experts to give
• 6:22
  Speaker 1: us their thoughts, advice, and their experience. Walter Kempsis is
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  Speaker 1: economist and chief strategist for U Sports, Airports and Global
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  Speaker 1: Infrastructure Group of j A L. That's Jones lang Lassalle
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  Speaker 1: and they're based in Chicago. Walter, thank you very much
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  Speaker 1: for being here. Maybe just tell people a little bit
• 6:41
  Speaker 1: about your background and that you are currently advising the
• 6:44
  Speaker 1: U s Department of Commerce their Advisory Committee on Supply
• 6:48
  Speaker 1: Chain Competitiveness, as well as the Department of Transportations Task
• 6:52
  Speaker 1: Force on Infrastructure Valuation. Maybe just give us a little
• 6:56
  Speaker 1: bit of a hint of your background and how you're
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  Speaker 1: applying that to the President's effort to improve the infrastructure
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  Speaker 1: quality in the United States. Thank you. I'm a former
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  Speaker 1: investment banker who got pulled into a marine engineering firm
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  Speaker 1: Mofitta Nickel to help the financial community as they were
• 7:15
  Speaker 1: trying to initially invest in infrastructure about twelve fifteen years ago. UH.
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  Speaker 1: That role eventually morphed into planning the infrastructure, and I've
• 7:25
  Speaker 1: worked with the number of port authorities around the country
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  Speaker 1: in strategic development plans, making sure they had the capacity
• 7:32
  Speaker 1: in advance of the freight coming in. And as a
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  Speaker 1: result of that work, um I was asked to join
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  Speaker 1: the Department of Commerce uh Advisory Committee on Supply Chain Competitiveness,
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  Speaker 1: which is comprised of port authorities, railroads are big importers
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  Speaker 1: and big exporters, as well as a few, uh you know,
• 7:51
  Speaker 1: advisory experts like myself. So Walter. Since you talk with
• 7:56
  Speaker 1: US ports and airports and other infrastructure groups, what's their
• 8:01
  Speaker 1: outlook and how much money is going to get unleashed
• 8:04
  Speaker 1: by some sort of infrastructure spending program and what can
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  Speaker 1: we glean from the budget the President Trump put out
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  Speaker 1: earlier this week that most people said it was dead
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  Speaker 1: on arrival. Is there anything any details that we can
• 8:16
  Speaker 1: hang on to? Okay, I mean, just if you're just
• 8:19
  Speaker 1: looking at the ports sector. On the water side of
• 8:21
  Speaker 1: the ports, uh, the American Association Port Authorities estimates about
• 8:26
  Speaker 1: sixty six billion dollars, you know, to raise bridges, to
• 8:29
  Speaker 1: drudge channels, to strengthen key walls, and buy bigger equipment
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  Speaker 1: to handle the bigger ships. The what they don't have
• 8:36
  Speaker 1: an estimate for is on the land side, because you know,
• 8:39
  Speaker 1: as the volumes have grown in this country, the economy,
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  Speaker 1: the population, the number of of paved miles have not
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  Speaker 1: kept pace. And in the major ports cities we see
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  Speaker 1: a lot of congestion, such as in Los Angeles Long
• 8:55
  Speaker 1: Beach as well as New York. Uh. You can add
• 8:58
  Speaker 1: other cities to that, but that's the part where the
• 9:01
  Speaker 1: estimated cost doesn't exist. But I would put that number
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  Speaker 1: at twice what we need for the for the waterside um.
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  Speaker 1: In terms of the plan itself, I think people need
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  Speaker 1: to understand that this is not supposed to be an
• 9:14
  Speaker 1: Eisenhower interstate program. We've already built our interstate. We've built
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  Speaker 1: the core infrastructure. But this is supposed to be a
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  Speaker 1: means to repair and upgrade all of our infrastructure, including transportation, energy,
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  Speaker 1: and the water supply. You know. And ever since the
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  Speaker 1: Eisenhower era, responsibility has shifted the states and local governments, uh,
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  Speaker 1: you know, to not only direct the infrastructure investments, but
• 9:40
  Speaker 1: also as a means to reduce the incentives to use
• 9:43
  Speaker 1: free federal money and I say free in quotes, but
• 9:46
  Speaker 1: free federal money to generate jobs building roads to nowhere.
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  Speaker 1: So the whole idea here is to target about two
• 9:53
  Speaker 1: billion dollars as seed capital, which, along with other actions
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  Speaker 1: such as a shock clock on on permit approval time,
• 10:00
  Speaker 1: will make it a lot easier for private capital to
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  Speaker 1: invest um. The other part of the program also includes
• 10:07
  Speaker 1: loosening the federal loan programs such as TIFFIA, WI, A
• 10:11
  Speaker 1: RIFF and the other you know alphabet soup of programs
• 10:14
  Speaker 1: that exist that currently um, you know, our structure to
• 10:19
  Speaker 1: help somebody, you know, do the upfront capital expenditures but
• 10:23
  Speaker 1: be able to wait a number of years before generating
• 10:26
  Speaker 1: the revenue necessary for debt repayment. The problem with these
• 10:30
  Speaker 1: programs is they've been extremely stingy, and loans generally don't
• 10:33
  Speaker 1: get approved, So there is an effort to loosen that, uh,
• 10:37
  Speaker 1: in order to unleash the federal support that's available already. Walter,
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  Speaker 1: is there a project that you could use as a showcase,
• 10:46
  Speaker 1: and I mean you as collectively of the industry that
• 10:49
  Speaker 1: could be used as a showcase in order to demonstrate
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  Speaker 1: both the politicians and to the electorate that these programs
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  Speaker 1: can work. That then would foster even greater incentive and
• 11:00
  Speaker 1: desire to accomplish these things, because it seems as though
• 11:03
  Speaker 1: we don't have a specific objective and that makes it
• 11:06
  Speaker 1: even more challenging. Yeah, I completely agree with you. Um
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  Speaker 1: you know where one of the things that the program
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  Speaker 1: falls short on is to tie all of this this
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  Speaker 1: effort into some kind of national economic objective. And the
• 11:21
  Speaker 1: simplest one, and this relates to the efforts for free
• 11:25
  Speaker 1: trade agreement renegotiations, is to support exports. Most of our
• 11:31
  Speaker 1: infrastructure investment in the last twenty thirty years has gone
• 11:34
  Speaker 1: towards the import side of the trade flows. And when
• 11:38
  Speaker 1: you look at it, you know, volume wise, the US
• 11:41
  Speaker 1: trade deficit is practically zero. But we import high value
• 11:46
  Speaker 1: per Ton goods and we export low value per Ton goods.
• 11:51
  Speaker 1: So on a dollar basis, we run a very large
• 11:54
  Speaker 1: trade deficit, averaging half a trillion a year for the
• 11:57
  Speaker 1: last you know, five ten years. So the money would
• 12:01
  Speaker 1: naturally be attracted to where there is a high value
• 12:04
  Speaker 1: per Ton, there's more pricing power and earned there's more
• 12:06
  Speaker 1: return available. If we tied the infrastructure program to something
• 12:12
  Speaker 1: like supporting exports, uh, then I think things would work
• 12:17
  Speaker 1: a little bit better. And part of the problem is
• 12:19
  Speaker 1: that as jobs have left the US, jobs in the
• 12:22
  Speaker 1: export oriented industries haven't taken up the slack in the
• 12:27
  Speaker 1: labor markets. So if we do renegotiate the trade agreements
• 12:31
  Speaker 1: and opener markets to US exports, we will need to
• 12:35
  Speaker 1: invest in infrastructure to support that. So just to be
• 12:38
  Speaker 1: really clear, what is that spending that needs to support exports? Yeah? Um,
• 12:44
  Speaker 1: the first off, it would be on the Mississippi Waterway.
• 12:47
  Speaker 1: Most of that was built in the nineties. Uh, you know,
• 12:51
  Speaker 1: during the great depression. That infrastructure is now uh seventy
• 12:56
  Speaker 1: five years or older. The Soybean Transportation Coalition has done
• 13:00
  Speaker 1: to report a couple of them now and they've pointed
• 13:02
  Speaker 1: out that roughly three fourths of our Mississippi Waterway infrastructures
• 13:07
  Speaker 1: over seventy five years of age. And the way it
• 13:10
  Speaker 1: works with the dams and the locks is that they're
• 13:12
  Speaker 1: built with the fifty year life cycle, and every twenty
• 13:15
  Speaker 1: five years you inspected and try to retrofit it a
• 13:19
  Speaker 1: little bit and get another twenty five years out of it.
• 13:22
  Speaker 1: But when you hit seventy five years, that's it. You're done.
• 13:25
  Speaker 1: You need to replace it, just like we're doing with
• 13:27
  Speaker 1: the bridges in New York. You know, perhaps a little late,
• 13:30
  Speaker 1: but yeah, that Mississippi Waterway infrastructure when it breaks down.
• 13:35
  Speaker 1: When a lock breaks down, miles of barges back up
• 13:38
  Speaker 1: on either side because they can't traverse the step in
• 13:42
  Speaker 1: the river, and oftentimes we have two three D print
• 13:46
  Speaker 1: apart because it just doesn't exist anymore. Walter Kemsies, thank
• 13:50
  Speaker 1: you so much for your insights. We'll have to have
• 13:51
  Speaker 1: you back. Walter Kemsie's economist and chief strategist for US
• 13:55
  Speaker 1: Ports Airports and Global Infrastructure Group at j L L.
• 13:58
  Speaker 1: Jones Langless Sality, Chicago, joining us by phone the shares
• 14:17
  Speaker 1: of Marriott International. They're hired by a little bit more
• 14:19
  Speaker 1: than one percent right now. The company will report results
• 14:23
  Speaker 1: after the close of trading today. Based in Bethesda, Maryland,
• 14:26
  Speaker 1: home to Bloomberg and one oh five point seven FM
• 14:29
  Speaker 1: HD two and here to tell us about the company
• 14:31
  Speaker 1: and more in the hospitality industry is Mike Belisario, equity
• 14:35
  Speaker 1: analyst at Baird. Mike, what can you tell us about
• 14:38
  Speaker 1: Marriott and the I guess it's the years since they
• 14:41
  Speaker 1: acquired the Star Wars brand. What are they going to
• 14:45
  Speaker 1: post in terms of savings and asset sales? Good morning,
• 14:50
  Speaker 1: things for having me UM. I think you're going to
• 14:53
  Speaker 1: hear a lot from Marriott that we heard from Hyatt,
• 14:56
  Speaker 1: from Tuney, from Hilton this morning. Really strong fourth quarter
• 15:00
  Speaker 1: guidance for that is pretty much in line with UM.
• 15:05
  Speaker 1: The results that they posted for fully, I mean specifically
• 15:09
  Speaker 1: for Marriott, it's been fifteen sixteen months since they've closed
• 15:12
  Speaker 1: the transaction. Investors are really focused on the synergies. A
• 15:16
  Speaker 1: lot of those have been realized assets sales here or there,
• 15:20
  Speaker 1: that's important. A lot of the heavy lifting has been done.
• 15:22
  Speaker 1: I think the thing people are really focused on is
• 15:25
  Speaker 1: all the extra benefit that Marriott being bigger, having more
• 15:29
  Speaker 1: negotiating power can pass to its owners, especially in a
• 15:32
  Speaker 1: tough operating environment like today. So, Mike, I'm wondering just
• 15:36
  Speaker 1: about the tourism industry in general. We had heard reports,
• 15:40
  Speaker 1: given some of the talk of the current presidential administration
• 15:44
  Speaker 1: about UH foreigners and immigrants and all of that, that
• 15:48
  Speaker 1: it had would have a dampening effect on tourism. Did
• 15:52
  Speaker 1: we see any of that from Hilton's results? We did,
• 15:56
  Speaker 1: and we've seen that broadly in the data. Inbound international
• 15:59
  Speaker 1: travel to the US was down a bit. In Hilton
• 16:05
  Speaker 1: this morning thinks it's inbound travel was down about four percent,
• 16:09
  Speaker 1: But that only makes up call it, you know, five
• 16:11
  Speaker 1: ish percent of their total business. You know. Some of
• 16:14
  Speaker 1: that is the you know, the political backlash if if
• 16:17
  Speaker 1: you're someone overseas and you might not want to come
• 16:19
  Speaker 1: to the US because you don't like what you're hearing,
• 16:21
  Speaker 1: that's possible. Some of it is also the US dollar.
• 16:25
  Speaker 1: It just was more expensive throughout seventeen to come to
• 16:28
  Speaker 1: the US. Flip side too, we don't talk about it enough.
• 16:31
  Speaker 1: Is the domestic traveler, the US traveler not going on
• 16:34
  Speaker 1: vacation to Florida or southern California, But because it's so
• 16:37
  Speaker 1: cheap to go to Europe or Japan, for example, more
• 16:41
  Speaker 1: US citizens going abroad too. So that's also an impact
• 16:44
  Speaker 1: in the numbers that people don't talk a lot about.
• 16:46
  Speaker 1: But yes, there there was an impact in seventeen. We're
• 16:49
  Speaker 1: still seeing it on the inbound international travel side. So
• 16:52
  Speaker 1: of the big hospitality companies which are most exposed to
• 16:56
  Speaker 1: that trend of domestic tourists from the US is going
• 17:00
  Speaker 1: international and not as many inbound tourists in the US. Actually,
• 17:05
  Speaker 1: the biggest beneficiary come on a percentage basis, would be
• 17:08
  Speaker 1: Highatt because a larger percentage of their portfolio is overseas Hilton,
• 17:14
  Speaker 1: Marriott and high Att. Hilton is the most domestic focused. Um.
• 17:18
  Speaker 1: The way to think about it too is where where
• 17:19
  Speaker 1: do people come to the US To go to New York,
• 17:22
  Speaker 1: They go to San Francisco, Los Angeles. So anyone that
• 17:24
  Speaker 1: has urban market gateway market exposure, if you're an owner
• 17:28
  Speaker 1: of hotels in those markets, which a lot of the
• 17:30
  Speaker 1: reeds are, those companies are also disproportionately impacted. But you know,
• 17:35
  Speaker 1: Marriott's brand, Hilton's brand in the US overseas, if you
• 17:38
  Speaker 1: can capture that same traveler that was maybe going to
• 17:41
  Speaker 1: travel to the Marriott in Orlando, but they're going to
• 17:43
  Speaker 1: the Marriott in Prague, that's kind of a win win
• 17:46
  Speaker 1: for Marriott in its eyes. So does this mean that
• 17:48
  Speaker 1: Mike that expansion for these growth markets in Asia and Europe,
• 17:53
  Speaker 1: would that be key to achieving some of these profit targets. Absolutely,
• 17:59
  Speaker 1: Roughly half of the big brand's pipelines is outside of
• 18:02
  Speaker 1: the United States. We can't zoom out these big global
• 18:06
  Speaker 1: hotel companies. They're very focused in the US and in
• 18:10
  Speaker 1: North America. There's a lot of white space still uh
• 18:13
  Speaker 1: in Europe, in Asia, Pacific and even in Africa, so
• 18:18
  Speaker 1: a lot of the growth is coming from there. You're
• 18:20
  Speaker 1: just also working off a smaller base. But yeah, that's
• 18:22
  Speaker 1: that's where they're focusing a lot of their efforts to
• 18:24
  Speaker 1: kind of capture both of the inbound and outbound travel,
• 18:28
  Speaker 1: but particularly from China. We've actually seen the dollar week
• 18:32
  Speaker 1: in this year a little bit. Does that matter or
• 18:34
  Speaker 1: in the scheme of things, is it such a minimal
• 18:36
  Speaker 1: weakening that it's not going to change the trend that
• 18:38
  Speaker 1: we saw in it matters that actually came up on
• 18:42
  Speaker 1: Hilton's conference call. It's hard to tell on a week
• 18:45
  Speaker 1: to week, month to month basis. I think over rolling
• 18:49
  Speaker 1: twelve month periods it's important. Um And on the margin,
• 18:52
  Speaker 1: it does cause people to either say yes or no,
• 18:55
  Speaker 1: I want to go to the U S or yes
• 18:56
  Speaker 1: or no, I want to go to London instead of Japan,
• 19:00
  Speaker 1: for example. Um And there's also a lag to booking.
• 19:03
  Speaker 1: If you're a leisure traveler, you're more price sensitive and
• 19:06
  Speaker 1: you're sometimes booking three to six months out. So if
• 19:09
  Speaker 1: there is a weakening or strengthening of the dollar, you're
• 19:11
  Speaker 1: not necessarily going to see it now. It might not
• 19:13
  Speaker 1: be until June or July or August, for example, when
• 19:16
  Speaker 1: we actually see the impact of what happened to the
• 19:19
  Speaker 1: dollar today. Mike Belisario, thank you so much for joining us.
• 19:23
  Speaker 1: Really interesting insights. Mike Belisario is senior equity research analyst
• 19:27
  Speaker 1: at Baird, coming to us from Chicago. The New York
• 19:45
  Speaker 1: Fed put out a report this week taking a look
• 19:48
  Speaker 1: at consumer debt, and it showed that student loan outstanding
• 19:53
  Speaker 1: have totaled one point for trillion dollars, and delinquencies could
• 19:58
  Speaker 1: be up to twenty two percent if you take out
• 20:01
  Speaker 1: instances of students who are not required to make payments
• 20:05
  Speaker 1: because they're still in schooled UH and still in school, unemployed,
• 20:08
  Speaker 1: or for other reasons. Joining us now is Marshall Steinbaum,
• 20:12
  Speaker 1: research director and fellow at the Roosevelt Institute in Washington,
• 20:15
  Speaker 1: d C. Marshall, thank you so much for joining us.
• 20:18
  Speaker 1: This is a really important topic. I'm just wondering. You
• 20:20
  Speaker 1: did a report looking at the macroeconomic implications of this
• 20:25
  Speaker 1: rising pile of student debt. What what are the implications?
• 20:30
  Speaker 1: I mean they could be quite significant, considering that this
• 20:33
  Speaker 1: is uh now a one point four trillion dollar pile
• 20:36
  Speaker 1: of debt. The effect on the macro economy of canceling
• 20:41
  Speaker 1: all the outstanding student debt and what we found is
• 20:43
  Speaker 1: that it would have a moderate stimulative effect on overall output.
• 20:49
  Speaker 1: I think the numbers of a v six billion to
• 20:51
  Speaker 1: a hundred billion dollars a year approximately given the two
• 20:54
  Speaker 1: models that we used, um that it would reduce the
• 20:57
  Speaker 1: unemployment rate and increase the total rate of people being employed.
• 21:02
  Speaker 1: And the main effect is because essentially the debt is
• 21:06
  Speaker 1: burdening the balance sheets of households, especially young households, and
• 21:10
  Speaker 1: if they didn't have to make those payments, they would
• 21:12
  Speaker 1: spend the money on other things, and that would increase
• 21:14
  Speaker 1: aggregate demand. Where would the money come from in order
• 21:17
  Speaker 1: to pay off this debt? That's a good question. Currently
• 21:22
  Speaker 1: the federal government is the lender for about the debt,
• 21:25
  Speaker 1: and what we modeled is essentially then for canceling it,
• 21:29
  Speaker 1: so just writing it off, and then the other ten
• 21:32
  Speaker 1: percent the federal government would assume making payments to the
• 21:35
  Speaker 1: private lenders on behalf of students um. So overall, both
• 21:39
  Speaker 1: of those two things would increase the federal deficit um
• 21:42
  Speaker 1: and and the federal debt outstanding um while relieving debt
• 21:46
  Speaker 1: from individual households. And the whole macroeconomic UH mechanism that's
• 21:51
  Speaker 1: going on in the in the forecast of the effects
• 21:54
  Speaker 1: is that that transfer of the debt from households to
• 21:56
  Speaker 1: the government is h macroeconomically beneficial. Okay, But if the
• 22:01
  Speaker 1: government is going to be the one to put the bill,
• 22:03
  Speaker 1: doesn't that really mean that the taxpayer is the one
• 22:06
  Speaker 1: to foot the bill. Well, we've been running up dead
• 22:09
  Speaker 1: and deficits for a long time. Now UM, and the
• 22:12
  Speaker 1: tax share of total output is I think at its
• 22:15
  Speaker 1: lowest ever UM and our lowest in a very long time,
• 22:18
  Speaker 1: and uh low for the state of the business cycle
• 22:22
  Speaker 1: where we currently are. Normally, you'd expect the federal government
• 22:24
  Speaker 1: to be collecting the most in taxes when the economy
• 22:27
  Speaker 1: is doing relatively well. UM. So I think you know,
• 22:32
  Speaker 1: whether there's this tight connection between the federal government assuming
• 22:36
  Speaker 1: debt and collecting taxes to pay that debt. I think
• 22:38
  Speaker 1: that's an open question at macroeconomics. I'm trying to figure out.
• 22:42
  Speaker 1: So your report found that there would be this modest
• 22:45
  Speaker 1: stimulative effect if the student debt were canceled of up
• 22:49
  Speaker 1: to one hundred and eight billion dollars per year. Does
• 22:53
  Speaker 1: that change over time? I mean, is it? How do
• 22:56
  Speaker 1: you quantify the economic effect of student debt on a
• 23:02
  Speaker 1: generation of people who might be delaying home purchases or
• 23:05
  Speaker 1: having children, or taking jobs that that are risk here
• 23:09
  Speaker 1: but might have more potential. That's a great question, and
• 23:12
  Speaker 1: we don't really do that in the paper. That is
• 23:14
  Speaker 1: specifically look at questions of like home ownership or small
• 23:17
  Speaker 1: business formation, or what jobs do people take as a
• 23:19
  Speaker 1: result of having debt? UM The macroeconomic models that that
• 23:23
  Speaker 1: we used to make those sort of big statements about
• 23:25
  Speaker 1: how large the the economy would be don't really get
• 23:28
  Speaker 1: into that level of detail. But I think it's crucially
• 23:30
  Speaker 1: important to understand what effect student debt is actually having
• 23:33
  Speaker 1: on the economy. Uh. It's certainly true that now we
• 23:36
  Speaker 1: have essentially a whole generation of workers who had who
• 23:41
  Speaker 1: felt that they had to take on some level of
• 23:43
  Speaker 1: student debt to get access to the labor market, much
• 23:46
  Speaker 1: more so than was the case previously. And I think
• 23:48
  Speaker 1: that given that the labor market has not been performing
• 23:50
  Speaker 1: terribly well, that wages are stagnant, they feel that that
• 23:53
  Speaker 1: debt is a burden rather than a an opening to
• 23:57
  Speaker 1: to social mobility and to better jobs. Well, how much
• 24:00
  Speaker 1: of this is an indictment, frankly on what individuals are
• 24:04
  Speaker 1: paying for. In other words, some of the schools that
• 24:07
  Speaker 1: aren't necessarily setting up students for jobs that are lucrative
• 24:11
  Speaker 1: enough to make this debt seem relatively insignificant. I think
• 24:16
  Speaker 1: the overall explanation for why we have a student debt
• 24:19
  Speaker 1: crisis in this country has to do with things that
• 24:22
  Speaker 1: aren't really about higher education, Although certainly part of the
• 24:25
  Speaker 1: story is there UM. I think what happened was that
• 24:28
  Speaker 1: we had a theory that the labor market was suffering
• 24:32
  Speaker 1: from a skills gap, and that the solution to that
• 24:34
  Speaker 1: skills gap was to make sure that people had the
• 24:37
  Speaker 1: education they needed for today's jobs, and ultimately, because that
• 24:42
  Speaker 1: education would end up paying for itself in the form
• 24:44
  Speaker 1: of higher wages, we got comfortable as a sort of
• 24:47
  Speaker 1: policy priority of shifting the responsibility of paying for that
• 24:50
  Speaker 1: education from UH state governments in the form of support
• 24:54
  Speaker 1: for public higher education to individuals using the federal student
• 24:58
  Speaker 1: loan program. And what we've found, I think, is that
• 25:01
  Speaker 1: that diagnosis of a skills gap was not correct, So
• 25:06
  Speaker 1: people ended up paying for these degrees that were supposed
• 25:09
  Speaker 1: to be the route to higher earnings, and it turned
• 25:12
  Speaker 1: out that that really wasn't why wages were stagnating. The
• 25:15
  Speaker 1: issue is not a skills gap, but rather UH trends
• 25:19
  Speaker 1: in the economy that have to do with the power
• 25:21
  Speaker 1: of employers and UM the ability of employers to essentially
• 25:25
  Speaker 1: credentialize the labor markets are to demand a higher UH
• 25:29
  Speaker 1: level of credentials and thus a higher level of debt
• 25:32
  Speaker 1: to go along with any given job who has financially
• 25:35
  Speaker 1: benefited from these student loans, I don't. I don't mean
• 25:39
  Speaker 1: the students in trying to sort of connect it with
• 25:41
  Speaker 1: a future employment. But who's benefited financially and why don't
• 25:46
  Speaker 1: they then if the government or someone decides that this
• 25:51
  Speaker 1: is something that we should not be supporting, why not
• 25:55
  Speaker 1: have them assume the burden of this financial problem. I
• 25:58
  Speaker 1: mean that's a very good question. Uh. I think so aside,
• 26:02
  Speaker 1: you know, the federal government is the lender, so in
• 26:04
  Speaker 1: a direct sense, they have benefited financially. I mean, this
• 26:07
  Speaker 1: is I think a policy that the federal government decided
• 26:09
  Speaker 1: to undertake that they wanted more people to get degrees,
• 26:12
  Speaker 1: and so they were willing to extend loans on what
• 26:14
  Speaker 1: for the private sector would be considered pretty generous terms, UM,
• 26:18
  Speaker 1: in exchange for having more people get higher education. I
• 26:20
  Speaker 1: think beyond that, UM, you have a lot of institutions
• 26:23
  Speaker 1: that have benefited a great deal from what I would
• 26:25
  Speaker 1: consider credentialization spiral. So they're able to sell degrees to
• 26:30
  Speaker 1: people who wouldn't previously have needed those degrees in order
• 26:33
  Speaker 1: to get access to the jobs they want. UM. I
• 26:36
  Speaker 1: think you know that that. I think people tend to
• 26:40
  Speaker 1: point to the for profit higher education providers as being
• 26:42
  Speaker 1: especially kind of culpable in that sense, but I think
• 26:45
  Speaker 1: it doesn't just extend to them. Um. And then the
• 26:47
  Speaker 1: other piece of this is that the federal government, you know,
• 26:50
  Speaker 1: really doesn't manage this large loan portfolio by itself. It
• 26:54
  Speaker 1: has a servicers. When the federal government took over responsibility
• 26:58
  Speaker 1: as as the lender, that is, stopped guaranteeing private loans
• 27:01
  Speaker 1: and started becoming being the lender itself for newly originated loans,
• 27:05
  Speaker 1: the financial institutions that had been the lenders before became servicers.
• 27:10
  Speaker 1: And then there there are some other um bodies that
• 27:13
  Speaker 1: that service these loans, and they have an incentive to
• 27:15
  Speaker 1: essentially extend payment as long as possible UM and not
• 27:19
  Speaker 1: necessarily to uh inform borrowers what their best options are
• 27:25
  Speaker 1: about how to for instance, UH available public service loan
• 27:29
  Speaker 1: forgiveness and other other income based repayment. So so it's
• 27:32
  Speaker 1: another word's almost like a credit card situation where you know,
• 27:36
  Speaker 1: you uh sort of demonize the people for getting into debt,
• 27:39
  Speaker 1: but you encourage them to be able to take out
• 27:41
  Speaker 1: more debt by offering them all kinds of incentives to
• 27:44
  Speaker 1: do so. Yeah, and I think that is an apt
• 27:48
  Speaker 1: point because we have this sort of uh glow of
• 27:51
  Speaker 1: higher education associated with student loans, and that's let people
• 27:55
  Speaker 1: get the financial institutions and other stakeholders get away with
• 27:58
  Speaker 1: UM tactics that I think there has been greater scrutiny
• 28:01
  Speaker 1: of when the when the question is credit card loans
• 28:04
  Speaker 1: or home mortgages. I mean we had sort of the
• 28:07
  Speaker 1: scrutiny that arose in the financial crisis to other forms
• 28:10
  Speaker 1: of other parts of the credit market that I think
• 28:12
  Speaker 1: student debt has largely avoided. So which age group is
• 28:17
  Speaker 1: most burdened by this one point for trillion dollar Well,
• 28:23
  Speaker 1: it's certainly younger workers are most burdened by it. UM.
• 28:26
  Speaker 1: You can see the enorm skyrocketing percentage of workers in
• 28:31
  Speaker 1: the forty age cohort that have student loans relative to
• 28:37
  Speaker 1: what that cohort would have had in earlier eras UM
• 28:41
  Speaker 1: or I should say what that age group would have
• 28:43
  Speaker 1: had in earlier ears. I should also say that a
• 28:44
  Speaker 1: lot of families go into interes generational debt. UM there
• 28:48
  Speaker 1: you know, federal programs that explicitly encouraged that. And then
• 28:51
  Speaker 1: I think it's just natural that UM parents and grandparents
• 28:54
  Speaker 1: and and other family members want to contribute to their children, UM,
• 28:58
  Speaker 1: getting educated and getting access to the labor market and
• 29:01
  Speaker 1: too good jobs. UM. And so there's a good report
• 29:04
  Speaker 1: from the Federal Reserve Community Affairs Division that comes out
• 29:07
  Speaker 1: every year that sort of goes into that the story
• 29:09
  Speaker 1: of student debt extending beyond the student and the debt
• 29:12
  Speaker 1: or themselves. Marshall, have you seen any change from employers
• 29:16
  Speaker 1: of not demanding sort of an increasing credentials No, the opposite.
• 29:21
  Speaker 1: I think it's it's it's going on and on. I think,
• 29:24
  Speaker 1: you know, employers know that they can, um, they can
• 29:26
  Speaker 1: get more credential workers for essentially the same or lower
• 29:29
  Speaker 1: wages as they did in the past. And just briefly,
• 29:31
  Speaker 1: have people conflated this current kind of student debt explosion
• 29:35
  Speaker 1: with what we're g I loans and no other words
• 29:37
  Speaker 1: saying they're kind of the same things. I beg your pardon,
• 29:40
  Speaker 1: you know what we're going to go to. I want
• 29:42
  Speaker 1: to thank you very much for joining us, Marshall Steinbaum,
• 29:44
  Speaker 1: Research Director fellow, Roosevelt Institute in Washington, d C. Thanks
• 29:52
  Speaker 1: for listening to the Bloomberg P and L podcast. You
• 29:55
  Speaker 1: can subscribe and listen to interviews at Apple Podcasts, SoundCloud,
• 29:59
  Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm
• 30:02
  Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa Abramo.
• 30:07
  Speaker 1: It's one before the podcast. You can always catch us
• 30:09
  Speaker 1: worldwide on Bloomberg Radio