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P&L: GOP Is Pushing Trump to Cut Obamacare Benefits · Bloomberg Intelligence

• 0:04
  Speaker 1: Welcome to the Bloomberg pm L podcast. I'm Pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Abramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:14
  Speaker 1: you and your money, whether at the grocery store or
• 0:16
  Speaker 1: the trading floor. Find the Bloomberg p L podcast on iTunes,
• 0:20
  Speaker 1: SoundCloud and at Bloomberg dot com. A lot of people
• 0:29
  Speaker 1: right now in Congress are coming to the realization, uh
• 0:32
  Speaker 1: that it's going to take some time before Republicans can
• 0:36
  Speaker 1: fully implement repeal of Obamacare. Not only is it going
• 0:40
  Speaker 1: to take a while, but it will actually be incredibly complicated.
• 0:44
  Speaker 1: But there are some steps that the new Republican lead
• 0:48
  Speaker 1: administration can take in order to limit Obamacare. UH. For
• 0:53
  Speaker 1: a look at what those maybe, I want to bring
• 0:55
  Speaker 1: in Zachary Tracer of Bloomberg News who covers healthcare sector. Zach,
• 1:00
  Speaker 1: what are some of the measures that Republican aids are
• 1:03
  Speaker 1: talking about doing right when President Elect Trump assumes office.
• 1:08
  Speaker 1: That's right. So folks in d CRE are starting to
• 1:11
  Speaker 1: realize that it's going to take a while to repeal Obamacare,
• 1:14
  Speaker 1: and they're looking at what ways they can use regulations
• 1:17
  Speaker 1: uh or or changing regulations to sort of chip away
• 1:20
  Speaker 1: at the Affordable Care Act over the next few months
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  Speaker 1: and a few years. So one big target of that
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  Speaker 1: push has been, uh, the benefits under the c A,
• 1:30
  Speaker 1: so figuring out ways to limit some of what's covered
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  Speaker 1: in ways that might bring down the cost of plans
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  Speaker 1: or get rid of things that some on the right
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  Speaker 1: really don't like, things like contraceptive coverage, for instance. Is
• 1:43
  Speaker 1: that great? What about the idea of repealing it but
• 1:45
  Speaker 1: not repealing it. You repeal it in name because it's
• 1:47
  Speaker 1: a politically expedient thing to do, but on the other hand,
• 1:50
  Speaker 1: you kind of leave in place many of the exchanges.
• 1:54
  Speaker 1: Because I understand that more than six million people have
• 1:58
  Speaker 1: signed up for obam Care policies through the federal exchanges,
• 2:03
  Speaker 1: and that's four thousand more than had selected policies a
• 2:06
  Speaker 1: year ago. But your parton six point four million people,
• 2:09
  Speaker 1: that's a record, that's right. So we're seeing sign ups
• 2:12
  Speaker 1: proceed pretty much at pace. I think right after the
• 2:15
  Speaker 1: election of Donald Trump, there was some worry that maybe
• 2:17
  Speaker 1: people wouldn't sign up, you know, given all the rhetoric
• 2:19
  Speaker 1: about this law is going away, we're going to repeal it.
• 2:21
  Speaker 1: But it turns out that so far, sign ups are
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  Speaker 1: on pace, and the government has said they think thirteen
• 2:27
  Speaker 1: point eight million people will ultimately sign up by the
• 2:29
  Speaker 1: deadline at the end of January. So if some of
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  Speaker 1: these benefits are cut, would it lower costs for the
• 2:36
  Speaker 1: actual people who are getting the insurance plans or would
• 2:39
  Speaker 1: it lower the cost just for the government. You know,
• 2:42
  Speaker 1: that's a really good question. So they talk about cutting
• 2:44
  Speaker 1: these benefits in part as a way to limit costs.
• 2:47
  Speaker 1: So if you take coverage out of waait cost to
• 2:50
  Speaker 1: the government, well, it's it's it's both. So that the
• 2:53
  Speaker 1: government pays for a big piece of of the a
• 2:56
  Speaker 1: C plans, I give subsidies to individuals with low incomes
• 2:59
  Speaker 1: the individual man date, that's right, So individuals do have
• 3:02
  Speaker 1: to buy health insurance under the law, um and and
• 3:05
  Speaker 1: the government gives them subsidies to help them do that.
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  Speaker 1: So what cutting these benefits would do theoretically is maybe
• 3:13
  Speaker 1: lower the cost of this health insurance. The big open
• 3:15
  Speaker 1: question is what do you cut? And we should be
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  Speaker 1: really clear about this because these essential benefits are things
• 3:21
  Speaker 1: like hospitalization. There are things like your doctor's visits, labs,
• 3:26
  Speaker 1: pregnancy and maternity care, um you know, emergency services. So
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  Speaker 1: these are You know, the question is, as one person
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  Speaker 1: put it to us, you know, where's the fluff? What
• 3:35
  Speaker 1: are Republicans really going to cut? And that remains to
• 3:38
  Speaker 1: be seen. What's um, Let's say they do make some
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  Speaker 1: of these cuts, even the ones that are more politically
• 3:43
  Speaker 1: fraught like contraception. Um, what are the chances that a
• 3:49
  Speaker 1: Republican administration might maintain some incarnation of Obamacare once it
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  Speaker 1: has been sort of neutrog in certain ways? So what
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  Speaker 1: we're hearing right now is it looks like, very broadly speaking,
• 4:02
  Speaker 1: there's gonna be an immediate push to do a repeal
• 4:05
  Speaker 1: of Obamacare and delay big pieces of that for several
• 4:09
  Speaker 1: years to give lawmakers time to come up with a replacement.
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  Speaker 1: So you could see Obamacare persist, either in full or
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  Speaker 1: in some sort of limited form for at least two years,
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  Speaker 1: maybe three or even four years. Some have said, as
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  Speaker 1: as lawmakers work to figure out what's next, what about
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  Speaker 1: the ratios that exist for premiums? Because I understand that
• 4:29
  Speaker 1: if you use the ratio that currently exists, this is
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  Speaker 1: a regulation. This is not something that you can just
• 4:36
  Speaker 1: you know, quickly get get away with. And aren't they
• 4:39
  Speaker 1: going to try to avoid any kind of filipbuster. I
• 4:41
  Speaker 1: mean that would ultimately maybe die in in the in
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  Speaker 1: the Senate. Right. So a big reason that Republicans want
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  Speaker 1: to repeal the law using what's called reconciliation, using the
• 4:52
  Speaker 1: budget process instead of um, you know, full Senate vote,
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  Speaker 1: is they only need fifty one votes that lets them
• 4:57
  Speaker 1: avoid a filibuster. So, you know, with with a pretty
• 5:01
  Speaker 1: split Senate, UM, it'll be tough to figure out how
• 5:04
  Speaker 1: to replace this law in a way that you can
• 5:06
  Speaker 1: get to sixty votes. Thank you very much for coming
• 5:09
  Speaker 1: in and spending time with us. Zachary Tracer is our
• 5:12
  Speaker 1: healthcare reporter for Bloomberg, giving us some insight into the
• 5:16
  Speaker 1: Obamacare Affordable Care Act and what it's likely to look
• 5:19
  Speaker 1: like under President elector Donald Trump. And uh, it's going
• 5:23
  Speaker 1: to be in Congress. It's going to be pretty complicated
• 5:25
  Speaker 1: to unravel this thing, and so it's gonna be interesting
• 5:28
  Speaker 1: to see how they chip away at it. That's why
• 5:30
  Speaker 1: you have to follow Zachary on Twitter at z Tracer
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  Speaker 1: t R A C E R. Thanks very much. All right.
• 5:50
  Speaker 1: Here to tell us a little bit more about where
• 5:51
  Speaker 1: to put our money is David Kotak. He is the
• 5:54
  Speaker 1: chairman of the chief investment officer at Cumberland Advisors, David
• 5:58
  Speaker 1: ko Talk. How are you, sir? I'm terrific, and I
• 6:01
  Speaker 1: think we should have an index that samples New York
• 6:05
  Speaker 1: City's finest cheesecake. I'm willing to volunteer terrific, terrific conversation.
• 6:11
  Speaker 1: All right, well you while while you track cheesecake, I'm
• 6:15
  Speaker 1: interested in tracking investments. Where do you want to start?
• 6:18
  Speaker 1: You want to do bonds first? Tell us whether this
• 6:21
  Speaker 1: bond sell off means it's time to buy or should
• 6:23
  Speaker 1: you stay away. I'm looking at the tenure right now
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  Speaker 1: at two fifty three and the thirty year at the
• 6:28
  Speaker 1: three ten. We're getting a little bit of a bit
• 6:30
  Speaker 1: on both of them. Um, We in our shop are
• 6:34
  Speaker 1: not buyers of treasury intermediate or long. Here we think
• 6:40
  Speaker 1: there is more likely a little higher rate sometime next year,
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  Speaker 1: possibly evento a three on the tenure. We are buyers
• 6:50
  Speaker 1: of high grade tax freeze. When high grade tax free
• 6:55
  Speaker 1: sold off, they sold off twice as viciously as the
• 7:00
  Speaker 1: taxable treasury bond. They went from eighty five of the
• 7:04
  Speaker 1: treasury yield to currently a hundred and thirty percent of
• 7:09
  Speaker 1: the treasury yield. I don't care what Donald Trump does
• 7:12
  Speaker 1: with the tax code, it's highly unlikely it's going to
• 7:15
  Speaker 1: be completely repealed. So four percent high grade tax free
• 7:20
  Speaker 1: is in the market today, even as the Treasury backed
• 7:24
  Speaker 1: up fifty basis points long Muni's over a hundred and
• 7:28
  Speaker 1: there a bargain. Yeah, you know, this has been u
• 7:30
  Speaker 1: an ongoing kind of question out there. Are muni's oversold.
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  Speaker 1: Municipal bonds sold off dramatically after the President elect Trump
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  Speaker 1: won the US election because there was this idea that
• 7:43
  Speaker 1: lower taxes, particularly for wealthier people, would reduce the appeal
• 7:47
  Speaker 1: for these tax free municipal bonds. Talking about municipal bonds,
• 7:51
  Speaker 1: I want to talk about Puerto Rico. I know, David
• 7:54
  Speaker 1: that you have a strategy that focuses specifically on Puerto
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  Speaker 1: Rican bonds, and we got news, uh that that Perto
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  Speaker 1: Rico is now facing a budget shortfall of sixty seven
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  Speaker 1: point five billion dollars over the next decade. That's almost
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  Speaker 1: ten billion dollars more than previously projected by the islands
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  Speaker 1: governor um At this point, would you be a buyer
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  Speaker 1: of Puerto Rican bonds or do you think that this
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  Speaker 1: is just sort of just a quagmire that is not
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  Speaker 1: worth it. Oh, it's a terrible quagmire, Lisa. We we
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  Speaker 1: believe in that the only bonds that we will own
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  Speaker 1: in Puerto Rico are very specific ensured bonds and those
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  Speaker 1: that have internal credit structures that have to be researched.
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  Speaker 1: There's seventy billion in debt, as you know, outstanding in
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  Speaker 1: Puerto Rico, and we go through every insurance contract, every
• 8:42
  Speaker 1: bond indenture, and every cross collateral claim. That's the only
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  Speaker 1: way to participate in Puerto Rico debt. And if you
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  Speaker 1: don't dig deep into the weeds, it's better to avoid it.
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  Speaker 1: If you'd have the resources, then there's opportunity. We have
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  Speaker 1: some Puerto Rico bonds which have three and four layers
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  Speaker 1: of credit enhancement in addition to the claim on a
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  Speaker 1: Puerto Rico agency. But you've really got to do the
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  Speaker 1: detail work to do it. The politics of the island
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  Speaker 1: have to change. And whether it's sixty billion or seventy
• 9:20
  Speaker 1: billion forward budget deficits, the notion is it's big and
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  Speaker 1: it requires political change, and it will be imposed on
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  Speaker 1: them by the board that will now run Puerto Rico's
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  Speaker 1: finances instead of the local government. David can I just
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  Speaker 1: take you to Muni bonds just complete that. I want
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  Speaker 1: to understand a little bit more. What kind of maturity
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  Speaker 1: are you talking about? Because I'm looking at a tenure
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  Speaker 1: in California two point seven one, tenure in New York
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  Speaker 1: two point four seven. Are those the kinds of bonds
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  Speaker 1: that you're talking about? Well, those bonds, those bonds are
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  Speaker 1: competing virtually at parody with yield on the treasuries. But
• 9:59
  Speaker 1: if you go long, were on the curve all the
• 10:01
  Speaker 1: way out to thirty. That's what I want to I
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  Speaker 1: want to go thirty for California three point six three,
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  Speaker 1: New York three point four. I would go thirty years
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  Speaker 1: in Muniland today when the yield is higher than the
• 10:14
  Speaker 1: taxable treasury. Absolutely. I think if you take a Californian
• 10:19
  Speaker 1: at a maximum new tax Brackett three whatever it's going
• 10:24
  Speaker 1: to be plus California taxes, you gross up to a
• 10:28
  Speaker 1: return that is very appealing for a high grade credit.
• 10:32
  Speaker 1: How concerned, David are you about the looming pension crisis,
• 10:36
  Speaker 1: or at least that's what many people believe. We have
• 10:38
  Speaker 1: California's biggest pension, actually the biggest public pension in the US.
• 10:43
  Speaker 1: Helpers saying this week are basically that it was probably
• 10:47
  Speaker 1: going to lower it's assumed rate of return over the
• 10:50
  Speaker 1: next a few decades to seven from seven point five percent.
• 10:53
  Speaker 1: A lot of people think that this still is an
• 10:55
  Speaker 1: unrealistic target. As a result, California will probably have to
• 10:59
  Speaker 1: add to two billion dollars per year to this fund.
• 11:05
  Speaker 1: Aren't you concerned about this? Of course I am. It's
• 11:09
  Speaker 1: the unfunded liabilities of SATAN, local governments and others are
• 11:16
  Speaker 1: are huge. California, which was at one point a triple
• 11:21
  Speaker 1: B credit, has taken steps to improve its financing and
• 11:26
  Speaker 1: a realistic reduction of the earnings assumption to bring it
• 11:31
  Speaker 1: in line with markets is another positive step, and added
• 11:35
  Speaker 1: funding is another positive step. The worst state is Illinois.
• 11:40
  Speaker 1: New Jerseys not far behind. Other states which have difficulties
• 11:45
  Speaker 1: include Connecticut, Kentucky, Louisiana. We have states and gradations in
• 11:50
  Speaker 1: our shop, and there are states like Illinois general obligation debt.
• 11:54
  Speaker 1: We will not own it for a client. Closed and
• 11:57
  Speaker 1: bond funds. Are they attractive? Maybe, but you've got to
• 12:01
  Speaker 1: look at what's inside. As we both know, PIM, what's
• 12:05
  Speaker 1: in the fund? The details are you know, the devil's
• 12:08
  Speaker 1: in the details always always is stocks. Ah, Now we
• 12:14
  Speaker 1: have the major question. Every dollar cut in the thirty
• 12:20
  Speaker 1: corporate tax rate equates to about the dollar dollar and
• 12:24
  Speaker 1: a quarter permanent shift of additional earnings in the SNP
• 12:29
  Speaker 1: five hundred index. If that rate is going to go
• 12:32
  Speaker 1: from thirty five to twenty or twenty five, and you're
• 12:36
  Speaker 1: going to permanently add ten, twelve or fifteen dollars year
• 12:39
  Speaker 1: after year to SMP five hundred earnings, then you have
• 12:44
  Speaker 1: to say, I need to reconsider the valuation of the
• 12:47
  Speaker 1: stock market. What the details will be in that tax
• 12:51
  Speaker 1: code change is another devil that hasn't been revealed, all right,
• 12:55
  Speaker 1: and we got right now price earnings ratio for the
• 12:58
  Speaker 1: SMP five twenty one with dividen deal of about two.
• 13:02
  Speaker 1: So I guess that would change all of that as well.
• 13:04
  Speaker 1: David co Tech, I'm so glad you could join us.
• 13:18
  Speaker 1: It was the tweet that sent alarms all over the
• 13:22
  Speaker 1: Twitter sphere and potentially beyond. President elect Donald Trump yesterday
• 13:26
  Speaker 1: tweeted that the United States must greatly strengthened and expand
• 13:30
  Speaker 1: it's nuclear capability until such time as the world comes
• 13:34
  Speaker 1: to its senses regarding nukes. That prompted many people to
• 13:38
  Speaker 1: have some catastrophic responses, including the circulation of a nuke
• 13:43
  Speaker 1: map where you could figure out how you would be
• 13:46
  Speaker 1: affected by a nuclear problem. I want to bring in
• 13:48
  Speaker 1: for some perspective and some real talk, George Ferguson, senior
• 13:51
  Speaker 1: Aerospace and Defense analyst for Bloomberg Intelligence. Um, George, what
• 13:57
  Speaker 1: did you make of of sort of President elect Trump's
• 14:00
  Speaker 1: insinuation that the US would be rebuilding its nuclear stop stockpile?
• 14:05
  Speaker 1: Uh so, good morning. So I think that a lot
• 14:10
  Speaker 1: of this work was probably going to get done anyways
• 14:13
  Speaker 1: under um, under potential president Hillary Clinton to you know,
• 14:18
  Speaker 1: there's a number of you know, we have a triad,
• 14:21
  Speaker 1: we have way have blistic missiles, nuclear missiles on ships, airplanes,
• 14:26
  Speaker 1: and ground based and a number of the triad are
• 14:31
  Speaker 1: worn out, i'd say, having been built a lot of
• 14:33
  Speaker 1: it in the Reagan era, and I think we had
• 14:36
  Speaker 1: to upgrade it anyways. The ships are the submarines to
• 14:38
  Speaker 1: the I think the most prominent of that spend. There's
• 14:42
  Speaker 1: been some discussion about revamping those submarines, and so I
• 14:48
  Speaker 1: think frankly that Hillary Clinton would have done the same thing.
• 14:51
  Speaker 1: And so I don't really get the sense that a
• 14:53
  Speaker 1: president elect Trump is going to go further than sort
• 14:56
  Speaker 1: of the way the current um that deter stockpile looks.
• 15:01
  Speaker 1: But I think he was just reinforcing the idea that
• 15:03
  Speaker 1: he is going to spend money on that on those programs. George,
• 15:07
  Speaker 1: let's turn on attention now to another defense program. This
• 15:10
  Speaker 1: is the Joint Strike fighter, the F thirty five, and
• 15:14
  Speaker 1: the request, or at least the mention on Twitter by
• 15:16
  Speaker 1: President elect Donald Trump two put together or at least
• 15:21
  Speaker 1: to have Boeing put together a competing bid for a
• 15:25
  Speaker 1: competing aircraft to update the F eighteen. Can you explain
• 15:31
  Speaker 1: what this is all about. Yeah, I think he's looking
• 15:34
  Speaker 1: for opportunities to to foster more competition. I think he
• 15:40
  Speaker 1: I think he is committed to spending defense money, and
• 15:43
  Speaker 1: I think he'll probably spend more defense money than President
• 15:47
  Speaker 1: Obama did just just because of the question other challenges
• 15:50
  Speaker 1: inside the defense budget. Um. But I think he wants
• 15:53
  Speaker 1: more bank for his buck. To use the old expression
• 15:56
  Speaker 1: which it gives applete fits here, and so I think
• 15:59
  Speaker 1: he really wants to find a way to foster more competition.
• 16:03
  Speaker 1: We've gotten to the point now where we only have
• 16:05
  Speaker 1: a handful of defense primes. They get a bit specialized
• 16:09
  Speaker 1: in what they do, and we're not getting as much
• 16:11
  Speaker 1: competition as we had back in the days of it.
• 16:15
  Speaker 1: But je, let's just stay specifically about this, this particular program,
• 16:19
  Speaker 1: because I mean, the total defense budget is like six
• 16:21
  Speaker 1: d and twenty two billion dollars that was this year, right,
• 16:26
  Speaker 1: It's forty of the global total is spent by the
• 16:30
  Speaker 1: United States, Right, So six billion go into defense this program,
• 16:35
  Speaker 1: the F thirty five Joint Strike Fighter. It's the only
• 16:39
  Speaker 1: plane I understand that the Marine Corps flies. Uh, the
• 16:43
  Speaker 1: Air Force doesn't even fly. The U is not interested
• 16:46
  Speaker 1: in flying the F A teen. So why would you
• 16:49
  Speaker 1: come out and say you want a proposal to update
• 16:53
  Speaker 1: the F A teen when two of the three branches
• 16:55
  Speaker 1: of service don't even use it well, And that's what
• 16:58
  Speaker 1: I'm saying. I think there's a bit of um posturing
• 17:01
  Speaker 1: going on here. I don't think the F A team
• 17:03
  Speaker 1: could be upgraded, changed, altered to perform the mission, you know,
• 17:09
  Speaker 1: an Air Force strike fighter mission or the Marine Corps
• 17:13
  Speaker 1: vertical lift mission. Right. The Marine Corps uses the vertical
• 17:16
  Speaker 1: lift harriers. So I think he's trying to get a
• 17:19
  Speaker 1: wedge in here to try to find a way to
• 17:20
  Speaker 1: drive down costs. But Lockheed right now is the only
• 17:23
  Speaker 1: game in town when it comes to fifth generation fighters,
• 17:26
  Speaker 1: and that's a challenge. George. I'm wondering the people who
• 17:30
  Speaker 1: you're talking to, how concerned are they that President elect
• 17:34
  Speaker 1: Trump is taking some of these issues, which are a
• 17:38
  Speaker 1: matter of national security to Twitter. Uh you know, Uh,
• 17:44
  Speaker 1: it's definitely interesting days. I don't think anybody's terribly disturbed
• 17:51
  Speaker 1: by it, but it's definitely interesting days. It seems like
• 17:53
  Speaker 1: public posturing. Well, but I mean the reason being that,
• 17:56
  Speaker 1: you know, yesterday's Twitter post about nuclear weapons certainly had
• 18:00
  Speaker 1: a pretty big reaction globally, and there were concerns that
• 18:04
  Speaker 1: we're going to be restarting the Cold War. Uh. You know,
• 18:07
  Speaker 1: I'm just wondering. And it's certainly helped the stocks of
• 18:09
  Speaker 1: some uranium companies, right I mean, for example, I was
• 18:13
  Speaker 1: looking at Uranium Resources. It was up thirty one percent
• 18:17
  Speaker 1: after this tweet. Yeah, I mean, I guess the challenge
• 18:21
  Speaker 1: here too is we still live in a world where Russia.
• 18:24
  Speaker 1: Russia has nuclear weapons. Other countries around the world have
• 18:26
  Speaker 1: nucular weapons, so we're definitely not going to abandon them.
• 18:30
  Speaker 1: Whether it belonged on Twitter. Um, you know, that's a
• 18:33
  Speaker 1: different debate. But again, I think we thought that the
• 18:35
  Speaker 1: money is gonna get spent anyways, It's a function how
• 18:39
  Speaker 1: much that's it's honestly, Um, I really appreciate the perspective, George,
• 18:43
  Speaker 1: because I think it's important to have a sort of
• 18:45
  Speaker 1: realistic look at what is going on, you know, whether
• 18:48
  Speaker 1: this really does indicate a restarting of the nuclear arms
• 18:52
  Speaker 1: race or whether this is just simply a chest pounding
• 18:55
  Speaker 1: exercise for something that we would have already done. Yeah,
• 19:00
  Speaker 1: that was my take. Well, I mean, and also it
• 19:03
  Speaker 1: brings into question the whole issue of whether our allies
• 19:06
  Speaker 1: are going to continue to buy the F thirty five
• 19:09
  Speaker 1: joint strike fighter, right. I mean, Canada has already delayed
• 19:11
  Speaker 1: what they say they were going to buy it. Now
• 19:14
  Speaker 1: the new prime minister they're saying maybe not. They're going
• 19:17
  Speaker 1: to upgrade the F A team, and we know that
• 19:20
  Speaker 1: other countries like Israel, they're already taking deliver at the
• 19:22
  Speaker 1: F thirty five and that's a major defense project. Thanks
• 19:25
  Speaker 1: very much, George Ferguson. He is senior Aerospace and Defense
• 19:28
  Speaker 1: analyst for Bloomberg Intelligence. One of the big stories of
• 19:44
  Speaker 1: the year, in my opinion, has been the tremendous increase
• 19:49
  Speaker 1: in libor rates in the US. In other words, the
• 19:53
  Speaker 1: rate the banks charge each other to borrow dollars has
• 19:57
  Speaker 1: risen to the highest level since two thousand and nine.
• 20:00
  Speaker 1: This is largely due to money market reform, and this
• 20:04
  Speaker 1: same brand of money market reform maybe coming to Europe.
• 20:07
  Speaker 1: I want to bring in Henley Smith, senior vice president
• 20:09
  Speaker 1: at Vanderbilt Avenue Asset Management in Greenwich, Connecticut. He's here
• 20:13
  Speaker 1: with us in our Bloomberg eleven three oh studio, Henley, Uh,
• 20:17
  Speaker 1: let us tell us, first of all, just give us
• 20:19
  Speaker 1: an update. How is the money market reform implementation going?
• 20:23
  Speaker 1: And do you expect librrates to continue to climb from
• 20:25
  Speaker 1: here as a result of them? Well, first, thanks for
• 20:28
  Speaker 1: having me in. Uh. Yeah, the implementation went fairly smoothly,
• 20:31
  Speaker 1: no hiccup, says we could see. But I think that
• 20:33
  Speaker 1: trade is still unfolding and will continue to unfold because
• 20:36
  Speaker 1: we haven't had any of these funds test those new rules.
• 20:40
  Speaker 1: But I will say in that library thing that obviously
• 20:43
  Speaker 1: since November eight, the trade has definitely gone from fear
• 20:47
  Speaker 1: to greed, and we're seeing that being reflected in the
• 20:50
  Speaker 1: in in the library rates have they pushed up to
• 20:53
  Speaker 1: one percent this week, and I think that's something we
• 20:55
  Speaker 1: talked about last time I was here. We expect expected
• 20:58
  Speaker 1: that and we continue to expect to see that move
• 21:00
  Speaker 1: and I think that's a big reason for that is
• 21:03
  Speaker 1: because of you've seen a massive movement out of some
• 21:06
  Speaker 1: of these prime money market funds which they invest in
• 21:08
  Speaker 1: commercial paper and other types of instruments that are based
• 21:11
  Speaker 1: on library and so the demand for those instruments has
• 21:14
  Speaker 1: really dried up, and that's what one of the reasons
• 21:17
  Speaker 1: why library rates are pushing up very high. And the
• 21:19
  Speaker 1: Justice review, if we can some of the most important
• 21:22
  Speaker 1: aspects of this money market reform. Prime institutional money market funds,
• 21:27
  Speaker 1: those that are investing in short term corporate debt, is
• 21:31
  Speaker 1: just to described as well as institutional municipal money market funds.
• 21:35
  Speaker 1: They have to allow the value of their shares to
• 21:38
  Speaker 1: fluctuate to reflect the current market price. Right, absolutely right.
• 21:41
  Speaker 1: I don't think that that's a problem. I think that
• 21:43
  Speaker 1: that sheds more transparency on the fact that these are
• 21:46
  Speaker 1: investment accounts, not savings accounts, which I think a lot
• 21:49
  Speaker 1: of investors, retail in particular, thought that they were you know,
• 21:53
  Speaker 1: safe liquid all those things, which they are, but they
• 21:56
  Speaker 1: are investment portfolios. But your money can actually be locked
• 21:59
  Speaker 1: up if there is a big move in volatility. Perhaps
• 22:02
  Speaker 1: that's correct. The SEC will require some of these funds,
• 22:05
  Speaker 1: the prime funds and missible funds that we've talked about,
• 22:08
  Speaker 1: to actually gate or uh stop redemptions for the matter
• 22:12
  Speaker 1: of thirty days, and that could be a tremendous amount
• 22:15
  Speaker 1: of problems. So you're seeing a lot of corporate treasurers
• 22:19
  Speaker 1: who typically invest in these prime money market funds move out.
• 22:22
  Speaker 1: So you've had a massive movement out of prime money
• 22:24
  Speaker 1: market funds into US government only money market funds. And
• 22:28
  Speaker 1: as I said, I think that that trade is still
• 22:30
  Speaker 1: going to unfold over the next year if any of
• 22:33
  Speaker 1: these funds do get any kind of liquidity stress. How
• 22:35
  Speaker 1: these rules will actually play out, you know, so the
• 22:38
  Speaker 1: US rules have been largely implemented. Whether the effects will
• 22:41
  Speaker 1: continue to be seen and you're saying they probably will,
• 22:43
  Speaker 1: but it will be it sounds like orderly, uh much
• 22:45
  Speaker 1: to the its difference. Uh, there was a there was
• 22:48
  Speaker 1: a fear that it could be somewhat disorderly. Uh. That said,
• 22:51
  Speaker 1: the European Union is about to impose their own set
• 22:55
  Speaker 1: of money market reform rules and it might be somewhat
• 22:59
  Speaker 1: just eruptive. What rate are you looking at for those
• 23:04
  Speaker 1: new rules to affect? And you know, how do investors
• 23:08
  Speaker 1: trade around that? Well? Again, yeah, I think those those
• 23:10
  Speaker 1: rules similar to the US will come into play over
• 23:13
  Speaker 1: the next year two. Um, it will be interesting because
• 23:16
  Speaker 1: you have an EU that's in flux, uh, you know,
• 23:18
  Speaker 1: with the Italian bank in the headlines this week being
• 23:22
  Speaker 1: rescued by the Italian government. Um, you know, how are
• 23:24
  Speaker 1: the basically I have a lot of prospects less clients
• 23:28
  Speaker 1: that are very concerned about European money market funds because
• 23:31
  Speaker 1: a lot of them invest in financial instruments, financial commercial paper, CDs,
• 23:36
  Speaker 1: those types of things. So as those rules get implemented, Uh,
• 23:40
  Speaker 1: and if we still have some concerns about the banking
• 23:44
  Speaker 1: system in the EU, I think there could be some
• 23:47
  Speaker 1: real hiccups here. So yeah, we'll continue to look at
• 23:50
  Speaker 1: LIEB or I. My guess is that will have a
• 23:52
  Speaker 1: similar type of of of movement out of these funds
• 23:55
  Speaker 1: that are affected, and that could create some dislocations, which
• 24:00
  Speaker 1: I think, you know, for investors like myself, it's not
• 24:03
  Speaker 1: such a bad thing. It's an anomaly that I can
• 24:05
  Speaker 1: take advantage of. How would you do that? Explain? How
• 24:07
  Speaker 1: would you do that? Right now? We've got two whales.
• 24:10
  Speaker 1: I mean, we do that through separately managed accounts, and
• 24:12
  Speaker 1: we've also have a private cash management trust that we've
• 24:14
  Speaker 1: set up for investors that is actually stepping into the
• 24:18
  Speaker 1: vacuum that's been created. So what do you buy? Can
• 24:20
  Speaker 1: you give us an example of something that is unpopular
• 24:24
  Speaker 1: that you've seen these outflows that you might be able
• 24:27
  Speaker 1: to take advantage of because two things, you know, commercial
• 24:30
  Speaker 1: paper being one, because US government funds can't invest in
• 24:33
  Speaker 1: commercial paper obviously, so that that's created a dislocation or
• 24:36
  Speaker 1: an anomaly that you've seen. The spreads between the risk
• 24:39
  Speaker 1: free curve and the and lieboor spread spread wide too.
• 24:43
  Speaker 1: Its broadest level we've seen it. And let's just say
• 24:46
  Speaker 1: so commercial paper is sort of the short term loans
• 24:49
  Speaker 1: that companies take out and used to rely upon for
• 24:52
  Speaker 1: just their liquidity needs and was very popular and has
• 24:55
  Speaker 1: shrunk substantially as a market as a demand has demand
• 24:58
  Speaker 1: is shrunk, So you've seen those rates move up. Uh,
• 25:01
  Speaker 1: those investors that invest primarily money market funds prime you
• 25:05
  Speaker 1: are not in that market now, so that gives investors
• 25:07
  Speaker 1: like myself a real opportunity to move into that market,
• 25:10
  Speaker 1: either through separately managed accounts or private cash management, trust
• 25:13
  Speaker 1: that we can take advantage of those yields without all
• 25:16
  Speaker 1: the restrictions that the redemption rules are are now presenting
• 25:20
  Speaker 1: to the investors. And with respects of Europe. Uh So,
• 25:23
  Speaker 1: earlier this month the Council of the European Union approved
• 25:27
  Speaker 1: rules and locally domiciled money market funds. They'll impose stricter
• 25:31
  Speaker 1: liquidity requirements, limit redemptions, among other measures. And only I
• 25:35
  Speaker 1: was struck by your talking about the fact that there
• 25:37
  Speaker 1: are European financial instruments in these money market funds. Um,
• 25:42
  Speaker 1: what kind of dislocation could we see in this market? Uh,
• 25:46
  Speaker 1: not only as these new rules come on board, but
• 25:48
  Speaker 1: also as potentially banking issues increase in that region. Well,
• 25:53
  Speaker 1: the two things you have to look at of just
• 25:54
  Speaker 1: absolute yields as they spread versus a risk free curve
• 25:57
  Speaker 1: the U S treasuries as an example, and the bid
• 26:00
  Speaker 1: between the where you can buy and where you can
• 26:02
  Speaker 1: sell to the bid mass because those wide now there
• 26:05
  Speaker 1: could be some problems and that's just an expression of
• 26:07
  Speaker 1: liquidity and One of the things in the real paradox
• 26:11
  Speaker 1: of these rules is you've got liquidity money markets and
• 26:14
  Speaker 1: it's all of a sudden it's locked up for thirty
• 26:16
  Speaker 1: days or whatever um. That creates a real concern for
• 26:20
  Speaker 1: a lot of investors. So I could see the similar
• 26:22
  Speaker 1: type of thing happening, and with the banking system being
• 26:26
  Speaker 1: a little bit more influx in Europe. Now remember again
• 26:30
  Speaker 1: a little well, are you buying? Are you buying? European
• 26:34
  Speaker 1: money markets are staying now, We're staying domestic right now.
• 26:36
  Speaker 1: We want to see how these rules on unfold before
• 26:40
  Speaker 1: we step into that market again. I think we'll just
• 26:42
  Speaker 1: we'll be focused on the prime space, but we have
• 26:45
  Speaker 1: to remember as well. Uh you know, last I saw
• 26:48
  Speaker 1: twelve trillion dollars of sovereign debt is negative still, so
• 26:52
  Speaker 1: how that plays into this whole equation is going to
• 26:54
  Speaker 1: be very interesting as these rules get get phased in.
• 26:57
  Speaker 1: Thanks very much, Henley Smith of to Build Avenue Asset Management.
• 27:01
  Speaker 1: They're based in Greenwich, Connecticut. Thanks for listening to the
• 27:10
  Speaker 1: Bloomberg pian L podcast. You can subscribe and listen to
• 27:14
  Speaker 1: interviews at iTunes, SoundCloud, or whatever podcast platform you prefer.
• 27:19
  Speaker 1: I'm pim Fox. I'm out there on Twitter at pim Fox.
• 27:23
  Speaker 1: I'm out there on Twitter at Lisa Abramo. It's one
• 27:26
  Speaker 1: before the podcast. You can always catch us worldwide on
• 27:29
  Speaker 1: Bloomberg Radio