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TCW's Rivelle: Cautious on EM Debt This Late In Cycle · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg PENL Podcast. I'm Paul swing you.
• 0:05
  Speaker 1: Along with my co host Lisa Brahma Wicks. Each day
• 0:07
  Speaker 1: we bring you the most noteworthy and useful interviews for
• 0:10
  Speaker 1: you and your money. Whether at the grocery store or
• 0:12
  Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
• 0:15
  Speaker 1: podcast or wherever you listen to podcasts, as well as
• 0:17
  Speaker 1: at Bloomberg dot com. Often people say that high yield
• 0:24
  Speaker 1: bonds are a leading indicator. They tend to show weakness
• 0:28
  Speaker 1: before US equities. If that is still true, there is
• 0:32
  Speaker 1: no sign of weakness US hiled bonds of returned nearly
• 0:36
  Speaker 1: seven percent in less than three months, of our markets
• 0:41
  Speaker 1: overly complacent or they signaling that the good times can
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  Speaker 1: last a bit longer. Joining us here in our Bloomberg
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  Speaker 1: Interactive Broker Studios, Tad Ravel, chief investment Officer for fixed
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  Speaker 1: income at TCW, helping to oversee a hundred billion dollars
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  Speaker 1: under management normally based in Los Angeles. But you're grace
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  Speaker 1: in our presence here. Thank you, So, Tad, what do
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  Speaker 1: you think I mean that this uh six point seven
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  Speaker 1: percent gain dramatic and indicating that there is not any
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  Speaker 1: concern about it turning the credit cycle, Well, the headline
• 1:09
  Speaker 1: is very impressive, but actually when you look underneath the hood,
• 1:12
  Speaker 1: you actually see something a little bit different. In particular,
• 1:15
  Speaker 1: you will notice that the triple C category, so the
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  Speaker 1: lowest tier of junkraded issuers out there, actually hasn't participated.
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  Speaker 1: So the spreads of triple cs are still I think
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  Speaker 1: about eight hundred and fifty plus basis points over treasuries
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  Speaker 1: plus or minus. So that's indicative that the fear level
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  Speaker 1: that investors experience in the fourth quarter of last year
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  Speaker 1: hasn't actually been completely dissipated. Must much of the rally
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  Speaker 1: actually has been The investors are in fact more discriminating
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  Speaker 1: in the current quarter than we've seen them in periods
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  Speaker 1: that were similar in terms of high returns, like two
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  Speaker 1: thousand seventeen, for instance. So it tad given where we
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  Speaker 1: are in terms of the economic cycle, the credit cycle, Um,
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  Speaker 1: where are you on the risk curve here? Where do
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  Speaker 1: you think investors should be going in terms of return? Here?
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  Speaker 1: How much riot should they be taking? I think you're
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  Speaker 1: supposed to be defensive, You're supposed to be highgrading your
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  Speaker 1: your bond portfolio. You're supposed to be focusing on a
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  Speaker 1: combination of traditional risk off instruments. That would be things
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  Speaker 1: like agency mortgages with some treasuries built into it, and
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  Speaker 1: then allocations to what we describe as bendable assets, so
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  Speaker 1: that would include Triple A rated commercial mortgage backed securities,
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  Speaker 1: Triple A rated asset backed securities, and UM investment grade credit.
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  Speaker 1: Provided that you've done your your credit homework properly and
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  Speaker 1: are properly thinking through and controlling for the for the
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  Speaker 1: fallen angel risk, what you're not supposed to be doing
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  Speaker 1: is adopting what we would describe as an early cycle strategy.
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  Speaker 1: An early cycle strategy would be where you're essentially dipping
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  Speaker 1: into and making significant allocations two things like high yield,
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  Speaker 1: emerging markets down the capital structure, taking on a lot
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  Speaker 1: of financial or operating leverage. You shouldn't be doing that,
• 2:53
  Speaker 1: So emerging markets you're not. You're not a fan. Well,
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  Speaker 1: the the the emerging mark at asset class has many,
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  Speaker 1: many opportunities in it, obviously, but I think that as
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  Speaker 1: a as a general statement, it has many of the
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  Speaker 1: features that are similar to high yield. At the end
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  Speaker 1: of a cycle, you tend to experience significant downside volatility
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  Speaker 1: when there is a contraction and credited leveraging environment. So
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  Speaker 1: how far away are we from a contraction or downturning credit? Well,
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  Speaker 1: it looks like we were heading there actually just a
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  Speaker 1: couple of months ago, and then UH Chairman Powell decided that, um,
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  Speaker 1: we were getting there too fast, and so he decided
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  Speaker 1: to do something about it. And of course that's the
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  Speaker 1: whole genesis behind the most recent FED flip flop and
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  Speaker 1: movement to being patient. So here's the question of the
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  Speaker 1: day and the question of the cycle, which is can
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  Speaker 1: the FED ultimately direct the movement of the clouds? Um?
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  Speaker 1: Are they that skilled and that powerful that they can
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  Speaker 1: delay the end of the cycle forever um or have
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  Speaker 1: they simply delayed it for for now? I think we're
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  Speaker 1: in the camp that says they've delayed it for now.
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  Speaker 1: And when when does the market essentially decide to in
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  Speaker 1: effect veto the Fed's decision? Well? Who can say? So
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  Speaker 1: you talked about the FED flip flopping, and obviously today
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  Speaker 1: we're going to hear from FED Chairman Pal this afternoon.
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  Speaker 1: What do you expect to hear that maybe the markets
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  Speaker 1: not discounting today? Do you expect anything unusual coming out
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  Speaker 1: of the FED today absolutely not, I think I think
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  Speaker 1: I think that the bravado with which the FED spoke
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  Speaker 1: of five months ago right, It was only I think
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  Speaker 1: in September where Powell said something to the effect we
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  Speaker 1: are a long way from being being neutral, and we
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  Speaker 1: got lots of rate rises. We're gonna shrink that balance sheet.
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  Speaker 1: Look how quickly or how easily a whiff of cold
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  Speaker 1: winter risk blowing into the markets change the Fed's mind.
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  Speaker 1: I think that they are going to be very careful
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  Speaker 1: and measured in what they say today to keep investors
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  Speaker 1: on the on what day would view as the straight
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  Speaker 1: and narrow before we let you go. I want to
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  Speaker 1: get in the weeds a little bit with respect to
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  Speaker 1: energy high yield bonds because I think that there has
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  Speaker 1: been a really notable underperformance in this space and there
• 5:10
  Speaker 1: have been some huge potholes. I was looking yesterday for example,
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  Speaker 1: ep Energy, which has more than four billion dollars of
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  Speaker 1: debt bonds falling forty cents in two days after disappointing earnings.
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  Speaker 1: Do you think that there are more bankruptcies to come
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  Speaker 1: in the show patch? Yes, is the short answer, And
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  Speaker 1: I think that I think that your example is an
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  Speaker 1: excellent one I think in terms of illustrating the asymmetry
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  Speaker 1: with which investors are approaching the market, which is that
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  Speaker 1: all you saw, as far as I know, was a
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  Speaker 1: disappointing earnings number coming out of the company, and that
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  Speaker 1: was enough basically to utterly reprice the capital structure of
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  Speaker 1: the business. So the complacency with which we saw investors
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  Speaker 1: operate a couple of years ago doesn't really seem to
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  Speaker 1: be enforced any longer. So ted us or any just
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  Speaker 1: ten seconds, any area that you're just avoiding, like the plague.
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  Speaker 1: Uh well, yes, there there are areas to to avoid,
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  Speaker 1: like to play, but they tend to be they I
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  Speaker 1: don't want to give you a broad brush stroke. There
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  Speaker 1: are there are specific areas and subsectors that you should
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  Speaker 1: be very careful and thoughtful about. Okay, but you're generally
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  Speaker 1: risk off. That's kind on taking away from from TAT. TAT,
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  Speaker 1: thank thank you very much. Thank you. Cautious, cautious, It's
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  Speaker 1: a better way. Tad Ravel, Chief Investment Officer for Fixing
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  Speaker 1: Comfort t c W. Joining us in our Bloomberg Interactive
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  Speaker 1: Broker's studio, we thought it'd be very interesting to get
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  Speaker 1: a sense of what local and regional banks, how they
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  Speaker 1: are dealing with the current interest rate, of environment, and
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  Speaker 1: how their customers are reacting. So we're very fortunate today
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  Speaker 1: to have Frank Sorrentino join us in our Bloomberg eleven
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  Speaker 1: three oh studios. Frank's chairman and chief executive officer of
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  Speaker 1: connect One Bank, which trades on the nastack unto the
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  Speaker 1: symbol c n O B. Frank, thanks very much for
• 7:08
  Speaker 1: joining us. Um. I know you have your finger on
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  Speaker 1: the pulse of kind of where rates are going. That's
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  Speaker 1: your business. What do you expect to hear from the
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  Speaker 1: FED today? Well, thanks for having me again, But I
• 7:17
  Speaker 1: don't think anyone's expecting any big surprise today. I think
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  Speaker 1: the FED has done a great job of telegraphing what's
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  Speaker 1: happening here over the last thirty or sixty days. Uh,
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  Speaker 1: it's pretty it's pretty clear to me that the FED
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  Speaker 1: is on pause for right now and and looking for
• 7:32
  Speaker 1: some additional information. All right. I want some additional information
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  Speaker 1: about the housing market in particular, and I know that
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  Speaker 1: you have quite a long history of expertise in this area.
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  Speaker 1: You used to actually be a home builder, right, that
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  Speaker 1: is correct? So what are you seeing right now? I'm
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  Speaker 1: really having a hard time getting a read on the
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  Speaker 1: US housing market, whether it's slowing down or whether there
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  Speaker 1: was just a pause when mortgage rades rose and that
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  Speaker 1: it's now picking back up. You know, I'll tell you
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  Speaker 1: I I from what we see from our client Bay Ace,
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  Speaker 1: and it's really dependent on specific market areas, but certainly
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  Speaker 1: in the market that connect One represents in the New
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  Speaker 1: York metro market, we've never really fully recovered from the recession,
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  Speaker 1: and there's still a lack of available brand new housing
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  Speaker 1: that's I think is required, and so at various price
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  Speaker 1: points there is you would you wouldn't believe tremendous demand
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  Speaker 1: for for that product, and with mortgage rates still close
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  Speaker 1: to four percent, it's a very compelling time to purchase
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  Speaker 1: a home. Um, builders just can't find enough property, can't
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  Speaker 1: put up the product fast enough in certain markets. Now.
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  Speaker 1: Of course, we keep reading the headlines about some of
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  Speaker 1: the very very high end real estate that's lagging on
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  Speaker 1: the marketplace today, but that's not really indicative of what's
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  Speaker 1: going on across the rest of the country. So, Frank,
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  Speaker 1: your your your your bank, your institution is a Metro
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  Speaker 1: New York institution. UM, what are your local, regional, midsize
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  Speaker 1: customers telling you about just the overall economic community there
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  Speaker 1: there their willingness to invest in their in their companies. Look,
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  Speaker 1: people were very nervous as we came into the beginning
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  Speaker 1: of the year, thought that, uh, the interest rate cycle
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  Speaker 1: was going to be a runaway train. Rates We're gonna
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  Speaker 1: go higher, and people started thinking very very hard about
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  Speaker 1: some of the transactions that they may have been contemplating,
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  Speaker 1: whether they were going to buy something, invest in their
• 9:18
  Speaker 1: companies and additional staff, whatever, I think. But as the
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  Speaker 1: as the year has unfolded and we're starting to see
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  Speaker 1: that the Fed has backed up a little bit, and
• 9:27
  Speaker 1: we believe now that we're more in a more neutral
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  Speaker 1: environment relative to interest rates. Our clients are actually bullish
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  Speaker 1: about where things are today. And you know, this whole
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  Speaker 1: notion of of climbing a wall a worry, in my opinion,
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  Speaker 1: is a really good thing. It's making people be very
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  Speaker 1: thoughtful about every decision that they make. But at the
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  Speaker 1: end of the day, acquisitions are happening, investment is happening,
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  Speaker 1: Hiring is happening. The biggest complaint where we're hearing about
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  Speaker 1: is the availability of qualified staff today. That is hindering
• 9:55
  Speaker 1: certain people's growth plans. So so pretty bullish is what
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  Speaker 1: our clients are are reporting to us, notwithstanding what we're
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  Speaker 1: reading in the news right or what we're reading in
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  Speaker 1: the newspaper. So, Frank, you talked about consolidation. There has
• 10:07
  Speaker 1: been consolidation in a number of different sectors, including in
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  Speaker 1: the banking sector. And I know JP Morgan CEO Jamie
• 10:12
  Speaker 1: Diamond came out and said he expected quite a bit
• 10:15
  Speaker 1: more Bank of America reiterating that from your perspective, connect
• 10:19
  Speaker 1: one has about six billion dollars in assets twenty nine locations.
• 10:24
  Speaker 1: Are you seeing opportunities for acquisitions or do you think
• 10:27
  Speaker 1: that there will be sort of ongoing consolidation that will
• 10:30
  Speaker 1: affect you. So, as you know, we've taken advantage of
• 10:33
  Speaker 1: the merger and acquisition marketplace. We did a large merger
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  Speaker 1: of equals back in two thousand fourteen, and we just
• 10:40
  Speaker 1: completed a merger at the at the beginning of this year,
• 10:42
  Speaker 1: starting on January two, which increased our size. And and yes,
• 10:46
  Speaker 1: there is I believe a build up in in the
• 10:50
  Speaker 1: desire for smaller banks to want to get together, uh
• 10:55
  Speaker 1: in order to share the expense base that's required to
• 10:57
  Speaker 1: run a financial institution today. And when we look at
• 11:00
  Speaker 1: what the marketplace looks like today. You know, as I
• 11:02
  Speaker 1: said before, twenty years ago there were some twenty thousand banks.
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  Speaker 1: There's five thousand banks today. I think we're headed very rapidly, too,
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  Speaker 1: closer to three. So, Frank, the news that Amazon was
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  Speaker 1: coming to Queens and then not coming to Queens As
• 11:15
  Speaker 1: a New York metro lender, what do you take away
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  Speaker 1: from that as a as it relates to is New
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  Speaker 1: York open for business? So look, I think New York
• 11:24
  Speaker 1: is definitely open for business. I'm not sure. I don't
• 11:27
  Speaker 1: want to get into the political discourse about what may
• 11:30
  Speaker 1: or may not have happened or what was or wasn't said.
• 11:32
  Speaker 1: But at the end of the day, um, every major
• 11:35
  Speaker 1: company is investing here in New York. And whether it
• 11:38
  Speaker 1: is Amazon, and notwithstanding what you know the the HQ
• 11:42
  Speaker 1: two conversation, but they're investing in New York. Google's investing
• 11:45
  Speaker 1: in New York, Facebook, all the technology companies, all the
• 11:48
  Speaker 1: financial institutions. Uh, there is a tremendous amount of investment
• 11:54
  Speaker 1: coming into this area. We're feeling it, we're seeing it,
• 11:58
  Speaker 1: and uh, I think it's a big positive for New York,
• 12:00
  Speaker 1: and I would say today New York is definitely still
• 12:03
  Speaker 1: open for business. Just lastly here, I'm curious about consumer
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  Speaker 1: confidence because this has sort of been an ongoing strength
• 12:11
  Speaker 1: of of the market that consumers just continue to be confident.
• 12:14
  Speaker 1: Are you seeing any potential headwinds to that at this point?
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  Speaker 1: You know? Again, I think this wall of worry concept
• 12:20
  Speaker 1: is is something that keeps coming up. And when rates
• 12:22
  Speaker 1: started to run up quickly at the end of last
• 12:25
  Speaker 1: year or by the end of last year, I think
• 12:27
  Speaker 1: that really put a little ding in consumer confidence and
• 12:30
  Speaker 1: what was coming down the pike, uh, you know later on.
• 12:33
  Speaker 1: I think as we stand here today, though, I think
• 12:35
  Speaker 1: the consumer feels pretty good and is out there spending.
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  Speaker 1: Frank Sorrentino, thank you so much for being with us.
• 12:41
  Speaker 1: Always wonderful having you on. Frank Sorrentino is chairman and
• 12:45
  Speaker 1: chief executive officer of Connect One Bank based in Englewood Cliffs,
• 12:49
  Speaker 1: New Jersey. He is joining us here today in our
• 12:51
  Speaker 1: Bloomberg Bloomberg Interactive Broker studios in New York. Let's give
• 12:56
  Speaker 1: you a sense of what is happening in markets ahead
• 12:59
  Speaker 1: of that FED meeting. The answer nothing, not very much
• 13:02
  Speaker 1: at all. The markets are pretty much flat say that
• 13:05
  Speaker 1: for quite some time, haven't we And and then this
• 13:06
  Speaker 1: is sort of to me one of the big question
• 13:09
  Speaker 1: marks in markets today, which is, uh, there has been
• 13:12
  Speaker 1: such a reduction in volatility at this point that a
• 13:15
  Speaker 1: growing number of analysts are saying that it does sort
• 13:18
  Speaker 1: of foretell some kind of broader whiplash akin to Taper
• 13:22
  Speaker 1: tantrum when we saw volatility shrink to the same kinds
• 13:25
  Speaker 1: of degree. Well, there certainly is a lot of news
• 13:43
  Speaker 1: out of the auto industry today, including a bmwes profit
• 13:46
  Speaker 1: warning which knock that stock down five and also news
• 13:49
  Speaker 1: that a Ford Motor company where the company plans to
• 13:51
  Speaker 1: spend about nine million dollars and higher about nine workers
• 13:55
  Speaker 1: to build electric and self driving vehicles in Michigan while
• 13:58
  Speaker 1: moving production of a small commercial van to Mexico from Europe.
• 14:02
  Speaker 1: I mus stick through those issues, we bring in and
• 14:04
  Speaker 1: welcome David Welch. David is the Detroit bureau chief for
• 14:07
  Speaker 1: Bloomberg News, joining us from the Detroit bureau. David, Welcome.
• 14:11
  Speaker 1: Let's start with that Ford news. How big of a
• 14:14
  Speaker 1: news item is that for Ford? How much teer is this?
• 14:18
  Speaker 1: Because this is pretty big because all we've heard about
• 14:21
  Speaker 1: recently from the car companies is cutting jobs, cutting back.
• 14:25
  Speaker 1: Even the BMW news you mentioned is sort of kicking
• 14:28
  Speaker 1: off a big austerity program for them to get their
• 14:31
  Speaker 1: profits in line. Everybody's just cutting jobs out, whether it
• 14:34
  Speaker 1: be white Cower engineers or blue cour assemblers, uh, in
• 14:39
  Speaker 1: the areas where they make conventional gasoline powered cars. Um.
• 14:43
  Speaker 1: So you've got a couple of things going on with Ford.
• 14:45
  Speaker 1: Not only is it interesting that the writing jobs, it's
• 14:47
  Speaker 1: quite a few of them, a lot uh. Last week,
• 14:51
  Speaker 1: Gentle Motors said they're going to hire a thousand people
• 14:53
  Speaker 1: at its Cruise Automation subsidiary that makes self driving software
• 14:57
  Speaker 1: and technology. So Okay, the bottom line here is if
• 15:00
  Speaker 1: you make electric cars, if you make self driving cars,
• 15:03
  Speaker 1: that's a good place to be. If you're an engineer
• 15:05
  Speaker 1: who releases brake calipers, or you're an assembler of gasoling
• 15:08
  Speaker 1: power sudans is you're in trouble. And and that's what's
• 15:12
  Speaker 1: really going on. But what Ford is saying hiring nine
• 15:16
  Speaker 1: people for an under used plan near Detroit to make
• 15:18
  Speaker 1: electric cars, that's a lot of people, said, tells us
• 15:21
  Speaker 1: they're going to be making a lot of evs. It
• 15:23
  Speaker 1: also tells us that Ford is making quite an interesting
• 15:27
  Speaker 1: public relations moves announcing this the same day that President
• 15:31
  Speaker 1: Trump visits an Ohio tank plant after a sharp criticism
• 15:35
  Speaker 1: of General Motors. How much is this sort of politically
• 15:38
  Speaker 1: motivated as far as the timing goes, I would say
• 15:42
  Speaker 1: the timing of the announcement absolutely. Now for GM, all
• 15:46
  Speaker 1: the car makers, they don't just flick a switch on
• 15:48
  Speaker 1: and say we're going to add jobs or do something
• 15:50
  Speaker 1: at a plant overnight. So this has been planned for
• 15:53
  Speaker 1: some time because they had to engineer the vehicles. But
• 15:56
  Speaker 1: on the eve of or i should say, them warning
• 16:00
  Speaker 1: of an evening rally President Trump is having after he
• 16:03
  Speaker 1: spent the weekend bashing General Motors overcutting jobs in Ohio. Yeah,
• 16:08
  Speaker 1: you know, this is Ford's way of kind of sticking
• 16:10
  Speaker 1: uh sticking it in, uh the knife into their crosstown rifle.
• 16:14
  Speaker 1: I think, and also look early in Trump's presidency, he
• 16:18
  Speaker 1: really was beating up Forward for not producing enough in
• 16:21
  Speaker 1: the US, and GM kind of got a free pass
• 16:24
  Speaker 1: for a while, even though GM has more factories and
• 16:26
  Speaker 1: and makes more vehicles in Mexico than Ford does. Now
• 16:30
  Speaker 1: that that Ford is h is kind of you know,
• 16:34
  Speaker 1: in good stead with the president over adding jobs, why
• 16:36
  Speaker 1: not make hay out of it, especially when GM's the
• 16:39
  Speaker 1: one getting the beating these days. But from a corporate perspective,
• 16:43
  Speaker 1: is Ford doing the right thing? Ford chairs down two
• 16:46
  Speaker 1: point two percent right now, I'm wondering. This comes after
• 16:49
  Speaker 1: BMW issued a profit warning saying that earnings will fault
• 16:53
  Speaker 1: well below last year's level, siting, among other things, the
• 16:56
  Speaker 1: cost of making electrical vehicles. I mean, how much is
• 16:59
  Speaker 1: it not paying off yet? This is the problem that
• 17:02
  Speaker 1: car companies have is you have to make electric cars
• 17:06
  Speaker 1: because Tesla is driving this whole thing where governments and
• 17:10
  Speaker 1: increasingly consumers want evs. Now where they're going to write.
• 17:14
  Speaker 1: Not every consumer does, but that's where the market is going,
• 17:17
  Speaker 1: whether it's from a regulatory standpoint or eventually, uh from
• 17:21
  Speaker 1: a consumer standpoint. Problems winner consumer is really going to
• 17:23
  Speaker 1: be buying a lot of these? And when will these
• 17:25
  Speaker 1: cars make money? GM says that it's next round of
• 17:28
  Speaker 1: evs will make money starting in about They say they'll
• 17:31
  Speaker 1: be profitable. Will they be as profitable as the current vehicles?
• 17:34
  Speaker 1: Investors are dubious? So in the cvous investments, they know
• 17:37
  Speaker 1: that the car companies have to do this, but that
• 17:40
  Speaker 1: doesn't really help them. It doesn't help investors because they're
• 17:43
  Speaker 1: they're worried they can make any money on these vehicles,
• 17:45
  Speaker 1: and if they do, it'll be lower margins, So why
• 17:47
  Speaker 1: should they put their money elsewhere? Very easy for investors
• 17:50
  Speaker 1: to say, hey, you know what, let's let these guys
• 17:52
  Speaker 1: start making evs and see if it hurts or doesn't hurt,
• 17:55
  Speaker 1: or even helps the bottom line. We'll put our money
• 17:57
  Speaker 1: somewhere else while that whole thing is playing out this
• 17:59
  Speaker 1: interim period here when everybody is investing in self driving
• 18:02
  Speaker 1: cars or electric cars waiting for those businesses to pay off.
• 18:07
  Speaker 1: It's gonna be tough for them to deal with investors
• 18:11
  Speaker 1: in this time because it's a lot of money being spent.
• 18:13
  Speaker 1: You're not going to see return on maybe for several years,
• 18:16
  Speaker 1: maybe for a decade for some of this stuff. So, David,
• 18:18
  Speaker 1: where is Ford Motor Company relative to its peers in
• 18:22
  Speaker 1: terms of its electric and self driving vehicles from a
• 18:25
  Speaker 1: competitive perspective? To look at what's on the market now,
• 18:28
  Speaker 1: they really they have more hybrids than they have pe evs.
• 18:32
  Speaker 1: It's really Tesla, General Motors, Oh Nissan to a certain degree,
• 18:37
  Speaker 1: they have an EV out there. It's it's not a
• 18:39
  Speaker 1: great one in terms of battery range, but they've been
• 18:41
  Speaker 1: in that business for quite a while. Those are the
• 18:43
  Speaker 1: three main players. The German carmakers are coming out with
• 18:46
  Speaker 1: a lot of electric vehicles in the next year or two.
• 18:48
  Speaker 1: So you're going to see a wave from the what's
• 18:51
  Speaker 1: called the Porsche of Volkswagen uh combine, you'll see how
• 18:55
  Speaker 1: these Volkswagen's Porsche evs coming out there. They're already taking
• 18:59
  Speaker 1: orders I think on the por should taken EV so
• 19:02
  Speaker 1: uh words, kind of trailing behind those players right there.
• 19:06
  Speaker 1: But the fact that they're they're going to be staffing
• 19:09
  Speaker 1: this plant Uptotia, that they're they're going to be racing
• 19:11
  Speaker 1: and catching up pretty quickly, broadening out a little bit
• 19:13
  Speaker 1: beyond electric vehicles. I'm wondering BMW's profit warning comes. It's
• 19:17
  Speaker 1: sort of a tenuous time for the auto industry at large.
• 19:20
  Speaker 1: I'm wondering how concerning it is that they did say
• 19:24
  Speaker 1: that earnings would fall so far below last year's level,
• 19:27
  Speaker 1: at the same time as Nissan saying that it's it's
• 19:31
  Speaker 1: not going to necessarily see as much of an expansion
• 19:34
  Speaker 1: in China as it had previously thought, Yeah, there's a
• 19:38
  Speaker 1: there's a kitchen sink aspect to what the BMW tourist. Right,
• 19:42
  Speaker 1: everybody has to invest a lot of money in cars
• 19:45
  Speaker 1: and in electric cars and our timmy right now, and
• 19:46
  Speaker 1: it's costing them and in the netting of return. So
• 19:50
  Speaker 1: we we we, you know, we talked about that and
• 19:52
  Speaker 1: that that was a big piece of what BMW said
• 19:55
  Speaker 1: this morning, that that those costs are are really hurting
• 19:58
  Speaker 1: their bottom line. So it a pretty big deal from
• 20:01
  Speaker 1: that perspective. Now, I think they're doing this at a
• 20:04
  Speaker 1: time when they know the markets are getting soft. China
• 20:06
  Speaker 1: took a step back last year and it's still kind
• 20:09
  Speaker 1: of uneasy. The US still very strong levels historically, but
• 20:12
  Speaker 1: still stepping backwards. And the other markets, the emerging markets
• 20:15
  Speaker 1: where and sees growth, places like South America, Brazil, especially
• 20:20
  Speaker 1: India and Russia. Just a lot of reasons that that
• 20:23
  Speaker 1: things aren't growing. There are a lot of instability either
• 20:26
  Speaker 1: with infrastructure in the case of India, politics with Russia.
• 20:29
  Speaker 1: So no one's really seen a lot of growth in
• 20:31
  Speaker 1: their car business right now. So if you're going to
• 20:34
  Speaker 1: tell investors that EVS and a vis uh, you know,
• 20:38
  Speaker 1: that's industry parents for Autno vehicles are going to cost
• 20:40
  Speaker 1: you a lot of money. Hit the bottom line, you
• 20:42
  Speaker 1: might as well do it. When the markets are wusy
• 20:44
  Speaker 1: in the big places where you've been seeing some growth,
• 20:47
  Speaker 1: kind of kitchen sink everything at once. Take the hit
• 20:49
  Speaker 1: on your share price, take the head on your profits.
• 20:52
  Speaker 1: Start leaning up. And then when things start to grow again,
• 20:56
  Speaker 1: when the cycle turns back up, and you can start
• 20:58
  Speaker 1: boasting about how your evs are on great and they're
• 21:00
  Speaker 1: breaking even, are making money, and maybe you'll get some enthusiasm.
• 21:04
  Speaker 1: But I get the sense of the car companies, they're
• 21:06
  Speaker 1: just clouds all around them. The business isn't bad everyone.
• 21:09
  Speaker 1: This isn't crazis time in terms of companies threatened with
• 21:12
  Speaker 1: bankruptcy like we saw a decade ago. But it is
• 21:15
  Speaker 1: crass time for investor interests. But it that way, and
• 21:18
  Speaker 1: I think you're going to see the stacks take a
• 21:20
  Speaker 1: beating for a while. David Welch, thank you so much
• 21:22
  Speaker 1: for being with us. David Welch, Detroit bureau chief for
• 21:25
  Speaker 1: Bloomberg News, coming to us from Detroit. Well, I think
• 21:40
  Speaker 1: both employers and employees agree that healthcare costs the inflation
• 21:44
  Speaker 1: of healthcare costs is getting very much a challenge for
• 21:47
  Speaker 1: both parties. Recently, there's Senate hearings on drug pricing where
• 21:51
  Speaker 1: senators challenged top executives of seven pharmaceutical companies on the
• 21:55
  Speaker 1: spiraling costs of prescription drugs. To help us look at
• 21:58
  Speaker 1: this complicated issue, we welcome Michael Ray. Michael's a founder
• 22:02
  Speaker 1: and CEO of r X Saving Solutions based on overal
• 22:05
  Speaker 1: in Park, Kansas. Michael joins us in our Bloomberg interact,
• 22:07
  Speaker 1: the Broker's Studio. Michael, welcome. You know, everyone agrees here
• 22:11
  Speaker 1: that drug prices are too high. The inflation associated with
• 22:15
  Speaker 1: bruck drug prices and drug therapies are you know, very
• 22:19
  Speaker 1: much of an issue for both employers and employees. Is
• 22:22
  Speaker 1: there what is the best way or is there any
• 22:24
  Speaker 1: way to kind of manage these costs? Yeah? I think
• 22:27
  Speaker 1: that excuse me, a transparent market where information flows freely
• 22:32
  Speaker 1: is the best way to manage it. I think that
• 22:34
  Speaker 1: when consumers have access to information about pricing and therapy options,
• 22:39
  Speaker 1: they can make decisions that are in both their best
• 22:41
  Speaker 1: financial interest and also that of the health planner employer
• 22:44
  Speaker 1: that ends up paying a lot of that cost of
• 22:47
  Speaker 1: the drug. So Michael It's interesting because we are heading
• 22:49
  Speaker 1: towards the election season. Joe Biden is expected to announce
• 22:54
  Speaker 1: his his his throwing his hat into the ring to
• 22:57
  Speaker 1: become a candidate for the Democratic Party. I'm surprised we
• 23:02
  Speaker 1: haven't heard more about reducing drug prices, are you? Um?
• 23:06
  Speaker 1: I think that what has become evident is this is
• 23:09
  Speaker 1: a difficult subject um and topic to really address and
• 23:13
  Speaker 1: actually bring about meaningful change. Everyone agrees with the idea
• 23:17
  Speaker 1: that you know, both bipartisan support that we want to
• 23:19
  Speaker 1: lower drug prices, but how to actually do that has
• 23:23
  Speaker 1: stymied most efforts to do so thus far. It's, in
• 23:26
  Speaker 1: other words, because it's complicated, and because it's not a
• 23:28
  Speaker 1: very sexy topic. UH candidates are not going to necessarily
• 23:32
  Speaker 1: make that a a sort of campaign issue in the
• 23:35
  Speaker 1: way that perhaps otherwise they would. Is that well, I
• 23:38
  Speaker 1: think I think it is a sexy topic that most
• 23:40
  Speaker 1: people can identify with, and so, uh, you know you're
• 23:43
  Speaker 1: gonna see UH candidates talk about it more and more. UM.
• 23:46
  Speaker 1: I think it hasn't probably been as much of a
• 23:48
  Speaker 1: focal point recently, just given the lack of progress that's
• 23:51
  Speaker 1: been made in the bills that have kind of come
• 23:53
  Speaker 1: before the Senate and the House. UH, and you know
• 23:57
  Speaker 1: thus far, but it's it's it's clear that big pharma,
• 24:00
  Speaker 1: there's really very little leverage that can be placed upon
• 24:04
  Speaker 1: big farmer to literally cut drug prices. Is that correct? Yeah,
• 24:08
  Speaker 1: it's a free, open market. They can set the list
• 24:10
  Speaker 1: prices for the drugs they own. But if I'm a
• 24:13
  Speaker 1: large corporation, let's let's if I'm a small to mid
• 24:15
  Speaker 1: sized business, what are some of the ways that I
• 24:18
  Speaker 1: can manage my healthcare costs and my employees for the
• 24:22
  Speaker 1: benefit of my employees. Um, there's a few ways. And
• 24:26
  Speaker 1: and most employ a pharmacy benefit manager that that brings
• 24:29
  Speaker 1: about negotiation tactics to UH, to the market, tries to
• 24:33
  Speaker 1: set up formularies that you know, get rid of the
• 24:36
  Speaker 1: expensive drugs and advantage the less expensive drugs. UM. Ultimately, though,
• 24:40
  Speaker 1: that information does not get to consumers the way it
• 24:42
  Speaker 1: needs to write. So you go into the doctor, they
• 24:45
  Speaker 1: prescribe a medication, you take to the pharmacy and fill it.
• 24:48
  Speaker 1: What if there was drug B that was ten dollars
• 24:51
  Speaker 1: instead of a hundred. That information gets lost and so
• 24:54
  Speaker 1: there's this missing component that that is not translated to
• 24:57
  Speaker 1: the consumer. That needs to be. So, Michael, what is
• 25:00
  Speaker 1: the bill that you think is most promising, either currently
• 25:04
  Speaker 1: going through Congress or that you've heard some candidates or
• 25:07
  Speaker 1: current lawmakers discuss. I would say elimination of the rebates. Um,
• 25:12
  Speaker 1: it's the most basic. It's easy for most parties to understand. Um.
• 25:18
  Speaker 1: You know, I think there's bipartisans support for it, but
• 25:21
  Speaker 1: the specifics of how it's crafted will make all the
• 25:24
  Speaker 1: difference in whether or not it's effective and lowering costs.
• 25:27
  Speaker 1: Can you please just remind us what the rebates are
• 25:29
  Speaker 1: and who would lose out if if they did remove
• 25:34
  Speaker 1: these rebates? Yeah. So rebates are money flowing from a farmer,
• 25:37
  Speaker 1: manufacturer to a third party entity. It could be a PBM,
• 25:41
  Speaker 1: a health plan, a wholesaler, or an employer. Who who
• 25:45
  Speaker 1: are the winners and losers is the question? And I
• 25:48
  Speaker 1: think you'll see fights to keep them in place, most
• 25:52
  Speaker 1: pronounced by the folks that are probably gonna lose lose debate,
• 25:55
  Speaker 1: which is the third party intermediaries such as uh uh,
• 26:03
  Speaker 1: probably the PBMs and wholesalers. He doesn't want to say
• 26:07
  Speaker 1: he's been a portfolio manentural So I mean, so, Michael,
• 26:10
  Speaker 1: what is the sense of timing and that we can
• 26:13
  Speaker 1: get anything meaningfully done here or the Congress can get
• 26:16
  Speaker 1: anything meaningfully done here on on pricing. Is there is
• 26:18
  Speaker 1: there enough bipartisan support to get something done in the
• 26:21
  Speaker 1: next I don't know, twelve months. I don't think it's realistic. Yeah.
• 26:24
  Speaker 1: I would love to tell you something different, and I
• 26:27
  Speaker 1: would support if they did do it, but I don't
• 26:29
  Speaker 1: think it's realistic. What about on the corporate side, in
• 26:31
  Speaker 1: the private sector, we did hear a little bit about
• 26:34
  Speaker 1: JP Morgan and Berkshire Hathway teaming up to create some
• 26:37
  Speaker 1: sort of in house healthcare plan to try to lower
• 26:40
  Speaker 1: DRUB prices and negotiate directly. Has there been any movement
• 26:44
  Speaker 1: on that front? Maybe not even with necessarily JPMorgan and
• 26:47
  Speaker 1: Berkekshire Hathway, but any other corporations that have really done
• 26:49
  Speaker 1: a good job at this well. Um, there's a number
• 26:53
  Speaker 1: of groups that have formed to try to address this issue, um,
• 26:56
  Speaker 1: you know, in a kind of coop type way. I
• 26:59
  Speaker 1: think some groups like the Health Transformation Alliance are probably
• 27:02
  Speaker 1: further ahead, um, you know, in in kind of grouping
• 27:06
  Speaker 1: companies together to try to create buying power. Um. Yeah,
• 27:12
  Speaker 1: I mean how much is that actually effectively lowering prices
• 27:16
  Speaker 1: in other words, is that actually like a competitive aspect
• 27:19
  Speaker 1: in markets? Now? Uh, these these teamed up corporations. I
• 27:23
  Speaker 1: think it depends on how how it's positioned and how
• 27:26
  Speaker 1: much it's utilized. So when you look at a medical cost,
• 27:28
  Speaker 1: you've got a unit economic and you're trying to get
• 27:31
  Speaker 1: a discount. With drugs, we're actually saying there might be
• 27:34
  Speaker 1: a different clinical therapy that is not two or three
• 27:36
  Speaker 1: percent cheaper, it's you know, thirty forty cheaper um. And
• 27:41
  Speaker 1: so that's where the power lies with drugs as compared
• 27:44
  Speaker 1: to medical and hospitals. So, Michael, this seems the healthcare
• 27:47
  Speaker 1: industry in general, it certainly the pharmaceutical part of it
• 27:50
  Speaker 1: seems like it is ripe for disruption. Where from a
• 27:53
  Speaker 1: technological perspective, I'm why has this Silicon Valley come in
• 27:57
  Speaker 1: here and looked at this big issue and done and
• 28:00
  Speaker 1: Amazon dot com whatever meant when Amazon did through retail
• 28:03
  Speaker 1: and consumer has there ever been is that you think
• 28:05
  Speaker 1: that's a focus of Silicon Valley. This seems like such
• 28:08
  Speaker 1: a huge mess that is right for a technological solution. Yeah,
• 28:11
  Speaker 1: I think it is. And and you know we hear
• 28:13
  Speaker 1: from them often from the folks the equity backers in
• 28:16
  Speaker 1: that area. There have been a number of companies that
• 28:17
  Speaker 1: have come and gone with the promise that they can
• 28:20
  Speaker 1: address this issue. I think what has occurred is most
• 28:23
  Speaker 1: have flamed out because this is such a complex space. Um.
• 28:26
  Speaker 1: When I look at what you know we do today,
• 28:28
  Speaker 1: I mean we service five million people as we have
• 28:30
  Speaker 1: market proof, not just a power point, and that piece
• 28:34
  Speaker 1: will become more and more important for anybody who's trying
• 28:37
  Speaker 1: to solve it. You gotta you gotta not just say it,
• 28:38
  Speaker 1: you gotta do it. You gotta do it, which has
• 28:41
  Speaker 1: definitely been challenging when it comes to tackling drug prices
• 28:44
  Speaker 1: in the in certainly in the United States. Michael Ry,
• 28:46
  Speaker 1: thank you so much for being with us here in
• 28:48
  Speaker 1: our Bloomberg Interactive Broker Studios. Michael Ray, founder and chief
• 28:51
  Speaker 1: executive officer of our ex Saving Solutions based in Overland Park, Kansas.
• 28:57
  Speaker 1: Thanks for listening to the Bloomberg pl podcast. You can
• 29:00
  Speaker 1: subscribe and listen to interviews at Apple Podcasts or whatever
• 29:03
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• 29:06
  Speaker 1: at pt Sweeney. I'm Lisa abram Woyit's I'm on Twitter
• 29:09
  Speaker 1: at Lisa Abram woits one before the podcast, you can
• 29:11
  Speaker 1: always catch us worldwide on Bloomberg Radio