Latest / Bloomberg Intelligence / Korea Gesture Is A Blink We Should Take Advantage Of: Devine

Transcript

Korea Gesture Is A Blink We Should Take Advantage Of: Devine · Bloomberg Intelligence

0:05
Speaker 1: Welcome to the Bloomberg p m 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
0:15
Speaker 1: you and your money, whether you're at the grocery store
0:17
Speaker 1: or the trading floor. Find the Bloomberg p m L
0:20
Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Diplomatic
0:34
Speaker 1: changes a foot on the Korean peninsula, as North Korea's
0:37
Speaker 1: leader Kim Jong un says that he will meet with
0:40
Speaker 1: President Donald Trump and the President apparently agreeing to that
0:44
Speaker 1: meeting sometime later this year, perhaps in early summer. Here
0:48
Speaker 1: to help us understand what is going on is Toby Harshaw.
0:51
Speaker 1: He is our Bloomberg view editor for all things related
0:54
Speaker 1: to national security, and also Jack Divine is the former
0:57
Speaker 1: acting director of this Central Intelligence Agency and founding partner
1:02
Speaker 1: and the president of the security firm the Arkin Group. Gentlemen,
1:06
Speaker 1: thank you very much for being with us that Jack Divine,
1:09
Speaker 1: I want you to come in on this and just
1:11
Speaker 1: give us your thoughts and reactions to this news. Well,
1:15
Speaker 1: I think it's first of all, hit the high note.
1:17
Speaker 1: I think it's a very positive development. I do think
1:20
Speaker 1: Kim jongan blank. But I want to say blink. It's
1:23
Speaker 1: not like a gladiator that kneels down and begs for mercy.
1:27
Speaker 1: This is a blink. We should take advantage of it.
1:31
Speaker 1: I think it would be one of the more interesting
1:33
Speaker 1: meetings of heads of state that we have seen in uh,
1:37
Speaker 1: in current memory. I think it will be to the
1:41
Speaker 1: matador and the bull trying to size each other up,
1:46
Speaker 1: and Uh, it's going to be a terribly important meeting, Toby,
1:51
Speaker 1: what are sort of both sides? Where are they in
1:55
Speaker 1: this meeting? Where are they lining up? What do they
1:57
Speaker 1: want to get? What will be considered a win? Well,
1:59
Speaker 1: I'm actually have to tell us which one is the
2:01
Speaker 1: bull and which one is the matador? I think, But
2:04
Speaker 1: I think um in terms of what they hope to
2:08
Speaker 1: gain on the world stage, UM, Kim is sort of
2:12
Speaker 1: the evident winner. I think a lot of people worry
2:15
Speaker 1: that having an American president come and meet with him
2:18
Speaker 1: will sort of legitimize him as a as a world leader, UM,
2:22
Speaker 1: will legitimize his government. UM. I don't think that's the case.
2:26
Speaker 1: I don't think it's dumb to go and meet with him.
2:28
Speaker 1: I don't think it legitimizes him, but I think in
2:31
Speaker 1: his mind it's extremely important. Um. There was a notable
2:37
Speaker 1: North Korean propaganda film a few years ago, UM that
2:40
Speaker 1: was called The Country I Saw and it has this
2:43
Speaker 1: huge triumphant ending in which Bill Clinton comes to meet
2:47
Speaker 1: with with the Supreme Leader and this was So this
2:50
Speaker 1: is just a huge thing and what the Kims have
2:52
Speaker 1: built about themselves Jack divine to Toby's point, though, what
2:57
Speaker 1: does it matter whether you know someone is a winner
3:00
Speaker 1: or a loser on a personal level or a prestige level,
3:03
Speaker 1: if indeed they are able to reach some kind of
3:06
Speaker 1: de escalation as it comes to the nuclear threat that
3:11
Speaker 1: North Korea poses. Well, I think these things are often intertwined.
3:15
Speaker 1: First of all, going back to Tobin's point, I I
3:19
Speaker 1: think we have to route that Donald Trump is the
3:21
Speaker 1: Mata door, okay, and uh, And I think the uh.
3:26
Speaker 1: The reason why I would just state that, I think
3:28
Speaker 1: Donald Trump, UM, and I think Kim Jong understands this
3:33
Speaker 1: is actually having has a stronger hand, the stronger hand
3:36
Speaker 1: being the might, the economic and military might of the
3:38
Speaker 1: United States, which you know, we can't even say in
3:41
Speaker 1: the same breath that North Korea is in the same category.
3:45
Speaker 1: So he has the mata to restore it here now
3:49
Speaker 1: having said that, we still have a major problem in
3:53
Speaker 1: that North Korea is now a nuclear force. And if
3:56
Speaker 1: we look back over the arc of the agociations, and
4:00
Speaker 1: I've been proposing to negotiations for as long as we've
4:03
Speaker 1: been speaking together here on Bloomberg, Um, but if you
4:06
Speaker 1: look over the long arc of dealing with North Korea,
4:10
Speaker 1: they have a pattern, and it's a very clear pattern.
4:14
Speaker 1: And when you're talking about deal making, Kim Jong own
4:17
Speaker 1: considers himself a deal maker. So this is why I
4:20
Speaker 1: think it's going to be a challenge for the two
4:22
Speaker 1: of them, and the national interest and the personal interests
4:25
Speaker 1: are are are intertwined. You know. It's interesting. Jack Toby
4:30
Speaker 1: was on our show the past few weeks and he
4:33
Speaker 1: said something that was very compelling, which is that China
4:37
Speaker 1: is really the big wild card here. And I'm wondering,
4:40
Speaker 1: from your perspective, Jack, what role is China playing in this?
4:44
Speaker 1: Because right now we understand that South Korea is the
4:46
Speaker 1: one sort of negotiating this meeting, We understand North Korea's stance,
4:50
Speaker 1: now we know President Trump stands, where's China. I think
4:54
Speaker 1: China is indeed a critical player, but it's not the
4:57
Speaker 1: critical player that it was years ago. There have been
4:59
Speaker 1: the distance between China and Korea is quite different than
5:02
Speaker 1: it was years ago, so they do have economic points
5:05
Speaker 1: of pressure. I was on the show. I've been pessimistic
5:10
Speaker 1: that the Chinese were going to lean as heavily on
5:13
Speaker 1: North Korea is needed needed to be the case. They've
5:15
Speaker 1: actually done more than I thought they would do. I however,
5:19
Speaker 1: on this particular occasion, I think going into these talks,
5:24
Speaker 1: we have to know what we really want to accomplish,
5:27
Speaker 1: because I know what the North Koreans are going to
5:29
Speaker 1: want to accomplish. They've reached a plateau, so they want
5:33
Speaker 1: to buy. They want to Now my view is to
5:37
Speaker 1: say that they'll stop doing um testing and stop doing
5:42
Speaker 1: development of additional nuclear weapons. Whether they do or not
5:46
Speaker 1: will be the test. Uh and that in exchange the
5:50
Speaker 1: one economic concessions. Now, you know, one of the things
5:54
Speaker 1: when you go back and look at the NEGO, they
5:56
Speaker 1: drag one for years. So I think if something's gonna
6:00
Speaker 1: happened here, it has to happen on a different timeline.
6:03
Speaker 1: I wouldn't give them only the most minimal concessions during
6:08
Speaker 1: the period, and I think the goal and I've been
6:10
Speaker 1: thinking about this so more heavily in recent days. I
6:14
Speaker 1: do believe the administration's right. It has to be the nuclearization,
6:19
Speaker 1: some effort moving in that direction, not just slowing down
6:23
Speaker 1: the process. So going into this, he's got the hell
6:26
Speaker 1: that sort up high? Toby, come on, do you agree
6:29
Speaker 1: on this? And also do you have a sense that
6:31
Speaker 1: China and Russia are playing in these negotiations at all? Um?
6:36
Speaker 1: I think that while Jack is very right and we're
6:39
Speaker 1: gonna look at this primarily right away as trading sanctioned
6:44
Speaker 1: relief for concessions on the nuclear program, it's not as
6:48
Speaker 1: as simple as even that, um were. There are all
6:52
Speaker 1: sorts of issues in play. One is their internet, intercontinental
6:55
Speaker 1: ballistic missile systems. Are we going to continue to let
6:58
Speaker 1: them develop that? There's they're horrible human rights abuses. Can
7:01
Speaker 1: we normalize relations with a country, uh, that that treats
7:06
Speaker 1: its people like this just so that we can get
7:08
Speaker 1: rid of a nuclear threat? Um? Obviously, as Jack said,
7:11
Speaker 1: there's China, UM, there's Russia. UM, there is Japan, and
7:15
Speaker 1: there is South Korea. UM. We've got you know, tens
7:19
Speaker 1: of thousands of troops. They're they're they're just such a
7:22
Speaker 1: huge flood of issues that we cannot look at it
7:25
Speaker 1: as just being about their nukes. But but Toby, do
7:27
Speaker 1: we just pushed back a little bit. I mean, this
7:29
Speaker 1: is a dynamic situation, and one consider that this is
7:32
Speaker 1: a positive, positive situation, positive element of this dynamic situation.
7:36
Speaker 1: Right now we don't know how it's going to play out,
7:38
Speaker 1: but give every chance for for the support to make
7:41
Speaker 1: this happen. I couldn't agree more. Pim, this is this
7:43
Speaker 1: is a great thing. I'm really glad. I hope it
7:45
Speaker 1: comes together. It's just it's it's the first step in
7:48
Speaker 1: a big process. And I was just gonna say again
7:55
Speaker 1: Toban's right that there's gonna be so much that goes
7:59
Speaker 1: in the negotiating and so much expertise on the details.
8:02
Speaker 1: The problem is, I'm really recommending that we not get
8:05
Speaker 1: bogged down on negotiations, on negotiations, on negotiations, and find
8:09
Speaker 1: that we're giving them economic relief and nothing's really happening,
8:13
Speaker 1: and then they decide a couple of years from now
8:14
Speaker 1: when they're ready to do another UM program to raise
8:18
Speaker 1: it to a new platform. We're looking at an empty ball.
8:20
Speaker 1: So I think we have to be really tough, and
8:23
Speaker 1: I think I think this is the right moment because
8:27
Speaker 1: I do think that the Koreans are feeling feeling the pain. Toby, Toby, uh,
8:33
Speaker 1: thank you so much and Jack, thank you so much.
8:36
Speaker 1: You both really lent some fabulous insight to this very
8:39
Speaker 1: complicated and evolving issue. Jack Divine, former acting director of
8:43
Speaker 1: the CIA and founding partner and president of the security
8:45
Speaker 1: form the ark And Group, And of course our own
8:48
Speaker 1: Toby Harshaw, Bloomberg View editor. Always fascinating to hear your insights. Uh, Pam.
8:54
Speaker 1: Definitely an evolving issue, a lot of questions. One of
8:57
Speaker 1: the biggest right now is who will be preparing President
9:00
Speaker 1: Trump for this meeting and who will be going with
9:02
Speaker 1: him to it, and not to mention where it will
9:04
Speaker 1: be held. Well, Jeffrey the Giraffe maybe calling it a day.
9:24
Speaker 1: Nol he read is our director of credit research for
9:26
Speaker 1: Bloomberg Intelligence, and Nol, I want you to come in
9:28
Speaker 1: on what's going on with toys r US and is
9:30
Speaker 1: it likely that we can just say goodbye to Jeffrey.
9:35
Speaker 1: It looks like domestically, at least in the current form
9:37
Speaker 1: in terms of the bricks and mortar stores, that does
9:40
Speaker 1: look like it's increasingly going to be the case. Uh,
9:43
Speaker 1: it didn't seem like that needed to be the case
9:44
Speaker 1: when they filed last October or so. But given the
9:48
Speaker 1: fact that they went into bankruptcy without a plan, and
9:51
Speaker 1: the way things kind of rolled through retail and change
9:53
Speaker 1: very quickly, and how contentious sort of the the bankruptcy
9:57
Speaker 1: has been between all the different stakeholders, that is looking
10:00
Speaker 1: like where we're going as we speak, you know, no,
10:02
Speaker 1: can you just elaborate a little bit on exactly what
10:06
Speaker 1: happened here? Why this fell apart? We are seeing, uh
10:09
Speaker 1: the shares of toymakers fall today, So there are broader
10:13
Speaker 1: consequences to the concept that Jeffrey the draft will go
10:16
Speaker 1: by the way of retired conception. So what happened here?
10:21
Speaker 1: What broke down? Well, I think, you know, I guess
10:24
Speaker 1: to go back to to part of what I just said,
10:26
Speaker 1: which is to say that they kind of went in
10:28
Speaker 1: without a plan. So when they filed, you know, unlike
10:30
Speaker 1: a lot of the deals, you know, when you file,
10:33
Speaker 1: you kind of go with plans, so you kind of
10:34
Speaker 1: know how long you're going to be in and how
10:36
Speaker 1: long you might take to get out here. Because they
10:38
Speaker 1: were kind of put into bankruptcy because you had a
10:41
Speaker 1: situation where the vendors basically just shut off for them.
10:45
Speaker 1: They were forced to file prematurely so they could at
10:47
Speaker 1: least get through the holiday, So nobody really anticipated them filing.
10:52
Speaker 1: And if you recollects, sort of the short term bonds
10:54
Speaker 1: went from like you know, in the nineties into the
10:56
Speaker 1: twenties like effectively overnight, so it was kind of a
10:59
Speaker 1: surp lies filing. And then as they've gotten into bankruptcy,
11:02
Speaker 1: had a very weak holiday. Uh, and you have a
11:06
Speaker 1: lot of operational dynamics that need to happen here for
11:09
Speaker 1: them to be solvent. But you have a lot of
11:12
Speaker 1: competing interests in terms of you know, you have the
11:15
Speaker 1: property companies that are very interested in preserving the value
11:19
Speaker 1: of the real estate, whereas the operational side of it
11:22
Speaker 1: really needs to get changes to the least terms in
11:25
Speaker 1: order to be profitable. So I think, you know, as
11:28
Speaker 1: the bankruptcy and folded, just given the competitive nature of
11:32
Speaker 1: the different creditor groups made it very difficult for them
11:35
Speaker 1: to sort of come to a consensus of what should
11:38
Speaker 1: a pro form Toys r US look like. And the
11:41
Speaker 1: toys are us not the only retailer facing some headwinds
11:45
Speaker 1: here Claires tell us about what's going on. So clears
11:49
Speaker 1: is it looks like it's gonna be better in the
11:52
Speaker 1: sense that you could have better in bankruptcy. Um, you know,
11:56
Speaker 1: it's going to be more along the lines of maybe
11:57
Speaker 1: what we saw with Quicksilver a couple of years ago
12:00
Speaker 1: Jimboury a year ago, where creditors are kind of it's
12:03
Speaker 1: going in with a plan. Right, So you had another
12:06
Speaker 1: LBO story severely over leveled, but you have a company
12:09
Speaker 1: that generates decent cash flow, has a decent little business,
12:13
Speaker 1: and creditors sort of have a plan of what this
12:15
Speaker 1: thing should look like on the other side. So this one,
12:19
Speaker 1: at least, you know, from the looks of it right now,
12:21
Speaker 1: probably is you know, it could go in maybe being
12:24
Speaker 1: bankruptcy for six months, get quickly turned around, they hand
12:27
Speaker 1: the keys over to the creditors, uh, and then it
12:30
Speaker 1: emerges on the other side, maybe a little bit smaller
12:32
Speaker 1: than what it is right now, but still a functioning operation. No,
12:36
Speaker 1: who's next on this retail death Well, how long is
12:43
Speaker 1: the list? I don't know so well, I mean, so
12:47
Speaker 1: I guess you know one of the companies that have
12:49
Speaker 1: been on the list that isn't anymore would have been
12:51
Speaker 1: Nemon Marcus right, so they had a reasonably good quarter
12:55
Speaker 1: that they reported today. Bonti has already gone. In Sears
12:59
Speaker 1: is is you know, the living dead of sorts. Um
13:03
Speaker 1: they're they're you know, they're definitely there, right, I mean,
13:06
Speaker 1: liquidity wise, operational wise, they're there. I think, um, you know,
13:10
Speaker 1: you also have names like Jake Crewe, but I think
13:13
Speaker 1: Jay Cruise get liquidity to navigate the intermediate terms. So
13:16
Speaker 1: if you just had to pick one out of out
13:18
Speaker 1: of the group, I think Sears is the one that
13:19
Speaker 1: obviously faces the you know, a very very weak operating climate,
13:24
Speaker 1: and they're running out of assets to sell to sort
13:27
Speaker 1: of stave off at next stage. Um So, so I
13:31
Speaker 1: think they're They're probably at the front of the queue
13:33
Speaker 1: at this point. No Hubert, thank you so much for
13:36
Speaker 1: joining us. Always a pleasure. No Hubert is director of
13:38
Speaker 1: credit research for Bloomberg Intelligence, The Walking Dead of retailers.
13:59
Speaker 1: Just In Woyd blank find is preparing to step down
14:02
Speaker 1: as Goldman Sachs Chief executive as soon as the end
14:05
Speaker 1: of the year. This according to The Wall Street Journal.
14:08
Speaker 1: Just crossing moments ago to get some perspective on what
14:11
Speaker 1: this would mean for the bank. I want to bring
14:14
Speaker 1: in Michael Moore, US finance team leader. Michael, what's your
14:17
Speaker 1: reaction to this and who is the likely successor to
14:22
Speaker 1: Lloyd Blank? Find sure? I think UM not hugely shocking,
14:27
Speaker 1: and you know, Lloyd's UM exit has been kind of
14:31
Speaker 1: forecast for a few years now, and if this is
14:33
Speaker 1: indeed the year, it would make some sense. He's been
14:37
Speaker 1: in the top job for a dozen years now and UH,
14:41
Speaker 1: at the end of twenty sixteen they named two uh
14:44
Speaker 1: CO presidents below him, Harvey Shortz and David Solomon. UH
14:48
Speaker 1: those are seen as the two likely successors, and now
14:51
Speaker 1: they've had UM a little more than a year in
14:54
Speaker 1: those UM top jobs kind of overseeing the firm with Lloyd,
14:59
Speaker 1: So I think UM this would be seen as a
15:02
Speaker 1: fairly UM you know, smooth handoff to one of them.
15:06
Speaker 1: Although Michael, this does raise some questions about the timing
15:10
Speaker 1: of this because Goldman Sachs has had some pretty big plans,
15:13
Speaker 1: but reviving it's bond trading unit has been pretty aggressive
15:16
Speaker 1: with consumer lending through its Marcus platform that it started
15:19
Speaker 1: a couple of years ago. UH, do you have any
15:21
Speaker 1: insights on why now UM you know, I think, Um,
15:27
Speaker 1: you know, I think, as you mentioned, they are kind
15:29
Speaker 1: of having this pivot um they um into more of
15:35
Speaker 1: the consumer business. The trading business has struggled. But if
15:39
Speaker 1: they you see the return of volatility this year, that
15:41
Speaker 1: may help them kind of get on firmer footing in
15:44
Speaker 1: their main business. Um. So um that that could be
15:50
Speaker 1: seen as a time to step down. Michael, just hang
15:54
Speaker 1: on because I want to bring in Tad Ravel. He
15:56
Speaker 1: is the chief investment officer for tc W based in
15:59
Speaker 1: Los Angeles, helping you manage more than a d eighty
16:01
Speaker 1: billion dollars. Tad, thanks very much for being with us.
16:05
Speaker 1: What are your what's your reaction to this breaking news
16:07
Speaker 1: that we might see Lloyd blank find stepped down as
16:11
Speaker 1: the head of Golden Sacks by the end of the year. Well, Um,
16:16
Speaker 1: I don't think that it is all that surprising in
16:18
Speaker 1: light of the naming of the two com uh CO
16:22
Speaker 1: presidents that occurred a year or so ago. Um. At
16:25
Speaker 1: a personal level, I've met Lloyd in a a smaller
16:29
Speaker 1: intimate type of setting. Always found him to be very amiable,
16:33
Speaker 1: very humble. Um. There's probably some background about him actually
16:37
Speaker 1: that many of the listeners might not be aware of
16:39
Speaker 1: his father was was a postman, and he initially, uh,
16:44
Speaker 1: as he described it, sort of bumbled into his role
16:47
Speaker 1: at Goldman Sachs by virtue of the fact that he
16:50
Speaker 1: had he had worked in a commodities firm um sometime prior,
16:54
Speaker 1: but actually started his career as an attorney. But he's
16:58
Speaker 1: had a really good run, and he's obviously built a
17:01
Speaker 1: incredible powerhouse of an operation. Well he as you mentioned,
17:06
Speaker 1: he has spent thirty six years at Goldman Sachs and
17:10
Speaker 1: as you mentioned, previously a gold salesman in the commodity division,
17:15
Speaker 1: then ran the firm's trading of business. Named chief executive
17:19
Speaker 1: in two thousand and six when Hank Paulson became the
17:22
Speaker 1: Treasury Secretary. Yeah, exactly so, Dad, I'm wondering your perspective
17:28
Speaker 1: on sort of the fixed income trading environment since Goldman
17:32
Speaker 1: Sachs was one of the leaders, has been one of
17:34
Speaker 1: the leaders in that area and has actually doubled down
17:37
Speaker 1: on their debt trading unit, even as revenues have flagged
17:40
Speaker 1: over the years on a year over year basis. I'm
17:43
Speaker 1: wondering going forward, do you think that we are heading
17:46
Speaker 1: into a better environment for trading revenues and that Goldman
17:49
Speaker 1: Sachs stands to benefit from that, or do you think
17:52
Speaker 1: that we're going to be in a very different environment
17:55
Speaker 1: due to electronification other kinds of streamlining. Well, I think
18:00
Speaker 1: at in the recent past, the issue with respect to
18:03
Speaker 1: poor trading revenues across the entirety of the industry has
18:08
Speaker 1: really been reflective of to UH two dynamics. One has
18:11
Speaker 1: been the incredibly low level of volatility that has persisted
18:15
Speaker 1: in financial markets to low for longer, and the engineering
18:19
Speaker 1: of this low volatility on the part of the central
18:21
Speaker 1: banks and the DoD Frank legislation that essentially drove large
18:27
Speaker 1: financial firms more or less out of the role of
18:29
Speaker 1: proprietary trading, and have they have been forced to over
18:34
Speaker 1: the course of this cycle to agent risk, but not
18:37
Speaker 1: to principal risk. And as a consequence of these two dynamics,
18:41
Speaker 1: we've had a very low level of transaction volumes for
18:44
Speaker 1: a long time. Going forward, I think that we can
18:47
Speaker 1: see several things happening. There seems to be some movement
18:50
Speaker 1: in the direction of relaxation of the financial regulations, particularly
18:54
Speaker 1: the vocal rule, which ought to help um. Secondly, we
18:57
Speaker 1: are seemed to be transitioning to a higher volic atility
19:00
Speaker 1: type of environment, and the the thrust as it relates
19:04
Speaker 1: to electronic trading. That's a process that's been around for
19:07
Speaker 1: a very long period of time, and the Wall Street
19:10
Speaker 1: firms have demonstrated almost an endless ability to adapt and
19:14
Speaker 1: the inventive and to make money as long as there's
19:16
Speaker 1: actually an opportunity for them to do that. Ted, tell
19:20
Speaker 1: us your thoughts right now on investing in fixed income.
19:23
Speaker 1: Do you think we're going to get a repricing of
19:25
Speaker 1: corporate bonds? Are there things that are worth buying right now? Well,
19:29
Speaker 1: we've been thinking that there ought to have been a
19:31
Speaker 1: repricing of corporate bonds for quite some time. UM where
19:35
Speaker 1: we continue to exist in this environment in which risk
19:38
Speaker 1: appetites are, in our opinion, exuberantly large. UM. The when
19:43
Speaker 1: you examine, for instance, the corporate asset class, several of
19:47
Speaker 1: your takeaways will be the observation of very high levels
19:50
Speaker 1: of leverage. So when you look at the total stock
19:54
Speaker 1: of debt, for instance, on the part of investment grade companies,
19:57
Speaker 1: and look at the relationship between that totality of debt
20:01
Speaker 1: as compared with their actual earnings, what one will take
20:04
Speaker 1: away is that you are at the highest levels of
20:06
Speaker 1: leverage of debt to EBA DHAH, since at least two
20:10
Speaker 1: thousand and two, you are above where we were back
20:13
Speaker 1: in two thousand and seven. If you want to look
20:15
Speaker 1: at it through other metrics, for instance, the amount of
20:17
Speaker 1: compensation that the investor earns per turn of leverage on
20:22
Speaker 1: the underlying business, you've come away with the same observation.
20:25
Speaker 1: If you look at what's happening in the M and
20:27
Speaker 1: A market, you can see that private equity has been
20:30
Speaker 1: pushing the envelope in terms of looking for um uh
20:34
Speaker 1: loose looseness in terms of covenant quality, protections for the investor,
20:39
Speaker 1: and obviously discretion for the equity sponsor. So the list
20:43
Speaker 1: kind of goes on and on. The there are plenty
20:45
Speaker 1: of yellow flags and maybe the beginning of some red
20:47
Speaker 1: flags that have been out there for some time. So
20:50
Speaker 1: you're supposed to be, I think, quite cautious about moving
20:53
Speaker 1: into the more cyclically exposed areas of the corporate as
20:59
Speaker 1: UM asset class, and particularly those areas that also evince
21:04
Speaker 1: financial leverage as well. All right, just real quick, which
21:07
Speaker 1: asset class and fixed income are your most bullish on? Well,
21:11
Speaker 1: I don't know that there's any asset class out there
21:13
Speaker 1: actually that you should be actually bullish on. I think
21:16
Speaker 1: that where you're supposed to focus your attention is to
21:19
Speaker 1: be disciplined, say short term in terms of maturity, and
21:22
Speaker 1: focus on higher quality type of asset classes, um the
21:27
Speaker 1: kind that we would describe as bendable and not breakable.
21:30
Speaker 1: Tadra Val, chief investment officer at TCW focused unfixed income
21:33
Speaker 1: TCW managing about hundred eighty billion dollars. Just to reiterate,
21:37
Speaker 1: Goldman Sachs chief executive Lloyd blank Find preparing to step
21:40
Speaker 1: down as soon as later this year, capping twelve years
21:46
Speaker 1: at the home of one of the biggest US banks. Indeed, well,
22:03
Speaker 1: it might not be that quick for Signa to acquire
22:06
Speaker 1: express Script as it has proposed. Evidently, antitrust regulators are
22:13
Speaker 1: very interested in seeing what this deal would actually look like.
22:15
Speaker 1: Here to join us as Max Nissan, biotech, pharma and
22:18
Speaker 1: healthcare columnist for Bloomberg gad Fly. Max, let's just start
22:22
Speaker 1: with how realistic is it that this deal is going
22:24
Speaker 1: to go through? Uh? You know, I I think it
22:27
Speaker 1: has a pretty decent shot, although it'll be the kind
22:30
Speaker 1: of one of the first real big tests of what
22:33
Speaker 1: any trust looks like under the Trump administration. UM, you
22:37
Speaker 1: know it's it's not a horizontal consolidation. Really, it's you know,
22:41
Speaker 1: an insurer teaming up with the PBM. Signa has a
22:43
Speaker 1: PBM pharmacy benefits pharmacy benefit manager, but a relatively small one.
22:48
Speaker 1: I guess the question is if you are you're concentrating
22:50
Speaker 1: too much general healthcare market power in the hands of
22:54
Speaker 1: just a few companies, especially when you add in the
22:56
Speaker 1: fact that this will be the second of two very
22:58
Speaker 1: large ensure PBN mergers are the first being at non CBS,
23:02
Speaker 1: So the fact that both of these are arriving at
23:04
Speaker 1: the same time might increase the level of scrutiny from
23:08
Speaker 1: an industry point of view. Max How do PBMs make money?
23:11
Speaker 1: How to physician pharmacy benefit management companies earned their keep?
23:16
Speaker 1: There are a couple of different ways. UM. The first
23:20
Speaker 1: is that they take a cut of the rebates that
23:22
Speaker 1: they negotiate on behalf of their clients. So example, for example,
23:26
Speaker 1: if you have two diabetes drugs, you pick one of
23:29
Speaker 1: them because they give you a bigger discount. They take
23:31
Speaker 1: a slice of that discount and send the rest onto
23:33
Speaker 1: their client. UM. They also take a piece of the
23:36
Speaker 1: spread between the manufacturer's price and what a pharmacy pays.
23:41
Speaker 1: And they also collect fees for for certain services um
23:45
Speaker 1: that they provide for clients, which is basically trying to
23:48
Speaker 1: manage drug spend in other ways. So if you use
23:50
Speaker 1: their prefer drug list, you pay a higher fee for example.
23:54
Speaker 1: So it's all those things. So the theory here, at least,
23:58
Speaker 1: this is what's being proposed to clients, is that mergers
24:01
Speaker 1: of this type will lead to signia, for example, passing
24:07
Speaker 1: along any savings to customers. You're laughing, I see, um,
24:12
Speaker 1: but you know, could that be true? I mean, could
24:15
Speaker 1: they have a certain negotiating power to get down pricing
24:19
Speaker 1: and strip out any sort of excess roles that get
24:23
Speaker 1: sort of uh lost in the shuffle and make it
24:26
Speaker 1: cheaper you know, at least theoretically anytime that you add
24:30
Speaker 1: scale um. And in this case, you have you know,
24:32
Speaker 1: a single company managing kind of the totality of a
24:35
Speaker 1: person's medical care both you know, the medical part which
24:39
Speaker 1: nets and the drug benefit. So um, theoretically, now that
24:43
Speaker 1: you don't have two different companies taking a slice of
24:45
Speaker 1: that profit, perhaps you'll see some savings and more passed
24:49
Speaker 1: on to the customer, to clients or two consumers. But um,
24:54
Speaker 1: I think kind of the arc of the health care
24:57
Speaker 1: universe is generally towards more inflation and taking the pretty
25:01
Speaker 1: close to the same amount. We'll see. Maybe maybe I'm
25:04
Speaker 1: just a bit of a skeptic, but I don't imagine
25:08
Speaker 1: that that there will be a tremendous amount of savings inaggregate. Okay,
25:12
Speaker 1: let's play Devil's advocate. If there are savings to be had,
25:16
Speaker 1: they have to come from someone or I mean a person,
25:19
Speaker 1: but some company or some industry group that is currently
25:23
Speaker 1: enjoying that money. Who is going to get hurt by this? Uh,
25:29
Speaker 1: probably drug makers on one side, and then potentially people
25:35
Speaker 1: who contract with insurers and PBMs on the other because
25:39
Speaker 1: there's even potentially less competition. Now you have just a
25:42
Speaker 1: couple of very large vendors, and um, you know, all
25:45
Speaker 1: will certainly be price competitive with each other in areas
25:48
Speaker 1: where they intersect. Um, when there are fewer there's less
25:52
Speaker 1: of a large so large corporations, for example, that use
25:55
Speaker 1: a pharmacy benefit manager in order to manage part of
25:58
Speaker 1: the healthcare costs of their workforce potentially and that's why
26:03
Speaker 1: you see you know, the the Amazon Berkshire JP Morgan thing, UM,
26:08
Speaker 1: them taking to attempting to take a little bit of
26:10
Speaker 1: that power back by running some of these things themselves
26:13
Speaker 1: instead of contracting out to one of these new giant companies.
26:16
Speaker 1: You know, one question that I have a lot of
26:18
Speaker 1: people say, there's gonna be plenty more consolidation in the
26:20
Speaker 1: healthcare space. Uh. The consolidations that we have seen are
26:23
Speaker 1: the proposed ones are somewhat different in each case. CVS
26:27
Speaker 1: for example, and now that is a healthcare company and
26:29
Speaker 1: a drug store operator. And then here you have a PBM,
26:32
Speaker 1: aformacy benefit manager getting acquired uh by signa a healthcare company.
26:37
Speaker 1: What's the optimal combination for cost savings? UM, you know,
26:41
Speaker 1: I think the one that I would point to is
26:44
Speaker 1: is having the most potential And we'll see if this
26:46
Speaker 1: is actually realized. Because I'm talking about CVS at and
26:49
Speaker 1: up because they are raising so much debt that's going
26:52
Speaker 1: to constrain their buildOn to actually spend to get the
26:55
Speaker 1: most out of it. But since they're combining UM, you know,
26:57
Speaker 1: and and insure uh, CVS all so owns the largest
27:01
Speaker 1: pharmacy benefit manager in the country, and the drug store,
27:05
Speaker 1: the physical location where they have clinics. Um, they control
27:08
Speaker 1: kind of the potentially broadest swath of healthcare. And how
27:12
Speaker 1: important is it that they're actually getting data on the
27:15
Speaker 1: health of their clients in real time as they go
27:19
Speaker 1: to clinics and managing their drugs. I mean, is that
27:21
Speaker 1: sort of the understated benefit as well? Yeah, I think
27:25
Speaker 1: that's hugely important. I mean, the more data that you have,
27:28
Speaker 1: the more effectively you can design plans and price them
27:31
Speaker 1: and interventions. Um, you know, all of these things can
27:35
Speaker 1: can contribute to controlling costs over time. I will see
27:38
Speaker 1: if that actually, you know, manifests as uh, you know,
27:41
Speaker 1: cost savings to the healthcare system as opposed to cost
27:44
Speaker 1: savings for CVS and better margin. But um, there's definitely
27:49
Speaker 1: potential for that. I want to thank you very much
27:51
Speaker 1: for joining us, Max Neeson as always illuminating and thoughtful.
27:55
Speaker 1: Max Neeson is our Bloomberg Dad Fly columnists for all
27:58
Speaker 1: things related to healthcare, and of course this is a
28:00
Speaker 1: topic that is of interest not only to people who
28:03
Speaker 1: access to healthcare system, but to those who are investing
28:06
Speaker 1: in it. Thanks very much. Thanks for listening to the
28:13
Speaker 1: Bloomberg P and L podcast. You can subscribe and listen
28:16
Speaker 1: to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform
28:20
Speaker 1: you prefer. I'm pim Fox. I'm on Twitter at pim Fox.
28:24
Speaker 1: I'm on Twitter at Lisa Abramo. It's one before the podcast.
28:28
Speaker 1: You can always catch us worldwide on Bloomberg Radio