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Rate Cuts, FedEx, and Trump · Bloomberg Intelligence

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Speaker 2: Let's look at in. I'm mix here, soft landing, hard landing.
1:00
Speaker 2: I don't it looks like the Fed's trying to help
1:01
Speaker 2: us out Here? We welcome Francis Donald here. She is
1:03
Speaker 2: the chief economist at Manual Life Investment Management. She joins
1:06
Speaker 2: us Life here in our Bloomberg Interactive Broker studio. We
1:08
Speaker 2: appreciate you coming into the office. So, Francis, what are
1:11
Speaker 2: you guys over at Manu Life thinking about this economy?
1:14
Speaker 2: The markets just un last five or six weeks just
1:16
Speaker 2: said this thing's rippen here. I mean, we have the
1:19
Speaker 2: yields on ten year treasury we go from five percent
1:21
Speaker 2: to now less than three point nine percent. I mean,
1:24
Speaker 2: what's your call on economy for twenty four.
1:27
Speaker 3: Well, there's a lot of questions in there, because if
1:30
Speaker 3: you ask me what do I think happens in the
1:31
Speaker 3: next month, we couldn't possibly have a better economic setup.
1:35
Speaker 2: Right.
1:35
Speaker 3: You've got growth holding in there, the consumer hasn't given
1:38
Speaker 3: up just yet. Inflation data globally just coming in downside
1:42
Speaker 3: surprises every morning when we wake up, and a FED
1:45
Speaker 3: that said, you know what, we don't even need a
1:47
Speaker 3: recession to cut. We're ready to cut even into this
1:50
Speaker 3: soft landing. You get support for equities, you get support
1:54
Speaker 3: for bonds. Just about every asset class does well there.
1:56
Speaker 3: But remember your investment horizon, because we are still looking
2:00
Speaker 3: at a material slow down in the middle of twenty
2:02
Speaker 3: twenty four, recession risk is still elevated. And even let's
2:06
Speaker 3: just throw out that term recession stop thinking about is
2:09
Speaker 3: a two quarters of negative GDP one quarter of negative
2:12
Speaker 3: Markets don't care as much as headlines do. We're going
2:15
Speaker 3: into a growth slow down middle year. So this is
2:18
Speaker 3: a tactical goldilocks, a nice air pocket that you can trade.
2:22
Speaker 3: You can also still believe there's a recession on the horizon.
2:24
Speaker 3: Two things can be true at the same time.
2:27
Speaker 4: The people who are calling for a soft landing right now,
2:29
Speaker 4: what do you think they're missing? What are they not
2:32
Speaker 4: seeing in the data that maybe you are noticing?
2:35
Speaker 3: Right Well, there's a whole difference of opinion is too
2:39
Speaker 3: And this is the core question. Is this time really different?
2:43
Speaker 3: Because if you look at the wealth of leading indicators
2:46
Speaker 3: that have traditionally helped you forecast a recession, every economist
2:51
Speaker 3: knows those are flashing red. The difference between those calling
2:55
Speaker 3: for a soft landing and those calling for a hard
2:57
Speaker 3: landing is really how much of a factor do you
2:59
Speaker 3: apply to saying there are things at play that are
3:02
Speaker 3: different than past cycles that will mute or mitigate And frankly,
3:06
Speaker 3: even those shops that are calling for mild recessions, And
3:09
Speaker 3: if you look at a list of consensus calls, it's
3:11
Speaker 3: either soft landing or mild recession. You don't have very
3:14
Speaker 3: many who are actually calling for a traditional deepercession, and
3:17
Speaker 3: you don't have very many that are calling for this
3:19
Speaker 3: reacceleration in twenty twenty four. But if you look at that,
3:23
Speaker 3: what they are effectively calling for is that the feed
3:26
Speaker 3: is easing a little bit. This time is different. It's
3:29
Speaker 3: going to be very mild. So this is really a
3:32
Speaker 3: difference of opinion, not a difference of data sets.
3:36
Speaker 2: How important is the labor market here, because the labor
3:38
Speaker 2: market has just been incredibly resilient here. I even had
3:41
Speaker 2: a tick down in the unemployment rate last month, which
3:44
Speaker 2: I don't think many people were forecasting. It's kind of
3:47
Speaker 2: tough to have a slow down in the economy if
3:49
Speaker 2: everybody's got a job and wages are going up.
3:51
Speaker 3: A job full recession. Have we had the jobless recoveries
3:56
Speaker 3: coming out of the GFC. Now this concept of job
3:58
Speaker 3: full recession, but there's a few things going on there,
4:01
Speaker 3: one of which is you don't actually need the consumer
4:03
Speaker 3: to be in a recession for the US economy to
4:06
Speaker 3: have two quarters of negative GDP that can come from
4:09
Speaker 3: housing capex. Let's not forget manufacturing is in a recession globally.
4:14
Speaker 3: We've actually had the longest manufacturing recession, one of the
4:17
Speaker 3: longest ever. So there are sectors and pockets of this economy.
4:21
Speaker 2: Existing home sees, rotation companies will tell you they've been
4:24
Speaker 2: in a good recession.
4:25
Speaker 3: I don't have to convince anyone who's on the good
4:27
Speaker 3: side of the business. I don't have to convince small
4:29
Speaker 3: cap portfolio managers that we're in a recession. They believe me.
4:33
Speaker 3: And frankly, I don't have to convince anyone in Germany,
4:35
Speaker 3: Canada and Japan or outside the United States that we're
4:38
Speaker 3: in a hard landing. This is a US story very specifically,
4:42
Speaker 3: and it's about services holding on. How much do jobs
4:45
Speaker 3: matter here? Well, one of the big challenges is jobs
4:48
Speaker 3: always break last, and they don't break in a linear fashion.
4:51
Speaker 3: It's a hockey stick, forgive my Canadian reference. It goes
4:55
Speaker 3: hard and fast upwards. And if you take a look
4:58
Speaker 3: at some of this underlying data, life continuing claims, if
5:02
Speaker 3: you look at that big drop down in vacancies, the
5:05
Speaker 3: risk is that the unemployment rate rises. Now when you're
5:08
Speaker 3: an economist working for a bank or the cell side,
5:10
Speaker 3: You've got to come out with a forecast. You've got
5:12
Speaker 3: to come out with conviction. When you're in a role
5:14
Speaker 3: like mine, you work with portfolio managers every day. They
5:16
Speaker 3: don't really care what my point forecast is. They want
5:19
Speaker 3: to know what is the balance of risks. And the
5:21
Speaker 3: risk is not that the unemployment rate declines and the
5:25
Speaker 3: job market strengthens from this point, it's that the job
5:28
Speaker 3: market weakens, and it's really asymmetric risk going into twenty
5:32
Speaker 3: twenty four. Does it matter for the economy, absolutely, But
5:36
Speaker 3: here I would say this is the difference between that
5:38
Speaker 3: mild recession soft landing and a worse recession. It's not
5:41
Speaker 3: about upside, it's about what downsides are not being recognized.
5:45
Speaker 4: So then against that, what do you make of all
5:48
Speaker 4: of the Fed speak that we've seen recently. I mean,
5:51
Speaker 4: first Powell kind of not pushing back on that idea
5:53
Speaker 4: that financial conditions have loosened, and then in the wake
5:56
Speaker 4: of that, a few officials coming out and maybe trying
5:59
Speaker 4: to walk back those expectations just a little bit.
6:02
Speaker 3: Yeah, you know, we're always trying to get a sense
6:04
Speaker 3: of what exactly is the FED watching as if they
6:06
Speaker 3: sit in a secret room. Well, I guess they do
6:09
Speaker 3: have a little bit of a secret room, and they
6:11
Speaker 3: have this magic formula, and we're all just trying to
6:13
Speaker 3: guess exactly what that magic formula is. I don't think
6:15
Speaker 3: it's that at all. I think, just like economists and
6:18
Speaker 3: strategists and portfolio managers, the weight that they put on
6:21
Speaker 3: different factors changes. But again, if I'm sitting at the FED,
6:24
Speaker 3: what is the balance of risks? Here's a risk that
6:26
Speaker 3: I haven't heard anybody talk about downshooting on inflation sub
6:31
Speaker 3: two percent inflation. Why are we not talking about that
6:34
Speaker 3: risk when we see this material decline in inflation expectations,
6:38
Speaker 3: energy costs, there's a wide range of goods prices that
6:41
Speaker 3: are dropping really quickly. That's not my point forecast, but
6:44
Speaker 3: it's a risk that need to be assessed and has
6:46
Speaker 3: to be taken into account by the FED. At the
6:48
Speaker 3: end of the day, I don't know how much it
6:50
Speaker 3: matters why they pivoted. It just matters that, as I've
6:53
Speaker 3: been saying, the toothpaste is out of the tube. It's
6:56
Speaker 3: real hard to walk it back. And I hear every day, Oh,
6:59
Speaker 3: but they're pushing back. They're saying they're not talking about
7:01
Speaker 3: rate cuts. Well, how come every day I turn on
7:04
Speaker 3: my news, my Bloomberg terminal and I see all the
7:06
Speaker 3: talk about how we're not talking about not talking about
7:09
Speaker 3: rate cuts. It's too late. And even you know, the
7:13
Speaker 3: ECB and the Bank of England they try to push
7:16
Speaker 3: back as well. The market says, we don't believe you.
7:19
Speaker 3: We don't believe you because you get UK inflation this morning.
7:22
Speaker 3: That just says you can walk that talk as much
7:25
Speaker 3: as you want, but the data is not supporting that.
7:27
Speaker 3: We are not in a disinflation and growth slow down
7:30
Speaker 3: type of environment.
7:31
Speaker 2: Stepping back a little bit from a global perspective, how
7:33
Speaker 2: concerned are you about China? Because it's just been a
7:36
Speaker 2: lot of soft the data coming out of China. The
7:38
Speaker 2: reopening wasn't what I think a lot of investors anticipated
7:42
Speaker 2: at the beginning of twenty twenty three. As you look
7:45
Speaker 2: forward to twenty twenty four, how do you feel like
7:47
Speaker 2: China is can impact maybe the global economy the US economy.
7:50
Speaker 3: Yeah, So we think about China in terms of fat tails,
7:54
Speaker 3: and by that I mean that the distribution of risks
7:58
Speaker 3: on both the downside and the upside are quite large.
8:01
Speaker 3: So on one hand, we you know, as I said earlier,
8:04
Speaker 3: we're talking so much about soft landing hardlining in the
8:06
Speaker 3: United States. The rest of the world is already in
8:09
Speaker 3: hard landing territory. Emerging markets lad interest rates higher coming
8:13
Speaker 3: out of COVID, and they are now actively cutting. China
8:16
Speaker 3: is in a very significant fiscal and monetary easing cycle.
8:20
Speaker 3: We've got a range of emerging markets that are already
8:22
Speaker 3: in easing. The FED and the rest of the developed
8:25
Speaker 3: market central banks are laggarts. When it comes, they will
8:28
Speaker 3: be the last ones to go. So following China through
8:32
Speaker 3: this disinflation, I think is really clutch. And let's also
8:34
Speaker 3: remember China is in deflation. They have negative CPI right now,
8:39
Speaker 3: so they are a really important leading story. What I
8:41
Speaker 3: think is telling about China is that they've put the
8:44
Speaker 3: pressure on the fiscal side to ramp up support. That's
8:48
Speaker 3: an upside risk to the global economy, But fiscal doesn't
8:51
Speaker 3: impact your economy overnight, so that's more of an upside
8:53
Speaker 3: risk to later twenty twenty four into twenty twenty five.
8:56
Speaker 3: When you look at the lags between Chinese economic activity
9:00
Speaker 3: and US economic activity, China's slow down becomes very impactful
9:03
Speaker 3: to the United States in the first the next six months.
9:06
Speaker 2: Right interesting and just we had some you know, some
9:08
Speaker 2: data that just came out at ten o'clock today. The consumer,
9:11
Speaker 2: the Conference Board consumer confidence came in much better than expected.
9:14
Speaker 2: So the consumer still hanging in there.
9:15
Speaker 5: Good.
9:16
Speaker 3: You know what, the consumer loves lower gas prices. How
9:19
Speaker 3: interesting is it that we are always talking about, you know,
9:23
Speaker 3: the central banks they have to contain infleetion expectations. You know,
9:28
Speaker 3: I worked at a central bank and when I did,
9:30
Speaker 3: I told some friends and they said, oh, you must
9:33
Speaker 3: be a bank teller. And I tend to think about
9:35
Speaker 3: that because the perception is that what a central banker
9:38
Speaker 3: does meaningfully moves infleetion expectations. And that's true in some components.
9:43
Speaker 3: But if you track where consumer expectations are for inflation,
9:46
Speaker 3: they just track on top of gas prices. That's what
9:48
Speaker 3: people see over time.
9:49
Speaker 2: And I can tell you it's three dollars at the
9:51
Speaker 2: huahwah and Wall township. Francis Donald, thanks so much. We
9:54
Speaker 2: appreciate it. Chief econmis Menu Life Investment Management joining us
9:58
Speaker 2: Live Instituto even after being lin on television earlier today.
10:01
Speaker 2: So we appreciate that commitment.
10:04
Speaker 5: You're listening to the team. Ken's our live program Bloomberg
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Speaker 5: Markets weekdays at ten am Eastern on Bloomberg dot Com,
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10:14
Speaker 5: on demand wherever you get your podcasts.
10:18
Speaker 2: I want to get to the latest on former President
10:21
Speaker 2: Donald Trump. We welcome Caroline Frederickson, Distinguished Visiting Professor at
10:25
Speaker 2: Georgetown Law. Caroline, can you encapsulate for us, summarize for
10:29
Speaker 2: us what you think the risk is here to former
10:32
Speaker 2: President Trump from this ruling from the Colorado Supreme Court
10:35
Speaker 2: taking mister Trump off the ballot.
10:39
Speaker 6: You know, the risk obviously is not so great for
10:42
Speaker 6: him in terms of winning Colorado in the general election,
10:45
Speaker 6: because that wasn't really destined to happen in any case,
10:48
Speaker 6: there has been a Republican who won that.
10:50
Speaker 7: State since two thousand and four.
10:52
Speaker 6: But nonetheless, it's such a precedent for the other states
10:54
Speaker 6: and there will be, no doubt a number of other
10:58
Speaker 6: states deciding this same issue about whether or not Trump
11:02
Speaker 6: can appear on the ballot. And for those in those
11:05
Speaker 6: states where there's actually a viable race, which is most
11:09
Speaker 6: states in the country, you will actually have a significant
11:11
Speaker 6: effect because if other states are going to rule that
11:14
Speaker 6: Trump can't be on the ballot, and we have a
11:17
Speaker 6: situation where it's obviously very closely divided electorate, it could
11:20
Speaker 6: be the difference whether he wins or loses.
11:24
Speaker 4: How do you see this situation faring out in the
11:26
Speaker 4: Supreme Court?
11:28
Speaker 7: Well, that's really hard to say. This is a completely
11:31
Speaker 7: novel question.
11:32
Speaker 6: This has never gotten to the Supreme Court, even involving
11:36
Speaker 6: someone of a lower level, let alone a president, presidential
11:41
Speaker 6: candidate and former president. So I think it's quite complex
11:45
Speaker 6: because the issues have never been addressed. There have been
11:49
Speaker 6: some lengthy dueling larvae articles trying to explain the meaning
11:54
Speaker 6: of the provision. It's the insurrectionist clause in the Fourteenth Amendment,
11:57
Speaker 6: section three, by the ball The bast bulk of scholarly
12:01
Speaker 6: opinion is that President Trump is squarely within the sights
12:06
Speaker 6: of that provision. But you know, there are those questions
12:11
Speaker 6: are open, and we you know, we can only think
12:13
Speaker 6: that the Supreme Court is going to have to approach them.
12:16
Speaker 2: Anew, are there other states that you're aware of that
12:20
Speaker 2: are maybe in advanced stages of doing something similar to
12:23
Speaker 2: what Colorado did?
12:24
Speaker 6: Well, there is an appeal from a ruling that kept
12:29
Speaker 6: Donald Trump on the ballot that is going up, I
12:32
Speaker 6: believe in Michigan to their Supreme Court, so that one
12:36
Speaker 6: could pose a problem for him. Michigan is a you know,
12:39
Speaker 6: fierce battleground state. So and I think the advocates and
12:45
Speaker 6: the voters who've been bringing these cases are surely looking
12:47
Speaker 6: at every opportunity now to make to use the Colorado
12:53
Speaker 6: ruling as a president because it was very thorough, it
12:55
Speaker 6: was very thoughtful, so it will be weighed very carefully.
12:59
Speaker 7: Ya other or other state courts.
13:02
Speaker 4: Can we backtrack for a second, What does it actually
13:04
Speaker 4: mean that Trump is not on the ballot?
13:09
Speaker 6: Well, I just it will be an empty line, I suppose.
13:13
Speaker 6: I mean they haven't printed the ballots. This is still
13:15
Speaker 6: for the primary in Colorado, and it will mean that
13:20
Speaker 6: the other Republican candidates will be listed and Donald Trump
13:23
Speaker 6: will not.
13:24
Speaker 4: This is only for the primary, or he can't appear
13:26
Speaker 4: in any election for public office.
13:29
Speaker 6: It will be any election right now, it's just the
13:31
Speaker 6: primary and the court itself. The Colorado Supreme Court has
13:36
Speaker 6: held its opinion until early January because it's very possible
13:43
Speaker 6: the Supreme Court might be able to we'll decide whether
13:46
Speaker 6: to take an appeal and will rule very quickly, but
13:51
Speaker 6: after January four it will go forward.
13:53
Speaker 2: So you know, is Caroline, what is the kind of
13:57
Speaker 2: the real legal argument that if it gets to the
13:59
Speaker 2: Supreme Court or maybe put to simply, what did the
14:03
Speaker 2: State of Cholrador court find that A he was an insurrectionist?
14:08
Speaker 2: And be the Constitution says insurrectionists can't be elected to office.
14:12
Speaker 2: I'm a little unclear as to the legal issue.
14:14
Speaker 6: So there are two elements here, and it's basically that
14:18
Speaker 6: for someone who has taken an oath to the Constitution,
14:21
Speaker 6: they cannot be an officer of the United States. So
14:26
Speaker 6: that is Donald Trump took an oath to the Constitution
14:28
Speaker 6: when he was president, and then under the factual analysis
14:32
Speaker 6: of the trial court, he engaged an insurrection, and that
14:35
Speaker 6: judge used the January sixth report and its extensive evidence
14:39
Speaker 6: of the ways in which former President Trump had been
14:44
Speaker 6: fanning the flames of the insurrection to find that he
14:48
Speaker 6: had engaged an insurrection. But that judge on the legal question,
14:51
Speaker 6: which is is Donald Trump is the president one of
14:57
Speaker 6: those officers that is barred from being a candidate, And
15:04
Speaker 6: it seems pretty clear I think to most people that
15:06
Speaker 6: the president is an officer of the United States.
15:09
Speaker 7: But that's the legal question, all right.
15:11
Speaker 2: If we step out kind of and look at former
15:15
Speaker 2: President Donald Trump's legal issues in mass I have, where
15:21
Speaker 2: is the greatest risk do you think to him? I
15:23
Speaker 2: guess as it relates to the election. Not personally, I guess,
15:27
Speaker 2: but just in terms of his ability to run and
15:30
Speaker 2: potentially you know, be elected.
15:33
Speaker 6: Well, I really think the actually biggest risks to him
15:35
Speaker 6: are the other cases. I mean, you know, it's a
15:39
Speaker 6: you know, certainly an important finding that he engaged in insurrection,
15:45
Speaker 6: you know, really just taking up what the January sixth
15:47
Speaker 6: Commission had already had already done.
15:50
Speaker 7: But I think the other.
15:52
Speaker 6: Cases, the Georgia case involving election interference and the the
16:01
Speaker 6: case in DC involving January sixth then an election interference,
16:05
Speaker 6: I think those are the ones that really could well
16:08
Speaker 6: bite him, because even you know, the kind of the
16:12
Speaker 6: most hardcore MAGA voters may start to question their candidate
16:17
Speaker 6: if there's a rock solid criminal case against him and
16:21
Speaker 6: it's moving forward and he's losing.
16:23
Speaker 2: And just one final question here, Caroline, does he get
16:27
Speaker 2: good representation? I Mean, it just seems like I don't
16:29
Speaker 2: know any of the firms that he hires these various things.
16:32
Speaker 2: They're not firms I've ever heard of. And do you
16:34
Speaker 2: think he gets quality representation?
16:36
Speaker 6: Well, you know, I think just ask Rudy Giuliani how
16:39
Speaker 6: he's doing. I think he's got some big bills right
16:42
Speaker 6: now and I don't see Donald.
16:43
Speaker 7: Trump stepping in to pay them.
16:45
Speaker 6: So, you know, I think, you know, one of the
16:47
Speaker 6: problems is the kind of relationships he's had with lawyers
16:50
Speaker 6: over the years haven't really meant that those lawyers have
16:53
Speaker 6: been able to succeed in their businesses. So I think
16:57
Speaker 6: a lot of very more serious, US reputable lawyers have
17:01
Speaker 6: stepped away.
17:02
Speaker 7: It's it's a dangerous place to go.
17:04
Speaker 2: Interesting, all right, Well, there's a lot to follow there.
17:07
Speaker 2: Caroline Frederickson, thank you so much for joining us. Caroline Frederickson,
17:09
Speaker 2: she's a distinguished visiting professor at Georgetown Law. Kind of
17:12
Speaker 2: breaking down some of the legal issues surrounding former President
17:16
Speaker 2: Donald Trump in Colorado, where they had the state has
17:19
Speaker 2: removed him, at least at this stage from the ballot
17:23
Speaker 2: for the upcoming primary. So another issue for the former
17:27
Speaker 2: president deal with from a legal perspective, and it's tough
17:30
Speaker 2: to keep tracking. You need you need like a you know,
17:33
Speaker 2: Bingo card to kind of keep track of everything.
17:35
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Speaker 2: all the transports and logistic stuffs for Bloomberg Intelligence. Second
18:11
Speaker 2: day in a row in studio. How about that man,
18:14
Speaker 2: what's going on in FedEx?
18:15
Speaker 8: Lucky me? Lucky? Yes, how you doing? Yeah?
18:18
Speaker 9: So FedEx, it's really the express business.
18:21
Speaker 8: If you think about their air freight business.
18:22
Speaker 2: So they have air freight ground and express is that
18:24
Speaker 2: how expresses.
18:26
Speaker 9: The air freight ground is the stuff that comes to
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Speaker 9: your house, and then freight is the less than truckload business.
18:32
Speaker 2: Okay, and the express business that most of us think about.
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Speaker 8: Yeah, kind of the planes, because that's what they were
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Speaker 8: built on.
18:38
Speaker 9: They were first an express company that built out a
18:41
Speaker 9: ground network, where UPS was a ground network that built
18:43
Speaker 9: out an air network. See because fred Smith kind of
18:46
Speaker 9: invented that air network.
18:49
Speaker 2: So what's going wrong with that network?
18:51
Speaker 9: It's just gotten too big. So they're trying to do
18:55
Speaker 9: a lot of cost savings, but the cost savings aren't
18:57
Speaker 9: coming up to the I guess they're servicing in the
19:00
Speaker 9: ebit line because they're facing some headwinds, whether it's demand
19:04
Speaker 9: headwinds from just consumers not buying as much. The US
19:08
Speaker 9: Postal Service was a big customer. They're actually using less
19:12
Speaker 9: air more ground and so that's not great for FedEx.
19:16
Speaker 9: So there's a lot of headwinds that they're facing and
19:20
Speaker 9: it's really impacting their overall margins. And their margins were
19:23
Speaker 9: you know, below two percent wow, which is not great,
19:26
Speaker 9: and it was about two hundred and twenty basis points
19:28
Speaker 9: less than what analysts were expecting.
19:30
Speaker 8: For the quarter.
19:32
Speaker 4: What did we learn about the health of the US
19:35
Speaker 4: economy and the US consumer from these FedEx earnings.
19:38
Speaker 8: It's a great question.
19:39
Speaker 9: I didn't learn much because I was more or less
19:42
Speaker 9: focused on you know, their businesses, you know what we
19:46
Speaker 9: But what I would say is that.
19:47
Speaker 8: You know, we are recalibrating demand.
19:50
Speaker 9: We're still coming off of those creamy highs in the pandemic,
19:54
Speaker 9: so we're still normalizing and that's going to continue to
19:57
Speaker 9: take time. But you know, the consumer seems to be
20:01
Speaker 9: in a pretty good spot. They mentioned that their peak
20:03
Speaker 9: season was running relatively well, but it's also worth noting
20:08
Speaker 9: that they were expecting probably more volumes in their express
20:11
Speaker 9: business and that kind of misaligned costs and kind of
20:16
Speaker 9: added to the margin pressure that they faced in their
20:19
Speaker 9: physical second quarter.
20:20
Speaker 2: So during the pandemic, everybody started shopping more and a
20:24
Speaker 2: lot more packages were going through the FedEx system. Did
20:27
Speaker 2: they add a bunch of fixed costs to service that
20:30
Speaker 2: demand and now we're at a point of, oh, now
20:33
Speaker 2: we've got to take someone's fixed costs out of the system.
20:35
Speaker 8: No, it really wasn't that for them.
20:37
Speaker 9: It was really about getting people and technology in the
20:41
Speaker 9: right places. Because I mean they had the sorting facilities,
20:44
Speaker 9: they had the planes, they had the trucks. You know,
20:48
Speaker 9: what they needed to do is just be a lot
20:49
Speaker 9: more productive in terms of the throughput of their overall system.
20:54
Speaker 9: And it's a very tough business because you know they
20:56
Speaker 9: do they try to predict as best as they can
20:59
Speaker 9: a couple of weeks out, but you know, things happen.
21:02
Speaker 9: Demand happens, and supply chains shocks happen, like we're seeing
21:06
Speaker 9: in the Red Sea right now.
21:08
Speaker 4: I hear the term shipping recession a lot, and we're
21:12
Speaker 4: in a shipping recession. I'm a little confused. I mean,
21:15
Speaker 4: everyone in my apartment complex is getting about ten packages
21:19
Speaker 4: a day. My doorman is completely overwhelmed with all of
21:22
Speaker 4: the packages. But can you talk a little bit like
21:25
Speaker 4: what does that mean and how we've seen them?
21:27
Speaker 9: So we've been in a freight recession for quite some time.
21:30
Speaker 9: If you think about it, you know twenty twenty two
21:32
Speaker 9: was the peak. If you look at any earnings of
21:35
Speaker 9: any companies that I cover, whether it's a railroad, a
21:37
Speaker 9: trucking company, a parcel provider, a marine shipping provider, you're
21:41
Speaker 9: going to see peak ear earnings for most of them
21:43
Speaker 9: in twenty twenty two, and fantastic earnings in twenty twenty one.
21:47
Speaker 9: And that is really was just purely driven by the pandemic.
21:50
Speaker 9: And again we're normalizing right so you know, Paul All,
21:54
Speaker 9: I'm sure you're going on vacation soon, so instead of
21:56
Speaker 9: maybe buying new furniture, you're going away. And so people
22:01
Speaker 9: are doing more the services aspect, and then all of
22:04
Speaker 9: a sudden, interest rates are higher, so people are buying
22:06
Speaker 9: less houses and so you're you're filling the house with
22:09
Speaker 9: less stuff because when you buy a house, usually buy
22:12
Speaker 9: a lot of stuff that goes along with it. So
22:13
Speaker 9: just people are just maybe still on the services side
22:18
Speaker 9: more and less on the product side more. The good
22:21
Speaker 9: news is that the d stocking that we saw over
22:24
Speaker 9: the last twelve months seems to be coming to an end,
22:26
Speaker 9: and so that would mean to us that normal seasonaley
22:30
Speaker 9: are going to go back into forest in twenty twenty four,
22:32
Speaker 9: and we should see more normal seasonal patterns next year.
22:35
Speaker 9: And you know, for most of the companies that we cover,
22:38
Speaker 9: in the markets that we cover, we are expecting growth
22:41
Speaker 9: north of where GDP expectations are for.
22:44
Speaker 2: So for FedEx, the stock was up fifty percent as
22:48
Speaker 2: of yesterday's closed now down ten percent today. What was
22:50
Speaker 2: the market if we are in Ober session is a
22:52
Speaker 2: market looking forward to saying, hey, twenty four and twenty
22:55
Speaker 2: five are going to be more better years relative to
22:58
Speaker 2: twenty three. I guess yeah.
22:59
Speaker 9: So the reality all the Aesthetex was a poor performer
23:01
Speaker 9: before twenty three.
23:03
Speaker 8: They did a lot of.
23:07
Speaker 9: Let's call it, they didn't execute on a lot of
23:10
Speaker 9: their plans. They disappointed consistently. That has kind of changed.
23:15
Speaker 9: Management has you know, I would say they are making
23:19
Speaker 9: progress and showing the street that they.
23:21
Speaker 8: Can execute on their plane.
23:22
Speaker 9: I think there was some confusion over the express network.
23:27
Speaker 9: They talked about, you know, changing their their air fleet
23:30
Speaker 9: into three different networks their color coding it. One's an
23:34
Speaker 9: express network, one is more of a deferred network, and
23:37
Speaker 9: one is a network that they're going to rely on
23:39
Speaker 9: third parties.
23:40
Speaker 8: I think people are trying to.
23:41
Speaker 9: Wrap their heads around how that's going to actually benefit
23:43
Speaker 9: costs and how quickly those costs can come out.
23:46
Speaker 2: All right, let's talk about I think the transport logistics
23:49
Speaker 2: topic of de du jour, which is really the red
23:52
Speaker 2: sea global shipping. I had to actually go to Google Maps,
23:55
Speaker 2: you know, a week or so ago and figure out
23:56
Speaker 2: where the heck this thing is. And it's right smack
23:59
Speaker 2: in the middle of a lot of stuff. I mean,
24:00
Speaker 2: it's there in the Suez Canal, that kind of it
24:02
Speaker 2: all came back to me.
24:03
Speaker 8: I hope that's not where you're going on vacation.
24:04
Speaker 2: No, that is not where I'm going on vacation. But
24:09
Speaker 2: if you're merishk how much of a hassle is it?
24:12
Speaker 2: Do you like to say, I'm not going to go
24:13
Speaker 2: through the Red Sea in the Suez Canal. Now I
24:16
Speaker 2: got to go around all the way down the Cape
24:19
Speaker 2: of Africa. I mean, economically, that's going to be just
24:22
Speaker 2: a real negative.
24:24
Speaker 9: Well, adds ten to twelve days of voyage times and
24:28
Speaker 9: so that adds costs. Time is money, and so you're
24:32
Speaker 9: going to see shipping rates increase. We've seen an increase
24:36
Speaker 9: in rates.
24:37
Speaker 8: So it's going to impact Europe more.
24:39
Speaker 9: It's going to impact the United States because the Suez Canal,
24:42
Speaker 9: a lot of the goods are going into Europe. Because
24:46
Speaker 9: still the best way to send freight from China or
24:50
Speaker 9: Southeast Asia to the United States is the West Coast
24:53
Speaker 9: ports or some of the Western Canadian ports like Port
24:56
Speaker 9: Prince Rupert So that's still the best way to get
24:59
Speaker 9: stuff into the States. During the pandemic, there was some
25:02
Speaker 9: share shift. We're seeing that coming back to the West Coast.
25:05
Speaker 9: But anyway, so it's going to impact Europe more and
25:09
Speaker 9: so that's going to add to.
25:10
Speaker 8: Costs and what we've seen since I think it's the end.
25:12
Speaker 9: Of October, costs up around like thirty percent to ship
25:16
Speaker 9: a forty foot box from Asia to Europe.
25:20
Speaker 4: But this is good for the shipping stocks. I remember
25:22
Speaker 4: back when that boat got stuck in the Suez Canal,
25:26
Speaker 4: I wrote an article about I don't remember the name,
25:28
Speaker 4: but the carrier of the boat. The stock went up
25:31
Speaker 4: like two hundred percent in just a matter of weeks
25:35
Speaker 4: after the blockage.
25:36
Speaker 9: Yes, it was fantastic for memes as well.
25:39
Speaker 8: And you know, yes, it's good.
25:42
Speaker 9: The container liner industry is facing a difficult next couple
25:46
Speaker 9: of years, probably through twenty twenty five. They're probably not
25:48
Speaker 9: going to make any money because rates are depressed right.
25:51
Speaker 2: Now and depressed because demand is lower.
25:54
Speaker 9: It's just so again I use this word a lot,
25:57
Speaker 9: creamy highs.
25:58
Speaker 8: We were like, okay, we were ridiculous highs.
26:01
Speaker 9: You know, rates are down eighty percent off their peaks
26:04
Speaker 9: for the liner industry, and they're down around twenty nine
26:06
Speaker 9: to thirty percent versus last year, so they're nearing break
26:11
Speaker 9: even below break even, so their EBIT levels are gonna
26:14
Speaker 9: probably be pretty negative for most of these companies throughout
26:16
Speaker 9: most of this next year in twenty twenty five, assuming
26:20
Speaker 9: that there's not a huge shock that we saw during
26:22
Speaker 9: the pandemic, which you know, knock on wood, that's not
26:25
Speaker 9: gonna happen.
26:26
Speaker 2: Wow. All right, So I guess for twenty twenty four,
26:32
Speaker 2: the railroad's my favorite topic. What's kind of your outlook
26:34
Speaker 2: for kind of you know, demand there for the railroads
26:37
Speaker 2: because I don't know if we're going to recession or not,
26:39
Speaker 2: but your companies really have a feel for it.
26:41
Speaker 5: Well.
26:41
Speaker 9: As we talked about earlier, we have an inter freight recession. Yeah,
26:44
Speaker 9: so intermodal has been negative. Intermodal has been trending down
26:48
Speaker 9: around mid single digits on the negative side.
26:51
Speaker 2: And that's where they put trailers and containers on flat cars, right.
26:53
Speaker 9: And they come in from they come in from the ports,
26:56
Speaker 9: and those are called international intermodal, okay, And when they
26:59
Speaker 9: come from a to the rail to a truck, that's
27:01
Speaker 9: domestic intermodal.
27:02
Speaker 2: Yep.
27:02
Speaker 8: So I'll be on the test later yep.
27:05
Speaker 9: And so we'll we're expecting this mid single digit growth again,
27:09
Speaker 9: probably more than GDP. You have easier comps you have
27:12
Speaker 9: better rail service again, knock on wood, and that should
27:16
Speaker 9: drive more conversions of truck traffic onto the rails, because
27:22
Speaker 9: if you're a shipper and you're thinking about, why do
27:24
Speaker 9: I want to do truck or rail like? You know, yes,
27:26
Speaker 9: rail is the emissions are less, it's better for the environment.
27:30
Speaker 9: But you know, trucking, I know it's exactly when it's
27:32
Speaker 9: going to get to the dock within a couple hours.
27:35
Speaker 9: Rail there's a little more variability. So there's a trade
27:37
Speaker 9: offf you have to make. And so if rails are
27:39
Speaker 9: able to improve their service get as truck like as
27:42
Speaker 9: they possibly can, They'll never be as good as trucking,
27:44
Speaker 9: but they can get pretty closer. If that trade off
27:46
Speaker 9: makes sense that a ship is going to go that.
27:48
Speaker 2: Way, you know what you should do. You should do
27:49
Speaker 2: a podcast.
27:50
Speaker 8: That's funny, you should say that.
27:51
Speaker 2: Ball You've got a podcast talking transports, just tell us
27:54
Speaker 2: about that. Already trying to.
27:55
Speaker 4: Get I feel like retail investors, people on financial Twitter
27:58
Speaker 4: actually really like this subject.
27:59
Speaker 8: Yeah.
28:00
Speaker 9: I launched it in October talking to great CEOs of
28:04
Speaker 9: public and private companies.
28:06
Speaker 8: My latest episode was Tuesday.
28:08
Speaker 9: It was with the CEO of arc Best, which is
28:10
Speaker 9: a large LTL carrier. Judy mcrenolds, she's fantastic. She's one
28:14
Speaker 9: of the first female female shows in trucking. Before that,
28:18
Speaker 9: Derek Leathers a great character. He's the CEO of Werner.
28:24
Speaker 9: You know, he's a very insightful person and I love
28:28
Speaker 9: spending time with him. I've been able to talk to
28:33
Speaker 9: the head of the ATA, the American Trucking Associations.
28:36
Speaker 2: The great thing about talking transports is it gives you
28:39
Speaker 2: a good sense as to what's going on in the
28:40
Speaker 2: economy because the transports certainly know about it. Lee Clasical
28:43
Speaker 2: covers all that stuff from Bloomberg Intelligence.
28:46
Speaker 5: You're listening to the tape Canser live program Bloomberg Markets
28:49
Speaker 5: weekdays at ten am Eastern on Bloomberg Radio, the tune
28:53
Speaker 5: in app, Bloomberg dot Com, and the Bloomberg Business App.
28:56
Speaker 5: You can also listen live on Amazon Alexa from our
28:59
Speaker 5: flagship New York's Just Say Alexa playing Bloomberg eleven thirty Family.
29:05
Speaker 8: Today Paul Sweeney.
29:06
Speaker 2: We are live here in at Bloomberg Interactive Broker Studio,
29:08
Speaker 2: or also streaming live on Youtubes. Ahead over to YouTube
29:10
Speaker 2: dot com and search Bloomberg Radio. A nice trade in
29:13
Speaker 2: the insurance space today m and a trade here a
29:16
Speaker 2: On agrees to buy NFP for about thirteen point four
29:20
Speaker 2: billion dollars in cash and stuck. Let's break down this
29:23
Speaker 2: deal with Matthew Palozola. He's a senior analyst Property and
29:26
Speaker 2: Casualty insurance for Bloomberg Intelligency joins us here in a
29:29
Speaker 2: Bloomberg Interactive broker studio. It looks like he forgot to
29:32
Speaker 2: shave today, but that's okay. He's a player, Matt. I
29:35
Speaker 2: see the stock is down five and a half percent today,
29:39
Speaker 2: so I'm not sure what's going on there. What's Aon
29:41
Speaker 2: trying to do here with this acquisition of NFP.
29:43
Speaker 10: Sure, so it probably bears taking the step back. So
29:46
Speaker 10: these companies are insurance brokerages, right, Okay? They a On,
29:50
Speaker 10: particularly their art rival Marsha mcclennan. I know that they
29:54
Speaker 10: are intermediaries for large businesses that need insurance. Okay, okay,
29:58
Speaker 10: So Bloomberg even buy insurance and they would help you
30:01
Speaker 10: do it.
30:02
Speaker 8: Okay.
30:02
Speaker 10: One of the more particularly attractive parts of the market
30:06
Speaker 10: is the middle market, so smaller companies actually, okay. Marshall
30:09
Speaker 10: mcclennan has been building a business in that space for
30:12
Speaker 10: a long time. Now a kind of let it go
30:15
Speaker 10: and ignored it. Aon now suddenly feels the need for
30:19
Speaker 10: a lot of scale. So they're buying NFP, which is
30:21
Speaker 10: a big player in that mintal market space.
30:24
Speaker 4: Are they getting a good deal? Thirteen point four billion
30:26
Speaker 4: dollars for NFP Corp.
30:28
Speaker 10: So if you look at the it's funny. When Aon
30:31
Speaker 10: announced the deal, they talked about it on forward earnings,
30:35
Speaker 10: the forward ebada basis, and they said, oh yeah, it's
30:37
Speaker 10: a really attractive price on a forward ebada basis. They're
30:39
Speaker 10: building in a nice jump in that ebada as well.
30:44
Speaker 10: If you look at the estimated twenty twenty three, it's
30:46
Speaker 10: about twenty two times, which is more expensive than what
30:50
Speaker 10: other the deals of this size, but what smaller deals
30:53
Speaker 10: are going for.
30:54
Speaker 2: But there's earnings dilution here. I don't like earnings dilution.
30:57
Speaker 2: What's going on here?
30:58
Speaker 10: So it's earnings solution upfront.
31:00
Speaker 2: Is that typical for an insurance deal upfront?
31:02
Speaker 5: Yeah?
31:02
Speaker 10: I mean it probably takes like two years or something.
31:05
Speaker 2: They're not talking about. Like I was looking for the
31:07
Speaker 2: synergy sentence. I didn't see these synergies. I saw the
31:10
Speaker 2: expects about four million dollars in one time transaction and
31:13
Speaker 2: integration costs. Your industry is different than my media industry.
31:16
Speaker 10: So there's some there's some synergies. Always weary of revenue
31:20
Speaker 10: synergies on the side. They're going to cut a bunch
31:22
Speaker 10: of costs out UH and they did identify in the
31:25
Speaker 10: back of the the UH investor presentation some revenue synergies.
31:30
Speaker 8: I think it might be a.
31:32
Speaker 10: Bit high, to be totally honest, And yeah, so it's
31:36
Speaker 10: it's diluted in the first couple of years. They're taking
31:38
Speaker 10: on some debt for it as well. The margins of
31:41
Speaker 10: this business are not as good as their business either,
31:43
Speaker 10: So I mean there's a bunch of headwinds. We had
31:45
Speaker 10: calculated their free cash FOW yields actually higher if they
31:48
Speaker 10: don't do the deal, Okay, which why you see it's
31:51
Speaker 10: selling off.
31:52
Speaker 2: Are we going to see you know? Another question Being
31:54
Speaker 2: a former banker, you know, when I see a deal
31:56
Speaker 2: in my space, I start picking them on the phone
31:58
Speaker 2: and I call everybody saying, hey, we got to do
32:00
Speaker 2: a deal. You saw what a on did? We got
32:01
Speaker 2: to do a deal? Trying to write some tickets here.
32:03
Speaker 2: Do you think you'll see more. Is the structure of
32:06
Speaker 2: that part of the jury ripe for any consolidation.
32:09
Speaker 10: Okay, so what's happening in the space, and we wrote
32:11
Speaker 10: a note about this in the past, is private equity
32:14
Speaker 10: likes these insurance brokers. They're cash cows, right, So there
32:18
Speaker 10: are a bunch of them that are owned by private equity.
32:20
Speaker 10: The valuations of the deals, a lot of deals take place.
32:24
Speaker 10: Valuation is probably peaking a bit this year and maybe
32:27
Speaker 10: on the downturn. So we do think it's a nice
32:30
Speaker 10: time for them to perhaps get out of this business.
32:33
Speaker 10: Truist Owns won. They sold twenty percent of that business,
32:36
Speaker 10: so you could see more. AND's been on the hunt though,
32:38
Speaker 10: I mean something was going to happen. They tried to
32:41
Speaker 10: buy Willis, which was a rival a couple of years ago,
32:45
Speaker 10: and that deal fell through due to anti trust concerns.
32:47
Speaker 10: I don't think the same thing happens here. This is
32:48
Speaker 10: a much smaller deal. But since that Willis deal fell through,
32:53
Speaker 10: they've been losing more ground. It was I think inevitable
32:56
Speaker 10: that they were going to do something.
32:57
Speaker 4: Do lower interest rates a FED pivot. Is that going
33:00
Speaker 4: to help spark some more m and a in your industry?
33:03
Speaker 4: Specifically anymore.
33:04
Speaker 10: I mean for insurance brokers, that might make it again
33:07
Speaker 10: more attractive because they can can lever them up. And
33:10
Speaker 10: the rise and interest rates probably hurt the valuation of deals.
33:14
Speaker 10: For insurance carriers, it probably makes it maybe a little
33:17
Speaker 10: bit less likely to be honest, there's still interest rates
33:20
Speaker 10: are still higher, insurrates still earning through, so still helping
33:24
Speaker 10: earnings probably into next year. Past that then you might
33:27
Speaker 10: see them going the other way, so investment income going down,
33:30
Speaker 10: maybe less likely to reach on an underwriting deal.
33:33
Speaker 2: Aon based in Chicago, fifty thousand employees got to mark
33:38
Speaker 2: a cap of about fifty nine billion dollars, so a
33:41
Speaker 2: pretty pretty big company. I'm looking at this stock here
33:44
Speaker 2: and a year to date it's off about one and
33:46
Speaker 2: a half percent. Again, off five point six percent today,
33:49
Speaker 2: probably on the dilution would be my guess. All right,
33:53
Speaker 2: let's step back here. I know you guys at Bloomberg
33:55
Speaker 2: Intelligence you really always have your your year head outlook
33:59
Speaker 2: around this time you publish your twenty twenty four outlook.
34:01
Speaker 2: What do you think is the best in your coverage
34:03
Speaker 2: property and casualty insurance? Where do you think some of
34:06
Speaker 2: the best areas of investors should be looking at.
34:08
Speaker 10: So maybe there's there's a couple of spaces, right, personal lines,
34:12
Speaker 10: commercial lines. Then you've got these insurance brokers and reinsurance.
34:17
Speaker 10: Probably one of the more attractive spaces, the more most
34:19
Speaker 10: room for improvement is going to be in personal lines
34:22
Speaker 10: and insurance. So that's companies like all State and Progressive
34:26
Speaker 10: Auto insurance costs have been higher than they've ever been.
34:29
Speaker 10: It's been the kind of worst couple of years ever.
34:31
Speaker 8: For some of these names.
34:32
Speaker 2: Okay, we're starting to see that thaw.
34:34
Speaker 8: Towards the end of the year.
34:35
Speaker 10: The stocks have responded to that, But all of these
34:38
Speaker 10: other spaces, they're at probably peak margins and their valuation
34:43
Speaker 10: is probably peaked before there aros do. So you know,
34:46
Speaker 10: it's gonna be tougher for the other spaces to improve
34:49
Speaker 10: much fundamentally in twenty four. So I think the personal
34:52
Speaker 10: line space probably is the place to be, all right.
34:54
Speaker 2: To show you my ignorance, do falling interest rates are
34:57
Speaker 2: the net positive or net negative.
34:59
Speaker 10: For insurance, they're net negative, so they take in premiums,
35:03
Speaker 10: they invest them, and they make money on that float.
35:05
Speaker 10: So the rise in interest rates has been good.
35:08
Speaker 2: So it's a net interest margin kind of story that
35:10
Speaker 2: Allison Williams has taught me about for banks a little bit.
35:13
Speaker 10: I mean it's it's not a spread business, you know,
35:15
Speaker 10: it's just you know, higher or low it can it
35:18
Speaker 10: can support underwriting a little bit. But I mean, int net,
35:21
Speaker 10: it's just a positive inflation going up. Modest inflation is
35:25
Speaker 10: actually good because it increases insured values, maybe increases interest rates.
35:29
Speaker 10: Runaway inflation probably bad because you are paying claims from
35:33
Speaker 10: stuff you may have wrote a couple of years ago,
35:35
Speaker 10: so things are more expensive.
35:36
Speaker 2: And just correct me if I'm wrong. Knock on wood.
35:39
Speaker 2: We haven't had a ton of like natural disasters kinds
35:43
Speaker 2: of things. I mean, I'm thinking Florida, I mean fires
35:46
Speaker 2: and things like that. So how's that impacted your business
35:48
Speaker 2: in a lift, It's.
35:49
Speaker 10: Been good business for particularly reinsurance companies, so they're most
35:52
Speaker 10: exposed to these large.
35:53
Speaker 2: Insurance companies that ensure the insurance industry.
35:56
Speaker 10: Leave Paul, So yeah, it's been good for them. There's
35:59
Speaker 10: been weird weather events, but none of them have risen
36:03
Speaker 10: to the level of impacting the reinsurance company. So it's
36:05
Speaker 10: been an abnormally good year for the reinsurance companies.
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Speaker 8: The primary carriers.
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Speaker 10: Did see kind of larger cats midway through the year,
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Speaker 10: but the fourth quarter actually looks to be shaping up
36:16
Speaker 10: even better.
36:16
Speaker 2: All right, Matt, thanks so much for joining us at
36:18
Speaker 2: Matthew Palozola. He's the senior analyst. He covers the property
36:20
Speaker 2: and casualty insurance companies for Bloomberg Intelligence.
36:25
Speaker 1: Thanks for listening to the Bloomberg Markets podcast. You can
36:28
Speaker 1: subscribe and listen to interviews at Apple Podcasts or whatever
36:32
Speaker 1: podcast platform you prefer. I'm Matt Miller. I'm on Twitter
36:36
Speaker 1: at Matt Miller nineteen seventy three and on fall.
36:39
Speaker 2: Sweeney I'm on Twitter at pt Sweeney Before the podcast.
36:42
Speaker 2: You can always catch us worldwide at Bloomberg Radio.