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Tech Poised For 5-7% Year-End Rally: Wedbush's Ives · 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 Waits. Each day
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  Speaker 1: we bring you the most noteworthy and useful interviews for
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  Speaker 1: you and your money. Whether at the grocery store or
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  Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
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  Speaker 1: podcast or wherever you listen to podcasts, as well as
• 0:17
  Speaker 1: at Bloomberg dot com. We got a deal. Maybe we're
• 0:21
  Speaker 1: getting all the details as they trickle out. There aren't
• 0:25
  Speaker 1: that many of them. We're talking about the US and China.
• 0:28
  Speaker 1: The focus now is on all of the iterations of
• 0:31
  Speaker 1: phase one, how it's going to be rolled out, and
• 0:33
  Speaker 1: people talk about the persisting uncertainty. However, there is some
• 0:38
  Speaker 1: detail that has become more concrete, at least for Dan Ives.
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  Speaker 1: He's Banging director for equity research at web Bush Securities,
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  Speaker 1: joining us here. Uh. Nice to say in our interactive
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  Speaker 1: broker studios, thank you for being here. You're saying that
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  Speaker 1: you do think that the trade deal removes a dark
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  Speaker 1: cloud over tech stocks. Can you explain why all that
• 0:56
  Speaker 1: mattered for tech investors was the December fifteen team percent tariff.
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  Speaker 1: If that happened, that would have been a gut punch,
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  Speaker 1: notch Us for Apple, Semis and really across the whole
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  Speaker 1: supply chain could have taken off about two bits of
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  Speaker 1: growth once that tariff got removed and no December fifteen,
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  Speaker 1: that would have been the issue. Right now green light
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  Speaker 1: for tech stocks. I can tell you from an investor perspective,
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  Speaker 1: I think we have five December cent rally in the
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  Speaker 1: year and because now despite all the noise, that was
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  Speaker 1: remaining risk for names like Apple and Semis to go higher. Alright,
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  Speaker 1: so you mentioned Apple that's kind of been held out
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  Speaker 1: as the poster child for the way to play or
• 1:32
  Speaker 1: go a long, go short, depending upon your view of
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  Speaker 1: how this trade will play out. How do you think
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  Speaker 1: Apple is gonna you know behavior, you know, thriving in
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  Speaker 1: the world where maybe trade tensions are a little bit lower. Yeah,
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  Speaker 1: I mean that was in our opinion twenty overhang on
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  Speaker 1: Apple stock. I think now that's the stock that's going
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  Speaker 1: to have a three in front of it either by
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  Speaker 1: year in or into early next year. But it speaks
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  Speaker 1: to why Cook was such a tactician, a pseudo ambassador
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  Speaker 1: between US and China, and why he's broken some spred
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  Speaker 1: with Trump because it came down to. For Apple, they
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  Speaker 1: bet the farm in China. I think right now they're
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  Speaker 1: in a sort of goldilocks scenario. I don't think they
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  Speaker 1: take anything out of China. This was sort of the
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  Speaker 1: worry for them. You'll see some US manufacturing like Austin
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  Speaker 1: and others right now. For Apple, it's an early Christmas present.
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  Speaker 1: I'm trying. I'm just struggling to understand beyond just the
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  Speaker 1: December fifteen tariffs being lifted or the prospect of them
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  Speaker 1: being removed from the table. Is there anything else that
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  Speaker 1: we know concrete, concretely out of this deal? No, I
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  Speaker 1: mean right now in terms of I P protection, any
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  Speaker 1: sort of five G specifics that many tax CEOs are
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  Speaker 1: focused on. Nothing in terms of those specifics. But that's why,
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  Speaker 1: going back to Friday, you know that there was a
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  Speaker 1: why noise was that we don't know the specifics of
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  Speaker 1: the trade deal from an investor perspective in terms of tech,
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  Speaker 1: all focused on if it was going to happen or
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  Speaker 1: if not it didn't. Right now that that's what we'll
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  Speaker 1: see a five sambers and rally attach Apple shares right
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  Speaker 1: now at about two and eighty dollars per share, up
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  Speaker 1: one point eight percent today following one point four percent
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  Speaker 1: gain on Friday. Why aren't the gains bigger If what
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  Speaker 1: you're saying is the case, It's just like what happened
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  Speaker 1: a few months ago. It took time that if you
• 3:13
  Speaker 1: go back before earning stocks to fifteen to twenty and
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  Speaker 1: we're trying to pound on the tables. We came away
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  Speaker 1: from China, it was clear iPhone eleven is much better
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  Speaker 1: than expected. It took time for that to show up
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  Speaker 1: in the stock. I think it's the same thing. That's
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  Speaker 1: why I go into next year. This is a stock.
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  Speaker 1: I think it starts with three hundred. You can now
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  Speaker 1: see three fifty, potentially four hundred into what I believe
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  Speaker 1: is a five g supercycle. So I think for Apple
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  Speaker 1: right now, it's not gonna happen overnight. But that's why
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  Speaker 1: that's a stock. It continues to be your favorite tech
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  Speaker 1: name into next year. You mentioned five gene. That's one
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  Speaker 1: of the areas that we hear probably most often when
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  Speaker 1: people talk about a bullish call for tech throughout the
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  Speaker 1: tech stack. How does how are you suggesting investors play
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  Speaker 1: five g other than the handset I e. Apple? Then
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  Speaker 1: there's so there's three ways to play if there's Apple,
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  Speaker 1: and then I think on the semi side, you look
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  Speaker 1: at qual Calm in terms of my opinion, probably the
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  Speaker 1: best way to play five G, as well as Intel
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  Speaker 1: in terms of where their position. And then even on cybersecurity,
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  Speaker 1: there's gonna be a security piece around five G. That's
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  Speaker 1: the name like Ford net ftn T, which plays its
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  Speaker 1: early days today. But I think as we go into
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  Speaker 1: the next six twelve months, that's gonna be a bigger
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  Speaker 1: focus into what I believe five G transformational technology of
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  Speaker 1: the next decade. I remember old enough to remember six
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  Speaker 1: months ago when we were talking about suppliers to Apple
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  Speaker 1: getting really whipped around on the heels of tariff news.
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  Speaker 1: I'm wondering which you expect to do the best with
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  Speaker 1: the removal of the prospects of the December fift tariffs. Yeah,
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  Speaker 1: I mean we just came away from China, you know,
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  Speaker 1: over the last few weeks in terms of our checks
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  Speaker 1: there on the ground, and I from a supplier perspective,
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  Speaker 1: it's really playing the chip names, you know. I think
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  Speaker 1: names that are going to be most beneficial or qual
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  Speaker 1: Calm in telling semis. There's some smaller suppliers that are
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  Speaker 1: going to benefit in terms of Apple, but I think
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  Speaker 1: here it's really playing the chip plaise for Apple as
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  Speaker 1: well as some of the distributors. Is there any chance
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  Speaker 1: at five g's not gonna live up to what's hype.
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  Speaker 1: I'd say it's the same view of Lamar Jackson not
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  Speaker 1: living up to his hype. I don't. I don't see
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  Speaker 1: it possible, just because it's right now. It's more of
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  Speaker 1: the most transformational trends and you're seeing whether it's on
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  Speaker 1: the handset side and Verizon AT and T and others,
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  Speaker 1: and it's really gonna affect enterprise. So I can tell
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  Speaker 1: you in terms of five G, I think it's really
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  Speaker 1: gonna be a seminal movement, similar as cloud in terms
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  Speaker 1: of how we view tech. Dan, I have thanks so
• 5:36
  Speaker 1: much for joining us. Dan, I was equity analyst web
• 5:38
  Speaker 1: Bush Security, joining us here in Bloomberg and actor brokerst
• 5:41
  Speaker 1: to given us the update on tech. He's bullish. I
• 5:43
  Speaker 1: like his calls into the end of the year, as
• 5:44
  Speaker 1: like his calls on Apple bullish and on five G
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  Speaker 1: we're hearing a lot of five GS relates to tech.
• 6:02
  Speaker 1: The analysis of the UK election continues, the one that
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  Speaker 1: led boris Johnson to victory. Also notable though, was the
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  Speaker 1: incredible majority and the number of seats at the Conservative Party.
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  Speaker 1: One joining us now Marian Harkin, former European Union of
• 6:17
  Speaker 1: Parliament member representing Ireland UH and she joins us by phone. Marian,
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  Speaker 1: I want to start there is there a broader takeaway
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  Speaker 1: from the UK election given the fact that some of
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  Speaker 1: the most liberal neighborhoods that always went for for that
• 6:35
  Speaker 1: party voted Conservative. Well, I think it's a generalization to
• 6:42
  Speaker 1: say at Lisa, but you know a lot of people
• 6:45
  Speaker 1: disliked Johnson, but they couldn't tolerate Corbon. And if you
• 6:49
  Speaker 1: look at what happened to the collapse of the labor
• 6:52
  Speaker 1: vote in the north of England, in particular the Midlands,
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  Speaker 1: what they're called the red walls, I mean that bought
• 6:59
  Speaker 1: just Upston one after another. Labor supporters were saying they
• 7:04
  Speaker 1: just couldn't bring themselves to vote for Corbin. I think
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  Speaker 1: that was one part of that. I think the other
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  Speaker 1: part was the simple message get Brexit done, three words.
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  Speaker 1: It resonated with people after three years people want to
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  Speaker 1: see progress of some kind and I think put those
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  Speaker 1: two things together and that really for me gives you
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  Speaker 1: the bare bones, if you like, of of what happened
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  Speaker 1: in this election. So Marian, now that it appears that
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  Speaker 1: the Brexit deal will go through, UM, give us a sense.
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  Speaker 1: One of the stumbling big stumbling blocks was Ireland Northern Ireland. Um,
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  Speaker 1: you know the boundaries. Where is zach? How's that going
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  Speaker 1: to play out? Do you think? Well? The agreements that
• 7:54
  Speaker 1: was reached between Boris Johnson and our own Prime Minister
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  Speaker 1: Ratkar the Withdrawl Agreement and has three main items, citizens rights,
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  Speaker 1: the divorce settlement, but the real one was the Irish
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  Speaker 1: border and force was agreed. They got rid of what
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  Speaker 1: was called the backstop, which was an insurance policy in
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  Speaker 1: case there was divergence in standards between the Republic and
• 8:23
  Speaker 1: Northern Ireland. But what they haven't placed now is a
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  Speaker 1: guarantee from the UK that there will be no checks
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  Speaker 1: at the border between the Republic of Ireland and Northern Ireland,
• 8:38
  Speaker 1: but there will be some checks in the Irish Sea
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  Speaker 1: between goods traveling from the UK to Northern Ireland. So
• 8:48
  Speaker 1: in many ways this is a perfect scenario for Northern
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  Speaker 1: Ireland because they have access to the UK market and
• 8:57
  Speaker 1: they have access to the EU market. But because obviously
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  Speaker 1: the UK wouldn't have the same access. That's why there
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  Speaker 1: has to be checks in the Irish Sea. And you'll
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  Speaker 1: be well aware that the DUP, which is the Democratic
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  Speaker 1: Unionist Party, were fiercely opposed to this. Boris Johnson promised
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  Speaker 1: them it wouldn't happen, but subsequently he agreed to that.
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  Speaker 1: There still remain fiercely opposed. But that's where we are
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  Speaker 1: now and if the deal is signed by the thirty
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  Speaker 1: one of January, we move on from there. Let's talk
• 9:37
  Speaker 1: about moving on from there, Marian. You know, given your
• 9:40
  Speaker 1: experience with the European Union as a member of the Parliament,
• 9:44
  Speaker 1: can you give us a sense of their approach and
• 9:46
  Speaker 1: dealing with Boris Johnson, given the fact that not only
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  Speaker 1: did he win, but that he has such a big
• 9:51
  Speaker 1: Conservative majority behind him. Well, actually it matures that he
• 9:56
  Speaker 1: has such a big majority because that means he does
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  Speaker 1: not need to be looking over his shoulder. There's a
• 10:03
  Speaker 1: small group in the Tories called the e r G
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  Speaker 1: European Reform Group who are all in favor of a
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  Speaker 1: heart Brexit, and they are smallish number. They will not
• 10:17
  Speaker 1: bother him the way they is too. Nigel for Age
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  Speaker 1: didn't have any MP selected. To be fair, he did
• 10:25
  Speaker 1: stand back in most constituencies are his his party did.
• 10:29
  Speaker 1: So Boris now is in charge. Basically, he's a man
• 10:34
  Speaker 1: at the helm and that makes a big difference when
• 10:38
  Speaker 1: it comes to negotiating and the sense, I think in
• 10:42
  Speaker 1: many European capitals and the fact that he won the
• 10:47
  Speaker 1: election and wanted well was a positive rather than a
• 10:52
  Speaker 1: negative because it means he's in charge and he can
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  Speaker 1: now negotiate and move forward because just like the UK,
• 11:00
  Speaker 1: the truth is many European citizens as well, while many
• 11:04
  Speaker 1: of them had wished at Brexit wouldn't happen, now that
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  Speaker 1: it's going to happen, they want to get on with
• 11:12
  Speaker 1: looking at the trade deal talks and seeing what kind
• 11:16
  Speaker 1: of a future relationship we can manage. So Maryan, one
• 11:20
  Speaker 1: of the items arguments that the Brexiteers made is as
• 11:24
  Speaker 1: in outside of the Union, the UK can make h
• 11:27
  Speaker 1: bilateral deals with the U S and the EU. What
• 11:30
  Speaker 1: is the expectation that of what they can get done
• 11:33
  Speaker 1: with the US Because we're seeing here with the U
• 11:35
  Speaker 1: S and China it's no easy, you know task negotiating
• 11:38
  Speaker 1: with the US. At this point, well, you know, there's
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  Speaker 1: a couple of things here. First of all, Charles Michelle,
• 11:45
  Speaker 1: who is the President of the European Council, he's the
• 11:48
  Speaker 1: former Prime Minister of Belgium, said immediately after the election
• 11:52
  Speaker 1: results that he's looking forward to open negotiations on the
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  Speaker 1: trade deal, but he ad about a level playing pitch,
• 12:01
  Speaker 1: and what he means is he's talking about environmental standards,
• 12:05
  Speaker 1: social legislation, workers rights, data rules, etcetera. And that's where
• 12:11
  Speaker 1: we start from. It's an unusual trade agreement. We're starting
• 12:15
  Speaker 1: from complete regulatory alignment and seeing where we go from there.
• 12:21
  Speaker 1: It's it's always the other way around in any trade deal.
• 12:25
  Speaker 1: So the question then becomes if the UK and when not.
• 12:30
  Speaker 1: It's when the UK negotiates trade deals with other countries
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  Speaker 1: and what kind of standard regulatory alignment will be involved.
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  Speaker 1: And it's the divergence from those standards that are in
• 12:46
  Speaker 1: the you that's what will cause the problems, if there
• 12:49
  Speaker 1: are problems. So it's it's hugely complicated and I think
• 12:54
  Speaker 1: what most people want and hopefully Bars Johnson will follow
• 12:58
  Speaker 1: this line as well. It could be some kind of
• 13:01
  Speaker 1: prioritizing sequencing to deal with some of the most important
• 13:06
  Speaker 1: issues first that we can put some sort of framework
• 13:10
  Speaker 1: in place because there are so many issues, I mean
• 13:13
  Speaker 1: fishing rights for example, that is fraught with difficulty, absolutely fraught.
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  Speaker 1: So we need to put some sort of framework in
• 13:23
  Speaker 1: place and work from there. Twelve months is too short,
• 13:27
  Speaker 1: but we have to do the best we can within
• 13:30
  Speaker 1: that period of time. Marian Harkin thanks so much for
• 13:33
  Speaker 1: joining us. Marian is a former member of the European
• 13:35
  Speaker 1: Parliament and of the Irish Parliament as well, giving us
• 13:37
  Speaker 1: her thoughts on the election win by bar Johnson what
• 13:42
  Speaker 1: it means for the Brexit process. We now go on
• 13:44
  Speaker 1: to actually getting this deal done for the folks in
• 13:47
  Speaker 1: the UK. They will be moving forward on that. We've
• 14:05
  Speaker 1: got a bunch of manufacturing data around the world coming
• 14:08
  Speaker 1: out this morning Europe disappointed in the US manufacturing also
• 14:14
  Speaker 1: slightly underwhelmed, but interestingly services p m I came in
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  Speaker 1: a little bit of head of expectations joining us now.
• 14:21
  Speaker 1: Lindsay piigsa chief economist at Siful Financial, joining us on
• 14:25
  Speaker 1: the phone from Chicago. Lindsay, before we get into sort
• 14:29
  Speaker 1: of the nitty gritty, how important is it to watch
• 14:32
  Speaker 1: the data that we're getting over the next few weeks.
• 14:35
  Speaker 1: Is this so messy and so noisy that it's hard
• 14:38
  Speaker 1: to count, or is this is this significant data? Well,
• 14:41
  Speaker 1: Dad has always done messy and difficult to count. But
• 14:44
  Speaker 1: I do think it takes a very important picture of
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  Speaker 1: what we're experiencing here at the US as well as
• 14:49
  Speaker 1: overseas as we head into the end of the year,
• 14:51
  Speaker 1: and it sets the tone for what we can expect
• 14:54
  Speaker 1: then looking out to the new year. Of all right,
• 14:57
  Speaker 1: so lindsay, it looks like just first like us on trade,
• 15:00
  Speaker 1: we look like we have a phase one deal. Of course,
• 15:03
  Speaker 1: we've seen nothing on paper yet, which is kind of
• 15:06
  Speaker 1: a part of the course, it seems. But assuming that
• 15:08
  Speaker 1: what's been reported is actually in a phase one deal,
• 15:11
  Speaker 1: does that change or impact your outlook in any way? Well,
• 15:16
  Speaker 1: it's difficult to say, because, like you said, we haven't
• 15:18
  Speaker 1: seen anything put to paper as of yet, and we've
• 15:21
  Speaker 1: obviously seen the evans flow of trade negotiations before, and
• 15:25
  Speaker 1: while a phase one deal has been agreed to in principle,
• 15:28
  Speaker 1: those principles have not yet been signed into text that
• 15:32
  Speaker 1: we won't see that for at least another month, so
• 15:35
  Speaker 1: there still is plenty of time for further disruptions as
• 15:37
  Speaker 1: further tweaks to negotiations to occur between now and then.
• 15:42
  Speaker 1: There's also a question of enforceability aside from adhering to
• 15:46
  Speaker 1: a specific level of purchases. China did say that it
• 15:49
  Speaker 1: would quote crack down on intellectual property, staff of force,
• 15:53
  Speaker 1: technology transfers, et cetera. Some of the key issues that
• 15:56
  Speaker 1: the Trumble administration has been focused on for the past
• 15:59
  Speaker 1: twelve to eight seen months, but there's few specifics that
• 16:02
  Speaker 1: have really been hammered out. So there is some skepticism
• 16:07
  Speaker 1: regarding the country's willingness to actually follow through when it
• 16:11
  Speaker 1: comes to these ladder issues, or or really how the
• 16:14
  Speaker 1: US can even enforce such efforts, because we have heard
• 16:17
  Speaker 1: from China many times before saying they would address these issues.
• 16:22
  Speaker 1: So I don't know if I'm necessarily convinced that this
• 16:25
  Speaker 1: time really will be different. So, given that we do
• 16:28
  Speaker 1: have a trade truce of sorts, but one that keeps
• 16:32
  Speaker 1: a lot of the uncertainty for the C suite, and
• 16:35
  Speaker 1: given the fact that we're getting a bunch of economic
• 16:37
  Speaker 1: data that shows ongoing strength in the US economy, albeit
• 16:41
  Speaker 1: UH an ongoing concern about manufacturing, how are we setting
• 16:45
  Speaker 1: up heading into well? I think that is going to
• 16:50
  Speaker 1: bring a lot of continued uncertainty and volatility. I do
• 16:54
  Speaker 1: think the market right now is looking at the positive.
• 16:57
  Speaker 1: They're looking at the economy through a glass half full ends.
• 17:00
  Speaker 1: They're focused on train negotiations taking a step in the
• 17:03
  Speaker 1: right direction. But I do think that the market is
• 17:05
  Speaker 1: really disregarding a lot of the red flags that we're
• 17:08
  Speaker 1: still seeing in fundamentals. We're still seeing business investment trend negatives.
• 17:13
  Speaker 1: We're still seeing manufacturing deep into contractionary territory. We're now
• 17:18
  Speaker 1: beginning to see signs of unevenness in part of the consumer,
• 17:22
  Speaker 1: which has been and we need to. We need the
• 17:24
  Speaker 1: consumer to continue to be the primary support to growth
• 17:30
  Speaker 1: going forward. So even if we do see this phase
• 17:32
  Speaker 1: of one trade deal signed into a certainty within a
• 17:36
  Speaker 1: month's time, there still is a lot of pain that
• 17:39
  Speaker 1: the U. S economy has experience that will take time
• 17:42
  Speaker 1: to unwind going into So given that backdrop, lindsay, do
• 17:47
  Speaker 1: you expect the FED too maybe cut rates once in
• 17:52
  Speaker 1: or prefer to stay on the sidelines, assuming the data
• 17:55
  Speaker 1: can support that. Well, I think both. I think the
• 17:57
  Speaker 1: FED does prefer to move to the sidelawe and stay
• 18:00
  Speaker 1: there indefinitely, but the FETE has also set the bar
• 18:03
  Speaker 1: relatively high. The FETE has essentially committed the U. S
• 18:07
  Speaker 1: economy to a perpetual two percent growth rate and a
• 18:11
  Speaker 1: return to two percent inflation in the near to medium term.
• 18:15
  Speaker 1: So if the U. S. Economy fails to meet the
• 18:17
  Speaker 1: feds set expectations, I do think the Committee has painted
• 18:21
  Speaker 1: themselves into a corner where they will have to act.
• 18:24
  Speaker 1: And because the trajectory of the data suggests we will
• 18:27
  Speaker 1: not meet the feds optimistic expectations, I do see the
• 18:31
  Speaker 1: Committee cutting once twice, if not three times next year.
• 18:35
  Speaker 1: Lindsay in in a recent research piece, you seem to
• 18:38
  Speaker 1: agree with Minneapolis Fed President Neil cush Kari that the
• 18:43
  Speaker 1: civilian unemployment rate is basically meaningless. How do you interpret
• 18:48
  Speaker 1: what we're seeing in the labor market in terms of
• 18:51
  Speaker 1: how strong or not strong? Uh? The U. S. Employment
• 18:54
  Speaker 1: market is? Well, I will say those are his words, um,
• 18:57
  Speaker 1: but I do echo his sentiment that the civilian on
• 18:59
  Speaker 1: his with it rates does a disservice to the average
• 19:02
  Speaker 1: American looking at those numbers, as it doesn't tell the
• 19:05
  Speaker 1: whole story. The civilian unemployment rate fails to capture all
• 19:08
  Speaker 1: of the millions of Americans that have been sidelined, pushed
• 19:11
  Speaker 1: out of the labor market that are no longer actively participating.
• 19:15
  Speaker 1: And what I mean by that is, in order to
• 19:17
  Speaker 1: be included in the unemployment rate, you have to be
• 19:20
  Speaker 1: actively seeking a job. So if you're not looking, if
• 19:23
  Speaker 1: you're taking a break from from seeking gainful employment, even
• 19:27
  Speaker 1: if you're not employed, you're not technically counted as unemployed.
• 19:32
  Speaker 1: So it really does a poor job of giving us
• 19:35
  Speaker 1: a true sense of the jobless level in the United States,
• 19:39
  Speaker 1: again with those millions Americans sitting on the sideline, not
• 19:42
  Speaker 1: actively participating in the labor market. Hey, Lindsay, just real quickly,
• 19:46
  Speaker 1: do you have a recession US recession in your model
• 19:49
  Speaker 1: in your forecast? I don't have a technical recession priced
• 19:53
  Speaker 1: into the model. My bigger concern is a longer run,
• 19:56
  Speaker 1: non accelerating economic scenario for the US a otomy falls
• 20:00
  Speaker 1: to a top line GDP rate of less than one
• 20:03
  Speaker 1: percent for an extended period of time. To me, that's
• 20:06
  Speaker 1: the scarier forecast than an outright you're special, Lindsay, thanks
• 20:09
  Speaker 1: so much for joining us. Lindsay Piega, chief economist for
• 20:12
  Speaker 1: Stipo Financial, joining us on the phone from Chicago, getting
• 20:15
  Speaker 1: her thoughts on the economic outlook. Generally, the economy remains
• 20:19
  Speaker 1: a quite strong slower growth, certainly relative to the prior
• 20:23
  Speaker 1: two years, but most forecasters looking for a two percent
• 20:26
  Speaker 1: ish type of growth in led by the consumer. We
• 20:30
  Speaker 1: are maybe seeing some stabilization in manufacturing business investment, but
• 20:34
  Speaker 1: still the weaker of the two. The consumer continues to
• 20:37
  Speaker 1: drive the US economy PG and E. That has been
• 20:55
  Speaker 1: a huge question for a lot of BEAT people as
• 20:58
  Speaker 1: they look to the biggest utility in California and wonder
• 21:01
  Speaker 1: what is the future facing bankruptcy, facing a bankruptcy restructuring. Luckily,
• 21:07
  Speaker 1: at Kit Conteledge has been monitoring all of the iterations
• 21:12
  Speaker 1: of this dragged out deal. Kit Contoledge is senior Industrials
• 21:16
  Speaker 1: and Utilities analyst for Bloomberg Intelligence. Just to sort of
• 21:19
  Speaker 1: give a sense of the latest pg N he shares
• 21:22
  Speaker 1: are sinking today after California rejected their restructuring proposal, Kit,
• 21:28
  Speaker 1: bring us up to speed. Why did California reject this um? I?
• 21:32
  Speaker 1: You know, it's it's such a detailed letter that the
• 21:37
  Speaker 1: governor sent to pg NY that there's there's a lot
• 21:40
  Speaker 1: of reasons. Let's put it that way. It sounds like
• 21:42
  Speaker 1: the governor wants uh kind of new corporate governance. Uh.
• 21:48
  Speaker 1: He wants uh stronger sounds like much stronger, uh financial
• 21:53
  Speaker 1: structure to the company. Uh. He wants guarantees that if
• 21:58
  Speaker 1: things go wrong, the state can take it over. I
• 22:01
  Speaker 1: think there's a lot of things there that it's hard
• 22:03
  Speaker 1: to say how they would be structured. And so where
• 22:07
  Speaker 1: we go from here. So he's put out a lot
• 22:10
  Speaker 1: of of markers and targets, but exactly how it gets
• 22:15
  Speaker 1: resolved in a way that the company can run in
• 22:17
  Speaker 1: the future is is very puzzling to me. So, Kate,
• 22:21
  Speaker 1: you've color covered the utility utility industry for many many years.
• 22:25
  Speaker 1: Give us a sense of how long can a utility
• 22:27
  Speaker 1: continue to operate under bankruptcy? Like can they just kind
• 22:31
  Speaker 1: of do this in perpetunity as long as I'm still
• 22:33
  Speaker 1: paying my bill and the other folks in californiare paying
• 22:35
  Speaker 1: their bill. Boy, That's that's a tough one. Uh. I mean,
• 22:38
  Speaker 1: I think clearly, Uh, nobody has an interest in a
• 22:42
  Speaker 1: utility just go and belly up and you know, not running.
• 22:47
  Speaker 1: Somebody's got to run the operation. And I think when
• 22:51
  Speaker 1: push comes to shove, the governor knows that PG and
• 22:54
  Speaker 1: he knows that, the financial people know that and so on. So, uh,
• 22:58
  Speaker 1: you know, it's not going to go on forever, but
• 23:01
  Speaker 1: I think there's a lot of game playing that can
• 23:05
  Speaker 1: go on here. And the governor wants to establish how
• 23:08
  Speaker 1: tough he is on the utility. The utility does don't
• 23:10
  Speaker 1: want to give away the store so that the shareholders
• 23:13
  Speaker 1: have have nothing left. And then you have the bond
• 23:16
  Speaker 1: holder position, which would basically wipe out the equity in
• 23:20
  Speaker 1: the utility and they'd take it over. But whether the
• 23:24
  Speaker 1: governor wants out of state hedge funds running the utility
• 23:28
  Speaker 1: is also a question. So you know, it's a question
• 23:31
  Speaker 1: of what's the least bad outcome. Maybe here kit just
• 23:35
  Speaker 1: to sort of paint the picture here, we see p
• 23:38
  Speaker 1: g N shares down today more than thirtent. Obviously, it's
• 23:42
  Speaker 1: been a terrible year for pg NY and the stems
• 23:45
  Speaker 1: from the wildfires and the liability that potentially will stem
• 23:49
  Speaker 1: from that. So that's the sort of company side of things.
• 23:54
  Speaker 1: There's also the investor side of things, and this has
• 23:57
  Speaker 1: been one of the top bets for distress debt investors.
• 24:00
  Speaker 1: A lot of different players getting involved here. Can you
• 24:03
  Speaker 1: give us a sense of who they are and how
• 24:05
  Speaker 1: much money is at stake here? Well, the um you know,
• 24:09
  Speaker 1: total enterprise value of the company is of course goes
• 24:13
  Speaker 1: up and down with the stock market every day, but
• 24:15
  Speaker 1: UH in the range of fifty billion dollars something like that.
• 24:18
  Speaker 1: So there are some very big bets by players like
• 24:23
  Speaker 1: Elliott UH for example, and on on the equity side.
• 24:29
  Speaker 1: There's UH Abrams and Pimco is involved on the debt side.
• 24:34
  Speaker 1: So UH, it's a big position where if you have
• 24:39
  Speaker 1: a strong ability to analyze this situation, you can make
• 24:44
  Speaker 1: a lot of money or potentially lose a lot of money.
• 24:46
  Speaker 1: And we don't know exactly where everybody's position is because
• 24:49
  Speaker 1: obviously you can be long or short or heads along
• 24:53
  Speaker 1: the way. So, Kid, one of the big issues that
• 24:56
  Speaker 1: that I learned about when this story first broke is
• 24:59
  Speaker 1: this whole concept that you know, there's these utilities in
• 25:02
  Speaker 1: California with the wildfires. There's really nothing to protect them.
• 25:07
  Speaker 1: I mean, so these fires keep coming every year, and
• 25:09
  Speaker 1: these guys are on the hook, and it seems like
• 25:13
  Speaker 1: you know, and and a lot of its just active
• 25:14
  Speaker 1: god kind of stuff. But is there a scenario during
• 25:18
  Speaker 1: this restructuring where maybe from a legal perspective, they get
• 25:21
  Speaker 1: a little bit of protection that if a lightning strikes
• 25:23
  Speaker 1: and or even if one of our equipments puts a
• 25:26
  Speaker 1: spark out there and burns down, that we're not you
• 25:29
  Speaker 1: can't put us out of business. Every single year we
• 25:31
  Speaker 1: keep coming back to this place. Well, ideally from the
• 25:34
  Speaker 1: utilities viewpoint, they would like an end to this inverse condemnation.
• 25:39
  Speaker 1: That's legal the legal rule where which says basically, if
• 25:43
  Speaker 1: their equipment can be connected in any way with the fire,
• 25:47
  Speaker 1: and it doesn't have to be proved that they did
• 25:49
  Speaker 1: anything wrong quote unquote, but just it was there when
• 25:53
  Speaker 1: the fire started kind of things. So it's easy for
• 25:55
  Speaker 1: the lawyers to prove that they were somehow part of
• 25:59
  Speaker 1: the problem them. Then everything is is their financial burden.
• 26:03
  Speaker 1: And so obviously in a state the size of California,
• 26:06
  Speaker 1: that can be a very big number very quickly. Um,
• 26:10
  Speaker 1: that's a killer. Uh. It's partly mitigated now by the
• 26:14
  Speaker 1: fact that the state has put out a future rule
• 26:19
  Speaker 1: where beginning middle of next year, UH, twenty one billion
• 26:25
  Speaker 1: dollars some from the utilities, some from the state will
• 26:28
  Speaker 1: be in a fund UH that will go to the utilities.
• 26:31
  Speaker 1: If there is a big fire, So you know, the
• 26:34
  Speaker 1: state's trying to set up and and I think the
• 26:36
  Speaker 1: market has gotten a little bit comfortable with that setup
• 26:39
  Speaker 1: of there's at least some protection so that they you know,
• 26:42
  Speaker 1: it's not one year everything has wiped out your back
• 26:45
  Speaker 1: in bankruptcy. Has it ever been more exciting to cover utilities?
• 26:48
  Speaker 1: So I'll tell you that, well cover one utility anyway,
• 26:51
  Speaker 1: or or the California utilities. I guess that there's also
• 26:55
  Speaker 1: there was a lot of talk initially about having some
• 26:57
  Speaker 1: sort of state operated utility. That seems to not be
• 27:00
  Speaker 1: on the table anymore. No one wants to actually take responsibility.
• 27:04
  Speaker 1: I think that you know, the cooler heads might realize
• 27:09
  Speaker 1: that having local governments run a gigantic utility like this,
• 27:14
  Speaker 1: it's not impossible. It's done. Los Angeles has a local utility,
• 27:20
  Speaker 1: Sacramento has a local utility. Whether San Jose would have
• 27:24
  Speaker 1: a local utility in San Francisco, uh, it would. It
• 27:28
  Speaker 1: would be a huge issue. There are still people who
• 27:31
  Speaker 1: own these wires and power plants that would have to
• 27:35
  Speaker 1: be paid off, and so the complexity gets, you know,
• 27:39
  Speaker 1: to levels of magnitude if if you also have somebody
• 27:43
  Speaker 1: buying the assets while you have a bankruptcy to work
• 27:45
  Speaker 1: out any sense of timing how this we get a
• 27:49
  Speaker 1: conclusion to this um. Everybody wants to see it done
• 27:54
  Speaker 1: by next June because that's when that wildfire fund I
• 27:58
  Speaker 1: was talking about kicks in. So the governor, clearly, I think,
• 28:02
  Speaker 1: would would like to see that happen. You know, on
• 28:05
  Speaker 1: the one hand, he wants to be tough on these
• 28:06
  Speaker 1: guys and get the right deal from his point of view.
• 28:09
  Speaker 1: On the other hand, uh, he doesn't want it to
• 28:11
  Speaker 1: drag him forever. That would be uh an ugly situation
• 28:14
  Speaker 1: for him politically too, So I think there's some urgency
• 28:19
  Speaker 1: on the part of all parties. Now that doesn't mean that,
• 28:22
  Speaker 1: you know, any one step that somebody takes might not
• 28:25
  Speaker 1: push it out further, and you know it's an unintended consequence.
• 28:30
  Speaker 1: Thanks so much, Ki. He's a senior industrials and utilities
• 28:33
  Speaker 1: analysts rock and job these days to utilities analysts. Lots
• 28:36
  Speaker 1: of fun out, I mean on every level though, I mean, yes,
• 28:39
  Speaker 1: it's P G and E, but it's also this has
• 28:41
  Speaker 1: been the hotspot because bond yields have been going downs,
• 28:43
  Speaker 1: utilities have been in fire, so much excitement, so kick
• 28:46
  Speaker 1: Conlge Bloomberg Intelligence, thanks so much for joining us here
• 28:48
  Speaker 1: in our Bloomberg Interactive Broker Studios, we looked at Pacific
• 28:51
  Speaker 1: guests and Electrics. They try to resolve the crisis there.
• 28:53
  Speaker 1: They're in bankruptcy, trying to forge a deal to get
• 28:56
  Speaker 1: out of bankruptcy, but it is now a political process.
• 28:59
  Speaker 1: The governor California Governor Newsom has to sign off on
• 29:01
  Speaker 1: the deal and they're in the midst of negotiations. We
• 29:04
  Speaker 1: will continue to cover that story. Thanks for listening to
• 29:07
  Speaker 1: the Bloomberg P and L podcast. You can subscribe and
• 29:09
  Speaker 1: listen to interviews at Apple Podcasts or whatever podcast platform
• 29:12
  Speaker 1: you prefer. I'm Paul Sweeney. I'm on Twitter at pt Sweeney.
• 29:15
  Speaker 1: I'm Lisa abram Woy. It's I'm on Twitter at Lisa A.
• 29:18
  Speaker 1: Bram wits one before the podcast, you can always catch
• 29:20
  Speaker 1: us worldwide. I'm Bloomberg Radio.