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Here’s Why U.S. Housing Will Get Even Less Affordable: Shilling · Bloomberg Intelligence

0:05
Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
0:08
Speaker 1: Along with my co host Lisa Bramowitz. Each day we
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Speaker 1: bring you the most important, noteworthy, and useful interviews for
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Speaker 1: you and your money, whether you're at the grocery store
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Speaker 1: or the trading floor. Find the Bloomberg p m L
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Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. Lennar
0:33
Speaker 1: is surging today on the prospects of continuing to build
0:36
Speaker 1: homes and continuing to have people buy them even as
0:39
Speaker 1: they become less affordable. Joining us now is Gary Shilling.
0:43
Speaker 1: He is a Bloomberg Opinion Calmness. We're always happy to
0:46
Speaker 1: have him on his president of a Gary Shilling and Co. Gary,
0:51
Speaker 1: you wrote a column saying US housing will get even
0:54
Speaker 1: less affordable. Why, well, they're not. A reason for that
1:01
Speaker 1: one is that the construction costs have gone up, Labor
1:05
Speaker 1: costs have gone up. A lot of the carpenters, masons, uh,
1:09
Speaker 1: plumbers and so on that came from Mexico and elsewhere
1:13
Speaker 1: in Central America. Uh, when the housing boom, they've gone home.
1:18
Speaker 1: And with immigration policy, it's harder for those people to
1:21
Speaker 1: come back. And also economic conditions are better in Mexico,
1:24
Speaker 1: so they're happier to stay there. You've also had increases
1:27
Speaker 1: in lumber cost is of paraffon imported Canadian lumber, and
1:33
Speaker 1: there have been forest fires and insect damage in the
1:36
Speaker 1: Pacific Northwest which you've added, which has added the costs.
1:40
Speaker 1: Uh so, And and you also also in terms of
1:46
Speaker 1: the cost you simply have a lot of builders who
1:49
Speaker 1: are in effect concentrating on a higher cost houses because
1:54
Speaker 1: those are people who can't afford them, lower lower income
1:58
Speaker 1: people a lot of times they don't have a credit
2:00
Speaker 1: scores and so on. So villers are saying, I'll concentrate
2:02
Speaker 1: on the area where people are less price sensitive. So
2:06
Speaker 1: you really do have in effect a shift to higher,
2:10
Speaker 1: higher cost housing. And it's it's a number of factors.
2:15
Speaker 1: Gary Shilling maybe explain why is it that a segment
2:20
Speaker 1: of the economy residential construction, which accounts for just four
2:24
Speaker 1: of g d P, Why is this such an important
2:28
Speaker 1: area it has a bigger effect. Well, it's bigger. It's
2:32
Speaker 1: bigger pen because it is so volatile and its last
2:35
Speaker 1: recession really proved it. Now this was this was really
2:39
Speaker 1: driven by the collapse in the subprime mortgage sector, and
2:43
Speaker 1: it took the economy with it, but you had their
2:46
Speaker 1: UH decline. Housing at its peak was six point seven
2:52
Speaker 1: of g d P in late two thousand five, then
2:55
Speaker 1: it went to two and a half percent two point
2:57
Speaker 1: five percent of GDP in two thousand eleven. Well, that
3:02
Speaker 1: collapse of four point two percentage points of GDP in itself,
3:06
Speaker 1: that is a major recession. It's a matter of fact,
3:08
Speaker 1: the whole economy declined attempt to less four point one
3:12
Speaker 1: percent of was housing collapse account for more than they
3:15
Speaker 1: declined in the economy and that recession that was the
3:18
Speaker 1: worst sense in myteen thirty So it's it's a volatility
3:21
Speaker 1: and a lot of it has to do with the
3:23
Speaker 1: fact that housing is driven by by interest rates. Is
3:27
Speaker 1: highly leverage. You think about it, if you had a
3:29
Speaker 1: company that was leverage where you can get an f
3:32
Speaker 1: h A loan three and a half percent down, Well,
3:34
Speaker 1: if you had a company that that that had only
3:37
Speaker 1: that amount of capital and the rest was piled you say, boy,
3:41
Speaker 1: their way over leverage. But actually housing is so it's
3:44
Speaker 1: very sensitive interest rates. And then of course you also
3:46
Speaker 1: had that banans of people rushing into subprime mortgages are
3:50
Speaker 1: ridiculing afford them, so it was augmented the whole the
3:53
Speaker 1: whole cycle on the downside. Well, Gary, I'm just trying
3:55
Speaker 1: to understand what the path forward is because a lot
3:58
Speaker 1: of people are lamenting the lack of affordable inventory here.
4:02
Speaker 1: You're you're predicting that there isn't gonna be much more
4:04
Speaker 1: of it because builders aren't really being incentivized to build it,
4:07
Speaker 1: and and just the materials and the labor is more expensive.
4:10
Speaker 1: So going forward, Uh, this this would seem to be
4:14
Speaker 1: supportive of prices right, um, but in the wrong places.
4:19
Speaker 1: In other words, that it's going to be perhaps cheaper
4:21
Speaker 1: to buy homes on the high end, but it's going
4:24
Speaker 1: to get more and more difficult to buy more affordable homes. Yeah,
4:28
Speaker 1: and you see that in the in the inventories. Uh uh,
4:32
Speaker 1: there is a lot more inventory, you know, months surply,
4:36
Speaker 1: Uh that the the inventory relative to the sales in
4:39
Speaker 1: the latest month that is much higher in new houses
4:43
Speaker 1: than there's for existing houses. And existing houses tend to
4:46
Speaker 1: be cheaper. So in effect, you just don't have the
4:49
Speaker 1: existing Housesn't that you haven't had a turnover four four
4:52
Speaker 1: babies are staying in their houses, they're working longer, allow
4:56
Speaker 1: of them need to. They don't have the income to retire.
4:59
Speaker 1: You had a huge shopping up of of used houses,
5:03
Speaker 1: existing houses brought out of foreclosure by institutional investors, and
5:08
Speaker 1: they and they tend to hang on to them. They
5:10
Speaker 1: turn don't turn over as fast as normal homeowners. And
5:13
Speaker 1: that's the that's the key reason. Both these are key
5:15
Speaker 1: reasons that the that the length of time that people
5:18
Speaker 1: are staying in the house now is ten years. It
5:20
Speaker 1: used to be six years. So you just don't have
5:22
Speaker 1: a turnover. You don't have the available supply, particularly of
5:25
Speaker 1: existing houses. Garrett, we've been talking about supply. We've spoke
5:29
Speaker 1: about the effect of the housing industry on the overall economy.
5:33
Speaker 1: Give you about a minute or so, tell us about
5:35
Speaker 1: the demand side right now. Well, the demand side is
5:39
Speaker 1: seeing is being hurt by a number of factors. One
5:42
Speaker 1: is affordability. Uh, particularly for younger people, they simply do
5:45
Speaker 1: not have the money the assets. I mean, you know,
5:48
Speaker 1: the average the average person under under thirty five has
5:52
Speaker 1: got savings of five thousand dollars or lett doesn't go
5:55
Speaker 1: very far in terms of buying a house. Uh. Student
5:59
Speaker 1: loans are big pressing a factor for many of these people.
6:02
Speaker 1: Credit scores. They've brightened up since the Great Recession and
6:05
Speaker 1: housing collapse, and they can't meet the credit scores. Uh.
6:09
Speaker 1: So you have a number of factors here that really
6:12
Speaker 1: make it much more difficult for people to uh to
6:16
Speaker 1: afford houses. And you can say this is an imbalance
6:19
Speaker 1: and it shouldn't exist forever, but what it really means
6:22
Speaker 1: there is a lot more people are being forced to
6:24
Speaker 1: to rent now new homes. First time buyers are increasing,
6:29
Speaker 1: no question about it. And the gap between mortgages and
6:33
Speaker 1: between the mortgages and rents is closing in favor of
6:37
Speaker 1: owning owning a house, but it's got a long way
6:40
Speaker 1: to go. Thank you very much, Gary Shilling. He is
6:43
Speaker 1: the president of a. Gary Shilling and Company. He is
6:46
Speaker 1: also a Bloomberg opinion columnists. He also is a wonderful
6:51
Speaker 1: honey producer. He has his own bees. Yes he does. Yes,
6:56
Speaker 1: yeah a p R. I think it's the term. Well done.
7:00
Speaker 1: Thanks very much, Gary Shilling. Hey, Gary Shilling and Company.
7:17
Speaker 1: All right, time to talk about commodities with Mike mcloan,
7:20
Speaker 1: our commodity strategist for Bloomberg Intelligence. He joins us here
7:24
Speaker 1: in our eleven three oh studio and Alan burga agriculture
7:26
Speaker 1: reporter for Bloomberg News. He joins us from our Bloomberg
7:30
Speaker 1: nine one studios in Washington, d C. And of course
7:33
Speaker 1: you can follow Alan on Twitter at Alan Burga. That's
7:37
Speaker 1: b J E r g A. Uh, Mike. I want
7:41
Speaker 1: to begin with you because let's get the price action
7:44
Speaker 1: first of all, and a little bit of the pain.
7:45
Speaker 1: Let's start with soybeans. What has been going on. If
7:48
Speaker 1: you're a soybean farmer, you're not happy. You're not happy
7:52
Speaker 1: with prices, You're happy with production. That's the one problem.
7:55
Speaker 1: The good, excellent conditions for this month are the best
7:58
Speaker 1: they've been in decades, in fact, basically right at the
8:01
Speaker 1: two thousand eleven peak. And I was there in the
8:03
Speaker 1: Midwest last weekend and I've just never seen the crop
8:06
Speaker 1: look this good, notably in corn, but soybeans are the
8:08
Speaker 1: main expert. We have to China, so good conditions, um
8:13
Speaker 1: export trade tensions, and then of course the plunge in
8:17
Speaker 1: the Brazilian real has been basically a perfect storm for soybeans.
8:20
Speaker 1: So looking forward, the question is is this perfect storm sustainable?
8:24
Speaker 1: And from these levels it's unlikely. So Allen, come on
8:27
Speaker 1: in here. I mean, what could potentially alter this backdrop,
8:31
Speaker 1: which is a perfect storm to send corn and soybean
8:34
Speaker 1: prices plummeting and uh and leave and leave a lot
8:38
Speaker 1: of crops out there, uh without a lot of profit margin. Well,
8:42
Speaker 1: there's two things you could do. I mean, one is
8:44
Speaker 1: sort of the perennial, which is weather. If you have
8:47
Speaker 1: we're getting to to a sensitive period in terms of
8:49
Speaker 1: the germination of the crops for corn and soybeans. If
8:52
Speaker 1: you have a hot dry spell in the US Midwest,
8:55
Speaker 1: that would change the crop out look. Um. Of course,
8:57
Speaker 1: you can always hope if you're a U. S. Farmer
8:59
Speaker 1: for lack of rain somewhere else. I mean, this is
9:01
Speaker 1: a global market with global supply and demand. So those
9:04
Speaker 1: are a couple things. That's that's one thing. That The
9:06
Speaker 1: other thing, of course, is the policy environment. I mean,
9:08
Speaker 1: somebody could blink in the trade war, or the trade
9:10
Speaker 1: war could be called off, or something could be done
9:13
Speaker 1: in that regard. Another factor is the U. S. Department
9:16
Speaker 1: of Agriculture keep saying that that they're going to have
9:18
Speaker 1: US farmers backs. That could be through some stepped up
9:22
Speaker 1: commodity purchases in the short term that could help support
9:25
Speaker 1: prices in the case of a trade war, but you
9:27
Speaker 1: in the long run it would just contribute to a
9:29
Speaker 1: supply overhang. So that's got to kind of present a
9:32
Speaker 1: bit of a mixed picture for the market. Alan a
9:34
Speaker 1: little bit more on these policy wars, perhaps on a
9:36
Speaker 1: product that isn't necessarily is widely traded anymore, and this
9:40
Speaker 1: has to do with cheese and dairy products, particularly on
9:43
Speaker 1: the Canadian border. What have you been hearing? You know,
9:46
Speaker 1: A lot of the attention on terry and cheese has
9:49
Speaker 1: been with with Canada and the tariffs that they have
9:52
Speaker 1: on US products and their system of supply management, which
9:55
Speaker 1: is something that's become very controversial in the NAFTA talks.
9:58
Speaker 1: I would actually draw some of your mentioned to Mexico.
10:01
Speaker 1: I mean, for the very reason that Canada doesn't gavel
10:04
Speaker 1: out of US market share. It's not actually a big
10:07
Speaker 1: supplier a big issue on the markets. Mexico, on the
10:10
Speaker 1: other hand, is our biggest export destination, and when you
10:13
Speaker 1: start to see some of these duties go into effect
10:16
Speaker 1: with Mexico, exports have really what have been supporting dairy
10:19
Speaker 1: markets um and if you see that cut off from
10:22
Speaker 1: the largest customer, now we see a return to dairy
10:25
Speaker 1: gluts that could be very difficult for producers. Mike, come
10:27
Speaker 1: on in here. I just want to broaden out and
10:29
Speaker 1: take take take a step back and look at commodities overall.
10:33
Speaker 1: Bloomberg Commodities index actually has declined for yet a fourth week.
10:37
Speaker 1: That is its worst run in more than a year.
10:41
Speaker 1: And this comes right after months after behemets from Pimco
10:45
Speaker 1: to Goldman. Sachs said, commodities is the place to go.
10:47
Speaker 1: This is the bullish bet of the year. It has
10:50
Speaker 1: not been. Is it it has not been? Is it
10:52
Speaker 1: because of the stronger dollar? Is it because of the
10:55
Speaker 1: trade talk? Is it just a perfect storm in a
10:57
Speaker 1: lot of different areas. When we're talking not just props,
11:00
Speaker 1: we're talking also zinc, We're talking aluminum, We're talking a
11:03
Speaker 1: whole bunch of things. I think you nail at first.
11:05
Speaker 1: With the dollar. The dollar had a pretty weak first
11:08
Speaker 1: first few months of the year. In the last few months,
11:11
Speaker 1: basically since the end of March, the Bloomberg dollar necks
11:13
Speaker 1: is up about five six percent, and guess what, the
11:15
Speaker 1: Bloomberg commodity necks is down almost exactly the same amount.
11:18
Speaker 1: So the dollar is a key thing. Also, we've seen
11:20
Speaker 1: a peak in energy and crude oil prices. And what's
11:23
Speaker 1: really been more surprising is this this plunge in metals,
11:26
Speaker 1: and I think the metals at a very good support level.
11:28
Speaker 1: Obviously they're the most dollars sensitive, that's the key area.
11:31
Speaker 1: And then aggs now aggs are really the ones getting
11:34
Speaker 1: hit by trade tensions the most. So these kind of
11:37
Speaker 1: areas and these levels of question is is this somewhat
11:40
Speaker 1: perfect storm the last few months for commodities last month
11:43
Speaker 1: really is it sustainable? I think it's unlikely, unlikely. What
11:47
Speaker 1: does that mean? So where people are people actually following
11:49
Speaker 1: that that that strategy? Well, yes, I think overall the
11:52
Speaker 1: commodity market looks like it's still in a pretty very
11:54
Speaker 1: solid recovering period. Now. It had got a little too
11:57
Speaker 1: enthusiastic earlier near and my main risk is that crewel
12:00
Speaker 1: would peak, and it did, and to me, the main
12:03
Speaker 1: potential upside is probably an agriculture and the eggs. But
12:06
Speaker 1: now that's a little bit far away from now. But
12:08
Speaker 1: as our prey previous, as Allen mentioned, you know, the
12:11
Speaker 1: market has still has not even you know, we haven't
12:13
Speaker 1: started July in August and that's the key month for eggs.
12:15
Speaker 1: But overall. The key thing to remember commanity is this
12:18
Speaker 1: bool markets only three years old. Look at stock markets
12:20
Speaker 1: about ten years old. And the key issues a dollar.
12:23
Speaker 1: If we if this dollar rally, which looks like it's unsustainable,
12:26
Speaker 1: if it peaks out soon, the commodity market should come
12:28
Speaker 1: right back, and it probably is going to. So Allen,
12:30
Speaker 1: come on in here, because I know you've you've got
12:32
Speaker 1: a lot of connections to the farming world and you've
12:36
Speaker 1: been tracking it for years, and I would love to
12:38
Speaker 1: get your sense of whether farmers kind of view this
12:42
Speaker 1: the same way as Mike was just portraying it, that
12:44
Speaker 1: this is just a perfect storm largely driven by the
12:48
Speaker 1: dollar rally that will reverse probably in short order. Or
12:52
Speaker 1: are they viewing this as something more substantial that they're
12:55
Speaker 1: that they're more concerned about. Well, it kind of depends
12:57
Speaker 1: on what you mean by this. If you're talking about
13:00
Speaker 1: some of the short term issues in terms of trade
13:02
Speaker 1: flows with China and wars with exporters, I do think
13:05
Speaker 1: the sentiment is is that something that could be a
13:07
Speaker 1: short term pain, but you know there is a hope
13:10
Speaker 1: for a long term gain there. You know, farm country
13:12
Speaker 1: tends to be very supportive of President Trump, and when
13:14
Speaker 1: they're told that he'll have farmers backs and in the
13:17
Speaker 1: long run this will lead to a better trade environment,
13:19
Speaker 1: a lot of them are willing to believe that message.
13:22
Speaker 1: But in terms of the overall commodities outlook, I don't
13:25
Speaker 1: think we've seen enough um in terms of adjustment to
13:28
Speaker 1: supply and demand for farmers to truly be confident that
13:32
Speaker 1: this sort of dull drum period that we've been in
13:35
Speaker 1: for about the past half decade is really going to change.
13:39
Speaker 1: You know, American farmers, in terms of their productivity, can
13:42
Speaker 1: often be their the greatest enemy. And and other you know,
13:44
Speaker 1: world productive producers from Brazil and Argentina to the Black
13:47
Speaker 1: Sea region have really up their gain too. And so
13:50
Speaker 1: from the macro standpoint of supply and demand and global agriculture,
13:55
Speaker 1: regardless of the headlines of the day, there has been
13:57
Speaker 1: a production and and and demand imbalance that even though
14:02
Speaker 1: this year we're seeing some progress on it for the
14:04
Speaker 1: first time in about five six years, it's still something
14:08
Speaker 1: that is very concerning an agriculture country. And I think
14:10
Speaker 1: you would need to have to three years of demand
14:13
Speaker 1: outstripping supply before farmers would feel really confident again. Thank
14:17
Speaker 1: you so much for joining us both of you. I
14:19
Speaker 1: personally have been really interested in the idea that you've
14:22
Speaker 1: seen this sell off in commodities after so many firms
14:25
Speaker 1: that this was the place to go. Mike mclognan, Commodity
14:29
Speaker 1: Strategies for Bloomberg Intelligence, Alan berga Bloomberg agricultural reporter. Thank
14:33
Speaker 1: you to both of you. Now we're going to get
14:49
Speaker 1: smarter on General Electric with Karen Yubilhart, our industrials analyst
14:53
Speaker 1: for Bloomberg Intelligence. Karen, if the ge healthcare business is
14:58
Speaker 1: such a great business, why are selling the business? I
15:02
Speaker 1: think that they needed to get smaller in a big way,
15:06
Speaker 1: and uh, they can't really do much with them Power
15:10
Speaker 1: aviation is their ground jewel. I think they the numbers worked.
15:15
Speaker 1: It is a different kind of business versus the other
15:18
Speaker 1: you know, industrial businesses they're in, and they can really
15:21
Speaker 1: pull a lot of cash out of it and solve
15:23
Speaker 1: a lot of their other problems. What's left, Uh, Well,
15:27
Speaker 1: the aviation business, which is the engine business and the
15:30
Speaker 1: all the after related aftermarket and digital etcetera. And that's
15:34
Speaker 1: a very very good business with margins almost twenty uh
15:39
Speaker 1: so that's a keeper and Power, which is a problem
15:42
Speaker 1: so they've got a great business and a problem business,
15:45
Speaker 1: but there is upside uh if they can just shrink
15:48
Speaker 1: power enough. So that's a multi year thing though, So
15:52
Speaker 1: what's the narrative that's driving the shares up seven today?
15:55
Speaker 1: That they took a big move that they gave us
15:58
Speaker 1: numbers are going to reduce step by twenty five billion dollars.
16:02
Speaker 1: A bunch of a lot of the pension is going
16:05
Speaker 1: with healthcare, which was another you know, um thing around
16:08
Speaker 1: their neck. And so some of these real financial balanchee
16:12
Speaker 1: cash full problems can go away with the magnitude of
16:16
Speaker 1: the money they can draw from these other assets sales,
16:18
Speaker 1: which includes by the way Baker use what happens to
16:21
Speaker 1: the dividend, Well, the dividend will stay intact as long
16:26
Speaker 1: as the entity is intact, but when they split it
16:28
Speaker 1: up in aggregate, the dividend will probably be lower. The
16:32
Speaker 1: industrial they will seek to get a yield in line
16:34
Speaker 1: with the industrial peers, which will be about to two
16:38
Speaker 1: point to two point three percent yield, and then the
16:41
Speaker 1: healthcare business will have a lower yield, so net uh,
16:44
Speaker 1: it will be down. However, solving these other problems I
16:49
Speaker 1: think matters significantly more to the stock. Let's go to
16:52
Speaker 1: the conspiracy theories, Karen. Right now, I just want to
16:55
Speaker 1: bring up what Dave Wilson noted earlier today. He was saying,
16:59
Speaker 1: it's so interesting ge was just booted from the Dow
17:02
Speaker 1: Jones Index and now it announces the spinoff and it
17:05
Speaker 1: shares our surging. Do you think that the removal of
17:08
Speaker 1: the company from the Dow Jones Index actually had anything
17:12
Speaker 1: to do with its decision to to do these sales? Now,
17:17
Speaker 1: I think the timing was I would think there was
17:20
Speaker 1: a little bit of planned timing on that front actually,
17:23
Speaker 1: because it happened the same day, right, Um, But I
17:27
Speaker 1: don't think a decision might would have the decision would
17:30
Speaker 1: have changed because new GI is going to still be
17:32
Speaker 1: a much smaller, smaller company. Right. But I think the
17:35
Speaker 1: timing is interesting. Well, I mean that the point being
17:38
Speaker 1: here that there's less pressure on General Electric to be
17:41
Speaker 1: a behemoth, and there's less pressure to sort of maintain
17:45
Speaker 1: a certain veneer of anything. They can go try to
17:48
Speaker 1: do whatever makes sense for their business, um, without having
17:51
Speaker 1: to worry about getting booted out of the index because
17:53
Speaker 1: they already happen. Yeah, I don't think they'd make big
17:56
Speaker 1: decisions based on that. I think all of this stuff
17:58
Speaker 1: was well under way, but I agree it lifts something
18:01
Speaker 1: that frankly didn't matter much to the you know, the
18:04
Speaker 1: prospects for the company, but it was a news that
18:07
Speaker 1: people worried about. Oh, they're gonna get taken out. They're
18:09
Speaker 1: gonna get taken out. Well, that's behind us now, Baker Hughes,
18:12
Speaker 1: what's the future there? Uh, you know, he got a
18:14
Speaker 1: lot of heat because that is um and I said,
18:16
Speaker 1: he could have monetized very easily, could have and um
18:20
Speaker 1: he the Flannery CEO. Flannery said, look, I'm not going
18:24
Speaker 1: to do something quickly just because you want me to
18:26
Speaker 1: do something quickly. I want to get the benefits of
18:28
Speaker 1: an oil recovery, and I'm not going to sell it now.
18:31
Speaker 1: So he said, he'll sell it over two or three years.
18:33
Speaker 1: You'll probably sell it in pieces. Strategically they made that
18:36
Speaker 1: made sense, but he had such cash issues that you know,
18:39
Speaker 1: there was a question of whether he'd be able to
18:41
Speaker 1: do that. And now by monetizing healthcare, he gets some
18:46
Speaker 1: flexibility to wait for a rebound. What's next for them
18:49
Speaker 1: to sell? You know, I think we're kind of done.
18:53
Speaker 1: I mean, there might be some little bits and pieces
18:55
Speaker 1: in power. Uh, you know that business. The core of
18:58
Speaker 1: it is the large gay since steam turbines. But there
19:01
Speaker 1: are some other businesses like a small grid business for example,
19:04
Speaker 1: you know, transmission and distribution business. Um, there's a few
19:08
Speaker 1: other smaller things in power he might want to prune,
19:12
Speaker 1: but the big stuff with these two moves is pretty
19:15
Speaker 1: much done. Karen Eu wil Heart, thank you. That was
19:18
Speaker 1: really really illuminating and explains why the shares are up
19:21
Speaker 1: nearly seven p I'm curious about the whole conversation they
19:25
Speaker 1: must have had about all right, we're out of the
19:27
Speaker 1: down jones, so you don't think it's anything he's giving
19:30
Speaker 1: me this look of incredible. I mean that, as Karen said,
19:36
Speaker 1: I think that timing is interesting and that may have
19:38
Speaker 1: had something to do with it, but I can't imagine
19:40
Speaker 1: that the decision to actually do it fair enough Karen,
19:44
Speaker 1: you wil Hurt, by the way, it's Industrials analyst for
19:47
Speaker 1: Bloomberg Intelligence. We always love getting Hurt insights. It is
20:04
Speaker 1: an official The Department of Labor's fiduciary rule is dead.
20:09
Speaker 1: Let's find out what that means from Elliott Wise. Bluthy
20:12
Speaker 1: is the founder and the chief executive of High Tower Advisors.
20:16
Speaker 1: They're based in Chicago and help manage approximately fifty billion
20:21
Speaker 1: dollars of customer assets, and I'm sure by the time
20:24
Speaker 1: you get done with the interview, they will manage even
20:26
Speaker 1: more than fifty billion dollars for customer assets. Elliott, thanks
20:30
Speaker 1: very much for coming into the studio. Maybe just refresh
20:33
Speaker 1: quickly the people. The fiduciary rule, which was proposed by
20:36
Speaker 1: the Department of Labor had to do with retirement accounts,
20:39
Speaker 1: but that rule is dead exactly. So this was I
20:42
Speaker 1: think that the latest attempt um well intended, and we
20:46
Speaker 1: applauded the effort for the agency to implement a true
20:50
Speaker 1: fiduciary rule. And for the folks that are listening that
20:53
Speaker 1: may not be familiar with that term, you know, think
20:56
Speaker 1: think about the way doctors follow the hippocratic oath, or
21:00
Speaker 1: a way a lawyer follows a duty to put the
21:02
Speaker 1: client interest first. It's a very simple concept. There's no
21:06
Speaker 1: caveats to it, there's no exceptions to it. Either you
21:10
Speaker 1: put the client interest first or you put your own
21:13
Speaker 1: interest first. It's it's really that simple. So when when
21:16
Speaker 1: you see the regulators producing thousands of pages of reports
21:20
Speaker 1: trying to explain a very simple concept. You know that
21:23
Speaker 1: there's been influences that have come to bear to make
21:26
Speaker 1: it complicated. And as I say to individuals that we
21:31
Speaker 1: talked to clients a lot, if you're confused about whether
21:34
Speaker 1: your advisor has a fiduciary duty, or if you're confused
21:38
Speaker 1: that they're putting your interest first or not, they're probably not.
21:42
Speaker 1: And there's a good reason why there's confusion. So last attempt. Again,
21:46
Speaker 1: we've been watching this for years. There was God Frank,
21:48
Speaker 1: there was the d O L, there's the sec UH.
21:51
Speaker 1: It's dead for now. VISAVI this effort, but it will
21:54
Speaker 1: come back. The fiduciary duty discussion is not going away.
21:57
Speaker 1: One thing. It is also not going away conflicts of
22:00
Speaker 1: interest when it consolutely management tell us about that. Well,
22:04
Speaker 1: we started High Tower in two thousand and seven just
22:07
Speaker 1: on the eve of the credit crisis, which was a
22:09
Speaker 1: massive example of conflicts of interest, and unfortunately in the
22:13
Speaker 1: past ten years not a lot has changed in the
22:17
Speaker 1: way certain parts of the industry operate. And to keep
22:20
Speaker 1: it very simple, if you can get paid a couple
22:23
Speaker 1: of different ways, and the person to whom you're looking
22:27
Speaker 1: for advice is getting paid one way, and and and
22:31
Speaker 1: the product or the service that you're being sold has
22:34
Speaker 1: also generated profits elsewhere inside that business. You have a
22:38
Speaker 1: conflict of interest, and that conflict of interest is pernicious
22:42
Speaker 1: inside of inside of these firms, it results in lots
22:45
Speaker 1: of proven example, so people understand this could be things
22:47
Speaker 1: like mutual funds. This could be so for example, if
22:51
Speaker 1: if a financial advisor and an institution says to you,
22:55
Speaker 1: I'm going to charge you one point one basis point
23:00
Speaker 1: hundred basis points or one percent point on your assets,
23:03
Speaker 1: and I get fifty of those basis points as my compensation,
23:07
Speaker 1: and then we pay fifty basis points to the platform
23:10
Speaker 1: of products. And look at all these products we have
23:12
Speaker 1: and different funds, equity funds and fixed income funds, all
23:15
Speaker 1: sorts of funds. And you pay fifty cents or fifty
23:19
Speaker 1: basis points for that product and fifty basis points for
23:21
Speaker 1: the fee. The client might think, well, that sounds like
23:24
Speaker 1: a reasonable proposition. What the client doesn't know is that
23:28
Speaker 1: the actual money manager who's behind that platform may only
23:33
Speaker 1: get thirty five basis points of the fifty basis points
23:37
Speaker 1: that the client is paying the firm. So the the
23:40
Speaker 1: institution gets a percentage of the fifty basis points paid
23:43
Speaker 1: to the financial advisor, and then hidden is a second
23:47
Speaker 1: layer of fees fifteen basis points, that is the cost
23:51
Speaker 1: between the product and what are charging the clients. So
23:54
Speaker 1: that second layer of fee is a very simple example
23:58
Speaker 1: of how the firm is getting paid twice. What's the
24:01
Speaker 1: alternative or what is an alternative? The alternative is the
24:03
Speaker 1: client should have complete transparency into the cost, and at
24:08
Speaker 1: High Tower, for example UH, a client would know what
24:11
Speaker 1: the fees are of their products and they would have
24:14
Speaker 1: transparency into how much they were paying their financial advisor.
24:18
Speaker 1: So pure transparency in a very simple fashion is one
24:22
Speaker 1: way to illuminate if a conflict exists or not. And if,
24:27
Speaker 1: as many people have complained over the years, you have
24:30
Speaker 1: a hard time understanding from your statement exactly how much
24:33
Speaker 1: you're paying the firm, then that confusion is probably covering
24:37
Speaker 1: up conflicts of interest. Tell us about banks as UH
24:42
Speaker 1: money managers and the wealth divisions of banks. So a
24:46
Speaker 1: number of years ago, there was a very famous argument
24:49
Speaker 1: that said it would be beneficial for the client if
24:52
Speaker 1: you brought together different types of financial activities. You should
24:56
Speaker 1: bring an insurance company with a bank lending company with
25:00
Speaker 1: an asset management company, trading companies, and if you brought
25:03
Speaker 1: all this other under one roof, presumably you would get
25:06
Speaker 1: quote unquote synergies and that would be better for the client. Well,
25:09
Speaker 1: the synergy part was right, but what didn't happen is
25:13
Speaker 1: that the benefit didn't go to the client. The benefit
25:15
Speaker 1: went to the firm. And so many of the people
25:17
Speaker 1: that thought that would benefit the client have now changed
25:20
Speaker 1: their story and recognized it's better to have those pieces separated.
25:24
Speaker 1: So if you go to a bank, you know the
25:26
Speaker 1: product you're getting from the bank, and you know the
25:28
Speaker 1: fees that you're paying. If you go to an asset
25:30
Speaker 1: manager whose job it is to pick stocks or pig bonds,
25:34
Speaker 1: you know how much you're paying for that service. And
25:36
Speaker 1: if you go to a fiduciary financial advisor, in the
25:40
Speaker 1: same way if you went to see a doctor or
25:42
Speaker 1: a lawyer, you would know that that professional owed you
25:46
Speaker 1: a legal duty to put your interest first and that
25:50
Speaker 1: there was no behind the curtain, multiple layers of fees
25:54
Speaker 1: or conflict of interest that would impair the service provider
25:57
Speaker 1: providing services that were in your interest. Out the firms.
26:01
Speaker 1: I want to turn your attention now to something that
26:03
Speaker 1: you've brought under the roof, and this is an acquisition
26:07
Speaker 1: that you made in Texas. Tell us about what High
26:09
Speaker 1: Towers doing there. Well. So the folks down in Houston, Texas,
26:14
Speaker 1: the name of the company as Salient, and the professionals
26:18
Speaker 1: there are are truly outstanding. High Tower has a collection
26:23
Speaker 1: across the entire country of some of the finest financial
26:26
Speaker 1: advisors from many, many different firms, and we take a
26:29
Speaker 1: lot of pride in discharging the fiduciary duty and putting
26:34
Speaker 1: our clients interest first. And the folks that that joined
26:38
Speaker 1: us out of Texas have been building that level of
26:41
Speaker 1: fiduciary energy and passion for for many, many years. They
26:44
Speaker 1: were already fiduciaries when we met them, and they were
26:47
Speaker 1: thrilled to find our infrastructure and technology and culture to
26:51
Speaker 1: partner up with us. What came along with that is
26:54
Speaker 1: that they were running a trust company as well. So
26:56
Speaker 1: High Tower not only picked up a whole slew of
26:59
Speaker 1: very fine professionals and a presence in a great state
27:02
Speaker 1: of Texas, we also picked up a new capability that
27:05
Speaker 1: we can now extend across the country to our other clients.
27:08
Speaker 1: All Right, So in maybe thirty thirty five seconds. Given
27:11
Speaker 1: that you've put this together, do you have in your
27:15
Speaker 1: mind what is what you consider to be a fair
27:18
Speaker 1: fee structure for the typical retail investor. Sure? So, fair
27:22
Speaker 1: fee schedule is best defined by the relationship between the
27:26
Speaker 1: advisor and the client. So one of the areas that
27:29
Speaker 1: we take a lot of pride in at High Tower
27:31
Speaker 1: is we respect the sophistication of our financial advisors. We
27:35
Speaker 1: respect them in their choices on products, we respect them
27:39
Speaker 1: in their choices and how to build portfolios, and we
27:42
Speaker 1: respect them on how they think they should generate a
27:46
Speaker 1: fee from their clients. So there's a tremendous amount of
27:48
Speaker 1: flexibility for our financial advisors to look at the human
27:52
Speaker 1: beings they service and come up with fair fees. Thanks
27:56
Speaker 1: very much for being with Elliott Weissbluth. He is the
27:58
Speaker 1: founder and the chief pigs executive of High Tower Advisors.
28:02
Speaker 1: They're based in Chicago, helping to manage about fifty billion
28:06
Speaker 1: dollars of customer assets. Thanks for listening to the Bloomberg
28:12
Speaker 1: P and L podcast. You can subscribe and listen to
28:14
Speaker 1: interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
28:19
Speaker 1: I'm Pim Fox, I'm on Twitter at pim Fox. I'm
28:23
Speaker 1: on Twitter at Lisa Abramo. It's one before the podcast.
28:26
Speaker 1: You can always catch us worldwide on Bloomberg Radio