Latest / Bloomberg Intelligence / Doritos Goes Organic to Break Into Amazon's Whole Foods, Kaplan Says

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Doritos Goes Organic to Break Into Amazon's Whole Foods, Kaplan Says · 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
• 0:11
  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
• 0:17
  Speaker 1: or the trading floor. Find the Bloomberg p m L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Right now,
• 0:32
  Speaker 1: we want to turn our attention to healthy dor Rito's
• 0:35
  Speaker 1: because it sounds so good and it's getting close to
• 0:38
  Speaker 1: that time of day when it is time for a snack.
• 0:40
  Speaker 1: Jenny Kaplan joins us right now. Jenny Kaplan is beverage,
• 0:43
  Speaker 1: tobacco and Cannabis reporter for Bloomberg News, and she joins
• 0:46
  Speaker 1: us in our eleven three oh studios. So, Jenny, you know,
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  Speaker 1: I'd love to get your sense on, first of all,
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  Speaker 1: why it's taken so long for some of these traditional
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  Speaker 1: junk food purveyors to health if I some of these foods,
• 0:59
  Speaker 1: and whether there's really an appetite for that. Well, PepsiCo
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  Speaker 1: generally and and Fridol specifically has been working for some
• 1:07
  Speaker 1: time to make healthier versions of their snacks. Both these
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  Speaker 1: core brands like Doritos and Cheetos and tostitos, and also
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  Speaker 1: create new products, new kinds of snacks that fit with
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  Speaker 1: the consumer. What's really driving this is consumers want better
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  Speaker 1: for you products, and that's in the snack part of
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  Speaker 1: PepsiCo's portfolio and the beverage part of the portfolio, and
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  Speaker 1: they're working towards that. But to get a dorrito to
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  Speaker 1: qualifies organic isn't totally simple task. I mean, if you
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  Speaker 1: think of a dorito, it has that bright orange cheese.
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  Speaker 1: I mean, I think it's not not not generally, I
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  Speaker 1: don't think. So it's definitely a challenge, and technology is
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  Speaker 1: improved and they're trying to get more and more of
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  Speaker 1: these products to qualify for these growing natural parts of
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  Speaker 1: the supermarket. What about the purchase of whole foods by
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  Speaker 1: Amazon that's got to feed into this conversation. And because
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  Speaker 1: you know there's a gate, you're not getting into Amazon
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  Speaker 1: if you're not the following all their rules and regulations
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  Speaker 1: in terms of what the food contains or what it
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  Speaker 1: doesn't contain. So there's some speculation by analysts that I've
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  Speaker 1: spoken with that this is actually going to be helpful
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  Speaker 1: for big companies like Freedo, Lay and getting some of
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  Speaker 1: these healthier products into whole foods. So Amazon already carries
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  Speaker 1: this line of chips called simply that are simply Doritos,
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  Speaker 1: simply Cheetos, that that fit technically the whole Foods guidelines
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  Speaker 1: but aren't actually in whole foods yet. Okay, So first
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  Speaker 1: of all, you know, when you say healthier, I just
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  Speaker 1: am seeing air quotes around all of that, because, first
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  Speaker 1: of all, I can't imagine that the actual nutritional value
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  Speaker 1: will change all that much. But I'm also wondering how
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  Speaker 1: much more is the price tag going to be on
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  Speaker 1: health if I junk food? It's a great question. The
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  Speaker 1: healthier segment of the snack market is what's growing at
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  Speaker 1: an accelerated pace, and part of that is because people
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  Speaker 1: are willing to pay more for products that they think
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  Speaker 1: are healthier or have cleaner labels, you know, don't have
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  Speaker 1: those things that people are trying to avoid, like GMOs
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  Speaker 1: or artificial colors or flavors or preservatives. So PepsiCo as
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  Speaker 1: a whole is trying to push into this higher market,
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  Speaker 1: higher margin market where they can charge more because the
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  Speaker 1: consumers willing to pay for it. Well, didn't Pepsi already
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  Speaker 1: buy into this uh, this business right. I mean, didn't
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  Speaker 1: they make a purchase that would allow them to then
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  Speaker 1: get in. I mean they bought Stacy's pita chips, right, correct.
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  Speaker 1: Stacy's is already in whole foods UH, and they have
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  Speaker 1: other products and their portfolio that are either in or qualified.
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  Speaker 1: But what's really important to talk about here is that
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  Speaker 1: these are the simply line is covering their core brands,
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  Speaker 1: So it's things like Fritos and Dorrito's. These are the
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  Speaker 1: big money makers for Freedo lay and for PepsiCo as
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  Speaker 1: a whole. And if they don't figure out a way
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  Speaker 1: to sort of push these big brands a little bit
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  Speaker 1: towards premium, there they risk getting caught on the one
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  Speaker 1: hand by value plays and on the other hand by
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  Speaker 1: these healthier and more expensive snacks. Well, Jenny, can you
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  Speaker 1: give us a sense of how these Doritos, Torito tostitos
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  Speaker 1: and other ETOs that they sell, how they're actually doing.
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  Speaker 1: I mean, have they actually seen some kind of cannibalization
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  Speaker 1: in that whole uh line based on the increase in
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  Speaker 1: desire for for healthier foods. So, based on my reporting,
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  Speaker 1: all of these chip brands are still doing pretty well.
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  Speaker 1: They've actually managed to avoid some of the trouble that Pepsi,
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  Speaker 1: for example, has gotten in on the soda side of things,
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  Speaker 1: because people are still snacking. But when they took steps
• 4:37
  Speaker 1: to make products more healthy, as in, for example, they
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  Speaker 1: have reduced sodium Lays just regular lays, but with less salt,
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  Speaker 1: and they've actually pushed growth, accelerated growth beyond what the
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  Speaker 1: rest of the Lays portfolio is doing. So they've sort
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  Speaker 1: of proven that healthier products work to drive sales. And
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  Speaker 1: I think largely people who are buying the in the
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  Speaker 1: natural aisle. It's not necessarily cannibalizing. Maybe those are customers
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  Speaker 1: who've moved away from the products altogether and now they're
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  Speaker 1: willing to do it. I will just say full disclosure.
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  Speaker 1: My eight year old son absolutely loves lace, and when
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  Speaker 1: I've tried to give him the baked not fried ones,
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  Speaker 1: he has rejected them. It's like these aren't lace. So
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  Speaker 1: I mean, there is also the gold Star gold star
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  Speaker 1: for what least healthy aspect of food, but he definitely
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  Speaker 1: distinguishes it. So I imagine others will too. I mean,
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  Speaker 1: I don't know if you tried simply, but do they
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  Speaker 1: really taste the same well, it's funny. A lot of
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  Speaker 1: these chips. I mean, if you think about plain Lays
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  Speaker 1: potato chips, they already pretty much fit into this category.
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  Speaker 1: Like there aren't a lot of crazy ingredients in a
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  Speaker 1: Plaine bag of lace. They're basically like potatoes with oil
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  Speaker 1: and salt. So some things it's making me feel a
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  Speaker 1: little better. Yeah, some things, it's pretty similar. And it
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  Speaker 1: really is sort of the messaging that's changed. Other things
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  Speaker 1: like Doritos and Cheetos. You have to imagine that the
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  Speaker 1: ingredients are pretty different, So it's sort of depends on
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  Speaker 1: which brand you're talking about. But I think the big
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  Speaker 1: message here is that it's really in the marketing and
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  Speaker 1: the messaging and trying to appeal to this different set
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  Speaker 1: that isn't already picking up a bag of you know,
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  Speaker 1: chips in their normal grocery shopping. All right, Well, like,
• 6:17
  Speaker 1: just talk briefly about something that we know is off
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  Speaker 1: the healthy chart because it's not smoking and cigarettes and
• 6:23
  Speaker 1: the cost of a pack of cigarettes in the city
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  Speaker 1: of New York. Tell us what's happening. So cigarettes in
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  Speaker 1: New York have just been the bottom price has just
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  Speaker 1: been raised by um. It's now going to cost at
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  Speaker 1: least thirteen dollars a pack to buy cigarettes in New
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  Speaker 1: York City. That's the highest in the country. New York
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  Speaker 1: was already the most expensive place to buy cigarettes in
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  Speaker 1: the country, but it's raised even higher, so it's tough
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  Speaker 1: to get cigarettes here. Well, when New York originally rose
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  Speaker 1: prices on cigarettes, was there a material decline in smoking rates.
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  Speaker 1: There is evidence that raising prices leads to declines in
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  Speaker 1: in purchasing volumes. That being said, New York is one
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  Speaker 1: of the places in the country that has the highest um,
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  Speaker 1: the highest amounts of people basically selling cigarettes that aren't
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  Speaker 1: legally HU sees basically in other things. And people who
• 7:18
  Speaker 1: go to pick your state and then they come back
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  Speaker 1: with these huge cartons of cigarettes and they sell them
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  Speaker 1: out of their back trunks. I've seen that happen. Yeah,
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  Speaker 1: I'm from North Carolina originally, and I will say that
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  Speaker 1: when I first got to New York, just looking in
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  Speaker 1: windows and seeing how much cigarettes cost, it's just insane
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  Speaker 1: to think of the difference. I mean, it makes sense
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  Speaker 1: that there are people who make a business off of
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  Speaker 1: driving to other states and coming back here and selling
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  Speaker 1: them for a higher price but still lower than that
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  Speaker 1: thirteen dollars a pack. Well, and and also I believe
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  Speaker 1: that they're gonna be a pro there's going to prohibition
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  Speaker 1: on pharmacies selling tobacco products when their licenses come up
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  Speaker 1: for renewal. We'll see the s has already stopped selling cigarettes. Um,
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  Speaker 1: they made a push saying, you know, we're about trying
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  Speaker 1: to CVS health exactly, We're trying to be a company
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  Speaker 1: that promotes health. We're not going to do this, but
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  Speaker 1: it's interesting, it's gonna it's gonna be a big deal.
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  Speaker 1: It's gonna have a big impact on the industry. Um,
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  Speaker 1: when there are fewer and fewer places you can buy cigarettes.
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  Speaker 1: That being said, the consumers very loyal, I mean smokers
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  Speaker 1: will buy have proven that they will continue to buy
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  Speaker 1: cigarettes no matter what the prices. So it's it's sort
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  Speaker 1: of we'll have to see whether this really has an
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  Speaker 1: impact on smoking rates or not so loyal that some
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  Speaker 1: could say that they're addicted. Jenny, sir, and thank you
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  Speaker 1: so much for joining us. Uh, Jenny Kaplan and thank
• 8:40
  Speaker 1: you so much for joining us. Truly a pleasure having you.
• 8:42
  Speaker 1: Jenny Kaplan is Beverage, Tobacco and Cannabis reporter for Bloomberg News,
• 8:46
  Speaker 1: joining us in our eleven at three oh studios. All
• 9:00
  Speaker 1: Tropical Storm Harvey has now prompted at least fourteen US
• 9:04
  Speaker 1: refineries to shut or reduce production. This affects about four
• 9:07
  Speaker 1: million barrels a day of US processing capacity. That's around
• 9:12
  Speaker 1: of the nation's total. Here to tell us more about
• 9:15
  Speaker 1: commodities energy as well as agricultural is Mike mcgloane. He
• 9:19
  Speaker 1: is our commodity strategist for Bloomberg Intelligence. He joins us
• 9:23
  Speaker 1: here in our studio and Sal GILBERTI. He is the
• 9:26
  Speaker 1: president and the chief investment officer and co founder of
• 9:29
  Speaker 1: a two cream trading based in Brattleboro, Vermont. Sal, I
• 9:32
  Speaker 1: want to begin with you because I know we're gonna
• 9:34
  Speaker 1: talk a lot about energy, but I want to give
• 9:35
  Speaker 1: you the opportunity to just set the stage in terms
• 9:39
  Speaker 1: of what is the agricultural dynamic for farmers and for
• 9:45
  Speaker 1: end markets such as cotton. Sure, cotton is a big one.
• 9:50
  Speaker 1: Cotton has taken an enormous hit. Farmers were expecting a
• 9:53
  Speaker 1: bumper crop and cotton, particularly in Texas and um As
• 9:57
  Speaker 1: We've seen from articles and news reports and in the
• 10:00
  Speaker 1: street reports, a lot of the cotton even even cotton
• 10:02
  Speaker 1: that was harvested was damaged because the storm basically ravaged
• 10:06
  Speaker 1: cotton that was in storage, cotton that was sitting on
• 10:09
  Speaker 1: the docks, cotton that was harvested in on the sides
• 10:11
  Speaker 1: of the field. So content a big impact, and we've
• 10:14
  Speaker 1: seen a price rallying cotton the last two weeks in
• 10:17
  Speaker 1: anticipation of that. I think what people uh haven't yet
• 10:21
  Speaker 1: factored in and in fact the markets are making new
• 10:24
  Speaker 1: loads as we speak in corn and soybeans, is that
• 10:27
  Speaker 1: in the path of Harvey, the current path uh as
• 10:30
  Speaker 1: it's it's headed up into um Louisiana, Arkansas, Mississippi, Tennessee.
• 10:35
  Speaker 1: There are unharvested bushels of corn, They're unharvested bushels of
• 10:39
  Speaker 1: soybeans out there that represent roughly um of the corn
• 10:44
  Speaker 1: of the projected ending stocks for this year's crop, and
• 10:47
  Speaker 1: UM potentially threatened our the equivalent of about eighty three
• 10:51
  Speaker 1: of the potential soybean surplus. Now, those those things aren't
• 10:55
  Speaker 1: all going to be damaged, but I think you may
• 10:57
  Speaker 1: take the chains the balance sheet. There's a ential to
• 11:00
  Speaker 1: change the balance sheet here, which could potentially support prices. Well, yeah,
• 11:03
  Speaker 1: I was just about to say, of the soybeans surplus
• 11:08
  Speaker 1: could get affected and possibly even wiped out. I mean,
• 11:11
  Speaker 1: based on the trajectory of the storm, what's your projection
• 11:15
  Speaker 1: for how big the damage might be to some of
• 11:17
  Speaker 1: these unharvested crops. It's really a stunning number. I think
• 11:21
  Speaker 1: it entirely depends for corn on wind at this point.
• 11:24
  Speaker 1: If the crops get wet, it's okay. It may raise
• 11:28
  Speaker 1: the cost a bit, because you've got to dry your
• 11:29
  Speaker 1: corn once you harvested. Soybeans is another matter. If they're
• 11:32
  Speaker 1: if they're sitting in water for a while, they're they're
• 11:35
  Speaker 1: not quite as far along as corn in their maturity. Um,
• 11:38
  Speaker 1: there could be some significant damage. Now, you're not gonna
• 11:41
  Speaker 1: lose all those crops. Crops are used to being rained upon.
• 11:43
  Speaker 1: But because we're making such extreme price loads right now,
• 11:47
  Speaker 1: and because actually there's a seasonal A year ago today, cotton, corn,
• 11:51
  Speaker 1: and soybeans all price bommed and there's a seasonal strength
• 11:55
  Speaker 1: that comes in beginning in September for all of those crops.
• 11:58
  Speaker 1: So Harvey may actually support a seasonable season seasonality effect
• 12:04
  Speaker 1: of bottoming prices on those three crops. And again, cotton
• 12:07
  Speaker 1: has already rallied but corn and soybeans, no one, No
• 12:09
  Speaker 1: one seems to be looking at them right now. Well,
• 12:10
  Speaker 1: we're gonna look at them after you said so, of course.
• 12:13
  Speaker 1: But I want to bring Mike McGlone into this because
• 12:16
  Speaker 1: Mike uh I got the report that Motiva Enterprises Port
• 12:19
  Speaker 1: Arthur facility, which is the largest in the United States,
• 12:22
  Speaker 1: is said to be shutting because of severe flooding issues.
• 12:25
  Speaker 1: Tell us about the availability of refined product, because you know,
• 12:28
  Speaker 1: if you've got soybeans, if you have corn, you're gonna
• 12:31
  Speaker 1: need to get it to market. Yeah, that's been the
• 12:34
  Speaker 1: key factor in the energy market from the hurricane is
• 12:37
  Speaker 1: this reduction supply, most notably of distillate, which means number
• 12:40
  Speaker 1: one unleaded gas and diesel. So what's happened so far
• 12:44
  Speaker 1: as obviously unletting gas has taken off. It's now a
• 12:46
  Speaker 1: fourteen percent on the year versus w t I down
• 12:49
  Speaker 1: down fourteen percent, which is blown out the crack spread,
• 12:52
  Speaker 1: and the crack spread is the indication is when you
• 12:54
  Speaker 1: take crude a bear of crude oil and you converted
• 12:57
  Speaker 1: to unleaded gas, and when that moves out means refineries
• 13:00
  Speaker 1: are making money. But the key thing that's happening is
• 13:02
  Speaker 1: it's reducing this supply. Now that supply is going to
• 13:06
  Speaker 1: come back, it just doesn't be it's not replaced. It's
• 13:09
  Speaker 1: going to reduce inventories and gasoline inventories which are historically high.
• 13:12
  Speaker 1: But the key thing is before the hurricane, inventories are
• 13:15
  Speaker 1: already trending down, so should accelerate that. It's obviously accelerating
• 13:18
  Speaker 1: the increase in in um a lot of gas prices,
• 13:22
  Speaker 1: so it's helping rebalance the US energy market. One issue though,
• 13:25
  Speaker 1: it's reducing exports, which are on a bowl market trend,
• 13:28
  Speaker 1: so that's gonna hurt for a little while. Well, and
• 13:30
  Speaker 1: it's sort of interesting when you say rebalance that should
• 13:33
  Speaker 1: end up helping crude values, I would think, because if
• 13:36
  Speaker 1: there's a rebalancing and diminishing of the supplies eventually down
• 13:39
  Speaker 1: the line, you would guess that the demand for crude
• 13:43
  Speaker 1: would go up, and yet the values declining again. Yet
• 13:47
  Speaker 1: it again today. Yeah, Well that's part of it because
• 13:49
  Speaker 1: now that we were bringing down the refining of I mean,
• 13:52
  Speaker 1: all crude oils essentially really worthless until it's refined, So
• 13:56
  Speaker 1: once it's refined and has values, we're bringing down that
• 13:58
  Speaker 1: refinery demand which is obviously reducing demand for w t I.
• 14:02
  Speaker 1: So the key thing is what's happening is Brent. W
• 14:04
  Speaker 1: t I has moved out in Brent, which is global
• 14:06
  Speaker 1: sea Born is doing fine. That it's getting it's seen
• 14:10
  Speaker 1: reduced supply of w t I in the market, reduced prices,
• 14:13
  Speaker 1: and that's blowing that spread out. But overall this is
• 14:17
  Speaker 1: a bullish indication. It's just showing up in the distalates
• 14:19
  Speaker 1: more and unletting guess the key thing underlying this before
• 14:22
  Speaker 1: that people need to remembers these trends were already fabled
• 14:24
  Speaker 1: before the hurricane. In one bottom line is the declining
• 14:27
  Speaker 1: value of the dollar overall, that was a very fable
• 14:29
  Speaker 1: trend for all and all commodity prices, most note and
• 14:33
  Speaker 1: definitely medals. Yeah, that's continuing. Thank you so much, Mike mclown,
• 14:37
  Speaker 1: commodity strategist for Bloomberg Intelligence, and of course our thanks
• 14:40
  Speaker 1: to Sal GILBERTI. He's president and founder of two Creum
• 14:44
  Speaker 1: Trading and focusing on uh, those soybeans and that corn
• 14:48
  Speaker 1: that has yet to be harvests and what effect I
• 14:51
  Speaker 1: could have on the U. S economy and those particular commodities. Well,
• 15:06
  Speaker 1: there was a headline today on the Bloomberg from stocks
• 15:10
  Speaker 1: two bonds, the bear market signals are multiplying, to get
• 15:14
  Speaker 1: a sense of whether that's an accurate reflection of the
• 15:17
  Speaker 1: risks that Hugh Johnson, thanks, we're gonna get talk with you. Johnson.
• 15:20
  Speaker 1: He's chairman and chief investment officer of Hugh Johnson Advisors,
• 15:23
  Speaker 1: which oversees one point two billion dollars and is based
• 15:26
  Speaker 1: in Albany, New York. Hugh, thank you so much for
• 15:29
  Speaker 1: joining us. So do you agree with the assessment that
• 15:32
  Speaker 1: the warning signs of some kind of broader deterioration in
• 15:36
  Speaker 1: markets is imminent. There's certainly some some warning signs when
• 15:41
  Speaker 1: you start to look at the performance of sectors, for example,
• 15:44
  Speaker 1: and you see that utility stocks have been performing very well.
• 15:48
  Speaker 1: That's ordinarily a very defensive sector of the market and
• 15:51
  Speaker 1: actually the best performing sector of the market during bear markets.
• 15:55
  Speaker 1: You also see, of course, large cap stocks. I think
• 15:57
  Speaker 1: it can be explained away, but large cap stocks out
• 16:00
  Speaker 1: forming small and mid cap stocks. And you see a
• 16:02
  Speaker 1: number of things in the credit markets, such as quality
• 16:05
  Speaker 1: spreads opening up a little bit, uh not much, but
• 16:08
  Speaker 1: a little bit. So you do see some signs, but
• 16:10
  Speaker 1: I think overwhelmingly if you take a look further back
• 16:13
  Speaker 1: towards the election, if you take a look at the
• 16:16
  Speaker 1: complete picture, which includes not just the signals coming from
• 16:20
  Speaker 1: the markets, but also important economic and monetary numbers. For example,
• 16:25
  Speaker 1: bank lending, money, growth, liquidity, leading indicators for the economy,
• 16:30
  Speaker 1: they say that we are further to go go in the
• 16:31
  Speaker 1: current cycle. So, yeah, you can be worried. You always
• 16:34
  Speaker 1: can be a little bit worried, as you know, Lisa,
• 16:36
  Speaker 1: But I think that you'd be probably overstating the worrieds
• 16:40
  Speaker 1: by moving to too much towards cash or a very
• 16:43
  Speaker 1: defensive beer market position. Hugh, can you be bullish on
• 16:47
  Speaker 1: stocks and accept the possibility that there will be no
• 16:50
  Speaker 1: tax reform bill, that there will be no change in
• 16:54
  Speaker 1: financial regulations at least as far as approval from the
• 16:58
  Speaker 1: Congress is concerned. I'm not talking about executive actions here.
• 17:01
  Speaker 1: I can be very bullish on stocks PIM, but I
• 17:03
  Speaker 1: can be very concerned about valuation. Uh, they're really evaluation
• 17:08
  Speaker 1: when you know, you know, and I know, and I
• 17:10
  Speaker 1: think we all kind of know are since that the
• 17:12
  Speaker 1: economy is growing at a very slow pace, And when
• 17:14
  Speaker 1: you take that, it doesn't give you the kind of
• 17:17
  Speaker 1: earnings numbers that would really justify the current levels of stocks,
• 17:20
  Speaker 1: or might say we're fairly valued, but the upside potential
• 17:24
  Speaker 1: is fairly limited. So something has to happen to give
• 17:27
  Speaker 1: us the kind of earnings that we really need to
• 17:29
  Speaker 1: get the market to go on the upside. One of
• 17:32
  Speaker 1: the two things would be, of course, tax reform that
• 17:34
  Speaker 1: would give us a little bit of a lift to
• 17:36
  Speaker 1: corporate profits and U S and P five earnings. But
• 17:39
  Speaker 1: quite frankly, you know, if you reduce the corporate rate
• 17:42
  Speaker 1: to two to it gives you some upside from the
• 17:46
  Speaker 1: current level, and it gives you some better earnings eight
• 17:49
  Speaker 1: percent instead of six percent through two eighteen, but not
• 17:52
  Speaker 1: not quite, not a whole lot. Uh. The The real
• 17:56
  Speaker 1: thing that has to happen is that the consensus forecast
• 17:58
  Speaker 1: for earnings, which is much brighter than I think that
• 18:02
  Speaker 1: the economic forecast will allow. Statistically, the consensus forecast is
• 18:08
  Speaker 1: really optimistic. If you get that, you can make the
• 18:11
  Speaker 1: case for higher stock prices. So I'd be bullish, but
• 18:14
  Speaker 1: I'd be very concerned or worried or concerned about the valuations.
• 18:18
  Speaker 1: So what's your heads right now? Well, my heade right
• 18:21
  Speaker 1: now is I'm not buying to the real hedge is
• 18:23
  Speaker 1: not buying any stocks at current levels. I'm maintaining or
• 18:25
  Speaker 1: preserving my current you know, allocation to equities. For an
• 18:29
  Speaker 1: account or a portfolio that says, let me have fifty
• 18:33
  Speaker 1: and equities and the balance being in fixed income, I'm
• 18:36
  Speaker 1: about six. The question is what I add to that
• 18:39
  Speaker 1: portfolio at current levels. And given those concerns about valuation
• 18:44
  Speaker 1: uncertainty about valuation, I have to say that no. Look,
• 18:47
  Speaker 1: I look for a better entry point, and a better
• 18:49
  Speaker 1: entry point would be somewhere, be in the neighborhood of
• 18:52
  Speaker 1: four to seven percent below current levels. And I think
• 18:55
  Speaker 1: you know, with the volatility of the news that we're
• 18:57
  Speaker 1: getting the international news, particularly North Korea, things like that
• 19:02
  Speaker 1: could touch off a correction which would get us down
• 19:04
  Speaker 1: to levels that make much more sense. We've got to
• 19:06
  Speaker 1: have a better, better entry point, Lisa, what if you're
• 19:10
  Speaker 1: an investor who is willing to take on more risk?
• 19:13
  Speaker 1: What would you recommend if someone wants to put the
• 19:16
  Speaker 1: pedal to the metal and says, you know what, I
• 19:18
  Speaker 1: think this is going higher and I really want to participate. Well,
• 19:22
  Speaker 1: we've got plenty of clients that are just like that.
• 19:24
  Speaker 1: Most of them right now are a little bit cautious,
• 19:26
  Speaker 1: which is sort of surprises me given the performance of
• 19:29
  Speaker 1: the markets. But if they want pedal to the metal,
• 19:31
  Speaker 1: and the first thing I'd say is, look, you know,
• 19:34
  Speaker 1: don't don't don't have a your guidelines, say fifty stocks,
• 19:38
  Speaker 1: fifty percent bonds. You know, give give me a little
• 19:41
  Speaker 1: bit more room, say that, raise your target for equities,
• 19:45
  Speaker 1: in which case I'd probably be up around in stock.
• 19:48
  Speaker 1: So it's really up to the client to say, if
• 19:51
  Speaker 1: I want pedal to the metal, I want to raise
• 19:53
  Speaker 1: my allocation equities or my target, and I would be
• 19:55
  Speaker 1: raising it from fifty eight. And then if you want
• 19:59
  Speaker 1: to do something, oh about that. You buy the kinds
• 20:02
  Speaker 1: of things that really work in bowl markets. And of
• 20:04
  Speaker 1: course technology has been a great performer, great relative performance,
• 20:08
  Speaker 1: and there's a lot of companies in the technology sector,
• 20:12
  Speaker 1: well known names, which are the kinds of stocks that
• 20:15
  Speaker 1: you want to own in the portfolio. And you might
• 20:17
  Speaker 1: buy some small cap but believe me, that has not
• 20:19
  Speaker 1: been performing well. C Is there any asset that you're
• 20:22
  Speaker 1: selling right now? Uh? No, there's no asset that I'm
• 20:25
  Speaker 1: really selling other than the fact that I'm reducing my
• 20:28
  Speaker 1: exposure as best I can uh to fixed income because
• 20:32
  Speaker 1: my expectation is we've got higher rates. I don't think
• 20:35
  Speaker 1: I'm the first person to say that. In fact, I've
• 20:37
  Speaker 1: been saying it for four years and haven't really gotten
• 20:39
  Speaker 1: a whole lot of it. But nevertheless, I really think
• 20:42
  Speaker 1: that the handwritings on the wall of it's going to
• 20:44
  Speaker 1: move towards restraint in response to that short long rates
• 20:47
  Speaker 1: going up. So it's not so much that I'm bailing
• 20:49
  Speaker 1: out of fixed income, but I'm really reducing my duration
• 20:53
  Speaker 1: or maturities or however you want to say it. UM
• 20:56
  Speaker 1: in fixed income securities, I'm trying to avoid it, and
• 20:59
  Speaker 1: then I'm avoid things like um, you know, consumer staples.
• 21:03
  Speaker 1: I really don't like it as a defensive sector. Uh,
• 21:06
  Speaker 1: telecommunications avoiding it. It's a very defensive sector. You want
• 21:10
  Speaker 1: maybe on a little bit there, but you want to
• 21:13
  Speaker 1: underweight that those are defensive sectors. They don't work in ballmarkets.
• 21:16
  Speaker 1: Just it's that simple. You've heard a lot of shure
• 21:19
  Speaker 1: about the emerging markets, people trying to move money outside
• 21:22
  Speaker 1: the United States. You buy that trade, I do. I do.
• 21:26
  Speaker 1: We've done that recently, you know, for the longest time
• 21:29
  Speaker 1: of him. As you know, the international markets generally emerging
• 21:34
  Speaker 1: and developed just significantly underperformed US markets. And I mean
• 21:38
  Speaker 1: I'm talking about ten years so more recently, and I
• 21:42
  Speaker 1: really mean this year two thousand and seventeen, we've seen
• 21:45
  Speaker 1: positive relative performance in response to improving economic numbers and
• 21:49
  Speaker 1: earnings numbers coming from other parts of the world. So
• 21:51
  Speaker 1: we've raised our exposure to international We raised it from
• 21:55
  Speaker 1: a very low, almost non existent number, up to seven
• 21:58
  Speaker 1: to ten percent of a portolio that that of the
• 22:01
  Speaker 1: equities in a portfolio. That doesn't sound like a lot,
• 22:03
  Speaker 1: that sounds like a fairly low allocation, but it's pretty
• 22:06
  Speaker 1: pretty meaningful change for US. So yeah, I do buy it.
• 22:09
  Speaker 1: I buy I buy buying the emerging as well as developing,
• 22:14
  Speaker 1: and but be a little bit careful. I won't warn
• 22:16
  Speaker 1: everybody to be a little bit careful about China, where
• 22:19
  Speaker 1: we have debt levels that, as you know, are not
• 22:22
  Speaker 1: at all low. There's a lot of risk, a lot
• 22:24
  Speaker 1: of leverage, and a lot of risk in China. It
• 22:26
  Speaker 1: sounds like a little bit of treading water at this point,
• 22:29
  Speaker 1: waiting for something to happen. Yeah, yeah, it's something that happened.
• 22:32
  Speaker 1: At least, then I think what I'd love to see happen,
• 22:34
  Speaker 1: and I've been waiting a long time for this. We
• 22:36
  Speaker 1: haven't gotten it yet. Is really the decline in stocks
• 22:40
  Speaker 1: to levels that make a lot more sense. Valuation continues
• 22:44
  Speaker 1: to be a very big concern. And then you have
• 22:46
  Speaker 1: to say that primarily because you try to make the
• 22:49
  Speaker 1: case for better economy, better earning, stronger economy, stronger earnings,
• 22:54
  Speaker 1: and you can't do it. It's it's two to two
• 22:56
  Speaker 1: point three growth in the economy and under those conditions
• 23:00
  Speaker 1: you don't get the kind of earning. Such a really
• 23:02
  Speaker 1: neat Thank you, Hugh Johnson, well said Chairman, chief investment
• 23:06
  Speaker 1: officer Hugh Johnson Advisors, helping to manage more than one
• 23:09
  Speaker 1: point to billion dollars and joining us from Albany, New York.
• 23:25
  Speaker 1: US second quarter growth was revised upwards, suggesting there is
• 23:29
  Speaker 1: more momentum than some people have been expecting. Uh in
• 23:32
  Speaker 1: the US economy. Of course, there still is a huge
• 23:35
  Speaker 1: question of what the damages and the ongoing fallout from
• 23:39
  Speaker 1: Hurricane Harvey will do, as well as to turmoil in Washington,
• 23:43
  Speaker 1: and how much this will crimp future growth here. To
• 23:46
  Speaker 1: give us a better sense of that is Carla Kadonna
• 23:48
  Speaker 1: of course, our chief US economist for Bloomberg Intelligence, and
• 23:52
  Speaker 1: he joins us here in our eleven three oh studios, Carl.
• 23:56
  Speaker 1: How much of an effect will Hurricane Harvey have on
• 24:01
  Speaker 1: GDP in the US? Well, of course, there's a a
• 24:04
  Speaker 1: tremendous localized impact. Houston is the fourth largest metropolitan area, UH,
• 24:10
  Speaker 1: and we should see a range of economic data series impacted. However,
• 24:17
  Speaker 1: when we look at the national aggregate and look at
• 24:20
  Speaker 1: GDP UH impacts around the times of other major storms
• 24:25
  Speaker 1: via Katrina or Sandy or whatnot, UH, there's not likely
• 24:30
  Speaker 1: to be a huge national impact. And and here's part
• 24:33
  Speaker 1: of the reason why. Well, first of all, Houston is
• 24:36
  Speaker 1: only the fourth largest city, so the rest of you know,
• 24:39
  Speaker 1: much of the rest of the country can step in
• 24:43
  Speaker 1: uh to UH replace the production that may have been
• 24:46
  Speaker 1: taken off offline in Houston in some regards now, certainly
• 24:49
  Speaker 1: with you know, pipelines and oil refineries, that's not the case.
• 24:52
  Speaker 1: But in some other industries there can be some catch up.
• 24:56
  Speaker 1: But the other part of the story is here we
• 24:58
  Speaker 1: are in August, obviously, which means that there will be
• 25:01
  Speaker 1: a full month of rebuilding and reinvestment and repair and
• 25:06
  Speaker 1: replacement of the capital stock, which will actually lift economic activities.
• 25:11
  Speaker 1: So hurricanes have a tremendous negative impact on the capital stock,
• 25:16
  Speaker 1: but that stock not flow. GDP measures the flow of
• 25:20
  Speaker 1: production in the economy. Uh, and so GDP will actually
• 25:24
  Speaker 1: be partly boosted by the recovery efforts. One thing that
• 25:30
  Speaker 1: caught my eye this morning there was a report saying
• 25:32
  Speaker 1: that more than eight percent of the people who have
• 25:36
  Speaker 1: lost their homes to flooding in Houston do not have
• 25:39
  Speaker 1: flood insurance. And I have to wonder. I understand the
• 25:42
  Speaker 1: point that rebuilding creates some kind of economic growth, at
• 25:47
  Speaker 1: the same time, couldn't there potentially be a real hit
• 25:51
  Speaker 1: to the wealth of these individuals and their families. Absolutely,
• 25:55
  Speaker 1: there will be a wealth impact due to the unfortunate
• 25:59
  Speaker 1: circumstances of folks not being uh properly or adequately ensured,
• 26:04
  Speaker 1: whether it's their house or or other personal property like
• 26:06
  Speaker 1: autos and whatnot. However, those items will have to be
• 26:10
  Speaker 1: replaced as life goes on, and uh, you know, perhaps
• 26:13
  Speaker 1: they'll be renters for some time. But there will be
• 26:15
  Speaker 1: a big demand obviously for housing stock in and around
• 26:19
  Speaker 1: the Houston area, and there will be a big demand
• 26:21
  Speaker 1: for replacement of autos and those are UH, those will
• 26:25
  Speaker 1: lift the economic activity. So we have some period where
• 26:30
  Speaker 1: part of the economy is taken offline and that's a
• 26:32
  Speaker 1: negative for GDP, but then the restoration efforts tend to
• 26:36
  Speaker 1: largely offset that. And this is consistent with what we
• 26:40
  Speaker 1: have seen around other major natural disasters. Carl, I wonder
• 26:43
  Speaker 1: if you could just comment on the second quarter GDP
• 26:46
  Speaker 1: revisions that we've received and also what that might portend
• 26:51
  Speaker 1: for future performance of the economy for the rest of
• 26:54
  Speaker 1: the year. Absolutely, so when you say revisions, a lot
• 26:57
  Speaker 1: of folks immediately tune out or or turn turn the
• 27:01
  Speaker 1: volume down. However, UH, these revisions were relatively interesting. So
• 27:07
  Speaker 1: while we saw much stronger than expected performance in the
• 27:11
  Speaker 1: second quarter, so we went from two point six percent
• 27:13
  Speaker 1: all the way up to three percent growth, but it
• 27:16
  Speaker 1: wasn't all revisions. There was also new information on corporate
• 27:20
  Speaker 1: profits UH, and so we saw corporate profits increase one
• 27:24
  Speaker 1: point three percent UH in the second quarter. That was
• 27:28
  Speaker 1: after a negative reading in the first quarter. UH. And
• 27:30
  Speaker 1: it's even more impressive if we look at it in
• 27:32
  Speaker 1: year in year terms, and this tells us that corporate
• 27:35
  Speaker 1: profit gains are in fact the accelerating but this is
• 27:39
  Speaker 1: relevant because we were in a corporate profits recession for
• 27:42
  Speaker 1: much of sixteen. So the rebounding profits tells us that
• 27:47
  Speaker 1: the economy is on firmer footing UH. And this will
• 27:50
  Speaker 1: support hiring gains and also business investment decisions. UH. And
• 27:55
  Speaker 1: so we have an economy that's accelerating, you have corporate
• 27:58
  Speaker 1: profits as a backs up, and this creates a positive
• 28:01
  Speaker 1: feedback loop. And so for just a secondly, for this reason,
• 28:05
  Speaker 1: I think that a FED funds rate increase still is
• 28:08
  Speaker 1: very much a possibility for your end. And also this
• 28:11
  Speaker 1: is going to increase capacity constraints in the economy and
• 28:15
  Speaker 1: potentially drive this much awaited, UH sluggish period of productivity growth.
• 28:21
  Speaker 1: We may finally see the rebound. In response to this, Carl,
• 28:24
  Speaker 1: this shouldn't come as a surprise to anybody. Anyone who's
• 28:27
  Speaker 1: been following earnings and anybody who's seen with the stock
• 28:29
  Speaker 1: market has done in response shouldn't be surprised that corporate
• 28:32
  Speaker 1: profits are better. Does this change your view at all? Well,
• 28:36
  Speaker 1: this makes me a little bit more confident in our
• 28:39
  Speaker 1: above consensus forecast for economic growth in the back half
• 28:43
  Speaker 1: of the year. So the profit story is positive, but
• 28:45
  Speaker 1: also the main driver of the upward revision of g
• 28:47
  Speaker 1: DP was consumer spending. So a lot of times when
• 28:50
  Speaker 1: you get us stronger than expected revisions to GDP, uh,
• 28:54
  Speaker 1: you'll say, well, okay, that helped the current quarter, but
• 28:57
  Speaker 1: it's going to take away from future quarters. That was
• 29:00
  Speaker 1: not the case here. This show that there is more
• 29:03
  Speaker 1: underlying momentum for consumers, which have been the predominant driver
• 29:07
  Speaker 1: of economic growth. So uh, taking this into account, I
• 29:10
  Speaker 1: did not change my second half growth forecast appreciably, but
• 29:15
  Speaker 1: it does boost overall year on your growth just because
• 29:18
  Speaker 1: you had a stronger performance in the second quarter. So
• 29:20
  Speaker 1: we're now two point four percent for full year growth
• 29:24
  Speaker 1: two point four pc. And you think that the rate
• 29:27
  Speaker 1: increase is still on the table for the FED. I
• 29:28
  Speaker 1: think the rate increase is still on the table. So uh,
• 29:31
  Speaker 1: the FED and a number of FED speakers have said
• 29:33
  Speaker 1: they need to see inflation rebounding. If we're seeing a
• 29:37
  Speaker 1: material sustained upshift and economic growth, policy makers will have
• 29:41
  Speaker 1: the confidence that inflation is going to follow suit. Thank
• 29:44
  Speaker 1: you very much, Always a pleasure. Carl Rick Odonna joining
• 29:47
  Speaker 1: us as the chief US economist for Bloomberg Intelligence. You
• 29:51
  Speaker 1: can follow him on Twitter at riconomics, reckonomics. Well it
• 29:57
  Speaker 1: rolls off the tongue, doesn't it? All right? Thanks very much, comic,
• 30:00
  Speaker 1: well done, well done. Thanks for listening to the Bloomberg
• 30:04
  Speaker 1: P and L podcast. You can subscribe and listen to
• 30:06
  Speaker 1: interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
• 30:11
  Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
• 30:15
  Speaker 1: on Twitter at Lisa Abramo wits one. Before the podcast,
• 30:18
  Speaker 1: you can always catch us worldwide on Bloomberg Radio