Latest / Bloomberg Intelligence / Agrochemical Mega-Deals Could Reshape Industry, BI's Miner Says

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Agrochemical Mega-Deals Could Reshape Industry, BI's Miner Says · Bloomberg Intelligence

0:04
Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim Fox.
0:08
Speaker 1: Along with my co host Lisa Abramowitz. Each day we
0:11
Speaker 1: bring you the most important, noteworthy, and useful interviews for
0:14
Speaker 1: you and your money, whether at the grocery store or
0:16
Speaker 1: the trading floor. Find the Bloomberg P L Podcast on iTunes,
0:20
Speaker 1: SoundCloud and at Bloomberg dot com. One share that is
0:29
Speaker 1: moving quite a bit is that of DuPont. Another is
0:32
Speaker 1: Dow Chemical. That's because the European Union approved the merger
0:35
Speaker 1: of these two agro chemical behemoths to create an even
0:39
Speaker 1: bigger company. To get a better sense of what this
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Speaker 1: means going forward is Jason Minor. He is senior Global
0:44
Speaker 1: Chemicals Analyst for Bloomberg Intelligence and it comes to us
0:47
Speaker 1: from Princeton, New Jersey. Jason, can you just give us
0:51
Speaker 1: a sense of how unexpected this was that the European
0:54
Speaker 1: Union would approve this deal? Well, on in one sense,
0:58
Speaker 1: it's you know, it's been widely inticipated. I mean, we've
1:00
Speaker 1: been watching this deal. This is really a shape shifter
1:03
Speaker 1: of a deal, remember, because it's such a huge behemoth
1:06
Speaker 1: merger and then a three way split up. But we've
1:08
Speaker 1: been watching that unfold or sort of rumble forward. Since
1:11
Speaker 1: two thousand fifteen when it was announced, the companies have
1:14
Speaker 1: said that they were expecting to close this in the
1:16
Speaker 1: first half. They have missed a couple of deadlines before,
1:19
Speaker 1: and we're in a really mind boggling climate for regulatory
1:23
Speaker 1: sort of antitrust approval and accempts a lot of deals
1:26
Speaker 1: so um. On the one hand, it was really foreshadowed.
1:29
Speaker 1: The timing though, and many folks mind was was uncertain,
1:32
Speaker 1: and there were those who would even thought that the
1:35
Speaker 1: divestitures required to be so massive that they might undermine
1:37
Speaker 1: the value. So maybe it's a little bit more minor
1:40
Speaker 1: or manageable than folks expected as well. So just to
1:43
Speaker 1: give some perspective, and some of the things we were
1:44
Speaker 1: talking about, I mean, there are a bunch of combined transactions,
1:48
Speaker 1: uh that are going to reshape the agrochemical industry, bears
1:51
Speaker 1: planned by Monsanto and China National Chemicals agreement to buy
1:55
Speaker 1: some Genta that would bring the six major players in
1:59
Speaker 1: this industry town to just three. Uh. The surprising thing
2:02
Speaker 1: to me was that the European Commission said that there
2:06
Speaker 1: was specific evidence that Dow and DuPont would cut back
2:09
Speaker 1: on the amount they spent on the developing innovative products.
2:13
Speaker 1: I mean, what is going to be the ramifications from
2:16
Speaker 1: this complete reshaping of the agrochemical industry. Yeah, you have
2:20
Speaker 1: to to to feel the fear. You've got to put
2:22
Speaker 1: yourself in the seat of the tractor. Right. So the
2:24
Speaker 1: fear is the farmers looking at this as exactly what
2:27
Speaker 1: you said, which is these labs have generated the yield
2:31
Speaker 1: gains around the world, particularly for corn and soy, but
2:33
Speaker 1: many other crops for for decades now. Uh. And as
2:37
Speaker 1: we as we put these all together, all the names
2:40
Speaker 1: that you've just mentioned, Um, we're potentially cutting back on overlaps,
2:44
Speaker 1: right and now do pot have promised US three billion
2:46
Speaker 1: cost synergies alone? Uh? And And obviously under the hood
2:50
Speaker 1: of that, the EU saw some specifics that looked like
2:53
Speaker 1: it would be a few less test tubes devoted to
2:55
Speaker 1: crop chemicals. So it raises a question though, who's left
2:59
Speaker 1: out there. It's a strong hand that can buy what
3:01
Speaker 1: comes out of this as it's spent off well. And
3:04
Speaker 1: then it raises another question to which is what is
3:06
Speaker 1: the advantage for these mergers if not for eventually jacking
3:10
Speaker 1: up prices or having or cutting jobs to such a
3:14
Speaker 1: degree that they are much more efficient, right, I mean
3:18
Speaker 1: studying the context. Remember we're we're in now, we're about
3:21
Speaker 1: to nominally break three years of declining farm incomes. It's
3:24
Speaker 1: been tough times. After biofuels kicked in after two thousand
3:28
Speaker 1: five or so, we had a big boom, a lot
3:30
Speaker 1: of investment. All these companies are looking to cut back now,
3:34
Speaker 1: from fertilizers to seeds. Everybody spent a ton and and
3:37
Speaker 1: so ultimately, I think the first wave really is cost cuts.
3:41
Speaker 1: Then if you get a little rise in some of
3:43
Speaker 1: the crop prices, you're right, that could have played into
3:45
Speaker 1: a lot of pricing power. So now the stipulation is
3:48
Speaker 1: you've got to find strong hands to put this thing
3:51
Speaker 1: in that will continue to compete with you. We've gotta
3:53
Speaker 1: keep five strong players out there. Who this fifth is
3:56
Speaker 1: going to be is is really uncertain because it will
3:59
Speaker 1: be a big transfer, your national deal for any of
4:01
Speaker 1: the leftover players probably who could do it? What what
4:03
Speaker 1: parts just to that point, what parts are going to
4:06
Speaker 1: be spun off? What businesses are going to be for sale?
4:08
Speaker 1: So what we're taking out is a piece of DuPonts. No,
4:12
Speaker 1: they haven't sized it one good reasonably guess it's a
4:14
Speaker 1: couple of billion dollars of sales a year. It's it's
4:17
Speaker 1: a a bunch of um insecticides and herbicides, uh and
4:22
Speaker 1: then and and they so they name specific products, but
4:25
Speaker 1: really the key is the R and D lab. They said,
4:27
Speaker 1: you can't take those, uh, the TAO and the DuPont
4:30
Speaker 1: R and D programs and put them together, which is
4:32
Speaker 1: obviously where that cost concern came in. You've got to
4:35
Speaker 1: hand that that R and D development and all of
4:37
Speaker 1: your upcoming products, which again it's really the core that
4:41
Speaker 1: the existing portfolios weren't the worry so much as UM
4:44
Speaker 1: you've got to put the place where the magic happens.
4:47
Speaker 1: You've got to keep that lab alive. You've gotta hand
4:49
Speaker 1: it to somebody else. UM. So, so it's a it's
4:52
Speaker 1: a few, it's herbicides, insecticides, and then the R and
4:54
Speaker 1: D program, which is a key Jason, does this at
4:57
Speaker 1: all play into the debate over genetically modified grains and
5:01
Speaker 1: and other types of foods? I mean, I know that
5:03
Speaker 1: Europe has been much more against genetically modified UH food
5:08
Speaker 1: whereas in the US it's more accepted. Yeah, links in
5:11
Speaker 1: two ways. So one of the concerns is, um, what's
5:13
Speaker 1: happening in all these deals is you're putting together big
5:15
Speaker 1: seed players who have done the biotech stuff with big
5:18
Speaker 1: chemical players. UH. And there's those two things go hand
5:21
Speaker 1: in hand. You often engineer a seed to work with
5:24
Speaker 1: a chemical or a spray, So it's a sort of
5:26
Speaker 1: a seeds plus sprays world we're going into. UH. But
5:30
Speaker 1: it can mean that if you have only certain sprays,
5:32
Speaker 1: you only engineer certain seeds, you reduce innovation that way.
5:36
Speaker 1: On the other hand, there are alternatives to GMOs that
5:39
Speaker 1: can come out of these labs, and we want to
5:40
Speaker 1: see those alternatives come to fruition. I think Jason Miner,
5:43
Speaker 1: thank you so much for joining us. A fascinating development
5:45
Speaker 1: in the agrichemical industry. I'm sure we'll be talking about
5:48
Speaker 1: it more coming up. Jason Minor is senior Global Chemicals
5:50
Speaker 1: analyst for Bloomberg Intelligence, and he was speaking to us
5:53
Speaker 1: from Princeton, New Jersey. Many people thought that volatility was dead.
6:11
Speaker 1: Well today it seems to be showing that perhaps it's
6:14
Speaker 1: not quite dead yet. We see the VIX index at
6:17
Speaker 1: the highest level of the year, and there's somebody perfect
6:20
Speaker 1: to talk about that today Rick sell Vola, CEO and
6:23
Speaker 1: co founder of Harvest Volatility Management. It's as hedge fund
6:27
Speaker 1: uh that overseas nine billion dollars of assets. Rick, thank
6:31
Speaker 1: you so much for joining us. I want to start
6:33
Speaker 1: with a VIX. We are seeing it tick up from
6:36
Speaker 1: a historical perspective. It is still incredibly low. But are
6:39
Speaker 1: we just seeing the beginning of this swell in volatility
6:44
Speaker 1: and equity markets? Thank you, Lisa. I think it's a
6:47
Speaker 1: pretty good way to think about it. The the fact
6:50
Speaker 1: that the SMP hadn't had a one percent pullback since
6:53
Speaker 1: early October, and we finally saw one late last week
6:57
Speaker 1: and are continuing to see that today. Umans the VIX
7:00
Speaker 1: is waking up, and so UM. The VIX is long
7:03
Speaker 1: term average, you know, is around twenty uh interesting, the
7:07
Speaker 1: last five years or so, the average has been closer
7:09
Speaker 1: to sixteen. So UM and to be clear, it's still
7:13
Speaker 1: less than fourteen, so it's still really low. It's still
7:16
Speaker 1: it's still low. It's it's it's traded closer to you know,
7:19
Speaker 1: eleven twelve area for much of this year, as we've
7:22
Speaker 1: just seen a very long, sustained rally without any real pullbacks,
7:26
Speaker 1: any real reason to be fearful. But UM, you know,
7:29
Speaker 1: now you're seeing markets wake up to the fact that, hey,
7:32
Speaker 1: stocks go up and down and everything that maybe was
7:34
Speaker 1: priced in perfection. Um, maybe there's some questions and and
7:38
Speaker 1: so now there's more reason to either be fearful or
7:42
Speaker 1: to um to realize that. You know, we could see
7:45
Speaker 1: a bit more chop and more reason to buy protection.
7:47
Speaker 1: But your fun doesn't. It doesn't really bet on the
7:50
Speaker 1: direction of fatility. It's not like you wake up every
7:52
Speaker 1: morning and say, ah ha, we're gonna finally get it, um.
7:55
Speaker 1: And if we don't get this pop in volatility, we're
7:57
Speaker 1: gonna get sunker we do, and we're gonna we're gonna
7:59
Speaker 1: we're gonn to win. Um. You're just betting on incremental
8:03
Speaker 1: changes in volatility. Correct. Um, that's close. You're like, you're right,
8:11
Speaker 1: we're not making judgment calls on the VIX and we're
8:14
Speaker 1: not making judgment calls on volatility. UM. We are a
8:18
Speaker 1: perpetual seller of volatility, but with limited risk, meaning we
8:21
Speaker 1: use spreads, so we try to sell the expensive options
8:25
Speaker 1: but by the cheap options to limit our risk. So
8:28
Speaker 1: another way to think about it is, UM, you know
8:31
Speaker 1: there is a perpetual richness of implied over realized volatility
8:36
Speaker 1: that's been in place since the eighty seven crash, and
8:38
Speaker 1: it's about three and a half four percent, and we're
8:41
Speaker 1: trying to exploit and harvest that UM. And there are
8:45
Speaker 1: many different ways you can do that, but we utilize
8:48
Speaker 1: index options on the SMP five hundred. You know, the
8:50
Speaker 1: deepest most liquid market UM. You know, liquidity transparency low,
8:56
Speaker 1: you know, execution costs, etcetera. UM. And for taxable investors,
8:59
Speaker 1: there's actually tax efficiency in using this SPX index option.
9:04
Speaker 1: So Rick, you're FIRB started in two thousand and eight,
9:06
Speaker 1: and one thing that I'm struck by is you're looking
9:09
Speaker 1: to get returns of one and a half to two
9:12
Speaker 1: percent that is sort of overlaid on top of returns
9:16
Speaker 1: that investors are already getting on their other capital. In
9:18
Speaker 1: other words, Uh, their investments are used as collateral for
9:21
Speaker 1: you to go out and make these synthetic wagers. Uh.
9:25
Speaker 1: And your goal is to gain that sort of incremental
9:28
Speaker 1: extra yield. And in the process you have amassed nine
9:31
Speaker 1: billion dollars. To me that this raises a question about
9:34
Speaker 1: the hunt for yield. And you know, if yields do
9:37
Speaker 1: go up, our investors still going to be seeking this
9:40
Speaker 1: incremental yield. And you know, does it also represent potentially
9:44
Speaker 1: that people are are looking too hard for it? Great question. Um,
9:48
Speaker 1: the we are very much the tortoise. This is a
9:51
Speaker 1: this is not a sexy, glamorous strategy where we're looking
9:54
Speaker 1: to hit it out of the park. Um. But when
9:56
Speaker 1: you can add one and a half to two to anything, um,
10:00
Speaker 1: you make it a lot better. Meaning if somebody's long
10:03
Speaker 1: equities and you can add one and a half to
10:05
Speaker 1: two percent, that's kind of take you maybe from the
10:08
Speaker 1: middle of the pack to the top desctile. But but
10:11
Speaker 1: you can also lose, right well, you can also lose.
10:13
Speaker 1: Of course, you can't add risk without adding um, you
10:16
Speaker 1: know the possibility of loss. So uh. Part of what
10:21
Speaker 1: we do is, you know, we're selling out of the
10:25
Speaker 1: money spreads on the upside and on the downside, which
10:27
Speaker 1: is another way of saying, um, a part of the
10:30
Speaker 1: return profile distribution of the SMP to the up and
10:33
Speaker 1: to the down. We create a nice wide band so
10:35
Speaker 1: the market can go up or down and we don't
10:37
Speaker 1: really care if it goes up too far too fast. Um,
10:40
Speaker 1: we're gonna lose a little on the call spread side.
10:42
Speaker 1: But we're gonna win in the foot spread side, etcetera. So,
10:44
Speaker 1: so do you have certain models to get a sense
10:46
Speaker 1: of when we are going to see these big swings
10:48
Speaker 1: in volatility? You know, the VIX is more reactive than predictive.
10:55
Speaker 1: Um it will um, it will wake up before big
10:59
Speaker 1: known on owns like you will see it um higher
11:03
Speaker 1: in front of an election, higher in front of a
11:05
Speaker 1: FED meeting, higher in front of monthly non farm payrolls.
11:09
Speaker 1: When there's an event that we know is there, but
11:12
Speaker 1: we don't really know a what the outcome will be
11:15
Speaker 1: and and and be how the market will react to
11:17
Speaker 1: that outcome um so um. But we don't have models
11:22
Speaker 1: that are going to tell us what is going to happen.
11:25
Speaker 1: We more react to it. But we have a lot
11:27
Speaker 1: of experience and and we're also looking at the curve
11:30
Speaker 1: and looking at where things look reature and look things
11:32
Speaker 1: like cheaper, etcetera. But you've been in the business for decades, right,
11:35
Speaker 1: and so you've been watching the cycles. And is there
11:37
Speaker 1: anything that gives you a sense that we are going
11:40
Speaker 1: to see a more dramatic swing in volatility this year? Um?
11:45
Speaker 1: I don't know. I'm not sure if it will be
11:47
Speaker 1: more dramatic, but I do think we will see UM
11:50
Speaker 1: higher levels of volatility. I think we'll see UM more
11:55
Speaker 1: frequent spikes, just because there is such great uncertainty, whether
12:00
Speaker 1: rits UM, political uncertainty, economic uncertainty, global uncertainty. UM. I
12:05
Speaker 1: frankly and many of my colleagues have been really shocked
12:09
Speaker 1: actually that the VIX has remained as low as it
12:12
Speaker 1: has for as long as it has, you know, since
12:13
Speaker 1: the election UM, and I think today is is probably
12:18
Speaker 1: more like what we're going to see going forward. UM.
12:21
Speaker 1: We will see the occasional drop down below twelve or so,
12:24
Speaker 1: but I think a VIX in the mid to higher
12:27
Speaker 1: teens is is a more likely outcome. Where are most
12:31
Speaker 1: of your investors from UM? Most of our investors at
12:35
Speaker 1: this point are ultra high net worth either individual investors, families,
12:40
Speaker 1: but we partner with firms like Mary Lynch and UBS
12:43
Speaker 1: and Morgan Stanley, and so their advisors see the value
12:47
Speaker 1: in adding harvest to their client portfolios. They see what
12:49
Speaker 1: it does to the risk adjusted quality of the returns
12:54
Speaker 1: UM and so well. One thing that somebody could argue
12:57
Speaker 1: is that your fund has been around since two thousand
12:59
Speaker 1: and eight, but it has really been Uh, certainly not
13:01
Speaker 1: in its current form. Has not survived through a crash.
13:05
Speaker 1: Um when you actually volatility is going to be the
13:07
Speaker 1: flash point. So you know what happens then, right, I
13:11
Speaker 1: mean if you have all these alternate worth people who
13:12
Speaker 1: are looking for uh, you know, an extra one percent,
13:15
Speaker 1: but it could be a lot more downside in a
13:18
Speaker 1: hurt cycle. Yes, a great question. Um. You know we
13:22
Speaker 1: launched in April of oh eight, so we did weather
13:24
Speaker 1: the financial crisis in the fall of oh eight. I
13:27
Speaker 1: mean when you look at what the SMP did from
13:29
Speaker 1: September of eight into early March of oh nine, and
13:32
Speaker 1: that six month window the SMP was down. Um, we've
13:36
Speaker 1: weathered a VIX that quadrupled you know, it's long term
13:40
Speaker 1: averages twenty and that's about where it was when we launched.
13:43
Speaker 1: You know, it doubled to its previous all time high
13:45
Speaker 1: of forty in September of eight. It doubled again to
13:50
Speaker 1: eighty in in October in parts of November of eight,
13:53
Speaker 1: so um, we did weather um quite a hilacious downturn
13:59
Speaker 1: and uh and spike involved. And then the flip side
14:02
Speaker 1: is equally challenging. When the market surges the way it
14:05
Speaker 1: has and and VIX has been more constrained. So well,
14:08
Speaker 1: we'll have to check back with you when the VIX
14:10
Speaker 1: wakes up a little bit more from its current levels.
14:13
Speaker 1: Rick Silvala, thank you so much for joining us, CEO
14:15
Speaker 1: and co founder of Harvest Volatility Management, which has nine
14:18
Speaker 1: billion dollars of asses under management. Well, it's a sad day,
14:33
Speaker 1: and they say a sad day in UH the s
14:35
Speaker 1: n P five hundred. It is the sixth day of
14:38
Speaker 1: falling UH index values. What do you make this, Dave Wilson, Well,
14:44
Speaker 1: I also like to look at the down Jones Industrial
14:46
Speaker 1: Average downy alright, fine, and if it closes lower, it
14:51
Speaker 1: will be the longest losing streets since August when stocks
14:55
Speaker 1: were really kind of falling out of bed. And what's
14:57
Speaker 1: interesting is if you take a step back and think
14:59
Speaker 1: about what's going on, it almost looks like the flip
15:03
Speaker 1: side of what we saw post election, where you know,
15:06
Speaker 1: you see stocks go up day in and day out
15:09
Speaker 1: pretty much but not very extreme moves. And you look
15:13
Speaker 1: at where we are now, it's sort of a similar situation.
15:15
Speaker 1: You know, down down eight days in row. You're talking
15:18
Speaker 1: about two and a half percent. Okay, but hold on
15:21
Speaker 1: one second. Though you raise an interesting question, Dave, which is,
15:24
Speaker 1: if we're seeing the reversal of the post election Trump bump,
15:28
Speaker 1: how much further do the SMP five hundred and the
15:31
Speaker 1: doubt jones have to fall to leave us flat. Well,
15:36
Speaker 1: there's still quite a ways to go. I mean, you
15:39
Speaker 1: look back to where we were just after the election,
15:44
Speaker 1: you see UH change. That's where the SMP started out,
15:50
Speaker 1: and we're about close to two hundred points higher than
15:53
Speaker 1: that even with today's decline. I mean, you can run
15:56
Speaker 1: the numbers on the down you see a similar UH
15:59
Speaker 1: potential role And it really comes down to at this point,
16:03
Speaker 1: you know how much of this is sort of people
16:06
Speaker 1: looking for an opportunity to sell, especially as you get
16:10
Speaker 1: close to the end of the first quarter, as opposed
16:13
Speaker 1: to real concern about the state of the policy agenda,
16:17
Speaker 1: if you will, given the fact that the healthcare bill
16:21
Speaker 1: did not manage to get a vote in the House
16:23
Speaker 1: last week. Well, the flip side to the risk off
16:25
Speaker 1: trade is the bullish trade for treasuries. And here with
16:30
Speaker 1: us is Brian Chapatta, who writes about treasuries and UH
16:33
Speaker 1: and generally for Bloomberg News. Brian, you're a really compelling
16:36
Speaker 1: story talking about how the cost of buying treasuries and
16:41
Speaker 1: hedging against any dollar moves for Japanese investors has actually
16:44
Speaker 1: fallen to the lowest in two years. It should make
16:46
Speaker 1: it a buy for them. They should be rushing into
16:48
Speaker 1: the US to capture the extra yield given how cheap
16:51
Speaker 1: it's gotten, But they're not. Why they're not because they're
16:54
Speaker 1: just worried about fiscal policy and monetary policy here in
16:57
Speaker 1: the U S which is seen as way more volatile
17:00
Speaker 1: than over in Japan, where it's you know, persistent easing
17:03
Speaker 1: on the monetary front and there's nothing going on on
17:06
Speaker 1: the fiscal side that's going to jeopardize things. I mean,
17:08
Speaker 1: in fact, their tenure rate is basically fixed between like
17:11
Speaker 1: zero and ten basis points, so they find it's much
17:14
Speaker 1: more attractive, but potentially to just stay home and you know,
17:17
Speaker 1: take the paltry yield that they got rather than you know,
17:20
Speaker 1: risk further losses. The losses on the treasury index, the
17:22
Speaker 1: Boo Bloomberg Barclays Treasury Index on the final quarter of
17:26
Speaker 1: sixteen was the worst that it's ever been in data
17:28
Speaker 1: going back about thirty years, so uh, it was it
17:32
Speaker 1: was a surprising loss on their books. So I'm looking
17:35
Speaker 1: at the ten year. It's down the most in uh
17:38
Speaker 1: about two weeks. I'm wondering, you know, the yield is down,
17:41
Speaker 1: the prices up. I'm wondering, who's buying, if Japan is
17:44
Speaker 1: not buying, if China's not buying, if European investors maybe
17:47
Speaker 1: are staying home. I mean, who who's coming into the
17:49
Speaker 1: US right now? I mean it seems like in part
17:51
Speaker 1: it's you know, the flip side of you know, the
17:53
Speaker 1: equity markets. You know, people who uh you know, we're
17:56
Speaker 1: potentially you know, betting against betting un interest rates going higher,
18:00
Speaker 1: essentially shorting the treasury market. Uh. Then I have to
18:02
Speaker 1: cover some of their shorts as they're seeing a risk
18:04
Speaker 1: off here in the market. We saw the specula the
18:07
Speaker 1: position UH in shorts really decline over the past week. So, um,
18:13
Speaker 1: it seems like it's a lot of that, and um,
18:15
Speaker 1: you know, I think the real interesting thing is that
18:17
Speaker 1: a lot of these uh foreign investors that were sort
18:19
Speaker 1: of hesitant seeing a FED poise to raise rates are
18:23
Speaker 1: really caught in limbo here because they missed out on
18:25
Speaker 1: a on a nice rally. But now they think, oh man,
18:27
Speaker 1: we're at the bottom of this range that we've been
18:29
Speaker 1: in for the past few months now. I don't want
18:31
Speaker 1: to buy either, so they're sort of caught, uh in limbo,
18:35
Speaker 1: which is not great for their demand. Well, Dave, to
18:39
Speaker 1: that point, there was a story that Matt Levine highlighted
18:42
Speaker 1: in the World. He's a Bloomberg columnist. Uh. The story
18:45
Speaker 1: was in Wall Street Journal, quoting in Investment Manager saying,
18:48
Speaker 1: it's like dental work. You dread it, you don't want
18:51
Speaker 1: to get it, but you're glad when it's over and
18:52
Speaker 1: you feel better. What is he talking about. He's talking
18:54
Speaker 1: about a correction, Like everyone's been sort of praying for
18:57
Speaker 1: this pullback in equity so that they can get in
18:59
Speaker 1: a better valuation. What are you hearing from investment funds?
19:01
Speaker 1: I mean, is this is this the time to get
19:03
Speaker 1: back in or people waiting for it for a lot more? Well,
19:06
Speaker 1: I mean, if you think back over the last year
19:09
Speaker 1: or so, I mean, we've certainly seen plenty of times
19:11
Speaker 1: when stocks have dipped, and you've seen so of recovery
19:16
Speaker 1: in short order. You know, the question is whether this
19:19
Speaker 1: time there's something more gradual going on that will take
19:22
Speaker 1: more time to unwind, sort of like you say, you
19:26
Speaker 1: know the the trunk trades, if you will, So you
19:29
Speaker 1: know that that becomes the issue for the moment, and
19:32
Speaker 1: you're certainly seeing that play out today within specific industry groups.
19:36
Speaker 1: You look at the banks, they're lower. You look at
19:38
Speaker 1: the steel companies, they're lower. You know, the banks were
19:41
Speaker 1: supposed to benefit from deregulation, the steel companies from infrastructure spending.
19:46
Speaker 1: And of course you've got the hospital stocks taken off
19:49
Speaker 1: because the repealing and replacing the Affordable Care Act hit
19:53
Speaker 1: its bumps. So you know, it's just a matter once
19:55
Speaker 1: you get to shake out, where do things go from here?
19:58
Speaker 1: And Brian, I mean when you talk with sources, do
20:00
Speaker 1: you get the sense that uh bond investment managers are
20:04
Speaker 1: generally kind of moving toward a or back toward, I
20:08
Speaker 1: should say, a slow growth for longer type of environment.
20:11
Speaker 1: Are they basically pricing in the same kind of environment
20:13
Speaker 1: that people were talking about last year and kind of
20:16
Speaker 1: ignoring and casting off the brief reflation hopes that we
20:19
Speaker 1: got after the election. I think that's the underlying tone
20:22
Speaker 1: of the market right now, is that you know, how
20:25
Speaker 1: much has changed from a year ago, and I think
20:28
Speaker 1: it's going to take a few days to shake out here.
20:31
Speaker 1: Exactly if you know, this is the death of the
20:33
Speaker 1: reflation trade that we've been seeing since the election, um
20:37
Speaker 1: or if there is still that potential because we haven't
20:39
Speaker 1: seen treasuries break out of arrange that they've been in
20:42
Speaker 1: since basically the start of December. UM, because there's just
20:45
Speaker 1: been this back and forth of you know, just sentiment,
20:48
Speaker 1: I mean, will that you know, will growth take off
20:51
Speaker 1: or will it be subdued? You know what what's going
20:53
Speaker 1: on with inflation? Is this going to be a persistent
20:56
Speaker 1: thing going on? And so um, It's gonna take a
20:58
Speaker 1: little while to play out, but I think the underlying
21:00
Speaker 1: tone definitely is you know, how how how sustainable is this?
21:04
Speaker 1: And just to sort of underscore the confusion, New York
21:07
Speaker 1: Fed President Bill Dudley has said that he is comfortable
21:10
Speaker 1: with a gradual rate hiking cycle, that the economy will
21:13
Speaker 1: cope just fine with that. But James Bullard, another FED president,
21:18
Speaker 1: thinks that potentially it's overkill, and he said in a
21:21
Speaker 1: Bloomberg television interview that it's not necessary to raise rates
21:24
Speaker 1: that quickly if the goal is to keep inflation in
21:26
Speaker 1: your target and keep employment unemployment between four and four
21:29
Speaker 1: and a half and five percent, so definitely clearly an
21:32
Speaker 1: important debate. Anyway, Thank you so much, Brian Chapota. When
21:47
Speaker 1: you think of the Dodd Frank Act, which is something
21:49
Speaker 1: that President Trump would like to overhaul, or that's what
21:52
Speaker 1: he has promised to do, you think of trading rules,
21:54
Speaker 1: you think of bank profits, you think of things that
21:57
Speaker 1: are really isolated to the financial sector. But that's not
22:00
Speaker 1: necessarily the case. Elizabeth Dexheimer, finance reporter with Bloomberg News,
22:06
Speaker 1: reported on another part of this law that affects retailers
22:11
Speaker 1: as much as it does the financial companies. Elizabeth, thank
22:14
Speaker 1: you so much for joining us. Can you just give
22:16
Speaker 1: us an overview of this part of the law that
22:19
Speaker 1: has to do with swipe fees or how much retailers
22:22
Speaker 1: can are charged by the banks uh per each transaction
22:27
Speaker 1: for debit or credit cards. Yeah, at least it's good
22:30
Speaker 1: to talk with you, so sure. This is UH. This
22:33
Speaker 1: is an issue that really gets the heart of how
22:36
Speaker 1: financial companies thanks payments firms like z and master Card
22:41
Speaker 1: make money from gebit in credit cards, which is a
22:44
Speaker 1: very lucrative business. Every time you used swipe your credit card. UH,
22:48
Speaker 1: one big chunk of it of the money that banks
22:52
Speaker 1: make is something called interchange fees, which are fees that
22:56
Speaker 1: are charged to the retailers UH every time a card.
22:59
Speaker 1: Is why those fees, particularly for debit cards. As part
23:03
Speaker 1: of Dodd Frank, there was a provision that was added
23:05
Speaker 1: that capped those fees for debit cards. About nine billion
23:09
Speaker 1: dollars has been lost to the banking industry and revenue
23:12
Speaker 1: because of that provision, well and just the direct The
23:16
Speaker 1: opposite side of that is that retailers have kept nine
23:19
Speaker 1: billion dollars in profits right right, and they argue that
23:23
Speaker 1: they have been able to translate that to lower prices
23:26
Speaker 1: at the register for consumers. So you have these two
23:31
Speaker 1: you know, the homes of industry UH. You know, we're
23:34
Speaker 1: talking about Walmart, JP, Morgan, as well as lots of
23:38
Speaker 1: small businesses restaurants uh. And then as well as on
23:41
Speaker 1: the banking side, this uh stems to small banks, community banks,
23:46
Speaker 1: credit unions that have all felt the effects on this
23:49
Speaker 1: ston on either side. And so as the House of
23:52
Speaker 1: Representatives in particular takes up this debate around what a
23:56
Speaker 1: package would look like to overhaul Dodd Frank's an updated package,
24:00
Speaker 1: one of sort of the sticking points that has come
24:02
Speaker 1: up is whether or not to include a repeal of
24:04
Speaker 1: this provision. Thanks would like to see a repeal of
24:07
Speaker 1: that provision. Retailers want to keep it as the law
24:11
Speaker 1: currently is right now. And that's put lawmakers in a
24:14
Speaker 1: very sticky spot, both Republicans and Democrats, because retailers and
24:19
Speaker 1: banks are a very big and important constituent for most
24:22
Speaker 1: lawmakers as well as an important political contributor from both sides.
24:26
Speaker 1: So the lawmakers would prefer to continue to put this off.
24:31
Speaker 1: As you sort of highlighted, you had a great list
24:33
Speaker 1: of responses from a number of both Republicans and Democrats,
24:38
Speaker 1: things like, we're listening to everyone, we haven't taken a
24:40
Speaker 1: position on this yet. If you contact our office, we'll
24:43
Speaker 1: talk to you about that at another time when I'm prepared.
24:46
Speaker 1: I love the quotes. That's sort of just this sense
24:48
Speaker 1: of wanting to kick the can down the road. And
24:50
Speaker 1: just to be clear, this is the Durban Amendment UM
24:53
Speaker 1: And can you give us a little bit of color,
24:54
Speaker 1: Elizabeth about how much money and time and how some
24:58
Speaker 1: of these industries are law lobbying for their perspective. So
25:03
Speaker 1: so this is really just the latest battle and what
25:05
Speaker 1: has been a nearly decade long fight between these two
25:09
Speaker 1: industries on Capitol Hill. This has also stem to the courts.
25:12
Speaker 1: This is um you know, an issue that has also
25:15
Speaker 1: come up just in business negotiations and of course recently
25:19
Speaker 1: ever since you know, Donald Trump was elected and sort
25:22
Speaker 1: of the conversation around broader god frank changes was put
25:26
Speaker 1: on the table, if you will. Uh, they've been both
25:28
Speaker 1: sides have been ramping up their their lobbying and advocacy efforts.
25:32
Speaker 1: One of them one of the strategies a lot of
25:35
Speaker 1: similar strategies that they that both sides have been using
25:37
Speaker 1: for for many years, but again sort of really ramping up,
25:41
Speaker 1: particularly relying on smaller constituents, uh, you know, relying on
25:46
Speaker 1: the small banks, relying on small retailers to religious storm
25:49
Speaker 1: Capitol Hill letters, phone calls just NonStop, uh you know.
25:54
Speaker 1: But but it's effective, and that there are so many
25:57
Speaker 1: that these constituents, you know, making noise in any one
26:00
Speaker 1: on Maaker's office is you know, gets the attention of
26:02
Speaker 1: that that lawmaker. Right what what what I mean? I
26:05
Speaker 1: don't know one thing that that does This does raise
26:07
Speaker 1: to me is potentially the banks could say, look, we're competitive,
26:12
Speaker 1: We're trying to compete with one another all that this
26:15
Speaker 1: cap does is removed the sort of inherent competition and
26:18
Speaker 1: remove the playing field in a way that potentially limits
26:23
Speaker 1: innovation or uh, you know, creates sort of ripples that
26:27
Speaker 1: might not be desirable through markets. What what do the
26:29
Speaker 1: retailers say to that? Sure, so there are both sides,
26:34
Speaker 1: point to various data and studies that have been done
26:37
Speaker 1: about the impact. Uh and quite frankly, it's it's not
26:40
Speaker 1: conclusive and that there you know, different sets of data
26:44
Speaker 1: tell different stories. The as you just pointed out, the
26:47
Speaker 1: level playing field and the competition factor that that banks
26:50
Speaker 1: will will cite. Retailers say that the the way that
26:56
Speaker 1: these prices are are are putting other an input out
27:00
Speaker 1: there is not fair. They have no real shay and
27:03
Speaker 1: sort of how these prices are are determined, and that
27:07
Speaker 1: by lowering the fees that they have to pay, they
27:10
Speaker 1: can in turn lower fee lower prices of anything that
27:15
Speaker 1: you would buy at the register. Although although you have
27:18
Speaker 1: to wonder, I mean, if people are going to be
27:20
Speaker 1: using other methods of payment, if you know, they just
27:23
Speaker 1: pass along the charges for credit card transactions right right,
27:27
Speaker 1: and and even that point about where the consumer sees
27:30
Speaker 1: the savings If a consumer sees sees any savings from this.
27:35
Speaker 1: That data is inconclusive as well. There have been some
27:37
Speaker 1: studies that show that retailers did not actually do make
27:41
Speaker 1: any changes, or if they did, it was actually to
27:43
Speaker 1: raise fees or excuse me, raise prices. That this did,
27:46
Speaker 1: you know, little to impact the you know what, what
27:49
Speaker 1: they're being charged. And yes, absolutely there's other forms of payments,
27:53
Speaker 1: and that's where the sort of what's really at stake
27:55
Speaker 1: for for this conversation in general is that, yes, this
27:58
Speaker 1: particular part is about choosing around the Urban Amendment, specifically
28:02
Speaker 1: as it relates to debit cards, but this is also
28:06
Speaker 1: about a broader conversation about credit cards, which is a
28:08
Speaker 1: much more lucrative business as well as sort of future
28:12
Speaker 1: when we're talking about a new technology. Unfortunately, Elizabeth, we
28:16
Speaker 1: have to leave it there, but thank you so much.
28:18
Speaker 1: Fascinating story. Elizabeth Dexheimer, finance reporter for Bloomberg News. Thanks
28:28
Speaker 1: for listening to the Bloomberg P and L podcast. You
28:31
Speaker 1: can subscribe and listen to interviews at iTunes, SoundCloud, or
28:35
Speaker 1: whatever podcast platform you prefer. I'm pim Fox. I'm out
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Speaker 1: there on Twitter at pim Fox. I'm out there on Twitter.
28:43
Speaker 1: At Lisa Abramo. It's one before the podcast. You can
28:46
Speaker 1: always catch us worldwide on Bloomberg Radio