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Disney-Fox Deal Would Be Defining Legacy For Bob Iger: Sweeney · Bloomberg Intelligence

0:05
Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
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Speaker 1: Along with my co host Lisa Bramowitz. Each day we
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Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. So
0:34
Speaker 1: it sounds like Comcast has fallen out of the running
0:37
Speaker 1: to buy some assets of twenty one century Fox, which
0:40
Speaker 1: leaves Walt Disney Company as the remaining suitor here and
0:45
Speaker 1: they are expected to announce a deal any day. Now
0:48
Speaker 1: Here to talk about that is Paul Sweeney, US director
0:50
Speaker 1: of Research and senior Media and Internet analyst for Bloomberg Intelligence. Paul,
0:56
Speaker 1: you have been covering this company for twenty seven years.
0:59
Speaker 1: You know this place inside and out. What exactly is
1:03
Speaker 1: Disney going to go after Century currently has and why? Well,
1:08
Speaker 1: this is a If they buy these assets from twenty
1:11
Speaker 1: century Fox, it will be a obviously a significant deal,
1:14
Speaker 1: you know, probably fifties sixty billion dollars of value there um.
1:17
Speaker 1: But it's really going to be the defining legacy deal
1:20
Speaker 1: for Bob Eiger. Uh just in the past two or
1:22
Speaker 1: three years, the media business has been tremendously disrupted by
1:25
Speaker 1: the Netflix is of the world and the whole unbundling
1:28
Speaker 1: and a chord cutting associated with the pay TV package.
1:31
Speaker 1: That's really upended everybody's business model, including UH, the Walt
1:35
Speaker 1: Disney Company, and the mighty ESPN. So if you're Bob Eiger, um,
1:38
Speaker 1: you really have to position your company for the next
1:41
Speaker 1: ten to twenty years. And I think the way they
1:43
Speaker 1: feel like they need to do that as they need
1:45
Speaker 1: to do a couple of things when they need to
1:46
Speaker 1: bulk up on even more content, even though Disney arguably
1:49
Speaker 1: has the best content in the world. By buying the
1:52
Speaker 1: twenty century Fox Film and Television Studio, you get even
1:55
Speaker 1: more UH film and television production, plus an amazing library.
1:59
Speaker 1: They can use that content to create our program their
2:03
Speaker 1: direct to consumer offering that they announced for next year
2:05
Speaker 1: their version of Netflix. UM. You also get a lot
2:08
Speaker 1: of international assets too, big assets one in Sky for
2:13
Speaker 1: Europe and Star India in India, which really helps Disney
2:17
Speaker 1: increase its international exposure, which I think they've been under
2:20
Speaker 1: exposed internationally before in terms of their percentage of operating income.
2:23
Speaker 1: So that's a big plus for them. And then third
2:25
Speaker 1: is they get a controlling interest in Hulu, which is
2:28
Speaker 1: a direct competitor to Netflix, and maybe you know, having
2:31
Speaker 1: direct control over Hulu will allow Disney to really drive
2:34
Speaker 1: that business afford and try to make that a much
2:37
Speaker 1: bigger competitor to Netflix. So do we have any idea
2:40
Speaker 1: why Comcast dropped out because we talked a lot about
2:43
Speaker 1: why the acquisition of the Sky Network in particular was
2:47
Speaker 1: really beneficial for Comcast. Yeah, yeah, I think Comcast and
2:50
Speaker 1: Verison was also mentioned there. I think kind of from
2:53
Speaker 1: the get go, the Murdochs have kind of sent out
2:56
Speaker 1: some signals that they prefer to sell their assets to
2:58
Speaker 1: Disney for a variety of reasons, some regulatory um and
3:02
Speaker 1: some cultural. I think the cultural one is that the
3:05
Speaker 1: rumors that James Murdoch, who was CEO of twenty one
3:08
Speaker 1: century Fox, will get a leadership role within Disney, potentially
3:12
Speaker 1: setting himself up for, in an ideal world in his mind,
3:15
Speaker 1: to be a successor to Bob Eiger, is real. It
3:18
Speaker 1: seems incredibly far fetched that a the Murdox would ever
3:21
Speaker 1: sell their company and be that they would ever quote
3:23
Speaker 1: unquote work for anybody else but we're in very crazy
3:27
Speaker 1: times here in the media space. And uh and I
3:30
Speaker 1: think if you're Disney, one of the real shortfalls into
3:34
Speaker 1: disney story is that they do not have a succession
3:37
Speaker 1: plan for Bob Biker. They had a very well defined
3:39
Speaker 1: one up until two or three years ago when it
3:41
Speaker 1: all fell apart, and since then they've been scrambling and
3:43
Speaker 1: they have not been able to identify, you know, an
3:46
Speaker 1: external candidate or an internal candidate, and it doesn't really
3:48
Speaker 1: seem to be anybody on the horizon. So this might
3:51
Speaker 1: fulfill one of their needs if it all were to
3:53
Speaker 1: work out. So crazier things seems to have happened, but
3:56
Speaker 1: this would certainly be right at the top. What do
3:58
Speaker 1: you think the price tag is going to be for Disney?
4:00
Speaker 1: It depends kind of what assets they buy. But you
4:03
Speaker 1: know the numbers that we've run, um, you know, you've
4:05
Speaker 1: put all the assets together that presumably that they're looking at.
4:08
Speaker 1: It could be fifty to sixty billion dollars of enterprise value.
4:10
Speaker 1: So um. And then what Fox will be left with
4:13
Speaker 1: would be kind of a remain code, which would be
4:15
Speaker 1: the Fox News cable network, the Fox uh broadcast network. UM.
4:21
Speaker 1: And you know, a couple of other assets there, and
4:23
Speaker 1: that would be in the Fox Sports one, and that
4:25
Speaker 1: would be a much much smaller company. Um. And then
4:29
Speaker 1: the question be what do the Murdochs do with that
4:31
Speaker 1: smaller company? Uh And then I think the expectations they
4:33
Speaker 1: would probably re emerge it into uh News Corporation, which
4:37
Speaker 1: is the company that houses all of their print businesses,
4:40
Speaker 1: the Wall Street Journal and all their papers around the world.
4:43
Speaker 1: Maybe create a little bit of a bigger company that way.
4:45
Speaker 1: So there's lots of pieces out there. The bankers are
4:47
Speaker 1: working crazy hours, I'm sure trying to make sure everybody,
4:51
Speaker 1: uh you know, all the pieces fit together. I'm just
4:53
Speaker 1: trying to wrap my head around James Murdoch and the
4:55
Speaker 1: cultural fit or lack thereof with Disney. That's that's kind
4:59
Speaker 1: of mind Bogle, It really is. And you know that
5:01
Speaker 1: Disney being the family uh friendly company and and Fox
5:05
Speaker 1: uh you know, on across all of its portfolio assets
5:08
Speaker 1: kind of being much more at their own edge in
5:10
Speaker 1: terms of the programming that it's studio produces, the TV shows,
5:13
Speaker 1: the Bart Simpsons of the world, and uh so they're
5:16
Speaker 1: very very different culturally. UM. But I think the the
5:20
Speaker 1: assets that uh, you know, Disney would be buying I
5:24
Speaker 1: think actually would fit very well with the company. And
5:26
Speaker 1: then what remains to be seeing how the other people
5:28
Speaker 1: fit in and frankly, I mean maybe Disney wants that diversity,
5:31
Speaker 1: that sort of edge. I'm just wondering about the timing
5:34
Speaker 1: when you think Disney is going to announce this, Well,
5:36
Speaker 1: this is very interesting the company. I'm I'm about to
5:39
Speaker 1: head out to Burbank on Thursday morning after Disney They're
5:41
Speaker 1: having an analyst meeting there where they were going to
5:43
Speaker 1: kind of uh screen their new Star Wars movie, which
5:46
Speaker 1: is gonna be a big driver for their company and
5:48
Speaker 1: their for their stock, they hope. So that was already
5:50
Speaker 1: established for Thursday. I think what they'd like to do
5:53
Speaker 1: is once, since they already have their analysts and their
5:55
Speaker 1: investors in the room at at in the Burbank studio,
5:57
Speaker 1: is let's announce the deal then, and you know, let's
6:00
Speaker 1: bring the Murdoch h Robert and his son's up on
6:03
Speaker 1: stage and let's try to really sell this deal as
6:05
Speaker 1: a as a great deal. And I think that's the
6:07
Speaker 1: event that Disney would like to to to do there.
6:10
Speaker 1: Nobody does events better than Disney, so I think that's
6:12
Speaker 1: kind of how they like to announce the deal to
6:14
Speaker 1: the world. Yeah, my heart's really bleeding for you. He's
6:16
Speaker 1: gonna go out to California to watch movies, to watch
6:19
Speaker 1: the premiere of Star Wars and having an amazing presentation,
6:24
Speaker 1: an incredibly interesting announcement, hang out with your friends, and uh,
6:28
Speaker 1: go out for a few drinks. Well, Paul Sweeney, it's
6:31
Speaker 1: been real. Please bring me back a souvenir. Absolutely. Paul Sweeney,
6:34
Speaker 1: US director of Research and senior Media and Internet Analyst
6:37
Speaker 1: for Bloomberg Intelligence. I'm struck by the high yield bond market.
6:58
Speaker 1: How people have been calling for its demise for almost
7:02
Speaker 1: a decade now, almost as soon as it started surging
7:04
Speaker 1: after the after the credit crisis. And yet here we
7:07
Speaker 1: are with another year of pretty impressive gains, up more
7:10
Speaker 1: than seven percent so far this year, following a seventeen
7:12
Speaker 1: and a half percent game last year. So what's ahead
7:14
Speaker 1: for next year? And uh has it already gotten to
7:17
Speaker 1: be too good to be true? Should we expect losses?
7:20
Speaker 1: Here to explain it all to us is Ken Monahan.
7:23
Speaker 1: He is Director of high Yield for a Moondi Pioneer
7:26
Speaker 1: in Durham, North Carolina. Nobody joins us here in our
7:29
Speaker 1: New York studios. So, Ken, what's your projection for next year?
7:32
Speaker 1: You know, Lisa m our crystal ball at this point
7:35
Speaker 1: is so foggy it looks more like a snow globe. So, um, well,
7:40
Speaker 1: we're we're we're working on it. You know, I think
7:42
Speaker 1: that the first half of next year is much easier
7:44
Speaker 1: to predict than the than the back half. And I
7:47
Speaker 1: think the first half of the year, you know, today
7:49
Speaker 1: we're waiting for news from the FED. Our expectation is
7:52
Speaker 1: we're going to get several more moves, probably three next year. Uh.
7:55
Speaker 1: And the question is what the e c B does
7:57
Speaker 1: as well, and what kind of an impact that ultimately
7:59
Speaker 1: will have a high yield marketplace. So you think that
8:01
Speaker 1: still the high yield bond market is highly dependent on
8:05
Speaker 1: actions of the central banks more than anything else. I
8:08
Speaker 1: think that I'm not saying highly dependent. I think that
8:10
Speaker 1: that's just one major variable. And with rates as low
8:13
Speaker 1: as they are, we haven't been in this situation before.
8:17
Speaker 1: You know, theoretically the high yield market should earn should
8:20
Speaker 1: earn its coupon next year, so it should earn somewhere
8:22
Speaker 1: around five percent plus or minus a little bit the
8:24
Speaker 1: current high yield bond market is currently yielding about five
8:28
Speaker 1: and three quarters percent. As you indicated, it earned a
8:30
Speaker 1: little bit more than seven percent this year if you
8:32
Speaker 1: look at the Bloomberg Barkley's index. I don't think it
8:35
Speaker 1: will match that next year, but if it earned a
8:37
Speaker 1: five percent return, that would be actually pretty reasonable. Um.
8:40
Speaker 1: The question really is is how much headwinds do we
8:43
Speaker 1: have out there and to what extent is the well
8:46
Speaker 1: the activities of central banks contribute to that. So moving
8:50
Speaker 1: beyond the macro story, one thing that I found fascinating
8:53
Speaker 1: this year is that within the high elk bond market,
8:55
Speaker 1: you've seen a number of potholes. Companies are just all
9:00
Speaker 1: out of bed suddenly tank uh. There have been some resurrections.
9:05
Speaker 1: We look at Valiant, for example, which seems to be
9:07
Speaker 1: doing all right. But going into next year, which companies
9:12
Speaker 1: do you expect to be the next potholes? Well, I'm
9:16
Speaker 1: not going to name specific companies. There are certainly industries.
9:20
Speaker 1: There's certainly industries that were watching. You know, Telecom is
9:22
Speaker 1: an obvious one. Retail I think is an obvious one
9:26
Speaker 1: as well. So in other words, you don't think the
9:28
Speaker 1: retail carnage is over. I think that the juggernaut known
9:32
Speaker 1: as aman Amazon is going to continue. Um. Having said that,
9:35
Speaker 1: I don't think we were as nervous as some uh
9:38
Speaker 1: you know, coming out of the third quarters numbers, or
9:41
Speaker 1: really the second quarters numbers, which are perhaps a bit weaker,
9:44
Speaker 1: and people had panicked and a lot of the retail
9:47
Speaker 1: names had sold off. I don't think, um, Amazon is
9:51
Speaker 1: going to replace the entire retail market. Uh. You know,
9:54
Speaker 1: I said to my analysts earlier this year, I said,
9:56
Speaker 1: you know, I've lived through environments where Internet was post
10:00
Speaker 1: to replace automo auto car dealers. Uh. And then um,
10:05
Speaker 1: the flat screen TVs in our home, We're going to
10:08
Speaker 1: replace all the movie theaters. And yet those businesses continue.
10:11
Speaker 1: It doesn't mean they don't have to re reconnect or
10:14
Speaker 1: re engineer their businesses, but it doesn't mean that they
10:17
Speaker 1: go out of business either. Well, and with telecom, before
10:19
Speaker 1: I let you go into other sectors that you see
10:23
Speaker 1: as as potentially experiencing some pain next year. Telecom is
10:27
Speaker 1: fascinating because you have some behemoths like I Heart Communications
10:30
Speaker 1: that's trying to bang out some kind of debt restructuring agreement.
10:34
Speaker 1: And then you also have Sprint, which with its on
10:36
Speaker 1: and off again, a deal with T Mobile that fell through.
10:39
Speaker 1: Left at the altar, that's right, left at the altar.
10:42
Speaker 1: There's a question of how it can continue in the
10:44
Speaker 1: future alone, without a bigger footprint and without better technology.
10:49
Speaker 1: It does not have the cash, it has tons of debt.
10:51
Speaker 1: What is Masio show uh Masioshi's son going to do
10:54
Speaker 1: from soft Bank, the big investor? Right? These are all
10:57
Speaker 1: huge questions. But you think that the route that we've
10:59
Speaker 1: seen and frontier, the route we've seen so far this
11:02
Speaker 1: year is not over. Is that what you're saying. I
11:04
Speaker 1: still think we're gonna get We're gonna have a very
11:06
Speaker 1: bumpy road in telecom for two thousand and eighteen. But
11:09
Speaker 1: doesn't mean if the sector can't earn a good return.
11:12
Speaker 1: In fact, because if you look at where the yields
11:14
Speaker 1: are for that sector right now, and those bonds are
11:16
Speaker 1: trading at pretty significant discounts to bar So if we
11:19
Speaker 1: can get, for example, some asset sales from some of
11:21
Speaker 1: the large players in that space, UH, if our friends
11:24
Speaker 1: spent sprint connect with somebody else or some how able
11:28
Speaker 1: to monetize or show value for their enormous bandwidth, uh,
11:33
Speaker 1: that that could change the the outlook for the sector
11:37
Speaker 1: in terms of returns. So one big question that I
11:39
Speaker 1: have is the field of triple B rated companies has
11:43
Speaker 1: expanded pretty wild wildly in the past few years. This
11:46
Speaker 1: is the lowest rung of investment rate. Yes, what is
11:49
Speaker 1: the likelihood in your mind that they will get downgraded
11:52
Speaker 1: to high yield and that you could see a rush
11:55
Speaker 1: of debt kind of move into your world that is unexpected? Well,
11:59
Speaker 1: if you if you look at a couple of things,
12:01
Speaker 1: it's interesting you bring this up because there's two things
12:03
Speaker 1: we would note. One, if you look at the at
12:06
Speaker 1: the percentage of corporate debt outstanding that's investment grade versus GDP,
12:11
Speaker 1: it's exploded, uh since the end of the recession, so
12:14
Speaker 1: it's moved up by about threefold. If you look at
12:17
Speaker 1: the percentage of high yield that it's increased as well,
12:19
Speaker 1: but by a much smaller percentage. So there's a lot
12:22
Speaker 1: more investment great debt that's been issued. A lot of
12:25
Speaker 1: it's been used as well, particularly for triple V companies,
12:27
Speaker 1: for shareholder friendly activity, so whether it's repurchasing shares or
12:32
Speaker 1: paying out dividends or for acquisitions, and those are the
12:35
Speaker 1: places you're right where you could have this risk of
12:37
Speaker 1: downgrade going forward. I'm so interested in this. Thank you
12:40
Speaker 1: so much for joining us. I could talk about this
12:42
Speaker 1: all day long with you. Ken Monahan, co director of
12:44
Speaker 1: High Yield at a Mundi pioneer, talking about what to
12:47
Speaker 1: expect next year. We shinned up his crystal ball and
12:50
Speaker 1: we got some insight. It's really interesting to me that
12:52
Speaker 1: the telecom route is not over. We will be discussing
12:55
Speaker 1: more about this. I'm sure a lot of people think
13:13
Speaker 1: of the Federal Reserve as being an independent body that
13:17
Speaker 1: is trying to maintain financial stability and keep the economy afloat.
13:23
Speaker 1: Desmond King and Oxford University professor seeks to dispel that
13:27
Speaker 1: notion with his new book, FED Power, How Finance Wins.
13:31
Speaker 1: It was published last month and it was co authored
13:34
Speaker 1: along with Lawrence Jacobs. Desmond joins us. Now it Doesmond,
13:38
Speaker 1: thank you so much for being with us. Can you
13:40
Speaker 1: just start. Can you just start with this idea that
13:44
Speaker 1: a lot of people have with the FED as a
13:46
Speaker 1: neutral player, and explain why you think that is inaccurate.
13:52
Speaker 1: The FED is clearly trying to make decisions on the
13:55
Speaker 1: basis of objective economic data and to do the best
13:59
Speaker 1: to manage the economy. But but the way in which
14:02
Speaker 1: this occurs is more tightly related to financial markets and
14:08
Speaker 1: to the needs of certain economic interests than is commonly
14:11
Speaker 1: recognized UM. And we developed this argument really about the
14:16
Speaker 1: feds um extraordinary response to the recession in two thousand
14:21
Speaker 1: and eight and the way in which it UM began
14:24
Speaker 1: the processes and the unconventional monitary measures, including, for instance,
14:30
Speaker 1: UM propping up money financial institutions and then going into
14:33
Speaker 1: this expanse of quantitative easing process. These are measures which
14:39
Speaker 1: UM are never scrutinized by UM a body such as
14:46
Speaker 1: Congress to ask whether they are the most appropriate, or
14:49
Speaker 1: they are measures which may or may not have various
14:53
Speaker 1: unexpected distributional consequences. So the idea here is that because
14:59
Speaker 1: the FED took these moves that directly propped up big banks,
15:04
Speaker 1: it shows that they're biased toward a market in which
15:07
Speaker 1: the biggest banks are the way they are and dominate
15:11
Speaker 1: finance and are not open to another way of the
15:15
Speaker 1: system running. Is that correct? Yes, I think biases may
15:18
Speaker 1: be a very too stronger term. But UM, in the
15:21
Speaker 1: way in which it responded, there were other options, for instance,
15:24
Speaker 1: trying to do more for the mortgage market, for the
15:27
Speaker 1: relief of mortgage holders UM, who had been allowed to
15:32
Speaker 1: acquire many borrowers have been allowed to acquire mortgages which
15:35
Speaker 1: they couldn't afford in the six to seven years before
15:39
Speaker 1: the crisis of two thousand and eight, which was in
15:42
Speaker 1: large part a regulatory failure UM and then when it
15:46
Speaker 1: acted in this dramatic way since two thousands and eight UM,
15:50
Speaker 1: we we think in the book that the processes of
15:54
Speaker 1: accountability around this were really very weak and remain quite weak,
15:58
Speaker 1: and we have at the moment then a situation which
16:03
Speaker 1: central banking is really in quite a new era. And
16:07
Speaker 1: it's not just the FED that the FED is by
16:09
Speaker 1: far the most important. The supplies also to the ECB
16:11
Speaker 1: and the Bank of England in terms of its there
16:15
Speaker 1: interventions in the financial markets through quantitent of easing. The
16:21
Speaker 1: sorts of measures that have been undertaken would be more
16:24
Speaker 1: commonly associated with fiscal policy, or at least they have
16:27
Speaker 1: fiscal policy implications in a way which moves beyond traditional
16:33
Speaker 1: understandings of monetary policy. Well, so I'm wondering what are
16:37
Speaker 1: the measures that should be taken to have better oversight
16:41
Speaker 1: of the federals serve and other central banks for that matter. Well,
16:45
Speaker 1: I think we need to think about who is appointed
16:52
Speaker 1: to the federal banks. Whether there might be a broader
16:55
Speaker 1: range of UM members of the FOMC, for instance, who
17:01
Speaker 1: are more familiar with different aspects of financial markets. UM.
17:07
Speaker 1: Whether there should be UM members of the economics profession
17:11
Speaker 1: who aren't quite so much part of the consensus about
17:14
Speaker 1: monetary policy. UM. So, whether there might be independent reviews
17:19
Speaker 1: of the Congress by sorry, by the Congress of UM
17:24
Speaker 1: of federal policy. You know, this is tricky because we're
17:27
Speaker 1: coming at this at a moment when a lot of
17:29
Speaker 1: people have raised concerns that the FED will become even
17:32
Speaker 1: more political in the US, given some of the demands
17:37
Speaker 1: on what we would like to see from growth from
17:39
Speaker 1: our from our current president. So, uh, you know, it's
17:41
Speaker 1: sort of tricky when you start to say, well, they
17:43
Speaker 1: should have more oversight from potentially political operatives. Right, Yes,
17:49
Speaker 1: I think it is, and I'm fully alert to that,
17:52
Speaker 1: and I entirely agree with you. But central banks are now,
17:56
Speaker 1: including the FED, are part of a of a quite
18:00
Speaker 1: extraordinary financialization system that has occurred in the last three
18:04
Speaker 1: decades UM. And so the way they operate, the importance
18:08
Speaker 1: of markets, the way that policies have effects on markets
18:12
Speaker 1: is deeper than it was, so we in some sense
18:14
Speaker 1: I have to think about new institutions of accountability. There
18:19
Speaker 1: is a there's a very strong argument that you know,
18:21
Speaker 1: Congress dominates the FED, that that the idea that the
18:24
Speaker 1: FED is independent is a myth, and that this is
18:28
Speaker 1: a common scholarly view, and that the Congress is able
18:31
Speaker 1: to um really exercise powerful control over it. I think
18:36
Speaker 1: if you look at history it's rather different. The The
18:38
Speaker 1: FED has been very good at maintaining itself as as
18:40
Speaker 1: a neutral technical agency or UM and showing its capacity
18:46
Speaker 1: to develop policies as it thinks most appropriate. But it's
18:49
Speaker 1: hard to see processes of accountability there in these institutions.
18:55
Speaker 1: Thank you so much for joining us, and your book
18:57
Speaker 1: is fascinating and it's certainly emily right now, Desmond King.
19:02
Speaker 1: Andrew W. Mellon, Professor of American Government at Oxford University,
19:06
Speaker 1: joining us from Oxford UH. He is the co author
19:10
Speaker 1: of a new book, Fedpower, How Finance Wins. A fascinating
19:14
Speaker 1: argument and an important one at a time when the
19:17
Speaker 1: FED is changing hands with respect to the chairmanship. It
19:36
Speaker 1: is time to throw our crystal ball to Chicago, where
19:40
Speaker 1: Jack Avalan is. He is chief investment officer at BEMO
19:43
Speaker 1: Private Bank, which overseas about sixty eight billion dollars. Jack,
19:48
Speaker 1: thank you so much for joining us. We've been talking
19:50
Speaker 1: about what to expect for eighteen and uh the most
19:54
Speaker 1: important question of the day, of course, is are you
19:56
Speaker 1: going to be buying bitcoin? I don't know it. I
20:01
Speaker 1: can't afford it. All right, in all seriousness, next year,
20:06
Speaker 1: a lot of people are seeing pretty sanguine economic pretty
20:10
Speaker 1: sanguine economic backdrop, synchronized growth. Pick the phrase that you will.
20:16
Speaker 1: What's your most contrarian call for the year. I'm going
20:19
Speaker 1: to say that, you know, if I'm looking for things
20:21
Speaker 1: that could potentially upset the apple cart, it's it's going
20:24
Speaker 1: to be a trade. Um. You know, we still have
20:28
Speaker 1: these open items on NAFTA and some other trade agreements outstanding.
20:33
Speaker 1: And I can't think of a single economist who stood
20:36
Speaker 1: up and said, you know, ending our current trade agreements
20:40
Speaker 1: going to help our economy. UM. So you know we
20:44
Speaker 1: still have, um, you know, some of these lingering issues outstanding.
20:47
Speaker 1: And I guess i'd call that contrarian in that, you know,
20:50
Speaker 1: that's the one thing that could you know, run counter
20:53
Speaker 1: to this, uh, you know, positive momentum on on growth. Alright,
20:57
Speaker 1: So as an investment manager, how do you head you
21:00
Speaker 1: endst that risk? Well, I'm not sure I want to
21:02
Speaker 1: do too much of that right yet. Um, these are
21:05
Speaker 1: things I'm gonna be watching for. I'm watching for that
21:08
Speaker 1: any indications there. But we're still gonna you know, stay
21:12
Speaker 1: in um. Uh, we're watching for inflation. Um also um,
21:17
Speaker 1: but we we believe we're not going to really run
21:20
Speaker 1: out of production capacity or even labor capacity until probably
21:25
Speaker 1: mid two nineteen. So I think you know, right now,
21:28
Speaker 1: our base case scenario is that we're still in the clear.
21:30
Speaker 1: We're bunting along and around, you know, a little bit
21:34
Speaker 1: more than potential GDP. While this is the one of
21:38
Speaker 1: the longest recoveries that we've had on record, it certainly
21:41
Speaker 1: the shallowest and so um, you know, it's it's uh,
21:45
Speaker 1: certainly recovery not built on a lot of excesses, which
21:47
Speaker 1: is its probably a good thing. So Jack, if you
21:50
Speaker 1: are watching for inflation, I take that to mean that
21:53
Speaker 1: you expected to pick up more next year. How are
21:55
Speaker 1: you positioning to capture some of the gains from that
21:59
Speaker 1: and to avoid some of the losses that say, may
22:02
Speaker 1: come with the longest the longest term bonds. Right. UM,
22:06
Speaker 1: So right now, we're you know, still somewhat um, you know,
22:10
Speaker 1: under our target duration. So you know, we we are
22:16
Speaker 1: you know, somewhat cautious there. I think what we're watching for,
22:21
Speaker 1: for example, any evidence that the European Central Bank uh
22:25
Speaker 1: takes it's it's uh photoph the accelerator would perhaps uh,
22:31
Speaker 1: you know, raise rates in Europe. You know, keep in mind,
22:33
Speaker 1: one of the main reasons we believe why the tenure
22:36
Speaker 1: treasuries two point three, seven or two point four and
22:40
Speaker 1: not three or more is because the German bonded zero
22:44
Speaker 1: point three. Uh. So as we start to see rates
22:47
Speaker 1: abroad move higher, uh, that probably raises the floor on
22:52
Speaker 1: you know, on our rates here. So yeah, so we're
22:55
Speaker 1: still somewhat cautious on interest rates UM, and we're still
23:00
Speaker 1: fully invested in equities UM, but would be looking for
23:04
Speaker 1: evidence that UM either inflation rise, as credit spreads widen,
23:08
Speaker 1: anything that would drive interest rate growth faster than profit
23:12
Speaker 1: growth would prompt us to reduce our equity risk. We
23:16
Speaker 1: don't see huge evidence of that soon, but that would
23:20
Speaker 1: be something that would suggest perhaps were either the end
23:22
Speaker 1: of the business cycle end of a credit cycle. The
23:26
Speaker 1: other thing that some people are watching is the yield curve,
23:28
Speaker 1: the differential between long and short term rates. And when
23:32
Speaker 1: you talk about the e c B and whether European
23:35
Speaker 1: rates are going to raise, a lot of people think
23:37
Speaker 1: that the ECB is going to keep its deposit rate
23:39
Speaker 1: where it is next year and just work on potentially
23:42
Speaker 1: tapering some of their asset purchases. So let's say they
23:45
Speaker 1: don't make a move at all. Could we see a
23:48
Speaker 1: yield curve in version because the Fed is going to
23:50
Speaker 1: be raising short term rates and that longer term rates
23:53
Speaker 1: going to be pegged. Yeah, we could, but I wouldn't
23:55
Speaker 1: necessarily read a ton into it. Um. I think that
24:00
Speaker 1: you know, it would invert for more more or less
24:02
Speaker 1: technical reasons than anything. Um, you know, economic per se um.
24:09
Speaker 1: You know, we still have a lot of distroy in
24:11
Speaker 1: the bond markets, and um, you know, it's sending a
24:14
Speaker 1: signal that you know, may not really be telling us
24:18
Speaker 1: what we've traditionally interpreted in the past. Well, you know,
24:22
Speaker 1: this is an important point because a lot of people
24:25
Speaker 1: are saying, look, even if the U s you old
24:27
Speaker 1: curve inverts next year, it won't necessarily be a harbinger
24:31
Speaker 1: of a recession the way it has in the past.
24:33
Speaker 1: And yet when I go back and I look at
24:36
Speaker 1: the meeting minutes from Federal Reserve meetings back in two
24:40
Speaker 1: thousand and six and two thousand and seven, a lot
24:42
Speaker 1: of the FETE officials at the time, we're saying the
24:44
Speaker 1: exact same thing. Yes we're seeing yield curve flattening, Yes
24:47
Speaker 1: we're seeing inversion, but it means something different. It is technical,
24:51
Speaker 1: it was not. Does that give you pause? Well, there
24:54
Speaker 1: was no quantitative easing going on back then, so um,
24:58
Speaker 1: you know, I'm not sure exactly what they were necessarily
25:02
Speaker 1: drawing on to suggest that an inverted real curve would
25:06
Speaker 1: have sent the wrong signal effect for us, it was,
25:09
Speaker 1: it was a concern. In fact, credit spreads widened to
25:14
Speaker 1: a point where they broke out in the third quarter
25:18
Speaker 1: of two thousand and seven, which to us was a
25:20
Speaker 1: signal to say, we do need to reduce our risk.
25:23
Speaker 1: When momentum finally broke down in January of oh eight,
25:26
Speaker 1: that was a clear signal for us to say, let's,
25:29
Speaker 1: you know, watch the play out of this year from
25:31
Speaker 1: the sidelines. With respect to credit, you said you're still
25:35
Speaker 1: fully invested in equities, you've had you have lowered the
25:39
Speaker 1: duration of your funds, meaning the exposure to interest rate risk.
25:44
Speaker 1: I'm wondering where you stand on credit. Yeah, I mean,
25:47
Speaker 1: that's that's really remarkable to me. Um. Credit spreads are
25:52
Speaker 1: still remarkably narrow. Um. So there could be a little
25:55
Speaker 1: technical factors. They are also as investors are clamoring or yield.
26:00
Speaker 1: One of the things that you know, we're noticing though,
26:03
Speaker 1: is that down grades are outpacing upgrades now and they
26:07
Speaker 1: have not for the last two or three quarters. So UM,
26:10
Speaker 1: I'm not necessarily flapping my arms and saying this is
26:14
Speaker 1: the end of the credit cycle, but it is something
26:17
Speaker 1: that we're watching, and it's a certainly a metric that
26:19
Speaker 1: I want to pay attention to. Where's the more risk
26:21
Speaker 1: in the lowest rung of investment grade or in high yield? Um.
26:26
Speaker 1: You know that's probably a good question, I would say
26:28
Speaker 1: in high yield. UM. In fact, you know, it's funny,
26:31
Speaker 1: investment grade actually is outpacing high yield so far this year. Um.
26:36
Speaker 1: So um, you know this this blind um uh, you know,
26:42
Speaker 1: blind reach for yield is really starting to fall apart
26:47
Speaker 1: in the notion that perhaps investors are really starting to
26:51
Speaker 1: look discern, you know, what's a better value. Um. So
26:54
Speaker 1: we're seeing it in the in the bond market, not
26:56
Speaker 1: seeing it so much in the stock market. But it
26:59
Speaker 1: sounds like good. Appears like we're going to get a
27:02
Speaker 1: sector rotation going into next year. Jack Aplin, thank you
27:05
Speaker 1: so much for joining us. Jack Avelin, Chief investment Officer
27:09
Speaker 1: at BEMO Private Bank, which overseas sixty eight billion dollars
27:12
Speaker 1: and is based in Chicago. Thanks for listening to the
27:21
Speaker 1: Bloomberg P and L podcast. You can subscribe and listen
27:24
Speaker 1: to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform
27:28
Speaker 1: you prefer. I'm Pim Fox. I'm on Twitter at pim Fox.
27:32
Speaker 1: I'm on Twitter at Lisa Abramo. It's one before the podcast.
27:36
Speaker 1: You can always catch us worldwide on Bloomberg Radio.