Latest / Bloomberg Intelligence / P&L: Some Italian Banks Should Die, "Zombie Banks" Author Says

Transcript

P&L: Some Italian Banks Should Die, "Zombie Banks" Author 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 PI L Podcast on iTunes,
• 0:20
  Speaker 1: SoundCloud and at Bloomberg dot com. Perhaps there's a newsletter
• 0:29
  Speaker 1: going out into the halls of Monte di Paski, the
• 0:33
  Speaker 1: oldest bank in the world, at least on record from Sienna,
• 0:37
  Speaker 1: and the European Central Bank has denied Monte di pasks
• 0:41
  Speaker 1: bid for more time in order to raise capital. Well,
• 0:44
  Speaker 1: what happens next and what does this mean? Well, it
• 0:46
  Speaker 1: means we turned to Yamen owner On. Yealman is our
• 0:49
  Speaker 1: senior writer for Banking and Finance, and he is also
• 0:53
  Speaker 1: the author of a wonderful book entitled Zombie Banks. Yeaman,
• 0:57
  Speaker 1: it's a pleasure to have you. Great to be here.
• 1:00
  Speaker 1: You uh, you seem to coin the term zombie banks,
• 1:03
  Speaker 1: or at least you've made it a little bit more
• 1:05
  Speaker 1: high profile. Shall we say? It is Monte di Paski,
• 1:09
  Speaker 1: the Mountain of piety zombie bank. It definitely is it's
• 1:14
  Speaker 1: the oldest bank and it's also a zombie, so maybe
• 1:17
  Speaker 1: it was due to die a long time ago and didn't.
• 1:21
  Speaker 1: But Italy has has um the worst of zombie banks
• 1:25
  Speaker 1: right now because um it, It's economy has been stuck
• 1:29
  Speaker 1: in recessions and slow growth for decades. That means bad
• 1:34
  Speaker 1: loans have piled up and up and up, and they
• 1:37
  Speaker 1: haven't and and some banks are just never They're losing
• 1:41
  Speaker 1: money constantly, not making money. Their balance sheets are in
• 1:44
  Speaker 1: horrible shape, and and they should die and and and
• 1:48
  Speaker 1: also another big problem is that they're over bank I
• 1:51
  Speaker 1: mean they have there are too many bank branches in
• 1:53
  Speaker 1: every street of Sienna or in every street of major
• 1:57
  Speaker 1: Italian city, and thus they can't they're has over competition.
• 2:01
  Speaker 1: They cannot make money. So so there are too many
• 2:03
  Speaker 1: dead banks, which also hurts the good banks. I mean,
• 2:06
  Speaker 1: some of Italy's top banks are actually in great shape,
• 2:09
  Speaker 1: but they get hurt by the same zombie banks surrounding
• 2:13
  Speaker 1: them because the message cannot tell which is a zombie
• 2:16
  Speaker 1: which is not. So this is a major zombie bank
• 2:19
  Speaker 1: problem issue and things are really coming to head. So
• 2:23
  Speaker 1: let's see if they actually fix it. Although I you know,
• 2:26
  Speaker 1: I I worry about stop gag solutions that that constantly
• 2:29
  Speaker 1: are done around the world. Um. Well, hold on, let's
• 2:33
  Speaker 1: talk about Monte de Paski. The fact that the ECB
• 2:36
  Speaker 1: rejected their request for more time to prepare a five
• 2:40
  Speaker 1: billion euro capital increase. This is this is an odd
• 2:43
  Speaker 1: move to me. Why wouldn't the ECP give it to
• 2:45
  Speaker 1: them and then allow them to avoid uh an Italian
• 2:49
  Speaker 1: government bailout, which seems to be a problematic approach from
• 2:53
  Speaker 1: from a legal perspective given the current guidelines. Um, you
• 2:57
  Speaker 1: know the we we have a little bit reporting from
• 3:00
  Speaker 1: Italy on on why the e CP rejected it, which
• 3:03
  Speaker 1: is basically they weren't sure if the market conditions would improve.
• 3:08
  Speaker 1: If they're giving more time, what if it actually got worse. Um.
• 3:13
  Speaker 1: But at the end of the day, the e c
• 3:15
  Speaker 1: B has given them and the and the regulators have
• 3:18
  Speaker 1: given them so much time. It's I mean, Monty Paskey,
• 3:21
  Speaker 1: problems have been going on for years. It's not last
• 3:24
  Speaker 1: weekend's problem, it's not last month's problem. Um. So they've
• 3:27
  Speaker 1: had so much time to fix this, and and they've
• 3:31
  Speaker 1: constantly put off the solutions. And not only that, every
• 3:34
  Speaker 1: time they raised these capital I mean, they've had three
• 3:37
  Speaker 1: or three capital or two or three capital increases and
• 3:40
  Speaker 1: they just burned through them because they're losing money constantly.
• 3:43
  Speaker 1: So let's say the e CP is trying to push
• 3:45
  Speaker 1: them to the edge, push them to a more concrete solution.
• 3:48
  Speaker 1: What is the path forward at this point? Um, I
• 3:51
  Speaker 1: mean there are multiple options, but you know, basically what
• 3:55
  Speaker 1: they've been trying to avoid with the government of matter Ramsey,
• 3:59
  Speaker 1: which is on its way out because he resigned a
• 4:01
  Speaker 1: few days ago. Um, what there he's been trying to
• 4:04
  Speaker 1: avoid is is UM burning junior um bondholders UM, almost
• 4:11
  Speaker 1: half of which are are depositors in the bank. So
• 4:14
  Speaker 1: little guys, small business owners, regular depositors u uhh, who
• 4:21
  Speaker 1: had junior debt in the bank and and they would
• 4:25
  Speaker 1: be wiped out because the European rules require some sort
• 4:29
  Speaker 1: of a bail in of junior creditors before the government
• 4:32
  Speaker 1: can also help bail out. So before a bailout happens,
• 4:36
  Speaker 1: that bailon had to happen. So he was trying to
• 4:38
  Speaker 1: avoid that. But now that that government is on its
• 4:41
  Speaker 1: way out, UM, probably there will be a caretaker government
• 4:45
  Speaker 1: which might not worry as much about these things. That
• 4:48
  Speaker 1: so so I think that that's what might happen. There
• 4:51
  Speaker 1: might be bail in and bail out at the same time.
• 4:53
  Speaker 1: Junior creditors become shareholders, or they lose some of their
• 4:58
  Speaker 1: bond face value at completely UM and there's some kind
• 5:03
  Speaker 1: of recapitalization that the government also takes part in contributes
• 5:07
  Speaker 1: UM and that will save the day for now. I
• 5:09
  Speaker 1: don't know how how long it's gonna last, because you know,
• 5:12
  Speaker 1: one of their biggest plans is to sell some of
• 5:14
  Speaker 1: the bad debt, but it's still some. They still have
• 5:17
  Speaker 1: so much bad debt, and they're not going to be
• 5:19
  Speaker 1: good look going forward either. Wasn't there a plan put forth,
• 5:23
  Speaker 1: I believe, for JP Morgan and Goldman Sachs to come
• 5:26
  Speaker 1: in and in some way ring fence a lot of
• 5:29
  Speaker 1: the bad loans and put them into a separate entity.
• 5:32
  Speaker 1: Right they were they were trying to sell off the
• 5:34
  Speaker 1: worst of the bad loans, the so frenzy, as they
• 5:36
  Speaker 1: call it, an Italian um and and um we're using
• 5:41
  Speaker 1: some private share you know, credit and government guarantees, etcetera. UM.
• 5:47
  Speaker 1: But I did a study a couple of months ago
• 5:49
  Speaker 1: on that even when they do that, it's about half
• 5:52
  Speaker 1: of the bad debt. But there's still so much bad
• 5:55
  Speaker 1: that and and and with those ratios, they'd be still
• 5:58
  Speaker 1: triple the levels of bad that in in the European Union,
• 6:01
  Speaker 1: and double the bad that rates in then Italy, which
• 6:04
  Speaker 1: has a bad that ratio problem. So three d and
• 6:08
  Speaker 1: sixty billion euros of bad loans on the Italian banks,
• 6:12
  Speaker 1: that is a lot of money. Let's turn our attention
• 6:27
  Speaker 1: now to gaming and our nation's capital. Here to tell
• 6:30
  Speaker 1: us more, Jim Muran. He is the chairman and the
• 6:32
  Speaker 1: chief executive of MGM Resorts International. Jim ur and thank
• 6:36
  Speaker 1: you very much for being with us. Well, thank you
• 6:38
  Speaker 1: for having me. All Right, so you're opening a one
• 6:40
  Speaker 1: point four billion dollar property. It's the MGM National Harbor
• 6:44
  Speaker 1: Casino and Resort. It's just outside our nation's capital. And
• 6:48
  Speaker 1: you said that this is property. It has a gambling
• 6:51
  Speaker 1: floor bigger than the White House, and it has an
• 6:53
  Speaker 1: art collection that includes a welded collage by Bob Dylan,
• 6:57
  Speaker 1: the recipient of the Nobel Prize for Literature. Tell us
• 7:00
  Speaker 1: about this project, and uh, and what makes it so different? Well,
• 7:04
  Speaker 1: it's been a journey of four years. It's uh perfectly
• 7:08
  Speaker 1: located on the banks of the Potoma eight mile from
• 7:11
  Speaker 1: the capitol. Uh, reviewing as I sit here the Washington
• 7:16
  Speaker 1: Monument as you speak, and right across Old Town on
• 7:21
  Speaker 1: over the Woodrow Wilson Bridge. Free airport service this area
• 7:25
  Speaker 1: as you know. So we have a tremendous international interests
• 7:29
  Speaker 1: of tourists to come to the Washington, DC and Metro
• 7:35
  Speaker 1: Atlantic area. We've built something here that I believe it's
• 7:40
  Speaker 1: truly unique, the first integrated resort in a large metropolitan
• 7:45
  Speaker 1: market in the United States. And yes, we have a
• 7:48
  Speaker 1: stunning art collection. Uh. We spent millions of dollars on
• 7:53
  Speaker 1: bringing some of the world's greatest artists and local artists
• 7:56
  Speaker 1: together as well as internationally acclaimed chef such as jos
• 8:00
  Speaker 1: Andreas and Market sam Ustin and the Potago Brothers, and
• 8:05
  Speaker 1: a tremendous amount of entertainment. Next week we have Boys
• 8:11
  Speaker 1: the Men, and then Lionel Richie and Bruno Mars Share
• 8:15
  Speaker 1: and Earthlin and Fire and Duran Durant and uh. You know,
• 8:19
  Speaker 1: it's like relentless amount of a listeners. Um, we really
• 8:25
  Speaker 1: wanted to wow the market, and early indicators are that
• 8:30
  Speaker 1: we have. Jim, how important is it to MGM to
• 8:34
  Speaker 1: diversify away from Las Vegas and Macau. I mean just
• 8:38
  Speaker 1: today we saw, you know, rumors that Macau was going
• 8:42
  Speaker 1: to limit a t M withdrawals from mainland China, which
• 8:46
  Speaker 1: sent shares of gaming companies, including MGMs down. Uh. They
• 8:50
  Speaker 1: since rebounded. Is as sort of the rumor was confirmed
• 8:53
  Speaker 1: as being somewhat less important. But but how important is
• 8:56
  Speaker 1: it to DIVERSEFY away from Macau? Well, the vertifications always
• 9:01
  Speaker 1: always a positive if you go into markets that are
• 9:05
  Speaker 1: large where your market share can grow and be defended,
• 9:10
  Speaker 1: and you see a future. Um, and so we we don't.
• 9:15
  Speaker 1: We don't like diversification for divertification's sake. There there there's
• 9:19
  Speaker 1: gaming in fully different states in the United States. We're
• 9:22
  Speaker 1: in very few of them. Um. We only want to
• 9:25
  Speaker 1: be in markets where we believe our non gaming, our
• 9:28
  Speaker 1: entertainment UH DNA can bereing UH bring an incremental competitive advantage.
• 9:33
  Speaker 1: So if you look at our portfolio, yes, we dominate
• 9:36
  Speaker 1: in Las Vegas. We have the market there with properties
• 9:39
  Speaker 1: like Bellagio and MGM, vandel A Bay and Aria, but
• 9:44
  Speaker 1: we also have the most profitable luxury resort on adult coasts.
• 9:47
  Speaker 1: But Revige the most profitable casino in Detroit, the most
• 9:51
  Speaker 1: profitable casino in Atlantic City for data and now here
• 9:56
  Speaker 1: in our nation's capital. This is a going to be
• 10:00
  Speaker 1: very successful resourts. The idea you can integrate these resorts together,
• 10:05
  Speaker 1: create synergy amongst them, you'll be able to diversify your
• 10:09
  Speaker 1: cash flows, grow your business. And that's why I was
• 10:14
  Speaker 1: so excited about this one. This one is uh. I
• 10:17
  Speaker 1: got to tell you, by the way, if it just
• 10:19
  Speaker 1: didn't work out, my wife would be mad at me.
• 10:22
  Speaker 1: She's from Maryland, and uh, she said, leave it on
• 10:25
  Speaker 1: the field. Jim and I think we have here. What
• 10:29
  Speaker 1: if you could just give us a little perspective on
• 10:31
  Speaker 1: the gaming industry, because I know that you joined the
• 10:33
  Speaker 1: company I think it was. You've seen it through tough times, restructuring,
• 10:37
  Speaker 1: a reorganization of financing in order to keep the business afloat.
• 10:42
  Speaker 1: Then you had the whole issue with the Las Vegas
• 10:45
  Speaker 1: City Center of property with Dubai World. Tell us the
• 10:49
  Speaker 1: state of the gaming industry and what's working and what's
• 10:51
  Speaker 1: not working. So yes, I've been around a while because
• 10:56
  Speaker 1: I've been there since then, and I've covered this industry
• 10:59
  Speaker 1: since nineteen before when I was on Law Street. So
• 11:02
  Speaker 1: I could say there's been a tremendous change. This was
• 11:05
  Speaker 1: a very property centric, developer centric industry in the eighties
• 11:10
  Speaker 1: and nineties, it was fairly fragmented. UM you had very
• 11:14
  Speaker 1: uneven levels of operation and quality of resorts, and then
• 11:18
  Speaker 1: we went through a corportization of the gaming industry. A
• 11:22
  Speaker 1: lot of M and A activity occurred in the eighties
• 11:25
  Speaker 1: and nineties, early part of two thousands, and then you
• 11:28
  Speaker 1: had the recession, which punished UM the economy in the
• 11:32
  Speaker 1: US and particularly damaged Las Vegas. And post that period
• 11:38
  Speaker 1: we've seen a remarkable recovery and entire sector, but also
• 11:44
  Speaker 1: a very very big change in public perception and gaming.
• 11:48
  Speaker 1: It's it's now at all time high in terms of
• 11:51
  Speaker 1: the perception. Folks either enjoy themselves or have no issue
• 11:57
  Speaker 1: with others to do so. It's more in stream. There
• 12:01
  Speaker 1: are two million American jobs in this industry. Uh. The
• 12:06
  Speaker 1: the industry's self is growing, but not everyone is doing
• 12:11
  Speaker 1: equally well. And I think when you consider this industry
• 12:15
  Speaker 1: like any other, quality counts. And that's why you've seen
• 12:20
  Speaker 1: bankruptcies of properties in Atlantic City and other properties in
• 12:23
  Speaker 1: the middle of the country that have not done as
• 12:25
  Speaker 1: well because there was under investment early on, under investment
• 12:30
  Speaker 1: an ongoing basis, and the consumers are becoming increasingly uh,
• 12:36
  Speaker 1: discerning and demanding. Um So, the industry today is doing well.
• 12:43
  Speaker 1: We benefit from a growing economy. MGM is doing quite
• 12:46
  Speaker 1: a bit better than the industry at large, but we're
• 12:49
  Speaker 1: all doing better. I want to learn more about President
• 13:05
  Speaker 1: elect Donald Trump's plan for energy, specifically with respect to
• 13:10
  Speaker 1: environmentally conscious energy sources. I want to bring Katherine trey Wick,
• 13:14
  Speaker 1: energy policy reporter for Bloomberg News, who's coming to us
• 13:17
  Speaker 1: from Washington. Katherine, you co authored a story that is
• 13:22
  Speaker 1: tremendously interesting today. Trump team's memo hints at broad shacope
• 13:27
  Speaker 1: of US energy policy. UM, I'm trying to sort of
• 13:30
  Speaker 1: square this article, which talks about how the president elect
• 13:34
  Speaker 1: is trying to sort of maintain some of uh President
• 13:38
  Speaker 1: Barack Obama's climate a gender or at least the nuclear
• 13:40
  Speaker 1: power plants, while also including some people who have been
• 13:45
  Speaker 1: known to be climate change deniers in his cabinet. Can
• 13:48
  Speaker 1: you talk a little bit about the story? Sure? So,
• 13:51
  Speaker 1: we obtained a document from sources at the Energy Department
• 13:55
  Speaker 1: which lists sixty five questions of the transition team gave
• 13:58
  Speaker 1: to Energy Department staff off basically just trying to UM
• 14:03
  Speaker 1: get a sense of what they needed to know to
• 14:04
  Speaker 1: make the transition go smoothly. But they were also a
• 14:07
  Speaker 1: lot of very specific questions about, as you mentioned, nuclear plants,
• 14:12
  Speaker 1: what can be done to UM save at risk plants
• 14:16
  Speaker 1: that aren't competitive amid low gas prices UM, as well
• 14:20
  Speaker 1: as asking for lists of every staff member and contractor
• 14:24
  Speaker 1: who participated in UN climate talks, who worked on crafting
• 14:28
  Speaker 1: climate policy for Barack Obama's administration UM, and also which
• 14:33
  Speaker 1: energy department departments were most essential to meeting Barack Obama's
• 14:41
  Speaker 1: climate agenda. Well, so, Catherine, one thing that UM sort
• 14:45
  Speaker 1: of still get stuck out to me. So nuclear power
• 14:47
  Speaker 1: plants are known to be a particularly waste free type
• 14:51
  Speaker 1: of energy, a particularly UM considered to be more environmentally friendly. Correct, Yes,
• 14:57
  Speaker 1: they are a zero carbon emission source. So the idea
• 15:02
  Speaker 1: that President elect Trump's team is asking specific questions about
• 15:07
  Speaker 1: how to keep some of these plants running would suggest
• 15:11
  Speaker 1: that they are looking at more environmentally conscious, conscious sources
• 15:17
  Speaker 1: of energy now, I think. So it is a little
• 15:20
  Speaker 1: bit of a departure from the Obama administration in that
• 15:26
  Speaker 1: the Clean Power Plan, which was his landmark climate regulation, UH,
• 15:32
  Speaker 1: didn't really do anything for nuclear plants and didn't adequately
• 15:35
  Speaker 1: value the carbon free contributions of nuclear plants. So I
• 15:40
  Speaker 1: think that it's fair to say that folks on the
• 15:43
  Speaker 1: Trump team view helping nuclear as a departure from past policy.
• 15:48
  Speaker 1: Even though helping nuclear isn't it does contribute to our
• 15:53
  Speaker 1: goals of reducing our carbon footprint. Catherine, you you mentioned
• 15:58
  Speaker 1: that as part of the President alex transition team requests,
• 16:03
  Speaker 1: they wanted to know the names of employees of the
• 16:06
  Speaker 1: Department of Energy who attended various United Nations climate meetings. Correct?
• 16:12
  Speaker 1: Is that normal operating procedure to ask for specific names
• 16:15
  Speaker 1: of people? And are these people civil servants? In other words,
• 16:18
  Speaker 1: they are career employees, they are UM their career employees
• 16:24
  Speaker 1: as well as contractors. The bulk of Department of Energy
• 16:27
  Speaker 1: staff are made up of contractors. Um it is it
• 16:30
  Speaker 1: is definitely normal to ask such questions just to make
• 16:34
  Speaker 1: sure that transition moves smoothly. But I will say that
• 16:37
  Speaker 1: sources within the Energy Department that we spoke to were
• 16:41
  Speaker 1: alarmed by these requests and that there was a fear
• 16:44
  Speaker 1: that um maybe they would be targeted UM for their
• 16:48
  Speaker 1: role in helping to craft climate policy. It's worth mentioning
• 16:51
  Speaker 1: that someone close to the Trump transition team told us
• 16:54
  Speaker 1: that those fears were unfounded, that this was more of
• 16:57
  Speaker 1: an issue of transparency and an effort to let Republican
• 17:01
  Speaker 1: lawmakers who have been asking for this information for years,
• 17:05
  Speaker 1: um finally get the information that they've been looking for. Wait. So,
• 17:08
  Speaker 1: in other words, Republican lawmakers have been asking for the
• 17:11
  Speaker 1: specific people on this team, the names of them, and
• 17:13
  Speaker 1: they haven't been delivered until now. They've been asking, yes,
• 17:17
  Speaker 1: for more transparency around who crafted these policies, the meetings,
• 17:21
  Speaker 1: who was involved, That's that sort of thing. I cannot
• 17:24
  Speaker 1: say that, um, there has there has been a specific
• 17:27
  Speaker 1: request for the names of all staff and contractors who
• 17:30
  Speaker 1: ever attended any of these meetings, that specific part It
• 17:33
  Speaker 1: could be near campup, Pops. I was just looking at
• 17:47
  Speaker 1: Delta shares that are up almost fifty percent since June
• 17:52
  Speaker 1: and the United h Airlines United Continental up more than
• 17:56
  Speaker 1: eighty percent. Yeah, that would have been the trade, wouldn't
• 17:59
  Speaker 1: it by the end of June, and then you'd be
• 18:01
  Speaker 1: happy Today, Well, we're going to find out if our
• 18:03
  Speaker 1: our next guest bought until in June four. Frank Holme
• 18:07
  Speaker 1: CEO and chief investment officer at US Global Investors um Frank,
• 18:14
  Speaker 1: you have an e t F US Global Jets e
• 18:16
  Speaker 1: t F, which is the only dedicated airline industry related
• 18:19
  Speaker 1: to E t F on the market. So do you
• 18:22
  Speaker 1: think that this rally is just getting started or do
• 18:24
  Speaker 1: you think that we're kind of going to hit a
• 18:25
  Speaker 1: plateau here? Well, I think it's got tremendous opportunity for website.
• 18:30
  Speaker 1: In fact, I think back at that period of time,
• 18:32
  Speaker 1: I was on this radio show and we talked about it.
• 18:35
  Speaker 1: So those people who are listening, uh and bought into
• 18:38
  Speaker 1: that was so cheap. And when I try to explain
• 18:40
  Speaker 1: to people back then, is that you could buy American
• 18:43
  Speaker 1: airlines at five times earnings with a return on investor capital.
• 18:50
  Speaker 1: And and I think that over time was taken place
• 18:53
  Speaker 1: with Warren Buffett is that return to investor capital is
• 18:56
  Speaker 1: the most important factor for picking stocks. And he didn't
• 18:59
  Speaker 1: trust the leadership that they would destroy that capital. That's
• 19:02
  Speaker 1: happened before. That's totally different now. And another important factor
• 19:06
  Speaker 1: for stock screens was called shareholder yield, and that is
• 19:09
  Speaker 1: dividends paid stock buy backs and reducing debt. If you
• 19:13
  Speaker 1: looked at the out industries in the SMP five, that industry,
• 19:19
  Speaker 1: the industry with the highest shareholder yield is the airlines Franco.
• 19:23
  Speaker 1: What if you could just offer a little story or
• 19:25
  Speaker 1: an anecdote about how you came to create jets because
• 19:29
  Speaker 1: you have a background as really an expert in the
• 19:31
  Speaker 1: world of commodities, and obviously jets do use fuel, so
• 19:35
  Speaker 1: that's a commodity. But you've got a background. You know
• 19:37
  Speaker 1: a lot about the gold mining industry, a lot about
• 19:40
  Speaker 1: the commodities in business. How did you come to put
• 19:43
  Speaker 1: together jets? Well, it's called yours Global, and I'm traveling
• 19:46
  Speaker 1: all the time, and I have millions of miles in
• 19:48
  Speaker 1: all these airlines, and I noticed that all of a
• 19:52
  Speaker 1: sudden my options had dropped by say to fly to
• 19:56
  Speaker 1: New York or go here and go there, And the
• 19:58
  Speaker 1: prices of my tickets started to escalate. And I had
• 20:02
  Speaker 1: a look at travel costs and I said, well, is
• 20:04
  Speaker 1: there any t F. I've got to getting this et
• 20:06
  Speaker 1: F business, and is there any t F? There's no,
• 20:08
  Speaker 1: there's no product for that. There was one that's shut down,
• 20:11
  Speaker 1: but there was really nothing there. So I went out
• 20:14
  Speaker 1: and said, what's the biggest inverse relationship? And its energy
• 20:18
  Speaker 1: prices and energy prices fall, uh than these stocks take
• 20:22
  Speaker 1: off with profit margin. And that's why I created It's
• 20:26
  Speaker 1: so it came from personal experience. It wasn't as if
• 20:28
  Speaker 1: you were, you know, plugging numbers into a computer or uh,
• 20:32
  Speaker 1: you know, going out and finding what everybody would want.
• 20:34
  Speaker 1: It was your own personal experience. Well except that you
• 20:37
  Speaker 1: said something that was really compelling to me, which is,
• 20:39
  Speaker 1: you know, you wanted to get into the e t
• 20:41
  Speaker 1: F business. And this has sort of been a theme
• 20:43
  Speaker 1: that we have heard from our asset managers across the board.
• 20:46
  Speaker 1: You just wrote a column about this from about Deutsche
• 20:48
  Speaker 1: Bank offering a lower fee e t F. So I
• 20:52
  Speaker 1: guess I'm curious about yet. So it started last year, correct? Correct?
• 20:55
  Speaker 1: And um, it still hasn't climbed to that sort of
• 20:58
  Speaker 1: key hundred million dollar asset mark. What's the challenge for
• 21:01
  Speaker 1: you with fundraising for an et F? A new one? Well,
• 21:05
  Speaker 1: actually is one of the best launches because it quickly
• 21:07
  Speaker 1: went to fifty million dollars. Uh. And what I found
• 21:11
  Speaker 1: on the travels was that everyone would quote that wanted
• 21:14
  Speaker 1: to be negative on the industry was Warren Buffett. Warren
• 21:17
  Speaker 1: Buffett said the fastest way to lose your money is
• 21:20
  Speaker 1: put a million dollars in, you lose it in the
• 21:21
  Speaker 1: airline's industry, and it was such a negative. He has
• 21:26
  Speaker 1: such a powerful force of people reluctant to go in
• 21:29
  Speaker 1: the industry. Now that he's changed his tune, because the
• 21:33
  Speaker 1: CEOs are buying back their stock, increasing their dividend and
• 21:37
  Speaker 1: UH and the bearers to entry are very high. It's
• 21:40
  Speaker 1: it's next to impossible to create a new airport, so
• 21:43
  Speaker 1: it's a moat stock. So now that Warren Buffett is
• 21:46
  Speaker 1: more positive on airline stocks, have you noticed a surge
• 21:49
  Speaker 1: of investor interests? Absolutely, we had to create the other day.
• 21:51
  Speaker 1: That's new money coming in. And I feel that the
• 21:55
  Speaker 1: factors that we said, if if you look at the
• 21:58
  Speaker 1: industrial category at which which airline shows up in, and
• 22:02
  Speaker 1: if you looked at h transportations such as trains and trucks,
• 22:07
  Speaker 1: they traded fifteen to eighteen times earnings, best trade at
• 22:10
  Speaker 1: six returns on investor capital. They are four times greater
• 22:16
  Speaker 1: than trains and trucks. So this is the most compelling
• 22:20
  Speaker 1: industry and two million people fly day America. The index
• 22:25
  Speaker 1: that you use in order to create the actual exchange
• 22:29
  Speaker 1: traded fund how did you come to select that? What's
• 22:32
  Speaker 1: called a smart beta one and two. I didn't realize
• 22:35
  Speaker 1: the two, But the smart beta one is that we
• 22:37
  Speaker 1: went and did all these thousands of hours of looking
• 22:39
  Speaker 1: at what factors are the best to deal with the crisis.
• 22:43
  Speaker 1: The airlines went through they went through bankruptcy, they came
• 22:45
  Speaker 1: out of it. Why does Southwest not go through it?
• 22:47
  Speaker 1: What were their their financial factors that helped pick those stocks?
• 22:50
  Speaker 1: And so then we did. We created five factors and
• 22:54
  Speaker 1: that's how we picked them. Then we basically played what's
• 22:57
  Speaker 1: called Prado's law. And the stocks are American UH and
• 23:03
  Speaker 1: United Continental, Delta State West Americans and they dominated, but
• 23:09
  Speaker 1: the smaller names are foreign. So seventy of the names
• 23:12
  Speaker 1: are actually foreign capped that one. So it's a very
• 23:15
  Speaker 1: efficient way of capturing global growth. So now the industry
• 23:19
  Speaker 1: is expected to make UH. The industry globally is gonna
• 23:22
  Speaker 1: do with seven forty billion and revenue the whole world,
• 23:26
  Speaker 1: and they're going to make about thirty six billion dollars
• 23:29
  Speaker 1: in the world. America's eighteen billion of it. You know,
• 23:34
  Speaker 1: one thing that still sticks out my mind is there
• 23:36
  Speaker 1: still is this race for lower cost airlines and sort
• 23:39
  Speaker 1: of a race to the bottom. I mean, how much
• 23:41
  Speaker 1: does that factor into the calculation? You just you just
• 23:44
  Speaker 1: don't want to pay to use the overhead been in
• 23:46
  Speaker 1: the United extra extra economy. Well, I'm just saying, which
• 23:50
  Speaker 1: they just announced still happen in two thousand seventy. This
• 23:53
  Speaker 1: has been the main tension, right, is that a lot
• 23:55
  Speaker 1: of airlines are concerned that they can't get the prices
• 23:57
  Speaker 1: up and stay up with just based on the competition, right,
• 24:02
  Speaker 1: based on the sort of race to the bottom, not
• 24:04
  Speaker 1: always a race to the bottom. But I think that's
• 24:07
  Speaker 1: is becoming an ologopoly. Uh. And I think that when
• 24:10
  Speaker 1: you go look even for pricing of tickets between American
• 24:14
  Speaker 1: United it's very difficult, a big differential. Uh. And it's
• 24:18
  Speaker 1: called yield management software and algorithm that is used for
• 24:21
  Speaker 1: stock trading for trading is now being used for pricing
• 24:24
  Speaker 1: of these tickets. So I think that they have tremendous
• 24:27
  Speaker 1: pricing uh collaboration using technology. It's not you and I
• 24:32
  Speaker 1: call and talk to each other, but it's technology, so
• 24:34
  Speaker 1: it's not colluding if there's some sort of technological uh intermediary.
• 24:38
  Speaker 1: The same thing with front running. It was a it
• 24:40
  Speaker 1: was an algorithm that can see things faster and jump
• 24:42
  Speaker 1: in front of your order. It's not front running. Frank Holmes,
• 24:46
  Speaker 1: what's the nicest flight you've been on recently? People notice
• 24:51
  Speaker 1: that people come up to and say you're the jets Man.
• 24:54
  Speaker 1: Not yet at least to do for the gold End,
• 24:56
  Speaker 1: but on the jets and I would say that Delta
• 24:59
  Speaker 1: right now is a most price competitive and gives me
• 25:02
  Speaker 1: the most options. What's interesting because they are testing coach
• 25:07
  Speaker 1: meals in coach free, so they're going in the other direction.
• 25:10
  Speaker 1: And they were the first buyer refinery to to control
• 25:13
  Speaker 1: their energy. Refiner. Thanks for listening to the Bloomberg P
• 25:21
  Speaker 1: and L podcast. You can subscribe and listen to interviews
• 25:25
  Speaker 1: at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm
• 25:30
  Speaker 1: pim Fox. I'm out there on Twitter at pim Fox.
• 25:33
  Speaker 1: I'm out there on Twitter at Lisa Abramo. It's one
• 25:36
  Speaker 1: before the podcast. You can always catch us worldwide on
• 25:39
  Speaker 1: Bloomberg Radio.