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It’s Only The Beginning Of The Decline From Trade Wars: Kotok · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm PIM Fox.
• 0:08
  Speaker 1: Along with my co host Lisa A. Bramowitz. Each day
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  Speaker 1: we bring you the most important, noteworthy, and useful interviews
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  Speaker 1: for you and your money, whether you're at the grocery
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• 0:32
  Speaker 1: Trade Wars with China? Does anybody win? Let's find out from.
• 0:37
  Speaker 1: David Kotaki is the chairman of the chief executive, chief
• 0:40
  Speaker 1: Investment Officer of Cumberland Advisors. They are based in Sarasota, Florida,
• 0:44
  Speaker 1: but David is joining us here in our eleven three
• 0:47
  Speaker 1: oh studios in New York. He's also the co author
• 0:50
  Speaker 1: of the book Adventures in Muni Land. All right, David Kotalk,
• 0:54
  Speaker 1: thank you for being here. Have an Adventures in trade
• 0:56
  Speaker 1: war Land. Does anybody come out a winner? Oh? My gosh. No,
• 1:02
  Speaker 1: It's a relative lost game, and it is a different
• 1:07
  Speaker 1: kind of a game. PIM. We spent the last thirty
• 1:11
  Speaker 1: years in monetary credit banking Federal Reserve Central Banks. We
• 1:17
  Speaker 1: dealt with linear type programs revert to the mean predictability,
• 1:23
  Speaker 1: numerous e nu mercy. This is a shock business. We're
• 1:28
  Speaker 1: not used to this. We've got market agents who haven't
• 1:31
  Speaker 1: had to deal with these kinds of shocks for thirty
• 1:34
  Speaker 1: or forty years. Now. You look around the street, half
• 1:37
  Speaker 1: of them weren't born the last time we had something
• 1:40
  Speaker 1: like this. This is a big deal, and it's not good.
• 1:43
  Speaker 1: If this is such a big deal, why is the
• 1:45
  Speaker 1: SMP five trading at such elevated levels. Try to make
• 1:50
  Speaker 1: that statement with six stocks removed. Defang the fang and
• 1:55
  Speaker 1: we can see what happens with Facebook when you defang
• 1:57
  Speaker 1: a tooth. Defang the fang and look at what the
• 2:01
  Speaker 1: market has been doing. Look at the breath shrinking, new
• 2:06
  Speaker 1: highlist shrinking. My view, personal opinion, that's why we've got you. Okay.
• 2:13
  Speaker 1: The economy peaked in the second quarter of this year
• 2:17
  Speaker 1: with the four percent growth rate. If you had to
• 2:19
  Speaker 1: pick a month, it probably was April or May, because
• 2:24
  Speaker 1: that was the time when you had trade bluster rhetoric,
• 2:29
  Speaker 1: but you didn't have actual. Now we have actual. You
• 2:31
  Speaker 1: open up the Wall Street Journal editorial today and what
• 2:35
  Speaker 1: do you see the list of the growing bureaucracy. You
• 2:39
  Speaker 1: see companies begging for relief and being denied. What else
• 2:45
  Speaker 1: do you see? You go to Maine. I just came
• 2:47
  Speaker 1: back from mere lobster men, family businesses, little business, a
• 2:52
  Speaker 1: few million in revenue, six eight employees are in a
• 2:57
  Speaker 1: lobster trade war with retaliator tariffs. Some of them are saying,
• 3:02
  Speaker 1: we're gonna lose a third of our revenue. We're gonna
• 3:05
  Speaker 1: lay off people. The banks that lend to them. We're saying,
• 3:09
  Speaker 1: come in here, let's talk about what we got to
• 3:11
  Speaker 1: do with your loans. This is an ugly anecdote by anecdote,
• 3:16
  Speaker 1: shock by shock, and we're only seeing the beginning. If
• 3:21
  Speaker 1: we're only seeing the beginning, and the stock market is
• 3:24
  Speaker 1: supposed to be a forward looking mechanism, why our investors
• 3:28
  Speaker 1: not looking at those lobstermen in Maine, the cranberry growers
• 3:33
  Speaker 1: in Massachusetts, and the steelmakers like well al CoA aluminum
• 3:39
  Speaker 1: they wanted an exemption on some of those import tariffs
• 3:42
  Speaker 1: because they wanted to import aluminum that came from their
• 3:45
  Speaker 1: own operations overseas. Well, Why does the stock market do
• 3:50
  Speaker 1: what it does? We had a conversation were buyers themselves,
• 3:53
  Speaker 1: Well there you go, so I I said, remember new
• 3:58
  Speaker 1: fed chair, green Span worried about currency, exchange rates, raises,
• 4:05
  Speaker 1: interest rates, market keeps going up, hits a wall in August,
• 4:10
  Speaker 1: and two months later it's down and we've had a
• 4:14
  Speaker 1: bear market that has been devastating. Why did the stock
• 4:17
  Speaker 1: market then go up in June to go down in September.
• 4:22
  Speaker 1: I don't know what the stock market's gonna I'll tell
• 4:24
  Speaker 1: you what we did in our portfolios. Tell us cash reserves.
• 4:27
  Speaker 1: We have them domestic focus. Depends on the portfolios, can
• 4:31
  Speaker 1: be as high as a third, as low as ten
• 4:35
  Speaker 1: fifteen percent, depends on the structure. But US Focus has
• 4:40
  Speaker 1: a cash reserved. Now, what do you do with the rest?
• 4:43
  Speaker 1: Domestic small mid cap focus locally reduce exposure to the
• 4:50
  Speaker 1: international breuhaha, and hope, by the way, you can restore
• 4:54
  Speaker 1: it because they're going to have a settlement and not
• 4:57
  Speaker 1: a long term trade war, and we don't know which
• 4:59
  Speaker 1: it's going to be now. I confess every time I
• 5:01
  Speaker 1: hear the word hope, when I hear about money, it's
• 5:05
  Speaker 1: not a It makes me worried a little a little bit.
• 5:08
  Speaker 1: You're you talked about the cash portfolio right ten on
• 5:13
  Speaker 1: the downs on the low side, and maybe third for
• 5:15
  Speaker 1: some other and it depends and that's temporary. It's transitional,
• 5:19
  Speaker 1: but it may be there for a while. What do
• 5:23
  Speaker 1: you sell in order to raise that kind of capital?
• 5:27
  Speaker 1: What we reduced the tech? Wait? We fortunately we came
• 5:32
  Speaker 1: out of the E t f s that were heavy
• 5:34
  Speaker 1: before Facebook blew up, and that kind of gave us
• 5:38
  Speaker 1: a little gift we didn't know. Take your profits, pay
• 5:41
  Speaker 1: your taxes, and be happy. You bet you. You know
• 5:44
  Speaker 1: what my grandfather taught me when I was a little boy.
• 5:47
  Speaker 1: If you make a profit, say thank you, and you
• 5:50
  Speaker 1: don't have to make the whole profit. And if you
• 5:52
  Speaker 1: pay the tax, say thank you because the rest of
• 5:55
  Speaker 1: it is in your pocket. Given that advice from your
• 6:00
  Speaker 1: and father, do you believe that investors are ignoring the
• 6:05
  Speaker 1: fundamental geopolitical situation in favor of Oh, corporate earnings are
• 6:12
  Speaker 1: going to continue to produce these incredible results. Well, I
• 6:16
  Speaker 1: think you hit it right on the head, Right on
• 6:19
  Speaker 1: the head. We've had great earnings. We've got another round
• 6:22
  Speaker 1: reporting off the second quarter of earnings. They're good. Most
• 6:26
  Speaker 1: companies beat expectations, pretty good result. We've had a good quarter. Now,
• 6:31
  Speaker 1: did we have a good quarter? And is this a
• 6:34
  Speaker 1: continuation of a trend? Maybe I don't think so. Did
• 6:39
  Speaker 1: we accelerate business into the second quarter? Did we borrow
• 6:42
  Speaker 1: from the future because of the trade effects? Do we
• 6:46
  Speaker 1: not see the dislocations from the trade effects yet? Are
• 6:50
  Speaker 1: they coming? Do they affect credit? Do we get some
• 6:53
  Speaker 1: inflation from it? Do we get growth slow down? All
• 6:57
  Speaker 1: those things line up. That's not healthy for continuing earnings
• 7:01
  Speaker 1: being robust. Let's say a client calls and three months
• 7:07
  Speaker 1: have gone by, stocks have still increased in value. Does
• 7:13
  Speaker 1: David Kotok say, Look, just because you didn't make the
• 7:18
  Speaker 1: last three months doesn't mean that what's coming is going
• 7:22
  Speaker 1: to get better. Yeah. I mean you say it, they
• 7:25
  Speaker 1: don't want to hear it. I And just that's my point.
• 7:26
  Speaker 1: How do you educate people? How do people take that?
• 7:30
  Speaker 1: Because you know that what happens, people spend a lot
• 7:33
  Speaker 1: of time looking at the downside, and they just complain
• 7:36
  Speaker 1: about not making at all. PIM we had a great run,
• 7:38
  Speaker 1: a great market. No one gets of the market. We
• 7:42
  Speaker 1: know that. We've talked about that over the years. So
• 7:45
  Speaker 1: you say, Okay, it's okay to put a little dry
• 7:48
  Speaker 1: powder in the bank. You don't have to sell everything,
• 7:51
  Speaker 1: but you have to put dry powder in the bank.
• 7:54
  Speaker 1: And there are times when you have to admit and
• 7:56
  Speaker 1: I'm in minting it. We don't know. We haven't had
• 8:01
  Speaker 1: the kinds of issues on the plate driven by politics
• 8:07
  Speaker 1: where a trade policy is driven by a man named
• 8:10
  Speaker 1: Peter Navarro who promised there'll be no retaliation. Remember who
• 8:16
  Speaker 1: promised we won't have any of these effects? Set it
• 8:20
  Speaker 1: looking into the camera and he's got the president's here,
• 8:25
  Speaker 1: and who knows who's got the president's here on the
• 8:28
  Speaker 1: latest tweet. This bizarre leadership and the country still permits it.
• 8:34
  Speaker 1: Thank you very much. David Kotak, Chairman, Chief investment officer,
• 8:38
  Speaker 1: Cumberland Advisers, based in Sarasota, Florida. President Donald Trump has
• 8:57
  Speaker 1: warned countries against doing big business with Iran as sanctions
• 9:03
  Speaker 1: kicked back. In To tell us more about the implications
• 9:06
  Speaker 1: for world oil markets is Dr Ellen Wall, President of
• 9:09
  Speaker 1: Transversal Consulting and an expert on energy and Middle East politics.
• 9:15
  Speaker 1: Dr Wall, thank you very much for being with us.
• 9:18
  Speaker 1: Can you explain what effect the sanctions will have on
• 9:22
  Speaker 1: Iran's oil industry? Right now? The sanctions that are being
• 9:26
  Speaker 1: implemented are on purchases of US dollars, purchases of gold,
• 9:31
  Speaker 1: and also particularly the automobile industry. And that means that
• 9:35
  Speaker 1: any person or institutions that's helping the government of Iran
• 9:38
  Speaker 1: to purchase US currency would be subject to sanctions, and
• 9:42
  Speaker 1: that impacts the oil industry because most oil transactions are
• 9:46
  Speaker 1: done in dollars. Now, for quite some time now, a
• 9:50
  Speaker 1: lot of Iran's transactions have actually not been occurring in dollars.
• 9:53
  Speaker 1: They've been using duros and also some local currencies. So
• 9:58
  Speaker 1: right now we're not looking to see a whole lot
• 10:02
  Speaker 1: of impact on the Iranian oil industry aside from what
• 10:07
  Speaker 1: we've already seen. But what we do need to look
• 10:10
  Speaker 1: at is the sanctions that are coming into effect on
• 10:13
  Speaker 1: November five, and those who are actually clarified in this
• 10:16
  Speaker 1: most recent executive order, and that will be sanctions against
• 10:20
  Speaker 1: anyone or any institution that assists, sponsors, or provides goods
• 10:24
  Speaker 1: or services in support of the National Iranian Oil Company.
• 10:28
  Speaker 1: And so everyone who is right now engaged in doing
• 10:31
  Speaker 1: business with Iran in terms of oil is going to
• 10:33
  Speaker 1: be watching how the US implements this round of sanctions
• 10:37
  Speaker 1: to see and to make their plans in advance of
• 10:41
  Speaker 1: November five. Okay, let's see if we can describe two
• 10:45
  Speaker 1: different scenarios, one having to do with the Iran's domestic economy.
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  Speaker 1: Do they have refining capacity? They do, it's not great.
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  Speaker 1: Part of the issue during the first round of sanctions,
• 10:59
  Speaker 1: the earlier ones before the j c p o A
• 11:02
  Speaker 1: was that they were unable to get parts and supplies
• 11:05
  Speaker 1: and things and infrastructure parts needed to um fix their
• 11:10
  Speaker 1: declining refineries and to put in more refining capacity. Apparently
• 11:15
  Speaker 1: they have made strides in producing some of these things domestically,
• 11:19
  Speaker 1: but they're not yet ready, so it will affect Iran's
• 11:23
  Speaker 1: domestic refining capacity, which will have an impact on the
• 11:27
  Speaker 1: Iranian economy. Okay, the second part is to which country
• 11:32
  Speaker 1: does Iran export the most oil? Is it South Korea?
• 11:36
  Speaker 1: Is it China? Right now, it's China. They are the
• 11:40
  Speaker 1: number one purchaser of Iranian oil. And what will the
• 11:45
  Speaker 1: sanctions do to Chinese oil imports? Well, that is the
• 11:50
  Speaker 1: big question that we're all looking to see what happens
• 11:54
  Speaker 1: right now. China has said it has no intention regardless
• 11:57
  Speaker 1: of these sanctions of decree seeing it's Iranian oil imports. However,
• 12:03
  Speaker 1: it has said it's not planning on increasing them, which
• 12:06
  Speaker 1: is actually a pretty big signal that it's um that
• 12:10
  Speaker 1: it is taking these sanctions somewhat seriously. The big question
• 12:13
  Speaker 1: is how is it going to import that oil? Is
• 12:16
  Speaker 1: it simply going to just ignore the sanctions? Will it
• 12:20
  Speaker 1: have to pass most of its funds and things through
• 12:23
  Speaker 1: uh the There's one particular bank in China that they
• 12:28
  Speaker 1: use last time that doesn't really do business with American interests,
• 12:31
  Speaker 1: and so they can use that bank to take care
• 12:35
  Speaker 1: of those financial transactions. The problem is that with the
• 12:38
  Speaker 1: amount of oil that China is importing from Iran these days,
• 12:42
  Speaker 1: they that bank may not be able to handle all
• 12:44
  Speaker 1: those transactions and we may see an involuntary decline from China. Now,
• 12:51
  Speaker 1: there has been a report that the total export volume
• 12:56
  Speaker 1: on various types of oil carrying ship to afromax Is,
• 13:00
  Speaker 1: Suez max Is and those very large crude carriers, that
• 13:04
  Speaker 1: the exports from Iranian ports have fallen about seven percent
• 13:10
  Speaker 1: in July. Do you agree with that? Yes, And we
• 13:15
  Speaker 1: are seeing that particularly India has their refineries in India,
• 13:19
  Speaker 1: not the state owned ones, but some of the other
• 13:21
  Speaker 1: ones like Naraya, which is owned by Rosneft, have been
• 13:26
  Speaker 1: cutting their imports of Iranian oil. So that does match
• 13:30
  Speaker 1: with what we're seeing also South Korea has been looking
• 13:34
  Speaker 1: at South Korea imports a lot of Iranian condensate, and
• 13:37
  Speaker 1: they've been looking at other options, including light oil from
• 13:40
  Speaker 1: create and oil from condensate from the United States. All Right,
• 13:44
  Speaker 1: some other customers include Japan. What do you believe the
• 13:47
  Speaker 1: Japanese refiners will do. I do think that when when
• 13:51
  Speaker 1: it comes down to it, the Japanese refiners will not
• 13:54
  Speaker 1: continue to purchase Iranian oil um if they do not
• 13:58
  Speaker 1: receive a waiver from the us UH. It seems right
• 14:01
  Speaker 1: now it's unlikely they're going to get a waiver. They've
• 14:04
  Speaker 1: asked for one. The State Department has been asked about
• 14:07
  Speaker 1: the status of that. They've decided they they're not commenting
• 14:10
  Speaker 1: on these case by case situations. But given the language
• 14:15
  Speaker 1: and the stances that we've seen coming from the Trump administration,
• 14:18
  Speaker 1: it does not seem likely that Japan will get a
• 14:21
  Speaker 1: waiver for to continue to purchase Iranian oil. Explain what
• 14:26
  Speaker 1: is Turkey's relationship to Iranian oil. Turkey is a is
• 14:30
  Speaker 1: a fairly large importer of Iranian oil right now, and
• 14:33
  Speaker 1: Turkey in the United States are not on good terms
• 14:36
  Speaker 1: at this moment, and so Turkey has said they're going
• 14:39
  Speaker 1: to continue to purchase this Iranian oil. Now the question
• 14:42
  Speaker 1: again is how, because how are they going to ensure
• 14:46
  Speaker 1: the tankers full of Iranian oil? How are they going
• 14:48
  Speaker 1: to purchase that oil. We may see them have to
• 14:51
  Speaker 1: decrease their um legitimate purchases, but we may see an
• 14:55
  Speaker 1: increase in um smuggling or in the illegitimate purchases of
• 15:00
  Speaker 1: Rainy oil. Iran and Turkey share a border. Now there's
• 15:03
  Speaker 1: no pipeline that connects Iran and Turkey because it was
• 15:07
  Speaker 1: blown up by the curds, but we could see some
• 15:09
  Speaker 1: trucking going on there, Thank you very much. Dr ellen
• 15:12
  Speaker 1: Wald is the president of Transversal Consulting and also a
• 15:16
  Speaker 1: non resident Senior Fellow at the Atlantic Council's Global Energy Center.
• 15:38
  Speaker 1: We consult with Damian Sassare are fixed income strategist for
• 15:42
  Speaker 1: Bloomberg Intelligence when we want to know anything about what's
• 15:45
  Speaker 1: going on in the world of emerging markets, and Damien,
• 15:49
  Speaker 1: good to have you with us. Is Turkey an emerging
• 15:52
  Speaker 1: market or is it a cratering market at this point? Yeah?
• 15:56
  Speaker 1: I know you. I mean, now the comparisons is really
• 15:59
  Speaker 1: only one comparison to make, and you just made its Venezuela.
• 16:01
  Speaker 1: You know, if you look at local currency tenure yields,
• 16:03
  Speaker 1: if you look at their their dollar equivalent yield, if
• 16:06
  Speaker 1: you look at the performance of their currency and their
• 16:07
  Speaker 1: equity markets, Venezuela is really the only one you can
• 16:10
  Speaker 1: even make comparison to, in fact, but the thing that
• 16:12
  Speaker 1: big difference is Venezuela has oil. Turkey doesn't have oil.
• 16:17
  Speaker 1: It just seems to have a problem. What is going first,
• 16:21
  Speaker 1: one don't just set out what are the issues that
• 16:24
  Speaker 1: Turkey faces and what are the potential solutions if any. Right, Well,
• 16:29
  Speaker 1: I mean Turkey's fiscal priorities are not aligned with the
• 16:32
  Speaker 1: country's sovereign balance sheet, right, I mean they have um,
• 16:36
  Speaker 1: They've extracted a ton of funding from the West, from
• 16:38
  Speaker 1: the US, from Europe, yet President Urdwin's pivoted away from them. Um.
• 16:42
  Speaker 1: And that's really at the root of this. And so
• 16:44
  Speaker 1: the market effectively has lost pretty much all confidence in
• 16:46
  Speaker 1: the central Bank and it's polity mechanisms that are in place,
• 16:49
  Speaker 1: such as interest rates and so forth, to um to
• 16:52
  Speaker 1: to to basically arrest the decline in UH in the
• 16:56
  Speaker 1: country's you know, asset base and so right now, so
• 16:59
  Speaker 1: far as I can tell, it looks like capital controls
• 17:02
  Speaker 1: appear inevitable and and that's never a good thing for
• 17:04
  Speaker 1: an emerging market, especially one were inflations running at sixteen
• 17:07
  Speaker 1: per year. The current account deficits over six percent now
• 17:11
  Speaker 1: UM it's external debtload is upwards of total debt um
• 17:16
  Speaker 1: p M I felt to its lowest level in May,
• 17:18
  Speaker 1: although it's recovered a bit. I mean, we're just, uh,
• 17:20
  Speaker 1: it's a bad situation. And so you know, from where
• 17:23
  Speaker 1: we sit, you know, there's a few other things that
• 17:24
  Speaker 1: kind of come to mind. And the first thing that
• 17:26
  Speaker 1: might help mitigate the issue is if if if President
• 17:29
  Speaker 1: Urdwin and Turkey were to re engage with the US,
• 17:31
  Speaker 1: because right now we're having some diplomatic issues and I'll
• 17:35
  Speaker 1: just kind of run you through them. Um. You know,
• 17:37
  Speaker 1: Turkey's refused to release UM Pastor Andrew Brunson, also a
• 17:41
  Speaker 1: NASA scientist, UM, who's who's been locked up since sixteen. UM.
• 17:45
  Speaker 1: We have a halk Bank, one of the largest banks
• 17:48
  Speaker 1: in Turkey, that helped a random ad U S sanctions
• 17:50
  Speaker 1: on oil some time ago. And we had Turkey decision
• 17:54
  Speaker 1: to recently purchase a missile system from Russia, really turning
• 17:56
  Speaker 1: their backs on NATO. So that's from the U S side.
• 17:59
  Speaker 1: From the Turkish side, You've got you know, um, Turkey
• 18:03
  Speaker 1: looking for the US to extradite Fatula Gulan, which is
• 18:06
  Speaker 1: an Islamic cleric whom is a former ally of Urdwin
• 18:08
  Speaker 1: who he blames for the kup In. And you have
• 18:12
  Speaker 1: the US arming Kurdish forces um uh, you know, basically
• 18:16
  Speaker 1: against Isis um. But you know basically that is Dwin
• 18:20
  Speaker 1: views the Kurds as as terrorists. So so you have
• 18:22
  Speaker 1: these diplomatic divides, and it's really just weighing on the
• 18:25
  Speaker 1: economy and the people of Turkey, and you know, something
• 18:28
  Speaker 1: needs to be done in order for for for US
• 18:31
  Speaker 1: to arrest it the clients. So let's let me see
• 18:34
  Speaker 1: I can get this. They have debts they cannot repay,
• 18:37
  Speaker 1: they have a currency that is dwindling in value, and
• 18:42
  Speaker 1: there is radio silence from the government. Yeah, that's exactly right.
• 18:46
  Speaker 1: And so we do have a delegation of Turkish officials
• 18:49
  Speaker 1: supposedly coming to Washington in the next two days, and
• 18:52
  Speaker 1: one would hope that would be the beginning of a
• 18:55
  Speaker 1: appeal to the I m F, perhaps for a line
• 18:57
  Speaker 1: of credit or alone or something of that nature to
• 18:59
  Speaker 1: sort of give some confidence to to their existing creditors
• 19:03
  Speaker 1: that hey, maybe there's gonna be Would the United Banks
• 19:05
  Speaker 1: have to approve any disbursement from the International Monetary Fund
• 19:09
  Speaker 1: to help Turkey? One would think the U S would
• 19:12
  Speaker 1: be heavily involved in those negotiations. Absolutely. Um, you would
• 19:15
  Speaker 1: think that perhaps there would be an appeal to the
• 19:17
  Speaker 1: White House and to President Trump's administration in that type
• 19:20
  Speaker 1: of a scenario. But you know, right now, um, it's
• 19:23
  Speaker 1: anyone's guess if they're even gonna make it here. And
• 19:26
  Speaker 1: so you know that is kind of where we are.
• 19:28
  Speaker 1: I mean, it's just, um, you know, it's been radio
• 19:30
  Speaker 1: silence quite frankly from urdle Win from the Central Bank
• 19:33
  Speaker 1: of the Republic of Turkey, right, and and that that
• 19:36
  Speaker 1: radio silence is giving a lot of people room for pause.
• 19:39
  Speaker 1: Let's just assume that you get a blank slate and
• 19:41
  Speaker 1: they called Damien Sassaur and say, all right, give us
• 19:44
  Speaker 1: three things that we ought to do by the end
• 19:47
  Speaker 1: of the week to start to put this on a
• 19:50
  Speaker 1: more reliable and sustainable recovery. Yeah, there are the three
• 19:54
  Speaker 1: things that I would do. Is I'd read anything and
• 19:56
  Speaker 1: everything I can to reinstall central bank confidence that's the most.
• 20:01
  Speaker 1: I don't think you can even I don't think it's
• 20:03
  Speaker 1: the level of interest rates. I think it's just about
• 20:06
  Speaker 1: the central banks independence, which, as we've discussed here on
• 20:09
  Speaker 1: this show before, has been called into question now that
• 20:11
  Speaker 1: Irwin's put his son in law at the head of
• 20:13
  Speaker 1: the finance ministry. Basically he's controlling the economy, or maybe
• 20:16
  Speaker 1: put someone else in charge of the central banks. We
• 20:19
  Speaker 1: need independence. That's the first order business. The second would
• 20:21
  Speaker 1: be they need to tighten fiscal spending. They need to
• 20:24
  Speaker 1: take structural forms. They have a lot of debt, they
• 20:26
  Speaker 1: need to stop spending money, stop spending money exactly. And
• 20:30
  Speaker 1: the third would be, yeah, I think they need to
• 20:32
  Speaker 1: go and appeal to the I m F. They need
• 20:34
  Speaker 1: to secure some sort of backup facility in place to
• 20:37
  Speaker 1: help arrest uh an idea how much? Um, I have
• 20:40
  Speaker 1: no idea how much? And I have no idea. Well,
• 20:43
  Speaker 1: I don't know if it's so much. The number again,
• 20:45
  Speaker 1: it's just the confidence that hey, they're now appealing to
• 20:47
  Speaker 1: multi lateral institutions for for assistance, and they realize that
• 20:51
  Speaker 1: their economy is in a bad way and they need
• 20:53
  Speaker 1: to do something about it. And you know, look we like,
• 20:56
  Speaker 1: I mean, like most most investors in emerging market debt
• 20:59
  Speaker 1: will they like I m F backed sovereigns, so you know,
• 21:03
  Speaker 1: we would like to see that happen as well. Thank
• 21:05
  Speaker 1: you very much. Damian Sassauer as always expert when it
• 21:08
  Speaker 1: comes to emerging markets. He's our fixed income strategist for
• 21:11
  Speaker 1: Bloomberg Intelligence. Talking about Turkey and it's a dire economic situation.
• 21:33
  Speaker 1: Let's turn our attention to the connection between wildfires in
• 21:37
  Speaker 1: California and the utilities in California. Here to tell us
• 21:41
  Speaker 1: all about it is Kit Ki is our senior Industrials
• 21:44
  Speaker 1: and utilities analysts for Bloomberg Intelligence. Kit thank you very
• 21:49
  Speaker 1: much for joining me. Maybe just explain to people that
• 21:52
  Speaker 1: it is not just the current wildfires that have been
• 21:56
  Speaker 1: affecting companies like Pacific Gas and Electric PGNI. This is
• 22:00
  Speaker 1: something that has lingered from last year's wildfire season and
• 22:05
  Speaker 1: it is continuing unfortunately this year. Absolutely right. Last year,
• 22:10
  Speaker 1: there was an estimate of up to fifteen billion dollars
• 22:14
  Speaker 1: in liabilities that p g n E ran up, and
• 22:18
  Speaker 1: maybe three or four billion that Edison International in the
• 22:21
  Speaker 1: South has pending. Nobody knows for sure what those numbers
• 22:26
  Speaker 1: are like because all the lawsuits have not been filed
• 22:30
  Speaker 1: and they're going to take a long time. But the
• 22:33
  Speaker 1: you know, given the track record so far, uh, and
• 22:37
  Speaker 1: given the likelihood the courts are sympathetic to victims. Uh, big,
• 22:42
  Speaker 1: big potential problems already in the books for pen and Edison,
• 22:48
  Speaker 1: and of course what's going on now and what might
• 22:51
  Speaker 1: go on next year. This had to do with a
• 22:54
  Speaker 1: signing blame or responsibility for some of the fires. But
• 23:00
  Speaker 1: there's also an issue having to do with laws regulations
• 23:04
  Speaker 1: in the state of California. Yeah, exactly. The utilities and
• 23:07
  Speaker 1: investors feel like they're falling in the cracks here that
• 23:11
  Speaker 1: there's a doctrine in California, mainly in California that the
• 23:16
  Speaker 1: courts of upheld called inverse condemnation, which holds that a
• 23:21
  Speaker 1: utility is gonna have to pay for any damages anybody
• 23:26
  Speaker 1: suffers if the utility is even slightly involved, regardless of
• 23:31
  Speaker 1: their fault. So the idea, uh, you know, broadly was
• 23:35
  Speaker 1: somebody picks up the tab first and then you go
• 23:38
  Speaker 1: and assign blame. Well, you know, by the time they
• 23:41
  Speaker 1: get around to assigning it, investors are legitimately afraid that
• 23:44
  Speaker 1: nobody's going to give the money back to the utilities,
• 23:46
  Speaker 1: and that's the huge threat there is that the utilities
• 23:49
  Speaker 1: have these multibillion dollar liabilities just lingering and eventually having
• 23:54
  Speaker 1: to be paid. We know that PGNI currently pays no dividend.
• 24:00
  Speaker 1: Correct they've been trying to conserve cash. What's the likelihood
• 24:05
  Speaker 1: that pen has to seek bankruptcy protection. I view it
• 24:09
  Speaker 1: as a strategic threat at this point. I don't think
• 24:15
  Speaker 1: that they're in my view that they, uh you know,
• 24:18
  Speaker 1: are an imminent cash danger the way they were in
• 24:23
  Speaker 1: the energy crisis in oh one, for example, because a
• 24:26
  Speaker 1: lot of these decisions about liabilities haven't been made yet. However,
• 24:31
  Speaker 1: they are gonna happen in the future, and I think
• 24:35
  Speaker 1: uh p GNY correctly is telling people we're gonna go
• 24:37
  Speaker 1: bankrupt if this continues someday, and it's up to us
• 24:41
  Speaker 1: when we file. And they're trying to make the state
• 24:45
  Speaker 1: legislature make some decisions about protecting us from catastrophic losses
• 24:51
  Speaker 1: that make no sense because you need a utility that
• 24:54
  Speaker 1: can operate financially. P GENS shares have lost about forty
• 24:59
  Speaker 1: of their value usince October of last year. Does that
• 25:04
  Speaker 1: figure into the back and forth between PG and E
• 25:08
  Speaker 1: and state regulators. Are they able to kind of use
• 25:12
  Speaker 1: that as a backdrop and say, look, this is what's happening.
• 25:16
  Speaker 1: And as you just said, they do need a public utility.
• 25:19
  Speaker 1: There's no question that the utility managers and investors go
• 25:24
  Speaker 1: to the public authorities and say, we're we've taken our heads.
• 25:29
  Speaker 1: You know, it's not all our fault. Even even in
• 25:32
  Speaker 1: the findings by the fire authorities. Yeah, we have some blame,
• 25:36
  Speaker 1: but other people have other blame, and some of it
• 25:39
  Speaker 1: is just fire start and they burn and it's not
• 25:42
  Speaker 1: you know, because we have wires around doesn't mean it
• 25:46
  Speaker 1: was our fault. Um. But at any rate, we can't
• 25:49
  Speaker 1: go bankrupt. It makes no sense. Don't force us into
• 25:53
  Speaker 1: that position. And we've done what we can by cutting
• 25:56
  Speaker 1: our dividend out completely. Give you about twenty seconds. What
• 26:01
  Speaker 1: is next? What should we look forward? We have two
• 26:04
  Speaker 1: things going on. One the big event should be by
• 26:09
  Speaker 1: the end of August. The legislature in California will have
• 26:12
  Speaker 1: to make a decision on whether they get rid of
• 26:14
  Speaker 1: inverse condemnation somewhere or not, and that could play into
• 26:17
  Speaker 1: PGNI deciding about bankruptcy. The other is in the near term,
• 26:21
  Speaker 1: the biggest fire from last year, the Tubs Fire, has
• 26:25
  Speaker 1: a decision to be made by the cal Fire Authority,
• 26:29
  Speaker 1: the firefighting agency that puts out a report. Thanks very much.
• 26:34
  Speaker 1: Kit Connoledge is our senior Industrials and Utilities analyst for
• 26:37
  Speaker 1: Bloomberg Intelligence. Knows all about the business and always appreciate
• 26:42
  Speaker 1: your stopping by and enlightening us. Much appreciated. Thanks for
• 26:48
  Speaker 1: listening to the Bloomberg P and L podcast. You can
• 26:51
  Speaker 1: subscribe and listen to interviews at Apple Podcasts, SoundCloud, or
• 26:55
  Speaker 1: whatever podcast platform you prefer. I'm pim Fox. I'm on
• 26:58
  Speaker 1: Twitter at and Fox. I'm on Twitter at Lisa Abramo
• 27:02
  Speaker 1: wits one. Before the podcast, you can always catch us
• 27:05
  Speaker 1: worldwide on Bloomberg Radio.