Latest / Bloomberg Intelligence / More Fed Rate Cuts Will Help EM Assets: Eric Stein

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More Fed Rate Cuts Will Help EM Assets: Eric Stein · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg PENL podcast. I'm Paul swing you.
• 0:05
  Speaker 1: Along with my co host Lisa Brahmas. Each day we
• 0:07
  Speaker 1: bring you the most noteworthy and useful interviews for you
• 0:10
  Speaker 1: and your money. Whether at the grocery store or the
• 0:12
  Speaker 1: trading floor, find a Bloomberg Penl podcast on Apple podcast
• 0:16
  Speaker 1: or wherever you listen to podcasts, as well as at
• 0:18
  Speaker 1: Bloomberg dot com. Yields around the world have plunged to
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  Speaker 1: near or record lows in the past few weeks. The
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  Speaker 1: question is how low will they go? What is this
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  Speaker 1: a response to? Is it monetary policy alone or is
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  Speaker 1: it the idea that we're headed for a global downturn.
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  Speaker 1: Joining us now is Eric Stein, portfolio manager and co
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  Speaker 1: director of Global fixed income at Eaton Vance, which oversees
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  Speaker 1: four hundred and sixty billion dollars in Boston. Eric, thank
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  Speaker 1: you so much for being with us. I want to
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  Speaker 1: start with your prediction going forward. Have we seen the
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  Speaker 1: lows of US treasury yields in particular? Um? Well, first off,
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  Speaker 1: thanks for having me on you great great question. Uh,
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  Speaker 1: you know, I still think we probably will head lower
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  Speaker 1: at some point. Um. You know, both given just pressure
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  Speaker 1: from global monetary policy where we're one central bank cuts
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  Speaker 1: and then more need to cut, as well as the
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  Speaker 1: US China trade war. And you know what's interesting to
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  Speaker 1: me is that everyone's focused on the FED meeting last
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  Speaker 1: week with the you know, slightly more more hawkish than expected,
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  Speaker 1: but cut uh. And then when the trade war ramped up,
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  Speaker 1: you just saw massive, massive amounts more and more an
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  Speaker 1: interest rate volatility from the trade war and the tariff
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  Speaker 1: tweet from Trump then you actually did from the FED meeting.
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  Speaker 1: So Eric, wonder kind of what the house call is
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  Speaker 1: on the economy as you guys with your vast holdings.
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  Speaker 1: I mean, I seem to have growing concern about the
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  Speaker 1: global slowdown and might create a global recession. How are
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  Speaker 1: you guys viewing it? Yeah, so I'd say, you know,
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  Speaker 1: first of the great thing at being in a place
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  Speaker 1: like Eating Vance, we don't have a house call. We
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  Speaker 1: have you know, lots of different portfolio managers running running
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  Speaker 1: different funds around the firm. We all have our own
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  Speaker 1: different views on the economy, so that there is no
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  Speaker 1: house view per se at Eating Vance management. But you know,
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  Speaker 1: I will say my own particular view is that you know,
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  Speaker 1: the economy is still okay, that pretty good. You know,
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  Speaker 1: globally you see strong consumers, strong labor markets, yet weak investment.
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  Speaker 1: What you know, what would concern me is just that,
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  Speaker 1: you know, uncertainty and lack of investment that we've really
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  Speaker 1: seen for for some period of time has ramped up.
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  Speaker 1: And if the trade war rhetoric and tariffs are ramp up,
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  Speaker 1: you know, that could lead to the further concerns. So
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  Speaker 1: right now, the US economy consumers in very good shape,
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  Speaker 1: labor markets in very good shape. It's just the delta
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  Speaker 1: based on investment is what's concerning people and concerning me
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  Speaker 1: as well. Eric. It's interesting you say that people have
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  Speaker 1: different views within eating vans and are able to execute
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  Speaker 1: on them. What's the biggest debate among Yeah, so, you know,
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  Speaker 1: i'd I'd say one debate I have with some of
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  Speaker 1: my colleagues on you know, is does the does these
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  Speaker 1: yield curve matter? Does the shape of the yield curve, uh,
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  Speaker 1: you know, actually meet anything? And you know, I have been,
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  Speaker 1: you know, personally of the view that the yield curve
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  Speaker 1: connotes information and investors should not ignore information. And I
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  Speaker 1: think I wrote a blog post that or et vance website,
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  Speaker 1: you know, ignore it, ignore it at your peril. You're
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  Speaker 1: talking about the three months tenure or the two year
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  Speaker 1: tenure or all of them, all of the above. You know,
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  Speaker 1: I don't get so precise and you know, which a
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  Speaker 1: part of the curve because they think, you know, focusing
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  Speaker 1: on a couple of basis points in version here there,
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  Speaker 1: I think is missing the bigger point. Uh. And certainly
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  Speaker 1: their arguments and sometimes my colleagues make them that look
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  Speaker 1: certain parts of the curve or uh, you know, or
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  Speaker 1: are misleading because of you know, FED purchases and other
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  Speaker 1: foreign central bank purchases and treasuries. And I think all
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  Speaker 1: that's true. Um. But to me, when you see you know,
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  Speaker 1: significant moves in the curve, it's telling your information. So
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  Speaker 1: if you go back to the FED meeting last week,
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  Speaker 1: that hawk ish cut um, Fed cut rates, and the
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  Speaker 1: yield curve flattened pretty dramatically, which is not typically what
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  Speaker 1: a central bank would want to see when they're cutting
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  Speaker 1: rates and trying to ease monetary policy. So, Eric, we
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  Speaker 1: have over fifteen billion or trillion dollars of negative yielding
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  Speaker 1: debt out there in the marketplace. What do you think
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  Speaker 1: that's telling us? I think it's it's telling you know, well,
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  Speaker 1: a few things. One is, there's uh, you know, a
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  Speaker 1: lot of countries that have negative interest rates at the
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  Speaker 1: front end, whether that be Europe, Japan, UH, Switzerland, countries
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  Speaker 1: like that. Uh. In addition, it's just saying, you know,
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  Speaker 1: some of those places, I say, particularly in Europe and
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  Speaker 1: I think of Germany, you know, there's just too much
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  Speaker 1: demand for that debt relative to supply. And you know,
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  Speaker 1: typically my own view isn't then I'm usually not a big,
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  Speaker 1: big believer of fiscal stimulus per se, because I sometimes
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  Speaker 1: think it's misguided. But I think in the current environment,
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  Speaker 1: and particularly in Europe and particularly in Germany, the market
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  Speaker 1: is effectively demanding more debt, and I think, you know,
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  Speaker 1: in Europe and Germany, I think we will see more
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  Speaker 1: fiscal stimulus down the road, and I think that's very
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  Speaker 1: much needed. So you previously worked on the market's desk
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  Speaker 1: of the New York Federal Reserve, which makes me want
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  Speaker 1: to ask so many questions to you about what we've
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  Speaker 1: recently seen in terms of the turmoil there and some
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  Speaker 1: of the people who have departed. Are you concerned that
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  Speaker 1: the Federal Reserve doesn't necessary really have the market insight
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  Speaker 1: to be able to telegraph their intentions effectively, as I
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  Speaker 1: would say, no, that's not a particular concern of mind.
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  Speaker 1: You know, as a as a veteran who worked in
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  Speaker 1: the New York Fed Open Markets desk in oh seven
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  Speaker 1: o eight in the really the beginning of the crisis,
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  Speaker 1: you know, and I still keep in touch with people there.
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  Speaker 1: There are lots of you know, very talented professionals that
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  Speaker 1: whose job it is to um, you know, talk to
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  Speaker 1: financial market participants and kind of gauge market reaction of
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  Speaker 1: various um, you know, Paul, of various monetary policy actions
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  Speaker 1: where whether that be FED cutting rates, or or operations
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  Speaker 1: with the balance sheet or even sometimes you know, FED speeches.
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  Speaker 1: Where I think it becomes challenging is when there are
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  Speaker 1: FED speeches that are sometimes designed to kind of give
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  Speaker 1: a a Fed Reserve officials kind of medium term view, UM,
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  Speaker 1: but market participants a kind of are looking at it
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  Speaker 1: word by word, and I think that's where the FEDS communication,
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  Speaker 1: you know, gets really really challenging. Well, and then there's
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  Speaker 1: also the expectation currently baked into markets that there will
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  Speaker 1: be four rate cuts by the end of next year.
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  Speaker 1: Do you think that the Federal Reserve will deliver on that.
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  Speaker 1: So look, honestly, to me, it's it's it's it's about
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  Speaker 1: the trade war, and it's about you know, what you
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  Speaker 1: see with inflation expectations. I think we will get you know,
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  Speaker 1: significantly more rate cuts from here, uh, and then it's
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  Speaker 1: really what happens from that, um, you know. And I
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  Speaker 1: think that the Fed, you know, if anything, would like
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  Speaker 1: to be forward looking, uh and do more rate cuts
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  Speaker 1: earlier than not to have to get to the zero
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  Speaker 1: lower bound issue. And I think, you know, to some extent,
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  Speaker 1: it was tough on the communication again last week. It
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  Speaker 1: was all before the trade war tweets heat up again. Um.
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  Speaker 1: But but by cutting rates but doing so in a
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  Speaker 1: hawkish manner, you know, they didn't really get inflation expectations up.
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  Speaker 1: So to me, yes, the trade war matters, um, but
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  Speaker 1: it's also about inflation expectations. And if I were the FED,
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  Speaker 1: I'd be concerned that the inflation expectations are now lower
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  Speaker 1: than they were before before they cut rates. So, Eric,
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  Speaker 1: given your sense that that rates are likely to go down,
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  Speaker 1: what does how does that kind of position your view
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  Speaker 1: on emerging markets? Yes, well, you know, it's a great question.
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  Speaker 1: I think that's to me one of the real beneficiaries
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  Speaker 1: of this race to the bottom in developed market yields
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  Speaker 1: is emerging markets. Um. You know, obviously you know we've
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  Speaker 1: eat advanced management. We we take a very much a
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  Speaker 1: country focused approach to investing in emerging markets and trying
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  Speaker 1: to find countries that are that are going in the
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  Speaker 1: right direction or avoid or short countries that are going
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  Speaker 1: in the wrong direction. But just from a broad asset
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  Speaker 1: class perspective, certainly having a lower base rate UH in
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  Speaker 1: developed market yields, whether that be US, Europe or or Japan,
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  Speaker 1: that you know, that makes the broad asset class, you know,
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  Speaker 1: all that much more attractive. So you're buying e M.
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  Speaker 1: Just real quick, thirty seconds, what else you're buying? So
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  Speaker 1: like emerging markets in treasuries, if I had their own treasuries,
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  Speaker 1: I said, I think rates may go down, but obviously
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  Speaker 1: there's not a huge amount of value. I like TIPS.
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  Speaker 1: I think I think the FED will ease to get
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  Speaker 1: inflation expectations higher. So so I like I like TIPS.
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  Speaker 1: Also certain parts of the mortgage markets and credit markets
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  Speaker 1: as well. But you know, I think we're central banks
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  Speaker 1: around the world, They're going to try to get inflation
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  Speaker 1: expectations up. So in addition to us tips, we like
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  Speaker 1: New Zealand inflation link bonds. We like tie inflation link bonds,
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  Speaker 1: so other inflation link bonds around the world as well.
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  Speaker 1: Eric Snyinan, thanks so much for joining us. We appreciate
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  Speaker 1: your time. Eric's a portfolio manager and co director of
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  Speaker 1: Global Fixed Income out of eating Vance based in Boston. Well,
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  Speaker 1: as interest rates grind lower, homebuyers are finding it more
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  Speaker 1: affordable to buy, So let's get the latest on the
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  Speaker 1: housing market. Return to our good friend Logan motor Shami.
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  Speaker 1: He's a senior loan officer for a mc lenning group
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  Speaker 1: based in Irvine, California. Logan, thanks so much for joining
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  Speaker 1: us again. Um again, interest rates for you've had, you know,
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  Speaker 1: kind of touch or get near some very long term lows. Here,
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  Speaker 1: give us a sense of what's going on in the
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  Speaker 1: housing market in this interest rate environment. Well a ten
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  Speaker 1: your yield finally got to my forecast on one point
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  Speaker 1: six percent. We've had a big reversal since the loads
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  Speaker 1: of yesterday. But in regards to the mortgage market, right
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  Speaker 1: now we're seeing an uptick in refinances. But we have
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  Speaker 1: to be mindful that we were working for twenty one
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  Speaker 1: century lows in refinance refinances. So it's not like we're
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  Speaker 1: having another refinancing boom. I don't think we'll surpassed twenty
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  Speaker 1: six never surpassed the refinance booms. So until more the
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  Speaker 1: tenure yield can actually break under one percent, um, well,
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  Speaker 1: we'll have an uptick and refinances. But a lot of
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  Speaker 1: that are the buyers of homes from eighteen where mortgage
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  Speaker 1: rates are higher. Those people can do radar term refinances.
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  Speaker 1: You're left looking at roughly nine million home buyers at
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  Speaker 1: that where those two years combined that helped them get
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  Speaker 1: a little bit more disposable income. In terms of existing
• 9:53
  Speaker 1: home sales, even though mortgage rates are lower, sales are
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  Speaker 1: down slightly a year over year, inventories up, but new
• 9:58
  Speaker 1: home sales. That's where low mortgage rates has really helped
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  Speaker 1: the housing market is the recovery and new home sales
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  Speaker 1: and the monthly supply draw down UH in that data line. Okay,
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  Speaker 1: so let's dig in a little bit there, because we
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  Speaker 1: do have the thirty year mortgage rate, at least is
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  Speaker 1: measured by Freddie Mac at the lowest since seen and
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  Speaker 1: continuing to fall in tandem with yields. I'm trying to
• 10:20
  Speaker 1: figure out how much of a boost is that to
• 10:22
  Speaker 1: the US housing market and where I mean really the
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  Speaker 1: best place to look as the new home sales data,
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  Speaker 1: I mean new home sales were trending recessionary towards the
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  Speaker 1: end of the monthly supply spiked up to about seven months,
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  Speaker 1: and when rates got lower because that's mortgage market, that's
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  Speaker 1: where the demand recovery came so and because of mortgage
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  Speaker 1: rates are low, what's going to happen is that the
• 10:47
  Speaker 1: year over year data for all housing data is going
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  Speaker 1: to be positive now because the comps are a lot better,
• 10:54
  Speaker 1: and that's where we're gonna start to see year over
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  Speaker 1: year games and existing home sales, depending home sales, housing starts,
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  Speaker 1: and new home sales, and that's where it's stabilized the
• 11:04
  Speaker 1: market enough to where we're not going lower anymore. So
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  Speaker 1: that's kind of how you should look at it. It's
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  Speaker 1: not really boosting total home sales as much as people
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  Speaker 1: would like. So look and give us a sense, maybe
• 11:16
  Speaker 1: are there any geographic areas that are sticking out to
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  Speaker 1: you that are particularly strong or weak. Pretty much everywhere
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  Speaker 1: outside of the coastal areas are doing fine. The areas
• 11:27
  Speaker 1: that you know like, for example, California, inventories up, sales
• 11:31
  Speaker 1: are down, things are taking longer, so that's that's a
• 11:33
  Speaker 1: weakness of demand. Now lower mortgage rates have stabilized, I
• 11:37
  Speaker 1: would say the California market is stabilized, maybe in the
• 11:41
  Speaker 1: Seattle markets as well, but they're not really boosting demand
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  Speaker 1: on a year or your basis, even with the inventory increases.
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  Speaker 1: So those places are just pricey and there's just the
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  Speaker 1: level of buyers are just not there. But if you
• 11:53
  Speaker 1: look at California home sales for ten years, it really
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  Speaker 1: hasn't done much. So we're just working off of these
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  Speaker 1: you know, some up years, some down years out here well,
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  Speaker 1: and we have seen a slowdown in luxury home sales,
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  Speaker 1: certainly in those areas as well as on the on
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  Speaker 1: the East Coast to New York City, And I'm wondering
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  Speaker 1: where are we in that sort of downturn cycle, you know,
• 12:15
  Speaker 1: the luxury market. You know, mortgage rates, you know, sometimes
• 12:18
  Speaker 1: it doesn't really impact that kind of market. It's it's
• 12:21
  Speaker 1: it's it's money. You know. Obviously, we we see the
• 12:24
  Speaker 1: you know, foreign buyers are down, you know from China,
• 12:27
  Speaker 1: so that impacts just a little bit out here. But
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  Speaker 1: again Uh, we're getting to areas where when you adjusted
• 12:33
  Speaker 1: to inflation, now home prices are starting to get to
• 12:37
  Speaker 1: levels to where during the housing bubble years you needed
• 12:40
  Speaker 1: exotic loans to really boost the luxury market out here.
• 12:44
  Speaker 1: So you can need to keep an eye on that
• 12:46
  Speaker 1: because you know, there's no more exotic debt anymore. So
• 12:49
  Speaker 1: pretty much everyone who owns the house can own a
• 12:51
  Speaker 1: house in real terms right now. But back doing a
• 12:54
  Speaker 1: housing bubble years, you know, this is where you needed,
• 12:57
  Speaker 1: you know, exotic products to boost the upper end of
• 12:59
  Speaker 1: the market. We don't have that anymore. So that's that's
• 13:01
  Speaker 1: an area to always keep an eye on considering where
• 13:04
  Speaker 1: we are in the home price days. So logan where
• 13:08
  Speaker 1: we in terms of kind of the credit quality of
• 13:10
  Speaker 1: the mortgage market right now. That was obviously, uh, you know,
• 13:13
  Speaker 1: a big big issue in the financial crisis. Kind of
• 13:16
  Speaker 1: where we now in terms of credit quality. Credit quality
• 13:19
  Speaker 1: is excellent, and we've never really had tight lending in America,
• 13:24
  Speaker 1: even from two thousand and on. We've just lend to
• 13:26
  Speaker 1: the people that can own a house, and I think
• 13:28
  Speaker 1: that's the difference. Uh, this is the best loan profile
• 13:32
  Speaker 1: I've seen in my twenty three years there's no exotic
• 13:34
  Speaker 1: debts out there. The FCO scores, which means these homeowners
• 13:37
  Speaker 1: have really good cash flow, are very high. They're very
• 13:40
  Speaker 1: good out here. And the best part is that the
• 13:43
  Speaker 1: nested equity, the equity position from buyers from two thousand
• 13:46
  Speaker 1: ten or two thousand sixteen looks really solid. There's no
• 13:48
  Speaker 1: cash out boom. This is as good as it gets
• 13:51
  Speaker 1: in terms of credit quality in the history of America
• 13:54
  Speaker 1: right now. And I hope we don't ruin it. You know.
• 13:56
  Speaker 1: I know there's a lot of people out there that
• 13:57
  Speaker 1: says lending is tight. I totally disagree with them. This
• 14:00
  Speaker 1: is how it should be. And uh, you'll see that's
• 14:03
  Speaker 1: when the next recession finally hits. We're not going to
• 14:06
  Speaker 1: have a mega wave of defaults like we had in
• 14:08
  Speaker 1: the previous cycle. Who really uptick supply would be more
• 14:10
  Speaker 1: late cycle lending, you know, low down payment, low cycle
• 14:13
  Speaker 1: score of homebuyers running into the recession because they have
• 14:17
  Speaker 1: no selling equity. But the credit quality, I cannot stress
• 14:21
  Speaker 1: how wonderful it looks in this cycle. So Logan, you
• 14:25
  Speaker 1: nailed it when you had your call for ten year
• 14:28
  Speaker 1: treasury yields. They did hit your target price for the year,
• 14:33
  Speaker 1: and they have bounced from there, currently trading at one
• 14:36
  Speaker 1: point seven five. Where do you see them going through
• 14:39
  Speaker 1: the end of the year. Boy? That really you know,
• 14:41
  Speaker 1: I think that tweet you and I had about you know,
• 14:43
  Speaker 1: fifteen days ago, we said, yeah, I could get to
• 14:46
  Speaker 1: one sixty with one selloff in the stock market. But
• 14:48
  Speaker 1: you know what panic buying. That's what I saw the
• 14:52
  Speaker 1: last few days. Uh, it was. It was just panic buying,
• 14:55
  Speaker 1: similar to what we saw in twenty sixty. Now I'd
• 14:58
  Speaker 1: like to say, hey, we got to the one sixty level,
• 15:01
  Speaker 1: and that's it. We should we should hold the whole
• 15:03
  Speaker 1: hold that level and yield should rise. And I've always
• 15:06
  Speaker 1: held at this one six level because I've always had
• 15:08
  Speaker 1: that in my prediction articles for his last five years.
• 15:11
  Speaker 1: But right now we have a lot of things in
• 15:13
  Speaker 1: play that I just can't you know, I can't model out.
• 15:16
  Speaker 1: You know, who knows what Trump's gonna do with China?
• 15:19
  Speaker 1: Who knows what China is gonna do? Bret exit two
• 15:22
  Speaker 1: point Oh it's gonna come at Halloween. Imagine adding that
• 15:25
  Speaker 1: to this dance. Right now, there's this so many headline risks,
• 15:29
  Speaker 1: but in terms of the economics, because p M. I
• 15:31
  Speaker 1: data has the ability to even go lower. That can
• 15:35
  Speaker 1: drive UH yields lower globally and here, but we're not
• 15:39
  Speaker 1: gonna have a double dip manufacturing recession that had the
• 15:42
  Speaker 1: same kind of impact this. So I will hold the
• 15:46
  Speaker 1: line here at one sixty and say that this is
• 15:48
  Speaker 1: the low for the year. But if you get p
• 15:51
  Speaker 1: m I data to get worse, if you get to
• 15:53
  Speaker 1: China and Trump trade wars to start, you know, going
• 15:56
  Speaker 1: at each other left and right, if Bret exit two
• 15:58
  Speaker 1: becomes really messy. But absolutely not only could the tenure
• 16:02
  Speaker 1: deel go below one, we could take the tenure heel below,
• 16:06
  Speaker 1: but those are things that we can't control. Loogan Modashami,
• 16:11
  Speaker 1: thank you so much for being with us and sharing
• 16:13
  Speaker 1: your insights with us today. Logan Modashami, a senior loan
• 16:16
  Speaker 1: officer at MC Lending Group, joining us on the housing
• 16:20
  Speaker 1: market and yields him saying that one point six on
• 16:24
  Speaker 1: the tenure probably is the year's low. Well, I would
• 16:44
  Speaker 1: like to give a narrative to today, Paul. I think
• 16:47
  Speaker 1: that there is a narrative picking up, which is people
• 16:49
  Speaker 1: have exhausted themselves, having some of themselves having a tantrum
• 16:53
  Speaker 1: over the prospect of a global trade debacle and are
• 16:58
  Speaker 1: basically now going back and looking at specific companies and
• 17:02
  Speaker 1: actual economic data. Dave Wilson, Bloebergs Socks Editor, joining us
• 17:06
  Speaker 1: here in the Bloomberg Interactive Broker Studios. Do you think
• 17:09
  Speaker 1: that that's fair? I mean, it's sort of like a child,
• 17:11
  Speaker 1: a toddler that has a tantrum and then only can
• 17:13
  Speaker 1: go on for so long before they just get tired.
• 17:17
  Speaker 1: If that's how you want to characterize characterizing, go for it,
• 17:22
  Speaker 1: because there's certainly a number of examples where you're seeing
• 17:27
  Speaker 1: some positives here that are being well received. Think about
• 17:31
  Speaker 1: a company like Advanced micro Devices, right, I mean I'm
• 17:34
  Speaker 1: thinking about it. Okay, big name in the chip business. Well,
• 17:39
  Speaker 1: they come out with this new processor for server computers
• 17:44
  Speaker 1: called EPIC, and they tell you that Google is already
• 17:49
  Speaker 1: using this chip in their data center equipment. And so
• 17:54
  Speaker 1: what do you get out of that? A gain of
• 17:56
  Speaker 1: almost twelve percent, biggest in the S and P five hundred,
• 18:01
  Speaker 1: you know, And you can go from there. I mean,
• 18:03
  Speaker 1: you had numbers out from Booking Holdings and trip advisors,
• 18:07
  Speaker 1: so we're talking you know, online travel there. Trip advisors
• 18:11
  Speaker 1: numbers didn't look that great. At all. But they're reaffirming
• 18:14
  Speaker 1: their full year projections, and the stocks up ten and
• 18:17
  Speaker 1: a half percent. In booking, whose numbers look better for
• 18:21
  Speaker 1: the second quarter after coming up short of antaly assessments
• 18:24
  Speaker 1: in the first quarter, up about six and a half percent.
• 18:27
  Speaker 1: So you know, you can find enough of those stories
• 18:30
  Speaker 1: to give people some comfort at a time, you know,
• 18:33
  Speaker 1: when the bigger picture, when you think about trade and
• 18:36
  Speaker 1: interest rates and currencies and you name it, is looking
• 18:40
  Speaker 1: a bit unsettled. You know what I'm thinking about today,
• 18:43
  Speaker 1: not trade or currencies. I'm thinking about ketchup. So are
• 18:46
  Speaker 1: good friends at Kraft Hein's head and exactly ketchup on
• 18:51
  Speaker 1: a Thursday morning? Are good friends at Kraft Heins? Uh?
• 18:54
  Speaker 1: Kind of a rough quarter they just reported, and it's
• 18:57
  Speaker 1: so rough that they don't even give guidance. So investors
• 18:59
  Speaker 1: are spooked. Style down. Let's break it down with our
• 19:03
  Speaker 1: good Fred Craig Giammona covers all things consumer for Bloomberg News.
• 19:07
  Speaker 1: He joins us here in our Bloomberg eleven three studios.
• 19:10
  Speaker 1: Craig give us kind of the highlights or low lights
• 19:12
  Speaker 1: of what we're seeing here. So they haven't reported earning
• 19:15
  Speaker 1: since February February was when they put out the release
• 19:18
  Speaker 1: basically saying that they had an sec investigation, fifteen billion
• 19:21
  Speaker 1: dollar write down, weak profit numbers. They did an internal investigation,
• 19:24
  Speaker 1: found some accounting problems. They haven't filed earnings for two
• 19:27
  Speaker 1: straight quarters, so this was the first six months of
• 19:30
  Speaker 1: twenty nineteen that they put out and the numbers are bad,
• 19:32
  Speaker 1: profit and sales are down. And you know the new CEO,
• 19:35
  Speaker 1: Miguel Patricio, he's a longtime Annheuser Bush guy. He's been
• 19:39
  Speaker 1: in there for a month. Took over July one, and basically,
• 19:41
  Speaker 1: I think what we're seeing here is the extent of
• 19:43
  Speaker 1: the challenge that he faces as he tries some amount
• 19:45
  Speaker 1: to come back at a company that really was never
• 19:47
  Speaker 1: supposed to be about growing sales. It was supposed to
• 19:50
  Speaker 1: be about buying something else. And this thing has been
• 19:52
  Speaker 1: kind of off the rails since they got rebuffed by
• 19:54
  Speaker 1: Unilever all the way back in Okay. So Warren buffin
• 19:57
  Speaker 1: It has admitted that he just overpaid for this acquescence, right,
• 20:01
  Speaker 1: So he's come out and he said, uh, you know,
• 20:03
  Speaker 1: not that it was a mistake, but it was a mistake.
• 20:05
  Speaker 1: My question is, what are the main problems here, bad brands, nobody,
• 20:10
  Speaker 1: I mean, so you know, and it's I'm not I'm
• 20:13
  Speaker 1: not making a joke. Like the problem here is that
• 20:14
  Speaker 1: they put this company together to build a gigantic food company.
• 20:17
  Speaker 1: Allah and Heuser Busch. Right. So what they did was
• 20:20
  Speaker 1: they took Hines private, they slashed all the costs, they
• 20:23
  Speaker 1: produced industry leading margins. Year and a half later, they
• 20:26
  Speaker 1: bought Kraft, slashed all the costs, fired thousands of people,
• 20:29
  Speaker 1: got the margins way up. February rolls around, right on schedule.
• 20:33
  Speaker 1: We're buying Unilever for a hundred forty three billion. Hold
• 20:36
  Speaker 1: on a second, Paul Pullman, you know, basically robuffs them.
• 20:39
  Speaker 1: The deal doesn't happen. Since then, the market cap has
• 20:42
  Speaker 1: just gotten absolutely destroyed because this isn't about building brands.
• 20:45
  Speaker 1: So here's my question, Dave Wilson, question of the day.
• 20:48
  Speaker 1: Does this just go to show that big conglomerates are
• 20:52
  Speaker 1: a thing of the past, because we've seen the big
• 20:54
  Speaker 1: conglomerates and industrial space in spaces certainly be in a
• 20:58
  Speaker 1: breaking up cycle. Now, is this evidence it just doesn't
• 21:03
  Speaker 1: work in today's environment. Well, when you think about conglomerates,
• 21:06
  Speaker 1: you know that word implies. You're talking about a company
• 21:10
  Speaker 1: that cuts across a whole bunch of industries and craft
• 21:13
  Speaker 1: hen's you know, as much as even buying Unilever, if
• 21:17
  Speaker 1: they've been able to do that, they still would have
• 21:19
  Speaker 1: had to focus on food maybe household products of some extent,
• 21:23
  Speaker 1: so you know, a bit more focused. It's the challenge
• 21:26
  Speaker 1: of size basically at a time when you have all
• 21:30
  Speaker 1: this competition. I mean, you bag you know, you know
• 21:33
  Speaker 1: that the folks who are in charge of craft hnes
• 21:36
  Speaker 1: are also in charge and analyze a push in bed
• 21:38
  Speaker 1: and they're dealing with competition left right and center and
• 21:43
  Speaker 1: having challenges come out of that. And you know, you
• 21:46
  Speaker 1: think about the food business, who's sort of in a
• 21:49
  Speaker 1: similar position. I mean a lot of stuff happening on
• 21:52
  Speaker 1: local level. So you know, that's really the the issue
• 21:57
  Speaker 1: for this company. It's not necessarily you know, conglomer or
• 22:00
  Speaker 1: it isn't exactly the right word, you know, just behave
• 22:03
  Speaker 1: there's more like it. So, Craig, I'm looking at the
• 22:05
  Speaker 1: stock here. It's down over the past twelve months of
• 22:08
  Speaker 1: fifty two week low today. Is there a solution for
• 22:11
  Speaker 1: this company? What are what's so here's the real problem.
• 22:14
  Speaker 1: I mean, the thing with them was they were always
• 22:16
  Speaker 1: had the idea was that they had Buffett behind them.
• 22:18
  Speaker 1: The Bank of Buffett could come along and they could
• 22:20
  Speaker 1: basically do another deal to get back to what they
• 22:22
  Speaker 1: do best, which is cutting costs. The problem now is
• 22:24
  Speaker 1: that with the debt they have, with the stock where
• 22:27
  Speaker 1: it is, they can't do a deal. And especially since
• 22:29
  Speaker 1: Buffett is saying, you know, basically I made a mistake,
• 22:32
  Speaker 1: and you know, or Paulo Laman, the chairman of Three
• 22:35
  Speaker 1: G also is kind of admitted that this didn't really
• 22:37
  Speaker 1: work out the way we thought. So the question is
• 22:39
  Speaker 1: what's the way out. They have to boost growth, they
• 22:41
  Speaker 1: have to sell more food, and when you look at
• 22:43
  Speaker 1: their brands, it's like, how is that going to happen?
• 22:45
  Speaker 1: I mean things like Maxwell House and or Ida, you know,
• 22:47
  Speaker 1: and and Capri Son and Oscar Meyer. These are not
• 22:50
  Speaker 1: brands that are on trend with what people want these days.
• 22:52
  Speaker 1: So I'm gonna have a moment of truth here. We're
• 22:55
  Speaker 1: gonna go around, We're gonna go around the room, and
• 22:57
  Speaker 1: we're gonna say what our favorite condiment is mustard cat
• 23:04
  Speaker 1: like soura crown on my hot dogs any but without
• 23:06
  Speaker 1: anything else. I have a little mustard too, But mustard
• 23:10
  Speaker 1: interesting because I'm also mustard. I'm not catchup and I
• 23:13
  Speaker 1: actually my kids are not into catch up. I mean, look, Hines,
• 23:15
  Speaker 1: catch up is probably their strongest brand. It's in like
• 23:18
  Speaker 1: of American households. Catch up is not the problem for them,
• 23:20
  Speaker 1: you know that. I mean it's not it's not, no, seriously.
• 23:22
  Speaker 1: I mean, Hines is like one brand that has not
• 23:24
  Speaker 1: been disrupted. You know, people still want Hines. You know, Hunts,
• 23:27
  Speaker 1: the second brand is way far behind. That's an example of,
• 23:30
  Speaker 1: you know, one brand that is sort of impenetrable as
• 23:32
  Speaker 1: far as you don't have enough boxes of macaroni and
• 23:35
  Speaker 1: cheese get around in their pantries. Oh I I do though.
• 23:38
  Speaker 1: Dave was in Socks editor and Craig Giamona covering all
• 23:42
  Speaker 1: things that consumer related for us here at Bloomberg News.
• 24:01
  Speaker 1: A number of countries have come out and issued warnings
• 24:05
  Speaker 1: to residents who might be thinking of traveling to the
• 24:07
  Speaker 1: United States in the wake of some of the mass shootings.
• 24:11
  Speaker 1: The latest to do so is Japan. The question is,
• 24:14
  Speaker 1: how is this among other things, I mean, aside from
• 24:16
  Speaker 1: the human tragedy that we have seen with respect to
• 24:20
  Speaker 1: these mass shootings. How will this affect the tourism industry
• 24:23
  Speaker 1: and the international appetite to go to the United States?
• 24:26
  Speaker 1: Joining US as Dan Wislek, he's senior equity analyst with
• 24:29
  Speaker 1: Morning Star in Chicago. Dan, so let's just get sorted there.
• 24:32
  Speaker 1: Do you think that these types of warnings, the latest
• 24:34
  Speaker 1: being out of Japan will impact the tourism to the
• 24:38
  Speaker 1: United States? Well, I think what we've seen, uh in
• 24:41
  Speaker 1: you know, past terrorist attacks for example in France, is
• 24:45
  Speaker 1: that yes. I mean when when these human tragedies do
• 24:48
  Speaker 1: occur for a period of time, that can subdue travel
• 24:51
  Speaker 1: to that country. Um. You know that being said, uh,
• 24:55
  Speaker 1: you know, international travel as a percent of overall travel
• 24:58
  Speaker 1: within the US represents about four maybe five percent of
• 25:01
  Speaker 1: total room nights. So um, just to give a little
• 25:04
  Speaker 1: bit of context there. So Dan, it's interesting, what have
• 25:08
  Speaker 1: you seen any impact I guess just historically from geopolitical
• 25:12
  Speaker 1: issues just generally speaking. I know it's a you mentioned
• 25:14
  Speaker 1: international is kind of a smaller a small piece of
• 25:17
  Speaker 1: the pipe, but historically hasn't been an issue that the
• 25:19
  Speaker 1: companies have called out. Yeah. Well, you know some of
• 25:22
  Speaker 1: the data that we see is that actually us their
• 25:25
  Speaker 1: global share or our global share of international travel. It's
• 25:28
  Speaker 1: been declining for the last three or four years. So
• 25:31
  Speaker 1: in two thousand fifteen, our share of international travel was
• 25:34
  Speaker 1: around thirteen point seven percent. Last year it ended eleven
• 25:38
  Speaker 1: point seven percent. And it's probably reasonable to assume that
• 25:42
  Speaker 1: some of that has to do with, you know, trade
• 25:44
  Speaker 1: tensions more recently, immigrant rhetoric. Um. You know, the recent
• 25:49
  Speaker 1: warnings around the mass shootings, UH and hate crimes, and
• 25:54
  Speaker 1: perhaps other things like a strong dollar. But you know
• 25:56
  Speaker 1: this is something you know, uh, you know, that's all
• 25:59
  Speaker 1: these add up to kind of a picture where the
• 26:02
  Speaker 1: US is slowly been losing some share here where are
• 26:06
  Speaker 1: where are we losing share in the United States? And
• 26:08
  Speaker 1: other words, where tourists sort of coming less from What
• 26:12
  Speaker 1: parts of the world are people avoiding the US uh
• 26:15
  Speaker 1: in a way that they hadn't been in the past. Yeah,
• 26:18
  Speaker 1: you know, I'm not sure you know what countries are
• 26:21
  Speaker 1: you know, maybe shining away more from the US. I know, well,
• 26:24
  Speaker 1: actually China is one where you know, last year represented
• 26:27
  Speaker 1: the first year where Chinese travel to the U s
• 26:30
  Speaker 1: was actually negative growth. Um, So that's that's one region. Um.
• 26:35
  Speaker 1: You know, Marriott had their call this week and there
• 26:38
  Speaker 1: was a little bit of discussion in the US at
• 26:40
  Speaker 1: the top twenty five largest markets that there has been
• 26:44
  Speaker 1: a little bit of a slow down in some of
• 26:46
  Speaker 1: the demand that they've been seeing there too, which maybe
• 26:48
  Speaker 1: kind of supports the overall point of the US for
• 26:52
  Speaker 1: you know, various reasons losing some share to uh, you know,
• 26:56
  Speaker 1: the international travel coming to this country. So, Dan, I'm
• 26:59
  Speaker 1: looking at the hotel stocks right here. It looked like
• 27:01
  Speaker 1: some good solid double digit gains for the stocks year
• 27:04
  Speaker 1: to date, led by Hilton up over over what's the
• 27:07
  Speaker 1: investor call out there in the market on hotel stocks
• 27:10
  Speaker 1: right now? Yeah, you know, these are good business models.
• 27:14
  Speaker 1: They they the growth is really driven by having hotelers
• 27:17
  Speaker 1: joined these brands. Uh. And you know that type of
• 27:20
  Speaker 1: growth for some of the larger companies like Marianne and
• 27:22
  Speaker 1: Hilton is around mid single digit UM. You know, I
• 27:26
  Speaker 1: guess the one potential or two potential warning signs I
• 27:30
  Speaker 1: would say is, well, you know, some of the travels
• 27:32
  Speaker 1: slow down that we've seen recently, uh, you know, some
• 27:34
  Speaker 1: driven by geopolitical events and others just by you know,
• 27:37
  Speaker 1: ctality slowing down would be one thing. And this year
• 27:41
  Speaker 1: represents the tenth year that we're going to have positive
• 27:43
  Speaker 1: demand growth. Uh. And that's a pretty long time. Uh.
• 27:48
  Speaker 1: Typically the cycle's last maybe seven the nine years, So
• 27:51
  Speaker 1: we might be getting a little bit long in the
• 27:54
  Speaker 1: tooth as far as this cycle. But you know, otherwise,
• 27:56
  Speaker 1: good business models give you pretty good growth. Uh. And
• 27:59
  Speaker 1: I think you know that's being rewarded in the marketplace today. Dan,
• 28:02
  Speaker 1: I'm I'm struggling to sort of put these two things together.
• 28:05
  Speaker 1: The idea that the US is losing share when it
• 28:08
  Speaker 1: comes to international tourists, and yet you're seeing solid growth
• 28:12
  Speaker 1: as some of these tourist focus chains like Marriott. Where
• 28:15
  Speaker 1: is the growth coming from? Yeah, So it really it's
• 28:19
  Speaker 1: it's less about um, you know, room night growth. Rooms
• 28:23
  Speaker 1: being filled is certainly one driver of growth, but even
• 28:26
  Speaker 1: a bigger driver for these guys is getting you know,
• 28:29
  Speaker 1: boutiques that convert into say a Merriott flag or brand
• 28:33
  Speaker 1: or have a third party hotel owners decide to build
• 28:36
  Speaker 1: a new hotel using the license of a Merriott brand
• 28:40
  Speaker 1: or a Hilton brand, And it's that unit growth that
• 28:43
  Speaker 1: you know is driving again mid single digit growth for
• 28:46
  Speaker 1: these companies. So even if the revenue per available room
• 28:50
  Speaker 1: or the amount of people that are going into rooms
• 28:52
  Speaker 1: even if that's slowing, and it has, it's slowed for
• 28:55
  Speaker 1: probably like two three percent growth uh last year to
• 28:58
  Speaker 1: one to two percent growth today. You know, that's a
• 29:01
  Speaker 1: smaller growth driver factor relative to the units that these
• 29:05
  Speaker 1: guys are are seeing. The unit growth that these guys
• 29:08
  Speaker 1: are seeing. Dan Wazelec, thanks so much for joining us.
• 29:11
  Speaker 1: Dan as a senior equity analyst at morning Star based
• 29:13
  Speaker 1: in Chicago. Thanks for listening to the Bloomberg P and
• 29:16
  Speaker 1: L podcast. You can subscribe and listen to interviews at
• 29:18
  Speaker 1: Apple Podcasts or whatever podcast platform you prefer. I'm Paul Sweeney.
• 29:22
  Speaker 1: I'm on Twitter at pt Sweeney. I'm Lisa abram Woyd's
• 29:25
  Speaker 1: I'm on Twitter at Lisa abram Woit's one before the podcast.
• 29:28
  Speaker 1: You can always catch us worldwide. I'm Bloomberg Radio.