Latest / Bloomberg Intelligence / Wall Street's Vulnerable to Downturn, Summers Says

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Wall Street's Vulnerable to Downturn, Summers Says · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Bramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:15
  Speaker 1: you and your money, whether you're at the grocery store
• 0:17
  Speaker 1: or the trading floor. Find the Bloomberg p m L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. It
• 0:32
  Speaker 1: is my pleasure and honor to introduce Larry Summers, Distinguished
• 0:35
  Speaker 1: Professor at Harvard, former president of Harvard, former Treasury Secretary
• 0:40
  Speaker 1: under President Clinton, and top economic advisor to President Obama. Larry, you,
• 0:46
  Speaker 1: in your comments that you just made you said that banks,
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  Speaker 1: despite all the capital that they have raised, or not
• 0:52
  Speaker 1: necessarily better capitalized or better protected from a downturn. Does
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  Speaker 1: that mean that we are as vulnerable now to a
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  Speaker 1: financial crisis as we were in two thousand and eight.
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  Speaker 1: I wouldn't go quite that far, at least, so we
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  Speaker 1: we've done a whole set of things. Banks are much
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  Speaker 1: more liquid, uh than they were in two thousand and eight.
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  Speaker 1: They've surely learned some lessons about the management of their
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  Speaker 1: activities from what has taken place in two thousand and eight.
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  Speaker 1: But the idea that we're on a new plateau of capital,
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  Speaker 1: which has been embraced by the regulatory community to an
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  Speaker 1: extent that surprised me very greatly when I looked at
• 1:31
  Speaker 1: it doesn't really show up in market data, so you
• 1:34
  Speaker 1: don't see it if you look at the value of
• 1:37
  Speaker 1: their common stock relative to the value of their assets.
• 1:41
  Speaker 1: If a business becomes much less levered, what you expect
• 1:46
  Speaker 1: is that it's going to become much less volatible. And
• 1:49
  Speaker 1: there isn't really much evidence for that UH in the
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  Speaker 1: pattern of UH bank stock prices, And so I am
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  Speaker 1: relative to stock prices of other of other firms, and
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  Speaker 1: so I am concerned that we may not be in
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  Speaker 1: as strong a position as UH we think we are.
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  Speaker 1: I don't think that's an imminent threat right now, but
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  Speaker 1: we've not seen the last recession in the United States,
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  Speaker 1: We've not seen the last period of excess, and I'm
• 2:26
  Speaker 1: not certain that our system is quite as robust as
• 2:29
  Speaker 1: many people suppose. You also said that you are skeptical
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  Speaker 1: of the idea that the Vulcal rule has been a
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  Speaker 1: net benefit to financial stability, So should it be repealed?
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  Speaker 1: I think it's certainly. We certainly need to take a
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  Speaker 1: very hard. Uh hard, look at what the consequence, what
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  Speaker 1: the consequences have been, you know, in some ways, Uh,
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  Speaker 1: it may already have happened. I'm not sure institutions that
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  Speaker 1: abandoned businesses are going to go back to those businesses. Uh,
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  Speaker 1: no matter, no matter what by it does seem to
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  Speaker 1: me that an idea that had I had a certain
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  Speaker 1: argument in favor of it um doesn't look to have
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  Speaker 1: been the contributor to financial stability. Uh that uh that
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  Speaker 1: many hoped. There isn't really any evidence even in all
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  Speaker 1: the retrospective since that proprietary trading was an important contributor
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  Speaker 1: to the crisis. And I think that anything that removes
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  Speaker 1: a viable business line, anything that involves very large compliance costs,
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  Speaker 1: and anything that adds to illiquidity and markets is at
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  Speaker 1: least not is at least having some adverse effects on
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  Speaker 1: financial stability, and one would have to ask what the
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  Speaker 1: offsetting benefits were. So do you think that if more
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  Speaker 1: regulations were rolled back that it could actually increased financial
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  Speaker 1: stability by increasing profitability of banks? I think. I think
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  Speaker 1: the great mistake is to have a debate that's all
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  Speaker 1: about more regulation versus less regulation, instead of better regulation,
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  Speaker 1: versus worse regulation. And I think that UH more regulation
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  Speaker 1: on the shadow banking system, more regulation to make sure
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  Speaker 1: that UH banks are responsive to dynamic changes in their
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  Speaker 1: capital position UH is very much appropriate. But I think
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  Speaker 1: it is appropriate to review the huge compliance burdens that
• 4:42
  Speaker 1: have been placed on many institutions to see whether those
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  Speaker 1: compliance burdens are really necessary. And yes, I think you
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  Speaker 1: caught a key pointly so, which is that a bank's
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  Speaker 1: expectation of future profitability offers secures to security to those
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  Speaker 1: who lend it uns and if you undermine that future profitability,
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  Speaker 1: you are undermining banks borrowing, and that in turn is
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  Speaker 1: raising questions about financial stability. Another point that you raised
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  Speaker 1: was the importance of regulators in the next downturn to
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  Speaker 1: be very open and to respond incredibly proactively to the
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  Speaker 1: first science of a problem. UM. You also recently wrote
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  Speaker 1: a column in The Washington Post talking about Secretary Treasury
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  Speaker 1: Secretary Stephen manution how he has compromised his credibility with
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  Speaker 1: some of his recent comments. Do you believe that his
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  Speaker 1: if he continues down this path, that this could compromise,
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  Speaker 1: for example, the Treasury's ability to fight it downturn or
• 5:41
  Speaker 1: or or other policies being think the Treasury secretary's credibility
• 5:45
  Speaker 1: is a crucial asset in any time of economic crisis,
• 5:50
  Speaker 1: and I think that plutent Treasury secretaries are very conscious
• 5:55
  Speaker 1: of preserving that credibility. Deserving that credibility means being seen
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  Speaker 1: as a person who says what he is analytically true,
• 6:10
  Speaker 1: rather than says what is politically convenient or expedient. And
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  Speaker 1: I think some of the statements that have been made
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  Speaker 1: outside of the financial regulatory area, particularly in the tax area,
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  Speaker 1: are hard to understand except through the prism of political expediency.
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  Speaker 1: The claims that UH tax cuts will raise revenue are
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  Speaker 1: I think ludicrous. The claims that the currently proposed tax
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  Speaker 1: cuts will benefit substantially the middle class relative to the
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  Speaker 1: wealthy are I think indefensible. And I don't think it
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  Speaker 1: serves us well UM for policies to be advocated in
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  Speaker 1: UH those kinds of terms. As former Treasury secretary, do
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  Speaker 1: you think that the idea of a fifty year one
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  Speaker 1: hundred year bond is is potentially I think it's something
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  Speaker 1: that deserves study if it is linked to UM commitments
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  Speaker 1: to long term investments, and if we can commit to
• 7:22
  Speaker 1: issuing long term debt to finance high return long term investments,
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  Speaker 1: then I think it's something that can be very that
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  Speaker 1: can be very attractive. UH. If it's a standalone independent
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  Speaker 1: of UH making long term investments, then I think the
• 7:46
  Speaker 1: case is less clear, and it depends upon what the
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  Speaker 1: appetite for those financial instruments is and at what yield
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  Speaker 1: the Treasury will be able to sell them. In a
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  Speaker 1: recent column that you wrote for The Financial Times, you
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  Speaker 1: were talking about how the FED, if the FED overdes
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  Speaker 1: it now, they will have little room to respond in
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  Speaker 1: another financial downturn. How likely do you think it is
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  Speaker 1: for them to overdo it, and sort of what would
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  Speaker 1: you determine to be overdoing it at this point. Yeah,
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  Speaker 1: that's a judgment that you have to make on an
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  Speaker 1: ongoing UH basis. I would just say that I think
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  Speaker 1: the risks of a the risks of a recession UH
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  Speaker 1: seemed to me or a downturn seemed to me to
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  Speaker 1: be far more serious than the risks of developing substantially
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  Speaker 1: excessive inflation as we did in the nineties seventies, and
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  Speaker 1: so I think the FED needs to be very cautious
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  Speaker 1: about rate hikes, and I think the FED is has
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  Speaker 1: tried to be very cautious about at a rate about
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  Speaker 1: rate hikes. The tendency has been for the D to
• 9:01
  Speaker 1: um expect that over time it will be able to
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  Speaker 1: engage in more red hiking rate hiking than in fact
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  Speaker 1: it has been able to. And so I think the
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  Speaker 1: FED has acted UH prudently in general, but it has
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  Speaker 1: sometimes been a bit over optimistic about how much rate
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  Speaker 1: increasing it will be able to do. UH in a
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  Speaker 1: prudent way. What do you think the terminal level is
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  Speaker 1: for how high they can go in this particular cyclone,
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  Speaker 1: I think the neutral real rate is substantially reduced from
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  Speaker 1: where it was, and so the old idea of four
• 9:39
  Speaker 1: seems pretty unlikely to make. But just where it will end, uh,
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  Speaker 1: I'll wait. I'll wait for some more cards to be
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  Speaker 1: turned over before making that prediction. One thing that I've
• 9:49
  Speaker 1: heard at this conference is people are talking about how
• 9:52
  Speaker 1: they are more concerned that benchmark borrowing costs decline rather
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  Speaker 1: than rise, that the idea of yields falling could be
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  Speaker 1: more of a threat to financial stability than rising. Would
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  Speaker 1: you agree, I'm not sure. I think it depends on
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  Speaker 1: you know, clearly, if you're a pension fund and returns
• 10:14
  Speaker 1: rise and there aren't increases and asset prices that can
• 10:17
  Speaker 1: be returns decline, and there aren't increases and asset prices
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  Speaker 1: that can be adverse. UH for you. On the other hand, UH,
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  Speaker 1: obviously lower rates are in many respects good for borrowers.
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  Speaker 1: I think on balance, I would tend to think that
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  Speaker 1: more liquidity and lower rates tends, at least in a
• 10:37
  Speaker 1: short run sense, to be favorable for financial stability. I
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  Speaker 1: obviously would recognize the concerns that over the longer term,
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  Speaker 1: if they lead to unsustainable asset price inflation or lead
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  Speaker 1: to the creation of bubbles, that could be problematic. And
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  Speaker 1: and lastly, I just would love to get your thoughts
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  Speaker 1: on how big of a risk we are right now
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  Speaker 1: of another recession than your term, Lisa, I don't. I
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  Speaker 1: think that I don't see the roots of a near
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  Speaker 1: term recession in any of the current data flow. On
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  Speaker 1: the other hand, I'm very much aware that you look
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  Speaker 1: at the current you look at history, and people never
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  Speaker 1: predict recessions a year in advance, and so something things
• 11:26
  Speaker 1: have a way of coming up. I think the right
• 11:28
  Speaker 1: reading of the data is that the odds are about
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  Speaker 1: twenty percent a year that if the economy has not
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  Speaker 1: yet gone into recession, that it will go into recession
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  Speaker 1: in the next year, and that would seem to me
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  Speaker 1: to be a reasonable estimate right now. Thank you so much,
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  Speaker 1: Professor Summers, Thank you so much for joining us. Thank you.
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  Speaker 1: Larry Summer is a distinguished professor at Harvard, former president
• 11:49
  Speaker 1: of Harvard, former Treasury secretary under President Clinton, and top
• 11:54
  Speaker 1: economic advisor to President Obama. We want to take a
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• 12:36
  Speaker 1: dot com slash lens Well. This morning, a Pacific investment
• 12:47
  Speaker 1: management co PIMCO came out and said that it expected
• 12:50
  Speaker 1: ten year treasury yields to climb to three over the
• 12:54
  Speaker 1: medium term. I am curious to find out whether our
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  Speaker 1: next guest agrees. Matthew Freund. He is co chief investment
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  Speaker 1: Officer and head of fixed income Strategies at Calamus Investments,
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  Speaker 1: overseeing eighteen point three billion dollars UH. The company is
• 13:08
  Speaker 1: based in Naperville, Illinois, and Matt joins us now by phone. Matt,
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  Speaker 1: thank you so much for joining us. I wanted to
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  Speaker 1: start really with treasuries and the idea that Pimco is seeing,
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  Speaker 1: the idea of ten years going to three UH in
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  Speaker 1: the medium term. Would you agree? Yeah? I think I would.
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  Speaker 1: So when you think about treasuries and where they're going
• 13:31
  Speaker 1: UM in the short run, treasuries are really influenced I
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  Speaker 1: I think by UH the Federal Central Bank policy, meaning
• 13:40
  Speaker 1: what what's the Fed going to do? The feed has
• 13:42
  Speaker 1: told us that they're raising rates, but very very slowly.
• 13:45
  Speaker 1: The wild card is what they're doing with the balance
• 13:48
  Speaker 1: sheet and whether they decide to aggressively reduce the size
• 13:52
  Speaker 1: of their balance sheet. That's great, but it's put on
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  Speaker 1: a position of an economy which is actually looking a
• 14:00
  Speaker 1: lot like last year. So we had a week Q one.
• 14:02
  Speaker 1: It was whether it was seasonal factors, but there's always
• 14:06
  Speaker 1: weather or seasonal factors. Earnings look good, jobs look pretty strong,
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  Speaker 1: but really they're acting very late cycle. So when you
• 14:14
  Speaker 1: put it all together, I think that the economy is
• 14:18
  Speaker 1: gradually getting better, that rates are gradually increasing, and that's
• 14:21
  Speaker 1: actually priced into the forward curves now. But I don't
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  Speaker 1: think we've seen the low and rates, and I don't
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  Speaker 1: think we're going to see the low and rates until
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  Speaker 1: we get through the next recession. Fortunately that's not coming
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  Speaker 1: up right away. Hold on a second, because this, this
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  Speaker 1: to me, is a really compelling point. In other words,
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  Speaker 1: you think that ten year yields could potentially go much lower, Yeah,
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  Speaker 1: I do so. Again in the short run, uh, this
• 14:46
  Speaker 1: year is shaping up to look a lot like last year.
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  Speaker 1: It's not a recession, but there's no escape velocity either,
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  Speaker 1: And in that environment, the idea that rates grind higher
• 14:56
  Speaker 1: makes a lot of sense very short term. Longer term,
• 15:00
  Speaker 1: we have an outlawed recessions just because rates were lower.
• 15:04
  Speaker 1: We have a new administration, and when the next recession hits,
• 15:07
  Speaker 1: I think we're going to quickly grab the tools that
• 15:11
  Speaker 1: worked in the past, and I think we're going to
• 15:13
  Speaker 1: see rates come a lot lower. The good news though, Uh,
• 15:17
  Speaker 1: you know, the recession doesn't appear to be on the horizon. Uh,
• 15:21
  Speaker 1: certainly over the next nine to twelve months. Well, just
• 15:25
  Speaker 1: to give a number to that, where do you think
• 15:28
  Speaker 1: rates could go? I think no, I think I think.
• 15:31
  Speaker 1: I think the idea that forward curves now have rate
• 15:33
  Speaker 1: tenure rates staying under three percent for the next year
• 15:37
  Speaker 1: or two, and that feels about right. The risk to
• 15:40
  Speaker 1: the long end of the curve is not the FED
• 15:43
  Speaker 1: moving too fast. It's that the FED moves too slowly.
• 15:47
  Speaker 1: So if the FED were to aggressively raise rates in
• 15:50
  Speaker 1: the short end, I think you'd see the long end
• 15:53
  Speaker 1: of the curve be very well behaved. You would see
• 15:55
  Speaker 1: a flattening in the yield curve. So I I think
• 15:59
  Speaker 1: that the base case has to be that rates are
• 16:01
  Speaker 1: gradually getting higher, not in a big rush, and very
• 16:05
  Speaker 1: very slowly. But again, we're keeping an eye out. We're
• 16:08
  Speaker 1: watching some things in the economy that worry us, things
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  Speaker 1: like increased delinquencies, uh, poor real earnings weekly real earnings
• 16:16
  Speaker 1: have actually been poor, and and some some troubling numbers
• 16:20
  Speaker 1: with tax receipts. So we think the economy is fine
• 16:23
  Speaker 1: for a while. We think that the direct natural direction
• 16:26
  Speaker 1: of rates would be to trend a little higher. But
• 16:29
  Speaker 1: again we're not out of the woods, and when that
• 16:31
  Speaker 1: next recession comes, expect rates to retest their loves. So, uh,
• 16:36
  Speaker 1: I want to pick up on something that you said
• 16:38
  Speaker 1: about increasing consumer delinquencies. We've seen rising credit card charge offs,
• 16:44
  Speaker 1: rising auto loan delinquencies. At what point do you care
• 16:47
  Speaker 1: from a systemic point of view, what point do you say,
• 16:50
  Speaker 1: you know, this means that the consumer is weakening from
• 16:53
  Speaker 1: a credit perspective more than is being currently priced into
• 16:56
  Speaker 1: the market. Yeah, that is a fantastic question. So when
• 16:59
  Speaker 1: you look get delinquencies, they are trending up a little bit,
• 17:03
  Speaker 1: but they're trending up from very low level, certainly levels
• 17:07
  Speaker 1: that uh bottomed dramatically post what we saw in oh
• 17:12
  Speaker 1: eight oh nine, But it feels like we're at an
• 17:15
  Speaker 1: inflection point. So again, delinquencies are still very low, but
• 17:21
  Speaker 1: the rate of change in those delinquencies is going in
• 17:24
  Speaker 1: the wrong direction. And that's what interest rates. As as
• 17:28
  Speaker 1: we started talking being very very low, we're interest rates
• 17:31
  Speaker 1: to go up unexpectedly, certainly higher. That's in my forecaster
• 17:35
  Speaker 1: pimco's forecasts. Consumers are going to be um stressed. But
• 17:40
  Speaker 1: the most important thing that I'm looking at is and
• 17:43
  Speaker 1: again I don't have to answer, it's a it's a question,
• 17:46
  Speaker 1: it's a dilemma for the market. Real weekly earnings have
• 17:50
  Speaker 1: been negative, they're they're right around zero now. And typically
• 17:55
  Speaker 1: when you're after when you're real wages, meaning after inflation,
• 17:59
  Speaker 1: wages are really being crimped, you start to um miss
• 18:04
  Speaker 1: your payments. We're seeing that, and then that generally is
• 18:08
  Speaker 1: an early sign of weakness in the consumer sector, which
• 18:11
  Speaker 1: is the majority of GDP so or or production activity
• 18:16
  Speaker 1: here in the United States. So it is an early
• 18:19
  Speaker 1: warning sign and it's one we're watching very carefully. So
• 18:22
  Speaker 1: as an investor, how do you take this information and
• 18:25
  Speaker 1: how do you apply it to what you decide to
• 18:26
  Speaker 1: buy or not? You know, that's a great question too.
• 18:29
  Speaker 1: So I think diversification is really important in this market.
• 18:33
  Speaker 1: And what I've come to find out is that most
• 18:36
  Speaker 1: investors don't want to be diversified. I mean, they say
• 18:39
  Speaker 1: they do, but when you talk to them, they want
• 18:41
  Speaker 1: half their portfolio to go up ten percent and the
• 18:44
  Speaker 1: other half to go up twenty And that's not the
• 18:46
  Speaker 1: way diversification works. Diversification is where you have assets that
• 18:50
  Speaker 1: will do well in different environment. So with that right
• 18:55
  Speaker 1: now here at Calamos, we do think um that the
• 18:59
  Speaker 1: risk markets have more to run. But again we we
• 19:03
  Speaker 1: we like international markets, we like emerging markets. We think
• 19:07
  Speaker 1: fixed income, even with our expectation that rates will gradually
• 19:11
  Speaker 1: go higher, has a place it will do well. Should
• 19:15
  Speaker 1: the economy we can unexpectedly it will provide more income
• 19:19
  Speaker 1: and within the fixed income market, and I like to
• 19:22
  Speaker 1: remind people it's it's it's not one bond market, it's
• 19:25
  Speaker 1: a market of bonds. We do think that high yield
• 19:29
  Speaker 1: still has some attractive risk returns. I know people are
• 19:32
  Speaker 1: pulling back on risk and we are certainly being more cautious.
• 19:36
  Speaker 1: But when you think about high yield, it's always got
• 19:39
  Speaker 1: something wrong with it. That's by definition. That's why it's
• 19:42
  Speaker 1: it's high yield. And we do think there are select
• 19:45
  Speaker 1: areas there that we find attractive. Where so again it's
• 19:49
  Speaker 1: it's not something i'd recommend your listeners going to. We're
• 19:53
  Speaker 1: spending an awful lot of time in retail. So retail
• 19:57
  Speaker 1: is a horrible place um to be From the headlines,
• 20:01
  Speaker 1: I mean, there's all sorts of stresses, but when there
• 20:04
  Speaker 1: are these sorts of stresses in that space when there
• 20:07
  Speaker 1: are more sellers, we often find that people are throwing
• 20:11
  Speaker 1: um good companies out with bad and even in companies
• 20:15
  Speaker 1: that are a little bit um stressed, they're throwing good
• 20:18
  Speaker 1: securities out with the bad. And so we're doing a
• 20:22
  Speaker 1: lot of work there. Uh, just nibbling at the moment.
• 20:25
  Speaker 1: It's it's not a dramatic change in what we do,
• 20:28
  Speaker 1: but that's got is very interested. And then the other
• 20:30
  Speaker 1: one is specialty pharma. So we had some interesting news
• 20:33
  Speaker 1: from Valiant and Endo today. Um, you know, this is
• 20:36
  Speaker 1: the sector that we've been interested in for a long time. Again,
• 20:40
  Speaker 1: it's been out, it's been out of favor, negative headlines,
• 20:44
  Speaker 1: but we often find the best valuations in areas that
• 20:47
  Speaker 1: people don't like. Matt, thank you so much for joining us.
• 20:50
  Speaker 1: Really fascinating. Matt Freund co, Chief investment Officer and head
• 20:54
  Speaker 1: of fixed income Strategies at Collamos Investments in Naperville, Illinois.
• 20:59
  Speaker 1: The company overseas about eighteen point three billion dollars and
• 21:03
  Speaker 1: Lisa Abram boys here at the twenty second Annual Financial
• 21:06
  Speaker 1: Conference at Amelia Island, Florida. This is Blueberk. I am
• 21:22
  Speaker 1: honored to bring in Alicia Garcia Ro Did I pronounce
• 21:26
  Speaker 1: that correctly? She is a cheap economist for the Asia
• 21:30
  Speaker 1: Pacific Region at NA, Texas and a longtime economist who
• 21:34
  Speaker 1: has advised UH with everything from the I m F
• 21:36
  Speaker 1: to other authorities to really gauge financial stability across the world. Alicia,
• 21:43
  Speaker 1: you know you have a viewpoint on the one area
• 21:45
  Speaker 1: that most people have the most questions about, which is China.
• 21:49
  Speaker 1: Do you think that the concerns about a hard landing
• 21:51
  Speaker 1: are overblown? Yeah, in tramps of economic activity they are,
• 21:57
  Speaker 1: at least for this year, but in trimps of financial
• 22:00
  Speaker 1: stability they aren't. I think Chinese indeed undergoing major shot
• 22:05
  Speaker 1: waves in terms of financial instability. And that's not so
• 22:09
  Speaker 1: much about the stock market of what we saw in
• 22:12
  Speaker 1: two thousand fifteen is actually about banks. And that's a
• 22:16
  Speaker 1: massive endeavor because today Chinese banks are actually larger than
• 22:22
  Speaker 1: European banks. So we're talking about thirty five trillion US
• 22:25
  Speaker 1: dollar in bank assets in China. It's a major in
• 22:28
  Speaker 1: dava for any financial regulator to deal with. Well. Um
• 22:32
  Speaker 1: one paper that is going to be presented here today
• 22:35
  Speaker 1: is going to talk about how sort of the unconsidered
• 22:38
  Speaker 1: consequence of China's actions to prevent a crash is that
• 22:43
  Speaker 1: there will just be much slower growth in China over
• 22:47
  Speaker 1: the longer term. Do you currently feel like that slower
• 22:51
  Speaker 1: growth in China, which has been an engine of growth
• 22:53
  Speaker 1: for the world, is currently being priced into markets, particularly
• 22:57
  Speaker 1: emerging markets. Certainly not. It isn't priced him because China
• 23:03
  Speaker 1: once again as engineered physical simulus package. We're still talking
• 23:08
  Speaker 1: about it. It It doesn't it physical Stimus package as if
• 23:11
  Speaker 1: they weren't any new package. But if you look at
• 23:14
  Speaker 1: fiscal data in China, it is quite obvious that we
• 23:17
  Speaker 1: call the augmented fiscal deficits. Unfortunately don't have a consolidate deficits,
• 23:21
  Speaker 1: so we need to come up with the numbers that
• 23:23
  Speaker 1: are not very accurate. But it's hovering around tempers and
• 23:26
  Speaker 1: of GDP. So if and that has been the case
• 23:30
  Speaker 1: since two doesn't tend. So you know, once they finished
• 23:32
  Speaker 1: that fis Custimus package, they've actually only go on going
• 23:38
  Speaker 1: on on the same path. And that means that that
• 23:41
  Speaker 1: growth that we see today is pretty fictissues. So yes,
• 23:45
  Speaker 1: we're not contemplating lower growth down the road, and I
• 23:48
  Speaker 1: think that's due to come. So what do you think
• 23:51
  Speaker 1: is the appropriate growth rate in China to price in
• 23:56
  Speaker 1: say two years, three years, four years down the road. Well,
• 23:59
  Speaker 1: it's not enormously low, so so you know, I don't
• 24:02
  Speaker 1: want to go all the way to the you know,
• 24:04
  Speaker 1: to the catastrophically, but it's currently about sicks for about
• 24:08
  Speaker 1: four percent to answer your question, and this is all
• 24:10
  Speaker 1: based on you know, potential growth. What is happening with
• 24:14
  Speaker 1: aging labor productivity coming down? Return on assets below two percent?
• 24:19
  Speaker 1: That's basically where you get it from. And and we
• 24:22
  Speaker 1: are pricing it quite a lot of total factor productivity
• 24:26
  Speaker 1: out of innovation, which is indeed there. So that's not
• 24:29
  Speaker 1: the problem. The problem is that that massive capital dis
• 24:33
  Speaker 1: location in terms of banks, you know, basically allocating capital
• 24:39
  Speaker 1: in the wrong sectors through massive government intervention to do so,
• 24:45
  Speaker 1: is just lowering down massively the return on assets. So
• 24:49
  Speaker 1: what would that do to the real to the countries
• 24:53
  Speaker 1: in that region that the countries that depend most on
• 24:55
  Speaker 1: China's growth, what would that do to their economies if
• 24:58
  Speaker 1: say China does go down to a four percent rate
• 25:01
  Speaker 1: from an ultimated six percent rate. Actually, that in a
• 25:04
  Speaker 1: way has already happened in two husand and fifteen early
• 25:06
  Speaker 1: thousand sixteen, because the actual real growth rate in China,
• 25:12
  Speaker 1: especially what was you know, the old economy, was probably
• 25:16
  Speaker 1: even lower, and that all the economy, what was the
• 25:20
  Speaker 1: one that was driving commodity imports into China, let alone
• 25:25
  Speaker 1: also parts and components from the rest of China. So
• 25:28
  Speaker 1: I think they've already gone through that. And if you
• 25:29
  Speaker 1: look at the resilience, it was quite impressive. The reason
• 25:32
  Speaker 1: being that if you look at as An as a
• 25:35
  Speaker 1: grouping point, they're actually much less leverage than China. They're
• 25:39
  Speaker 1: actually more resilient in a way to China's chock that
• 25:43
  Speaker 1: we actually China China shock that we actually think they are.
• 25:46
  Speaker 1: So I'm not too worried actually about the rest of origin.
• 25:49
  Speaker 1: I'm worried about China though with the worst case scenario
• 25:52
  Speaker 1: in thirty seconds um, I don't expect the crisis anytime soon.
• 25:58
  Speaker 1: I think they have enough instru ment still today to
• 26:01
  Speaker 1: deal with that. But this will only worsen their potential
• 26:06
  Speaker 1: growth they it will only lower that potential growth and
• 26:09
  Speaker 1: just mentioned in the future because of that massive misallocation
• 26:14
  Speaker 1: of of capital that is still going on. Thank you
• 26:17
  Speaker 1: so much for joining us. Truly a fascinating discussion. Alicia Garciarero.
• 26:22
  Speaker 1: She is chief Economist for the Asia Pacific Region at
• 26:25
  Speaker 1: n Texas and also a long time advisor to the
• 26:29
  Speaker 1: I m f H, and she starts as an advisor
• 26:31
  Speaker 1: to the research arm of the Hong Kong Monetary Authority
• 26:34
  Speaker 1: as well as others. Someone who has a very clear
• 26:37
  Speaker 1: view on what the challenges are currently facing China and
• 26:40
  Speaker 1: what the solutions are and just to sort of repeats,
• 26:42
  Speaker 1: I find this a really fascinating point. The more that
• 26:44
  Speaker 1: China has to do now, the more it's going to
• 26:47
  Speaker 1: slow their longer term growth and potentially be a threat
• 26:50
  Speaker 1: on that level. There are reports that health insurers are
• 27:05
  Speaker 1: asking for sharp increases in the cost of their Obamacare
• 27:09
  Speaker 1: plans this year. Why well, they blame instability in the
• 27:12
  Speaker 1: laws coverage markets that's been compounded compounded by the Trump administration.
• 27:17
  Speaker 1: To make sense of this, I want to bring in
• 27:19
  Speaker 1: Max Nson, a Bloomberg Gadfly columnist, and Max joins us
• 27:23
  Speaker 1: from the Bloomberg eleven three oh studio in New York. Max,
• 27:26
  Speaker 1: what's your take on this, because so far three companies
• 27:29
  Speaker 1: have reported their insurance premiums for the Obamacare plans that
• 27:34
  Speaker 1: they have and the costs are up more than twenty Yeah,
• 27:38
  Speaker 1: I have to say it's not especially surprising that this
• 27:41
  Speaker 1: is happening. UH companies are having to price their insurance
• 27:45
  Speaker 1: plans for next year really having no idea what the
• 27:48
  Speaker 1: market is going to look like next year. There are
• 27:50
  Speaker 1: a couple kind of primary areas of uncertainty. The first
• 27:54
  Speaker 1: is whether the mandate that people buy insurance is going
• 27:58
  Speaker 1: to be enforced next year heavily or you know, with
• 28:01
  Speaker 1: any kind of urgency by the Trump administration, or even
• 28:05
  Speaker 1: if it will actually be in place if the a
• 28:08
  Speaker 1: c A becomes law. So that means that people on
• 28:11
  Speaker 1: these markets might face a less healthy marketplace enough to
• 28:15
  Speaker 1: pay more more healthcare costs because people healthy people aren't
• 28:19
  Speaker 1: compelled by that financial penalty to buy insurance. Well, so
• 28:23
  Speaker 1: the just let's put the increase in Obamacare premiums in
• 28:27
  Speaker 1: the three states that have posted rate so far, how
• 28:31
  Speaker 1: does that compared to previous UH premium rate increases in
• 28:36
  Speaker 1: previous years, because they've been subtly increasing, haven't they. Yeah,
• 28:40
  Speaker 1: you know, things vary so much state by state and
• 28:44
  Speaker 1: year by year that it's hard to kind of have
• 28:46
  Speaker 1: a consistent comparison. But they're they're pretty similar to it,
• 28:50
  Speaker 1: and actually somewhat less than what we've seen in some
• 28:54
  Speaker 1: of the states with shake care markets. But um, I
• 28:56
  Speaker 1: think the fact that we're seeing this again after kind
• 28:59
  Speaker 1: of you know, consecutive years of price increases just kind
• 29:03
  Speaker 1: of goes to show how how concerned insures are about
• 29:07
  Speaker 1: what the market might look like next year. You know,
• 29:09
  Speaker 1: on top of the mandate, you also have the fact
• 29:12
  Speaker 1: that the administration might choose not to fund, uh. You know,
• 29:16
  Speaker 1: these payments or subsidies that help low income people pay
• 29:20
  Speaker 1: for out of pocket the art of pocket portion of
• 29:22
  Speaker 1: their costs, which helps them kind of maintain insurance and
• 29:25
  Speaker 1: actually get healthcare. So are actually these insurance companies when
• 29:28
  Speaker 1: they put out their their estimates for what the plans
• 29:33
  Speaker 1: will cost, uh, do they give some kind of statement
• 29:37
  Speaker 1: about what they hope to see in Washington? Um? I mean,
• 29:40
  Speaker 1: I think they're sending a signal that, you know, they
• 29:45
  Speaker 1: can't really price it at the level they might otherwise
• 29:48
  Speaker 1: they have to kind of plan for the worst case scenario.
• 29:51
  Speaker 1: If you price your plan too low and have high
• 29:53
  Speaker 1: medical costs or kind of an unexpectedly um risky set
• 29:58
  Speaker 1: of of people that you ensure, then you end up
• 30:02
  Speaker 1: losing money and then that that's something they're out to avoid.
• 30:05
  Speaker 1: So they're kind of planning for the worst, and I
• 30:07
  Speaker 1: think with the way that they're setting premiums there, they're
• 30:09
  Speaker 1: suggesting that the worst could be pretty bad. Indeed, Um, well,
• 30:13
  Speaker 1: we thought that the worst could be pretty bad, indeed
• 30:15
  Speaker 1: from for Valiant. I know that you and I have
• 30:17
  Speaker 1: spoken extensively about your views on Valiant, and yet Valiance
• 30:21
  Speaker 1: shares are up more than as I know, I just
• 30:24
  Speaker 1: completely changed the topic, but I feel like we would
• 30:26
  Speaker 1: be amiss if we didn't talk about this, and I
• 30:27
  Speaker 1: know you cover the issue closely. So do you think
• 30:30
  Speaker 1: that this pop the Valiant and seeing is is sort
• 30:32
  Speaker 1: of more wishful thinking than reality, or has Valiance prospects
• 30:36
  Speaker 1: actually materially changed. I absolutely think it's once again wishful
• 30:41
  Speaker 1: thinking by any kind of conventional measure. Valiant actually had
• 30:46
  Speaker 1: a pretty dreadful quarter, missed both earnings and revenue estimates.
• 30:51
  Speaker 1: The company's sales continue to deteriorate pretty aggressively, and within
• 30:56
  Speaker 1: that sales decline, there are a bunch of troubling trends
• 30:58
  Speaker 1: for some really important du things for the company. But
• 31:02
  Speaker 1: investors kind of seized on what they wanted to see
• 31:04
  Speaker 1: and in that case, uh, it was a fifty million
• 31:07
  Speaker 1: dollar increase in the companies adjusted and I mean adjusted Ebitdakians.
• 31:13
  Speaker 1: So um. You know, with the with the company that
• 31:16
  Speaker 1: it's bettered as this, people will kind of take what
• 31:19
  Speaker 1: they want. And in this case, because the company for
• 31:22
  Speaker 1: once didn't cut its estimates, uh, they saw it as
• 31:25
  Speaker 1: a big positive. Well then they also sort of suggest
• 31:28
  Speaker 1: that they were going to have some kind of capital
• 31:29
  Speaker 1: raise and they talked about selling a number of their
• 31:32
  Speaker 1: businesses as they've been doing. Um, and they projected higher
• 31:36
  Speaker 1: a full year forecast. So this also could be potentially positive.
• 31:39
  Speaker 1: Now yeah, I mean it's it's more of the same
• 31:44
  Speaker 1: rhetoric from valiant Um. You know, we're going to have
• 31:46
  Speaker 1: more asset sales, we're gonna turn the business around, etcetera, etcetera.
• 31:50
  Speaker 1: But it really, for the most part, has failed to materialize.
• 31:53
  Speaker 1: I wanted just to switch and quickly get Allergan in
• 31:56
  Speaker 1: because they also reported earnings just now for the first quarter,
• 31:59
  Speaker 1: and they reported earnings that were better than estimates, and
• 32:03
  Speaker 1: it also is seeing a boost. What do you make
• 32:06
  Speaker 1: of that? Um? So all again, you know it's it's
• 32:09
  Speaker 1: kind of the anti Valiant in the sense that you know,
• 32:12
  Speaker 1: they're able to because of you know, their relatively healthier
• 32:15
  Speaker 1: balance sheet, continue to make deals that are kind of
• 32:18
  Speaker 1: a creative in the near term, and you're seeing that
• 32:20
  Speaker 1: with these earnings. So they boosted their their guidance for
• 32:24
  Speaker 1: the year in part because they acquired Celtic, which is
• 32:27
  Speaker 1: a UM kind of a company that provides a technique
• 32:30
  Speaker 1: that produces fat on the body UM. And then Botox
• 32:33
  Speaker 1: continues to do really well, so um, you know, on
• 32:36
  Speaker 1: one hand, it's it's a nice quarter. They're seeing the
• 32:39
  Speaker 1: benefit acquisitions, but they're also not quite seeing kind of
• 32:42
  Speaker 1: a plan for trans transition of the company from being
• 32:46
  Speaker 1: really narrowly focused on aesthetics, um, you know, things to
• 32:49
  Speaker 1: approve the appearance, towards a more conventional pharmacutical company. It's
• 32:53
  Speaker 1: still the aesthetic stuff that's really driving results. So we'll
• 32:57
  Speaker 1: see if that transition continues. And perhaps that's the reason
• 33:00
  Speaker 1: why the shares really are not really doing much of anything.
• 33:02
  Speaker 1: So even though Valiant might have a worse outlook according
• 33:05
  Speaker 1: to you Max Uh, it shares her up more just
• 33:08
  Speaker 1: on a mirror hope, whereas Allargan is seeing nothing after
• 33:12
  Speaker 1: reporting it another round of pretty solid earnings. Maxis and
• 33:16
  Speaker 1: thank you so much for joining us. Max Neison is
• 33:18
  Speaker 1: a Bloomberg goad Fly columnist covering healthcare as well as
• 33:22
  Speaker 1: the pharmaceutical industry, and he comes to us from our
• 33:25
  Speaker 1: Bloomberg eleven three oh studio in New York. Thanks for
• 33:33
  Speaker 1: listening to the Bloomberg P and L podcast. You can
• 33:35
  Speaker 1: subscribe and listen to interviews at Apple Podcasts, SoundCloud, or
• 33:39
  Speaker 1: whatever podcast platform you prefer. I'm pim Fox. I'm on
• 33:43
  Speaker 1: Twitter at pim Fox. I'm on Twitter at Lisa abramoids one.
• 33:47
  Speaker 1: Before the podcast, you can always catch us worldwide on
• 33:50
  Speaker 1: Bloomberg Radio.