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Bill Dudley: Why Markets Should Worry About Inflation · Bloomberg Intelligence

• 0:01
  Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, along
• 0:04
  Speaker 1: with my co host of Bonnie Quinn. Every business day
• 0:06
  Speaker 1: we bring you interviews from CEOs, market pros, and Bloomberg experts,
• 0:10
  Speaker 1: along with essential market moving news. Kind the Bloomberg Markets
• 0:13
  Speaker 1: Podcast on Apple Podcasts or wherever you listen to podcasts,
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  Speaker 1: and on Bloomberg dot com. Good is time for Bloomberg Opinion.
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  Speaker 1: Today we are joined by Bill Dudley. He's a senior
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  Speaker 1: research scholar at Princeton University Center for Economic Policy Studies
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  Speaker 1: and obviously also former president of the Federal Reserve Bank
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  Speaker 1: of New York based in Princeton, New Jersey. Bill, thanks
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  Speaker 1: so much for joining us here. Love to chat with
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  Speaker 1: you kind of about your column about inflation. I think
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  Speaker 1: the Federal Reserve would like to see some inflation come
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  Speaker 1: back into this marketplace, but the signs really aren't there.
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  Speaker 1: What are your thoughts on that. Well, the first thing
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  Speaker 1: is that people are of the view that it's not
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  Speaker 1: going to come back. And so if you look at
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  Speaker 1: the spread between normal treasuries and inflation protected treasuries, spread
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  Speaker 1: it on a tenure basis is one point nine. That's
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  Speaker 1: on a CPI basis, So that translates to UH you know,
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  Speaker 1: core PC deflator of about one point six So basically,
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  Speaker 1: market participants are saying the Fed's not going to succeed
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  Speaker 1: in their goal of pushing inflation not just back to
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  Speaker 1: two percent, but above two. I've set the missages that
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  Speaker 1: we've had in recent years, so market participants are very,
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  Speaker 1: very confident that inflations will stay low in definitely, and
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  Speaker 1: I think that just a little bit too optimistic and assessment.
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  Speaker 1: There are some indicators though maybe I do that. What
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  Speaker 1: about the five year five year forward which has been
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  Speaker 1: creeping up and is at what two point nearly three
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  Speaker 1: percent at this point. Yeah, we've had some movement in
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  Speaker 1: the last week, so people are finally, I think, is
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  Speaker 1: taking this on board. But there are a number of
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  Speaker 1: reasons why I think inflation is a greater risk and
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  Speaker 1: what's pricing from markets. The first is base effects. So
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  Speaker 1: last April, March and April we saw a big decline
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  Speaker 1: in the COREPC deflator because the onset of the pandemic.
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  Speaker 1: When we get to May and those numbers drop out
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  Speaker 1: of the UH year over year statistics, all sudden inflation
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  Speaker 1: will look a little bit firmer. Second, I think that
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  Speaker 1: as we as we get an economic recovery in the
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  Speaker 1: second half of the year, which I fully anticipate, I
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  Speaker 1: think you're going to see more pricing power in those
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  Speaker 1: areas that were hurt most by the pandemic, things like
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  Speaker 1: hospitality and leisure, especially given the fact that that we
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  Speaker 1: probably actually are gonna have a shortage of capacity in
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  Speaker 1: some of those areas, given business failures that have occurred
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  Speaker 1: over the intermediate period. Third, you know, the other issue,
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  Speaker 1: of course, is we know the fens will be very patient.
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  Speaker 1: The fat is basically said they're not going to raise
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  Speaker 1: short term interest rate until they until maximum employment gets
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  Speaker 1: until we get the maximum employment, until we get to
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  Speaker 1: two percent inflation, and the fattest confident inflation is going
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  Speaker 1: to go above a two percent for some period of time,
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  Speaker 1: So the FED is gonna be slow rather than fast.
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  Speaker 1: And then uh, I think the final thing that makes
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  Speaker 1: me more more worried about inflation is fiscal policy. There's
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  Speaker 1: a pretty strong consensus developing that that if economies we
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  Speaker 1: use fiscal policy, there's not a lot of worry anymore
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  Speaker 1: about uh, that sustainability over the medium to longer term.
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  Speaker 1: So fiscal policy is a lever that can be used
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  Speaker 1: more aggressively than before. If you remember back during the
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  Speaker 1: last economic cycle, fiscal policy restraint was one reason why
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  Speaker 1: we had a subpar recovery in two thousand and twelve
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  Speaker 1: without fourtune well bill, just like on that last point,
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  Speaker 1: and maybe this is just political positioning, um, but we're
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  Speaker 1: actually starting to hear some Republicans say, whoa, whoa, whoa,
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  Speaker 1: let's put the brakes on some of the fiscal stimulus
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  Speaker 1: that we're talking about. Three trillion UH is way too
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  Speaker 1: big the number. We're thinking something less than a trillion
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  Speaker 1: for example, just on the discussion this latest fiscal stimulus,
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  Speaker 1: do you believe that after years of supporting higher and
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  Speaker 1: higher spending, that the Republicans have any stomach for kind
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  Speaker 1: of reining it in. Well, historically the Republicans have been
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  Speaker 1: uh for fiscal consolidation when Democrats are in the White
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  Speaker 1: House and not so much when Republicans. Certain way, I
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  Speaker 1: think they'll I think they'll continue that that pattern. The
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  Speaker 1: important thing on the fiscal size, it looks like we're
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  Speaker 1: going to get another round of physical stimuls. If there's
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  Speaker 1: nine billion dollar proposal goes forward, it seems more likely
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  Speaker 1: than not at this point that I think is sufficient
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  Speaker 1: to provide a bridge to the recovery that we're going
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  Speaker 1: to see late spring uh an early summer bill. So
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  Speaker 1: we definitely will see price increases in perhaps places like services,
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  Speaker 1: which make up about there all c p I and
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  Speaker 1: the core measures. So I could see where you would
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  Speaker 1: get inflation. But if we have slack in the labor force,
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  Speaker 1: which were likely to have for some time, won't that
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  Speaker 1: offset that kind of inflation at least for the federal reserve? Well,
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  Speaker 1: I think it. I think the question is how long
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  Speaker 1: is that slack in the liver market actually going to persist?
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  Speaker 1: And the other issue I think is, you know, people
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  Speaker 1: talk about the scarring of the economic caused by the pandemic,
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  Speaker 1: but the scarring isn't just about you know, workers being unemployed.
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  Speaker 1: It's also about businesses. They are just going under so
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  Speaker 1: capacity is also suffering. I mean, in my hometown Cranford,
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  Speaker 1: New Jersey, to two of the major restaurants have gone
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  Speaker 1: out of business. So when demand comes back, there's gonna
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  Speaker 1: be a lot more pricing power for those that have
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  Speaker 1: survived this, this this pandemic bill, how do you view
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  Speaker 1: the labor market here? We get you know, a week
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  Speaker 1: after week we get this really really sobering jobless claims,
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  Speaker 1: and of course we had some of the jobs data
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  Speaker 1: on Friday. Here, how do you view the labor market
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  Speaker 1: and the resiliency of the labor market as we come
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  Speaker 1: onto the back side of this pandemic arguably beginning maybe
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  Speaker 1: you know sometime next year. Well, it's not as good
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  Speaker 1: as the employment statistics suggests. For example, looking at the
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  Speaker 1: unemployer rate of six point seven percent. The our reason
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  Speaker 1: that as low as six point seven percent is a
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  Speaker 1: whole bunch of people have dropped out of the labor force.
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  Speaker 1: You're only counted as unemployed in the United States if
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  Speaker 1: you're actively looking for work. The labor force participation rates
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  Speaker 1: dropped by nearly two percentage points since February. So there's
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  Speaker 1: a lot more people unemployed than suggested by the current
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  Speaker 1: labor market, and that's certainly going to hold inflation back
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  Speaker 1: for a while. But I do think the recovery in
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  Speaker 1: the second half the years quite powerful. Once you get
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  Speaker 1: people vaccinated and the risk of pandemic goes down from
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  Speaker 1: a health perspective, social distancing land, you'll have an opening up.
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  Speaker 1: And so I think there's a lot of pen of demand.
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  Speaker 1: I mean, you look at the savings rate, the stavings
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  Speaker 1: rate right now, it's really high, even though we've gone
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  Speaker 1: through a very bumpy economy. So it seems to me
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  Speaker 1: like there are resources, especially among higher income people to
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  Speaker 1: go out and spend. So, Bill, if you don't mind
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  Speaker 1: taking us through it very slowly for some of us
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  Speaker 1: who may may maybe you know, less quick of thought
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  Speaker 1: than you. Take that restaurant example that you just gave
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  Speaker 1: us in your hometown to have closed. The others will
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  Speaker 1: have pricing power when people come back and start eating
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  Speaker 1: out properly. But how long will it take before those
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  Speaker 1: businesses or new businesses open to take that pricing power away,
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  Speaker 1: to employ some of the people that haven't been employed,
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  Speaker 1: that were in the services sector, and that then you know,
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  Speaker 1: contribute to the labor market becoming sort of full again
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  Speaker 1: full employment. Well, I wish I knew the answer to
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  Speaker 1: that question. I mean, we've never gone through anything quite
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  Speaker 1: like this before, and the burden of course has fallen,
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  Speaker 1: you know, disproportionately on leisure and hospitality and especially on
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  Speaker 1: a lot of small businesses. You know, if you look
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  Speaker 1: at the share of you know, demand, it's it's gone
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  Speaker 1: disproportionately towards the larger, large, larger stores, larger businesses. You know,
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  Speaker 1: Walmart's is able to stay open because they sell super
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  Speaker 1: sell sell groceries, or while follower smaller stores that specialize
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  Speaker 1: in things that Walmart sells, maybe you know, don't don't
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  Speaker 1: have as much much business. So I think, you know,
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  Speaker 1: I think you're right that you know, there will be
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  Speaker 1: you know, a small business creation. But then that's about
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  Speaker 1: you know, mobilizing capital and being credit worthy, and so
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  Speaker 1: I think that's going to take some time. Hey, Bill,
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  Speaker 1: thanks so much for joining us. We appreciate that. Bill Dudley,
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  Speaker 1: former year FED president and senior researcher at Prince University,
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  Speaker 1: and Vonnie, that's a big, big issue I think for
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  Speaker 1: some of these small businesses, the you know, the how
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  Speaker 1: quickly they can come back, or maybe a new entrepreneur
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  Speaker 1: comes in and starts a new restaurant in that old
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  Speaker 1: old space. Well that's just it. And you know, to me,
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  Speaker 1: in some senses, that might be the critical question how
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  Speaker 1: long does that take? Because that's when we're going to
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  Speaker 1: see those indicators move around, the inflation indicator, the employment indicator,
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  Speaker 1: and it's how they all sort of interact that you know,
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  Speaker 1: decides whether we suffer from too much inflation, or whether
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  Speaker 1: the FED needs to do something about the FED folds
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  Speaker 1: back and so on, so many questions to resolve that
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  Speaker 1: was built only former Fed Reserve. New York billion dollar
• 8:36
  Speaker 1: and logistics company d h L has just released its
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  Speaker 1: annual Global Connectedness Index, which it does in conjunction with
• 8:43
  Speaker 1: n y U Stern School of Business, and the report
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  Speaker 1: highlights key developments in international flows of capital, trade, information,
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  Speaker 1: and people. Joining us now with the conclusion from the
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  Speaker 1: report that globalization is far from dead is the CEO
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  Speaker 1: of the America's of dhl Express America's Mike Power and
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  Speaker 1: thanks for joining Mike. So my globalization may not be
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  Speaker 1: dead according to the report, but what are the flows
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  Speaker 1: showing us. Are we dealing with other countries as much
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  Speaker 1: as we did a peak globalization? Well, good morning, Bonnie
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  Speaker 1: and Paul, and thanks for having us. Yeah, I mean
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  Speaker 1: the report in itself, uh, there there weren't big surprises.
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  Speaker 1: So obviously people flows, if you've seen the report, people
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  Speaker 1: flows suffered an unpreceded decline in We expected that based
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  Speaker 1: on what was happening during the pandemic um capital flows
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  Speaker 1: were hit a bit harder, but they are rebounding UM.
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  Speaker 1: And that is positive, as you know, with governments and
• 9:39
  Speaker 1: central banks having stabilized the markets and helping to do that.
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  Speaker 1: But the one that came out that we're actually excited
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  Speaker 1: about his international trade. It's rebounded uh strongly. And people
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  Speaker 1: ask us all the time, is this a U shape
• 9:56
  Speaker 1: and L shape? Uh? It's a rather narrow V shape
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  Speaker 1: recovery that we have seen. UM. Our lowest point at
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  Speaker 1: DHL this year was in April. Uh. If you think
• 10:08
  Speaker 1: about when we found out about the pandemic UH in
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  Speaker 1: Wuhan and where it started, we started flowing from the
• 10:16
  Speaker 1: US to China ppe equipment UH. And then it turned
• 10:20
  Speaker 1: around in March April and you started the c PP
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  Speaker 1: equipment that started to flow from China to the world
• 10:29
  Speaker 1: into the United States. UH. So really what we've seen
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  Speaker 1: is the world remains connected. UH. International trade UH is key,
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  Speaker 1: and globalization has been more resilient uh than expected. So
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  Speaker 1: it's far away from coming to a standstill. Yeah, Mike,
• 10:50
  Speaker 1: that's interesting to hear your perspective because folks at DHL,
• 10:54
  Speaker 1: obviously it just has a bird's eye view of kind
• 10:56
  Speaker 1: of global trade. Here one of the concerns that some
• 11:00
  Speaker 1: folks have is, uh the trade war between the US
• 11:03
  Speaker 1: and China, and not so much the tariffs and maybe
• 11:08
  Speaker 1: the method in which the Trump administration carried out some
• 11:11
  Speaker 1: of its trade policies with China, tariffs and so on,
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  Speaker 1: but just the general belief that the world needs to
• 11:17
  Speaker 1: get tougher with China. Does that uh throw some roadblocks
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  Speaker 1: into the globalization story at all? I would say at
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  Speaker 1: the beginning, Paul, I think there was a lot of speculation,
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  Speaker 1: a lot of anecdotes that went out there. There is
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  Speaker 1: always gonna be a change in the world, especially for
• 11:39
  Speaker 1: US when we're dealing in two d and twenty countries
• 11:41
  Speaker 1: and territories globally. What we have seen is China continues
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  Speaker 1: to be one of our biggest trade lanes for US
• 11:49
  Speaker 1: at DHL China, US and a p US. I think
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  Speaker 1: when you take a look at it, Uh, they're firing
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  Speaker 1: in all cylinders right now, China and Asia Pacific to
• 11:59
  Speaker 1: Europe in the United States. So what I would say is, uh,
• 12:04
  Speaker 1: you know, the things that took place this past year,
• 12:06
  Speaker 1: whether it be the U S m c A deal
• 12:09
  Speaker 1: and the revision of NaSTA, which by the way, was needed,
• 12:12
  Speaker 1: some form of revision was needed, but there are biggest
• 12:15
  Speaker 1: trading partners now as well, UH and China. There needed
• 12:19
  Speaker 1: to be a reset from that perspective as well. But
• 12:22
  Speaker 1: there's been no slowing down at all. Mike. What have
• 12:26
  Speaker 1: you done in terms of changing routes, re prioritizing routes,
• 12:30
  Speaker 1: putting stuff on certain routes and so on in order
• 12:32
  Speaker 1: to deal with the changes the last year or two. Yeah,
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  Speaker 1: it's thank you for that, UM, because we've been in
• 12:38
  Speaker 1: peak season, as I said, since early June, and as
• 12:42
  Speaker 1: a result of that, we've been adding jobs. So we
• 12:45
  Speaker 1: took a decision in the month of March that we
• 12:47
  Speaker 1: would not furlough one single employee UH. And all we've
• 12:51
  Speaker 1: been doing is adding jobs. So we're over three thousand
• 12:54
  Speaker 1: new added jobs and growing in the United States as
• 12:58
  Speaker 1: an example, over six thousand when you take into account Canada. UH.
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  Speaker 1: In Mexico, we've added additional capacity as a reduction as
• 13:05
  Speaker 1: a result of reduction in airline capacity UH, and that
• 13:10
  Speaker 1: is coming back slow. As you can imagine some of
• 13:12
  Speaker 1: the recent announcement of further restriction, further lockdown. From a
• 13:17
  Speaker 1: commercial airline perspective, we had to supplement that with additional
• 13:21
  Speaker 1: capacity in the air. So we've added additional flights that
• 13:25
  Speaker 1: of Asia, China into Europe and into the United States,
• 13:29
  Speaker 1: intra United States, into Canada, into Mexico, uh, down south
• 13:34
  Speaker 1: into Central South America. UH. And that has been ongoing
• 13:39
  Speaker 1: for us really since the month of June. Uh And again,
• 13:43
  Speaker 1: don't see that slowing down anytime soon. Uh. And really
• 13:48
  Speaker 1: we've seen growth in eat commerce. UH so more and
• 13:52
  Speaker 1: more people, maybe like yourselves. I don't know about yourself,
• 13:54
  Speaker 1: but my wife's shops everything online, have gone to shopping online.
• 13:59
  Speaker 1: You you all the results of Black Friday and Cyber Monday,
• 14:03
  Speaker 1: some of the biggest ever online shopping numbers, uh in
• 14:07
  Speaker 1: the history of the United States. We saw greater than
• 14:10
  Speaker 1: a fift uh in a very short period of time.
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  Speaker 1: And I get asked. I got asked the other day, Mike,
• 14:16
  Speaker 1: is this gonna slow down? I don't see it slowing down.
• 14:20
  Speaker 1: And we basically saw ten years of e commerce in
• 14:25
  Speaker 1: in a in a six month period of time. Wow. Yeah,
• 14:28
  Speaker 1: just extraordinary how consumer behaviors change. E commerce has just
• 14:32
  Speaker 1: been accelerated. I'm sure you see that clearer than just
• 14:35
  Speaker 1: about anyone. Mike Parrott, Thanks so much for joining us.
• 14:37
  Speaker 1: We really appreciated Mike Parrott, chief Executive Officer for the
• 14:40
  Speaker 1: Americas for d h L Express America's joining us on
• 14:43
  Speaker 1: the phone from Plantation, Florida. Just extraordinary. They're seeing the
• 14:47
  Speaker 1: recovery uh, you know in Asia, in China more specifically, uh,
• 14:53
  Speaker 1: and then a broad recovery in terms of traffic just
• 14:56
  Speaker 1: across the board. Amazing. We just got word that the
• 15:01
  Speaker 1: call between Prime Minister Boris Johnson and the US vander
• 15:04
  Speaker 1: Lyon has finished. Desperate to know what actually happened, because
• 15:08
  Speaker 1: this was the call during which talks could collapse or
• 15:10
  Speaker 1: they could actually find a solution. So let's bring in
• 15:13
  Speaker 1: to as Raphael to let us know what she knows.
• 15:16
  Speaker 1: Torez a Booberg opinion editor and is based in London.
• 15:19
  Speaker 1: Tores what do we know anything more about the call
• 15:22
  Speaker 1: except that is over? Yeah, I'm sorry to say we
• 15:25
  Speaker 1: don't know. Um, we don't have any detailed readout at
• 15:28
  Speaker 1: that call. It was a crucial one, as you said,
• 15:30
  Speaker 1: because uh, the talks are at an impast. This week
• 15:34
  Speaker 1: is considered, you know, if not the last week, then
• 15:38
  Speaker 1: pretty close to it. Given the European Council meet on Thursday. Um,
• 15:42
  Speaker 1: and Uh, the UK is due to leave its transition
• 15:45
  Speaker 1: period at the end of the month, and there's a
• 15:47
  Speaker 1: lot that needs to happen before that in terms of
• 15:49
  Speaker 1: legally scrubbing and translating and getting approval for any deal. Um.
• 15:54
  Speaker 1: There needs to be a political solution at this point.
• 15:57
  Speaker 1: I think that much is clear, and that's why we
• 15:59
  Speaker 1: have Boris Johnson and Slavander Lai and the European Commission
• 16:03
  Speaker 1: President speaking directly now whether they can unlock things, I
• 16:07
  Speaker 1: think we're unlikely to hear um the announcement of a deal,
• 16:10
  Speaker 1: for example, tonight. But what we I think, what what
• 16:13
  Speaker 1: everyone is waiting to hear is whether they're going to
• 16:15
  Speaker 1: keep talking at least another couple of days. Sores talk
• 16:20
  Speaker 1: to us about fishing. Why is fishing such a big thing?
• 16:23
  Speaker 1: I just don't get it when I read headlines of
• 16:26
  Speaker 1: thousands of jobs, finance jobs leaving London, billions of dollars
• 16:29
  Speaker 1: of capital leaving. Okay, I get that's an issue, But fishing, Yeah,
• 16:34
  Speaker 1: it's It's actually much simpler than it sounds. Uh. The
• 16:38
  Speaker 1: whole you know, Brexit was was thought on the one
• 16:42
  Speaker 1: very basic central idea, and that is that Britain would
• 16:45
  Speaker 1: take control of its borders, its laws, its money. And
• 16:49
  Speaker 1: when you look at the map of Britain, right, it's
• 16:51
  Speaker 1: an island and there's water and and their fish in
• 16:54
  Speaker 1: that water. And to you know, to to to the
• 16:57
  Speaker 1: common person's mind, well, if we control our borders, we
• 17:00
  Speaker 1: also control our water. And why should the EU have
• 17:03
  Speaker 1: the automatic right to fish? Uh to to claim you know,
• 17:06
  Speaker 1: very large share of the fish in British water. So
• 17:09
  Speaker 1: that's that's the simple assertion that the UK makes. It's
• 17:12
  Speaker 1: not so simple in reality, because um, EU fishermen have
• 17:16
  Speaker 1: been fishing those waters for you know, generations and more. Uh.
• 17:20
  Speaker 1: The fish are spawned in EU water, some of them
• 17:22
  Speaker 1: and then mature and are caught in British waters. It's
• 17:25
  Speaker 1: very complicated. Most of what Britain catches it sells into
• 17:29
  Speaker 1: the EU. So it's a very it's one of these
• 17:32
  Speaker 1: small issues that has the potential to blow things up.
• 17:35
  Speaker 1: That said that, the word out over the weekend was
• 17:38
  Speaker 1: that they were pretty close to agreeing a deal on
• 17:40
  Speaker 1: fish and that things were really hung up over these
• 17:43
  Speaker 1: what are called level playing field issues, you know, UH,
• 17:46
  Speaker 1: state aid subsidies for industry, labor, and environmental standards and
• 17:51
  Speaker 1: that sort of things, and those are pretty um, you know,
• 17:54
  Speaker 1: pretty important too to Boris Johnson and his party because
• 17:57
  Speaker 1: they signify how much the UK can divert from the
• 18:00
  Speaker 1: rest of Europe, which is again another you know, fundamental
• 18:05
  Speaker 1: reason why they're leaving the EU. But this fisheries issue
• 18:09
  Speaker 1: TOAs it's important on its own, but it's also sort
• 18:11
  Speaker 1: of symbolic of the whole thing, right because it will
• 18:14
  Speaker 1: decide what stands either parties take on things like creep
• 18:20
  Speaker 1: mission creeping and what gets decided for the past versus
• 18:23
  Speaker 1: what gets decided for the future in terms of what
• 18:25
  Speaker 1: companies can do. The Europeans don't want the British to
• 18:30
  Speaker 1: have the right to sort of change mandates over time, right, Yes,
• 18:34
  Speaker 1: So that's that's the level playing field a side of this,
• 18:36
  Speaker 1: and it's really stuck because the EU, from the used perspective,
• 18:40
  Speaker 1: what they don't want is a is a you know,
• 18:43
  Speaker 1: medium to large size economy right on their doorstep, having
• 18:47
  Speaker 1: the ability to undercut European companies in all sorts of
• 18:50
  Speaker 1: ways and yet having access to EU market. So they're
• 18:54
  Speaker 1: negotiating position is quite clear. Uh, if you want access
• 18:57
  Speaker 1: to the single markets, which is a euro terrfzuro quota deal.
• 19:01
  Speaker 1: Then you need to agree not to undercut European UM
• 19:05
  Speaker 1: countries with through regulations and different standards on labor markets
• 19:11
  Speaker 1: for example, UM and the UK's position as well, we've
• 19:15
  Speaker 1: left the single market, we've left the EU, why should
• 19:18
  Speaker 1: we follow your rules still, UM, we've left for the
• 19:21
  Speaker 1: very purpose of diverging. So that has created, you know,
• 19:24
  Speaker 1: the impass And as with all of these things, there
• 19:28
  Speaker 1: is a solution, but it would require concessions and political will,
• 19:32
  Speaker 1: and that's what we haven't seen up to now. We
• 19:34
  Speaker 1: haven't seen either side being willing to give enough to
• 19:37
  Speaker 1: get to a deal. So tres It's so it's fair
• 19:42
  Speaker 1: to assume by some that no deal will be reached
• 19:47
  Speaker 1: if there's a kind of a no deal here at
• 19:49
  Speaker 1: this last minute. What is crashing out of the EU
• 19:52
  Speaker 1: at your end really mean? Well, the first thing it
• 19:56
  Speaker 1: means is that there are a whole load of terror
• 20:00
  Speaker 1: that come into play. So right now there's free movement
• 20:03
  Speaker 1: of good services, capital, labor, that's what the single market means.
• 20:06
  Speaker 1: Suddenly you have teriffs. So for example, UM, sheep meet
• 20:10
  Speaker 1: the EU. UH that thirty percent of the UK sheep
• 20:14
  Speaker 1: meat goes into EU markets and terrorists would um add
• 20:18
  Speaker 1: about I think it's something like six ad belorum you know,
• 20:22
  Speaker 1: per year on that and there's a whole host of terrorits.
• 20:25
  Speaker 1: It would make British farming, um it would. It would
• 20:28
  Speaker 1: price it out of the European market. It would have
• 20:31
  Speaker 1: a huge impact on the automotive sector because of all
• 20:34
  Speaker 1: of the input, the intermediate goods, the supply chain that
• 20:38
  Speaker 1: involves EU part It also means a whole lot of
• 20:41
  Speaker 1: non tariff barriers. And by the way, this happens even
• 20:44
  Speaker 1: if there's a deal, So we we tend to think
• 20:46
  Speaker 1: of a deal as kind of you know, releasing all
• 20:51
  Speaker 1: of the pressure that's built up. But even with the deal,
• 20:53
  Speaker 1: we see a lot of non tariff barriers and those
• 20:55
  Speaker 1: are things like customs checks, rules of origin, where did
• 20:59
  Speaker 1: this product have to originate from? How do you certify that? Uh,
• 21:02
  Speaker 1: food safety standards and those kinds of certification. For a
• 21:07
  Speaker 1: British citizen who wants to take their dog to provounce
• 21:10
  Speaker 1: in the summer, you will need a special pet passport,
• 21:13
  Speaker 1: You'll need to get a vet to certify it. All
• 21:16
  Speaker 1: of these things become more complicated if you have a
• 21:18
  Speaker 1: second home in the South of France or Spain. You
• 21:21
  Speaker 1: will only be able to use it for I think
• 21:24
  Speaker 1: it's ninety days and a eighty day period um, whereas
• 21:27
  Speaker 1: now you can spend as much time as you want there.
• 21:29
  Speaker 1: So this is all sorts of implications. Some of them
• 21:32
  Speaker 1: are you know, seem quite you know, sort of small hassles,
• 21:35
  Speaker 1: and others are quite significant. But we're talking about, you know,
• 21:39
  Speaker 1: potentially a six percent loss of GDP compared to staying
• 21:44
  Speaker 1: in the EU. Uh GDP growth compared to what it
• 21:47
  Speaker 1: would be staying in the EU, according to the Office
• 21:49
  Speaker 1: of Budget Responsibility. So it's it's it's significant whether brigons
• 21:53
  Speaker 1: will feel it from day one, um, that remains to
• 21:56
  Speaker 1: be seen, but I think it's it's a sea change
• 21:58
  Speaker 1: on a lot of levels, and no deal most of
• 22:01
  Speaker 1: all means that the relationship between Britain and it's its
• 22:05
  Speaker 1: closest trading partner, it's geographical neighbor um are put on
• 22:09
  Speaker 1: on very sort of um, you know, not not a
• 22:15
  Speaker 1: good place. Yeah, terrible place, boyd dress. I remember when
• 22:20
  Speaker 1: we used to speak to you you on a daily basis
• 22:21
  Speaker 1: pre pandemic. But the it looks like we're finally getting
• 22:24
  Speaker 1: to the short strokes here. For Brexit uh winner or
• 22:27
  Speaker 1: lose thres Raphael Bloomberg, opinion editor covering the politics and
• 22:31
  Speaker 1: economics of Europe, joining us on a Brexit update. Just
• 22:37
  Speaker 1: looking at the d X Y Spot Dollar index trading
• 22:40
  Speaker 1: right now at about nineties spots seven five. That's done
• 22:43
  Speaker 1: about ten percent from just March. Here. As we think
• 22:47
  Speaker 1: about the Federal Reserve and uh FED Chairman Pale talking
• 22:50
  Speaker 1: about lower rates for longer, let's get a sense of
• 22:53
  Speaker 1: what's going on in the currency markets relative to the dollar.
• 22:57
  Speaker 1: We welcome Wolfgang Coaster, senior strategy officer for Kiriba uh Wolfgang,
• 23:02
  Speaker 1: thanks what for joining us here. So we have had
• 23:04
  Speaker 1: this pullback in the dollar and again summer calling for
• 23:07
  Speaker 1: maybe some continued weakness. What are your thoughts? My thoughts
• 23:11
  Speaker 1: Good morning everybody. Um My thoughts are that while we've
• 23:15
  Speaker 1: had some weakening here and certainly significant, the bigger issue
• 23:19
  Speaker 1: for corporations is really the volatility. Sometimes it's uptront as
• 23:22
  Speaker 1: it's down. We all know that we've had some we've
• 23:25
  Speaker 1: seen those continuous strength, we see some repriets. They're clear
• 23:28
  Speaker 1: with all the global economic things that are going on
• 23:31
  Speaker 1: that we're going to continue to see. One thing, which
• 23:32
  Speaker 1: is volatility. And the problem with the volatility is that
• 23:36
  Speaker 1: it doesn't just happen on day one and day nine
• 23:38
  Speaker 1: d of the quarter. It happens every single day. And
• 23:41
  Speaker 1: there are lots of corporations who if they are negative
• 23:43
  Speaker 1: to the impact of that forn exchange, its impacts their
• 23:46
  Speaker 1: cash and it's all about liquidity right now, as we
• 23:49
  Speaker 1: all know. So what we're helping companies was just trying
• 23:52
  Speaker 1: to make that as agnostic as possible and not worry
• 23:56
  Speaker 1: about whether dolls going up or down, but reality run
• 23:59
  Speaker 1: their business as I was a constant dollar business. Yeah,
• 24:02
  Speaker 1: just for context, let's let everybody know that the dollar
• 24:04
  Speaker 1: index today is at ninety point seven five nine zero
• 24:08
  Speaker 1: point seven five is you know, thanks to you know,
• 24:12
  Speaker 1: factor is beyond the dollars control as well, of course,
• 24:14
  Speaker 1: like euro strength and I mean not the British pounds
• 24:17
  Speaker 1: hurt nay, because that's been weakening too. So well, King,
• 24:20
  Speaker 1: I know you're particularly concerned about airbnbs currency problem. What
• 24:24
  Speaker 1: does the likes of AIRBND that's dealing with all sorts
• 24:26
  Speaker 1: of currencies all the time do, So what companies like
• 24:31
  Speaker 1: that should do is really understand where all their exposers
• 24:33
  Speaker 1: come from. And then manage it to a point that
• 24:37
  Speaker 1: it becomes immaterial. Lots of companies around the world do
• 24:40
  Speaker 1: that today. It looks like in the statements from Airbnb
• 24:44
  Speaker 1: that they recognize they have an issue. They actually mentioned
• 24:48
  Speaker 1: in their opening documents their currency sixty nine times. They're
• 24:53
  Speaker 1: in forty countries. Um they mentioned euro and Sterling is
• 24:56
  Speaker 1: the two largest exposures, which is a little bit of
• 25:00
  Speaker 1: setting right now. But overall, what what what investors will
• 25:04
  Speaker 1: be looking at is how they actually manage this and
• 25:06
  Speaker 1: what they're showing in their two thousand twenty results so
• 25:09
  Speaker 1: far as a sixty three million dollar hit due to
• 25:12
  Speaker 1: four exchange. That's sixty three million dollars worth of cash
• 25:15
  Speaker 1: that they do not have, and that is over ten
• 25:18
  Speaker 1: of their overall net losses. So they would have ten
• 25:22
  Speaker 1: less losses if they've managed that to a level where
• 25:25
  Speaker 1: it becomes immaterial. And lots of companies, as I said,
• 25:28
  Speaker 1: like the Googles of the world and others who have
• 25:30
  Speaker 1: the same problem, manage this. Just to follow, if you
• 25:32
  Speaker 1: don't mind, are they not hedging? It looks like they're
• 25:36
  Speaker 1: doing some hedging, but it doesn't seem to be as
• 25:39
  Speaker 1: effective as it could be, So they look like they're
• 25:41
  Speaker 1: doing from what they're saying, they are using their product
• 25:43
  Speaker 1: to partially manage this. How exactly they're doing it don't know,
• 25:47
  Speaker 1: But what I do know is that they have that
• 25:50
  Speaker 1: they have very material losses that they shouldn't be having.
• 25:54
  Speaker 1: So what's gotting up to last let's call it years?
• 25:57
  Speaker 1: As the global commony global economy has become much more
• 26:01
  Speaker 1: global uh and internationalism has uh, you know, increased. From
• 26:06
  Speaker 1: your perspective, how are companies today managing their currency exposure risk?
• 26:11
  Speaker 1: It still seems like when I listen to earnings calls,
• 26:13
  Speaker 1: I hear big, big numbers of currency swings, hits and
• 26:17
  Speaker 1: or gains to the earnings. Yeah, so that's absolutely correct. Unfortunately,
• 26:22
  Speaker 1: because we try to help companies make sure that that
• 26:24
  Speaker 1: doesn't happen. We we do actually a quarterly report where
• 26:28
  Speaker 1: we do were last quarter we had losses of in
• 26:32
  Speaker 1: eight hundred North American companies by exceeding seventeen billion dollars,
• 26:37
  Speaker 1: which is a lot of money. So you have to
• 26:39
  Speaker 1: answer your question. You have two camps. You have the
• 26:42
  Speaker 1: camps of companies will really understand it, understand their exposure
• 26:45
  Speaker 1: and actually fully automate that management. Today it is automated
• 26:49
  Speaker 1: all it is, and it is not expensive to do,
• 26:52
  Speaker 1: and especially relative to the losses that that we're seeing
• 26:56
  Speaker 1: companies have. And then you see the ones who kind
• 26:58
  Speaker 1: of think that this is a zero sum game and
• 27:01
  Speaker 1: practice it is not a zero sum game. You may
• 27:04
  Speaker 1: have ops, you may have downs, but they hit you
• 27:06
  Speaker 1: every single day during your business, and you may well
• 27:08
  Speaker 1: be losing lots of money in times when you need
• 27:11
  Speaker 1: it and so during for example, this these tough times.
• 27:14
  Speaker 1: U does is it really good for Airbnb to lose
• 27:16
  Speaker 1: another sixty million dollars due to this? I think not
• 27:20
  Speaker 1: and it's not necessary to there. Now, what's impressive about
• 27:23
  Speaker 1: Airbnb is still they're doing a great job through these
• 27:26
  Speaker 1: through this economy quite frankly, still having some nice revenues
• 27:29
  Speaker 1: of two and a half a billion dollars. So fundamentally
• 27:32
  Speaker 1: they have a lot of things going for for them.
• 27:34
  Speaker 1: But the financial risk management, it looks like it's in
• 27:36
  Speaker 1: that they unfortunately are a little bit more in the
• 27:39
  Speaker 1: camp of could improve. All right, then, well that's that's
• 27:43
  Speaker 1: telling them. Volcang. Let us know if they if they
• 27:46
  Speaker 1: get back to you and put a strategy in place,
• 27:48
  Speaker 1: we'd love to hear about it. All Going a Coaster
• 27:50
  Speaker 1: is senior strategy officer at Kiriba, based there in downtown
• 27:55
  Speaker 1: New York, New York Plaza. Thanks for listening to Bloomberg
• 28:00
  Speaker 1: Markets podcast. You can subscribe and listen to interviews at
• 28:03
  Speaker 1: Apple Podcasts or whatever a podcast platform you prefer. I'm
• 28:07
  Speaker 1: Bonnie Quinn, I'm on Twitter at Bonnie Quinn, and I'm
• 28:10
  Speaker 1: Paul Sweeney. I'm on Twitter at pt Sweeney. Before the podcast,
• 28:13
  Speaker 1: you can always catch us worldwide at Bloomberg Radio