Latest / Bloomberg Intelligence / We are starting to see the fruit of regulatory easing: Terrazas

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We are starting to see the fruit of regulatory easing: Terrazas · 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 Abramowitz. Each day we
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  Speaker 1: bring you the most important, noteworthy, and useful interviews for
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  Speaker 1: you and your money, whether you're at the grocery store
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  Speaker 1: or the trading floor. Find the Bloomberg p m L
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  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Well,
• 0:32
  Speaker 1: today we got housing starts data that was kind of mixed. Frankly,
• 0:36
  Speaker 1: we saw an increase in the number of housing starts
• 0:40
  Speaker 1: UH to housing starts the fast pace in about decade,
• 0:43
  Speaker 1: but the number of applications for permits declined. Joining us
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  Speaker 1: now to talk about the state of the US housing
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  Speaker 1: market is Aaron Terrazas. He is a Zillo Xenior Senior
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  Speaker 1: Economist Zillo Senior Economists. UM, thank you so much for
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  Speaker 1: being here. Aaron, So, whoops your take on this sort
• 1:01
  Speaker 1: of mixed data. You're right, it was a mixed report,
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  Speaker 1: but I think there was good news and that we
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  Speaker 1: are seeing a single family starts steadily rebound. There there
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  Speaker 1: nowhere near what we would expect at this point in
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  Speaker 1: the business cycle. Multi family starts have actually been a
• 1:15
  Speaker 1: bright spot. Um. Those apartments five plus unit buildings UM.
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  Speaker 1: They dropped a little bit in twenty seventeen, but have
• 1:21
  Speaker 1: been up over the past year unexpectedly, still strong. What
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  Speaker 1: accounts for that strength up seven and a half percent?
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  Speaker 1: That's right, you know, I think there's a couple of
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  Speaker 1: factors driving that strength UM. First, as rent affordability really
• 1:35
  Speaker 1: began to deteriorate two or three years ago, UH cities,
• 1:38
  Speaker 1: particularly high press high price cities, began to invest in
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  Speaker 1: easing the regulatory process UM, and now to three years later,
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  Speaker 1: we're starting to see the fruit of that kind of
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  Speaker 1: regulatory easing. Really, although I thought that the big gains
• 1:52
  Speaker 1: were really in the Midwest and some cities where perhaps
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  Speaker 1: that wasn't as much of an issue. You're right, So
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  Speaker 1: so the Midwest has seen the most recent month and
• 1:59
  Speaker 1: month gains, but you're looking over the past year, kind
• 2:01
  Speaker 1: of the West and the Northeast have still seen strong
• 2:04
  Speaker 1: multifamily starts. Have you seen any effects because of the
• 2:08
  Speaker 1: rise and lumber prices, tariffs on imported lumber from Canada,
• 2:12
  Speaker 1: for example, You're right. In the single family space, the
• 2:15
  Speaker 1: single family construction in particular, tariffs and and kind of
• 2:19
  Speaker 1: recent trade actions have increased costs for builders. I heard
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  Speaker 1: an estimate of about nine thousand dollars at home, right,
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  Speaker 1: so that's kind of in line my estimates attend to
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  Speaker 1: fifteen tho dollars for your median new home. UM. That adds,
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  Speaker 1: but it's important remember it's not just softwood. Softwood is
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  Speaker 1: the biggest particular component that's been tariffed, but things like cedar,
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  Speaker 1: shingles um have also kind of received teriffs. UM, Things
• 2:41
  Speaker 1: like aluminum and and still are about three percent of
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  Speaker 1: the diciplical costs of your single family home, not too
• 2:47
  Speaker 1: much of consumer appliances like washing machines and dishwashers. So,
• 2:50
  Speaker 1: you know, just to pick up on on that that
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  Speaker 1: important point. The cost of the actual materials has been increasing,
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  Speaker 1: but so have the costs of the labor because there's
• 2:57
  Speaker 1: been a real shortage there. How much has that contributed
• 3:00
  Speaker 1: to an increase in home prices as well? You're right
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  Speaker 1: number two of the rising cost the headwinds and builders
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  Speaker 1: are facing. Residential construction wages are up five percent over
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  Speaker 1: the past year compared to a liver two percent for
• 3:12
  Speaker 1: overall wages. We're seeing double the pace of wage growth
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  Speaker 1: in in kind of for those residential construction workers. That's
• 3:17
  Speaker 1: a clear sign of any that that builders are facing
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  Speaker 1: labor shortages. So at what point will these increased costs
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  Speaker 1: materially slow housing starts. I'm not sure they're gonna they're
• 3:27
  Speaker 1: slow housing starts. What they are doing is they're pushing
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  Speaker 1: up UM, the price point that that builders are targeting.
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  Speaker 1: So you know, we are seeing that that median price
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  Speaker 1: point of new construction rise UM and UM and you know,
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  Speaker 1: and kind of a little bit of is that is
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  Speaker 1: what we're not seeing I said before at this point
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  Speaker 1: in the business cycle, we should be seeing more housing starts. Okay,
• 3:46
  Speaker 1: this is what confuses me. The biggest earth of housing
• 3:49
  Speaker 1: right now is sort of smaller starter homes. It's the
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  Speaker 1: affordable homes that people want to buy. If you have
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  Speaker 1: builders basically having a disincentive to go out and buy
• 3:58
  Speaker 1: and and create these homes, you know, is there enough
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  Speaker 1: of a market at the high end, first of all,
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  Speaker 1: to absorb what the builders want to build and can
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  Speaker 1: they afford to build what is actually needed? I think
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  Speaker 1: builders builders have that that same concern that that's one
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  Speaker 1: of the reasons there the remaining cautious If you look
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  Speaker 1: at UM new home sales, about a third of new
• 4:18
  Speaker 1: homes are sold before they even started. That's up from
• 4:22
  Speaker 1: historically about means builders are offloading this risk that they're
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  Speaker 1: carrying UM rather than wait for a couple of months
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  Speaker 1: of appreciation while construction finishes. I think kind of builders
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  Speaker 1: today are do have that scars of what happened a
• 4:34
  Speaker 1: decade ago and are being conservative UM, not wanting to
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  Speaker 1: overbuild UM. They know there's demand at that more affordable
• 4:40
  Speaker 1: price point. The math doesn't work out for them there
• 4:43
  Speaker 1: new home sales. Just to get more color on that topic,
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  Speaker 1: what's your outlook? So our outlook new home sales data
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  Speaker 1: will release next week. Are our forecast suggests? I think
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  Speaker 1: a small decline. You know there is some month to
• 4:57
  Speaker 1: month volatility in that series. I think the more important
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  Speaker 1: point that I'm looking at um next week next week's
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  Speaker 1: data is that that medium price point. Last month in
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  Speaker 1: the provisional April data, we saw a big drop in
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  Speaker 1: that medium price point. I think that's gonna be revised upward.
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  Speaker 1: One thing that really struck me there was a story
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  Speaker 1: on the Bloomberg Today looking at a Harvard study that
• 5:15
  Speaker 1: found that US homes are a lot cheaper than they look.
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  Speaker 1: And they looked at an inflation adjusted basis, The monthly
• 5:22
  Speaker 1: payments that people are making now in their homes are
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  Speaker 1: actually blow what they would be in seven This is
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  Speaker 1: all thanks to low interest rates. So you know how
• 5:33
  Speaker 1: much does that factor into people's equations right now? Lock
• 5:36
  Speaker 1: in the low interest rates while they are where they are,
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  Speaker 1: and that will actually mean a cheaper home now, even
• 5:41
  Speaker 1: if prices are pretty high. Nation Wide, home affordability looks
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  Speaker 1: great right now. You know it's it's in the low twenties.
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  Speaker 1: Your your your your typical mortgaged income ratio. So much
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  Speaker 1: of that is driven by interest rates. As interest rates rise,
• 5:53
  Speaker 1: that's gonna kind of push that in abruptard. But you know,
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  Speaker 1: if you look at that historical average share of income
• 5:58
  Speaker 1: that goes to a mortgage, that's that's assuming an average
• 6:01
  Speaker 1: historical mortgage rate of eight percent. I'm not sure that
• 6:04
  Speaker 1: mortgage rates are going to get up to eight percent,
• 6:06
  Speaker 1: even at their highest point the cycle. Just to go
• 6:09
  Speaker 1: back to this idea of rent affordability, looking at specific
• 6:13
  Speaker 1: cities where it is affordable to rent, Pittsburgh number one. St. Louis,
• 6:19
  Speaker 1: number two, Oklahoma City, followed by Raleigh, Birmingham, and so on.
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  Speaker 1: What do you see in terms of any trends for
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  Speaker 1: big cities. Yeah, so so. Rent affordability is almost the
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  Speaker 1: opposite of the mortgage affordability story. It is at historic
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  Speaker 1: highs um particularly in in those high priced cities. In
• 6:34
  Speaker 1: a place like San Francisco, l A. People are spending
• 6:37
  Speaker 1: kind of almost fifty of their income on rent. That's
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  Speaker 1: at the median for a bottom a bottom third renter,
• 6:43
  Speaker 1: kind of renting a bottom foot house. It's it's which
• 6:47
  Speaker 1: is just just not realistic, But you're right. Kind of
• 6:49
  Speaker 1: there are kind of those more affordable cities, um where
• 6:52
  Speaker 1: there has been more supply and you know, more importantly
• 6:55
  Speaker 1: kind of less demanding that rental market because it is
• 6:57
  Speaker 1: still affordable to buy in places like like Lahoma City. Um,
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  Speaker 1: you know, people in those markets tend to buy as
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  Speaker 1: soon as they can. Thanks very much for being with us.
• 7:05
  Speaker 1: Aaron Rossis, he is the senior economist for ZELLO, talking
• 7:10
  Speaker 1: about new housing starts and the housing market. China is
• 7:29
  Speaker 1: planning to act quote forcefully on Trump's two hundred billion
• 7:33
  Speaker 1: dollar tariff threat. President Trump's administration is drawing up a
• 7:38
  Speaker 1: list of perhaps new tariffs to impose on China to
• 7:43
  Speaker 1: retaliate for the retaliation to the retaliation to the retaliation.
• 7:46
  Speaker 1: Here we are in this cycle, and here to explain
• 7:48
  Speaker 1: to us how to strip out what we should be
• 7:50
  Speaker 1: paying attention to from the noise. Patrick Chauvinik Chavannic. He
• 7:54
  Speaker 1: is chief strategist of Silver Silver Crust Asset Management. Patrick,
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  Speaker 1: you know, when you talk to a lot of traders,
• 8:02
  Speaker 1: they say, there's a lot of noise, there's a lot
• 8:05
  Speaker 1: of threats, but the actual economic impact so far is
• 8:12
  Speaker 1: fairly minimal. At what point should people take up their
• 8:17
  Speaker 1: their pens and say, wait a seconds, something here is
• 8:20
  Speaker 1: vastly different. So there is a steady march from words
• 8:25
  Speaker 1: to actions, and we are starting to see more and
• 8:28
  Speaker 1: more of these words translated into actions. Um, it's incremental,
• 8:33
  Speaker 1: You're right, Um, but UH, you know, I look at it.
• 8:37
  Speaker 1: There there two sets of effects. There's the short term
• 8:40
  Speaker 1: effects UM that may affect uh this market cycle or
• 8:45
  Speaker 1: how stocks perform in the near future, and that is
• 8:49
  Speaker 1: UH the potential impact of of inflationary shock from more
• 8:55
  Speaker 1: expensive inputs like from steel. UH. And then also the
• 8:59
  Speaker 1: retaliatory impacts measures that are meant to target specific companies
• 9:04
  Speaker 1: or specific industries in the United States and hit their earnings.
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  Speaker 1: But there's also a longer term impact, which is the
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  Speaker 1: erosion and the undermining of these trade rules, which, however
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  Speaker 1: imperfect that they may be, have created a lot of opportunity,
• 9:16
  Speaker 1: not just for American companies but from for companies around
• 9:19
  Speaker 1: the world. And you know, there's something going on right
• 9:22
  Speaker 1: now at w t O where the United States is
• 9:25
  Speaker 1: refusing to allow new judges to take up their roles
• 9:30
  Speaker 1: at w t O, and very soon we're gonna get
• 9:32
  Speaker 1: down to where there's only three judges, which is the
• 9:35
  Speaker 1: minimum required um to have any kind of ruling, and
• 9:38
  Speaker 1: then we'll go to two and they won't be able
• 9:40
  Speaker 1: to rule on anything. So you have countries like Canada
• 9:44
  Speaker 1: or your European Union who say, well, we don't like
• 9:47
  Speaker 1: what the U s is doing, we're gonna take it
• 9:48
  Speaker 1: to w t OH. If they can't take it to
• 9:51
  Speaker 1: w t O because the US is blocking that, they're
• 9:53
  Speaker 1: going to be adopting more unilateral actions. And this what
• 9:59
  Speaker 1: we're seeing here is a situation where the temperature just
• 10:01
  Speaker 1: keeps rising and rising and rising, and the actual economic
• 10:05
  Speaker 1: impacts start to accumulate. Patrick. Let's say you get a
• 10:10
  Speaker 1: call from a client and they say, look, you know
• 10:13
  Speaker 1: you taught at a university in Beijing, shin Khua University. Also,
• 10:20
  Speaker 1: you've worked in private equity. You worked for John Bayner
• 10:25
  Speaker 1: because you've got a political acumen there, and you also
• 10:31
  Speaker 1: have worked in public policy. Where do we put our
• 10:35
  Speaker 1: money today? How can we take advantage of people following
• 10:38
  Speaker 1: headlines going in one direction? Maybe that's a head fake.
• 10:41
  Speaker 1: Let's assume that that's how we see it. Where do
• 10:44
  Speaker 1: you put your money? If you bet that the demographics
• 10:48
  Speaker 1: of emerging markets, particularly in Asia can be your friend. Okay, well,
• 10:52
  Speaker 1: you raise a bigger question about sort of globally, you
• 10:55
  Speaker 1: know where growth is going to come from. Let me
• 10:57
  Speaker 1: let me answer the immediate question that that people are
• 11:00
  Speaker 1: asking me about about all this kind of trade headlines.
• 11:06
  Speaker 1: And the thing that I've been saying is, look, there
• 11:08
  Speaker 1: are there We're already seeing in markets, um a disparity
• 11:12
  Speaker 1: and performance between the smaller caps and more technology focus
• 11:16
  Speaker 1: firms which are not exposed to uh these sort of
• 11:20
  Speaker 1: trade disputes, and the larger caps. Many people ask me,
• 11:24
  Speaker 1: they say, when is when are these trade issues going
• 11:27
  Speaker 1: to start affecting the markets? I'd say they've affected the
• 11:30
  Speaker 1: markets throughout the year. We've had excellent economic numbers. Um,
• 11:35
  Speaker 1: we had a great earning season. In the first quarter,
• 11:38
  Speaker 1: we had six in May we had retail sales were
• 11:42
  Speaker 1: up six percent year on year. And and in the
• 11:46
  Speaker 1: face of all this though, we've got flat markets, particularly
• 11:49
  Speaker 1: in large caps. So you're making the argument of small
• 11:52
  Speaker 1: caps versus large caps, and the small caps have outperformed
• 11:54
  Speaker 1: by more than twice the large caps. The question is,
• 11:58
  Speaker 1: and a lot of people will argue this is uh messy,
• 12:02
  Speaker 1: a messy analogy, and that you know, small caps will
• 12:05
  Speaker 1: eventually feel the brunt of any economic downdraft that the
• 12:10
  Speaker 1: large caps are reflecting. Yes, so, so there are the
• 12:13
  Speaker 1: broader concerns that you know, if we have inflationary pressure rising,
• 12:17
  Speaker 1: if we have retaliation that doesn't just target a few
• 12:20
  Speaker 1: companies that actually has a broader economic impact, everyone's going
• 12:24
  Speaker 1: to feel that. But for the moment, right there is
• 12:27
  Speaker 1: that disparity between We can't ignore the good economic news.
• 12:30
  Speaker 1: I mean, I'm as alarmed at the headlines and the
• 12:33
  Speaker 1: potential impact that they might have as anyone else, But
• 12:37
  Speaker 1: I also look at numbers that the market on a
• 12:41
  Speaker 1: bad day like this tends to ignore, which is that
• 12:44
  Speaker 1: retail sales up six per year on year expectations of
• 12:48
  Speaker 1: three to anywhere from three to five GDP growth in
• 12:51
  Speaker 1: the second quarter, and you can't ignore that either. So
• 12:54
  Speaker 1: where are you going to pick up? Where are you
• 12:56
  Speaker 1: going to maximize your exposure to that good news and
• 12:58
  Speaker 1: minimize your exposure your to those potential risks. So you're
• 13:02
  Speaker 1: buying small caps on a day like today, Uh? I
• 13:05
  Speaker 1: would I mean, we manage whole portfolios. So what I
• 13:08
  Speaker 1: would say is you want to have that in mind
• 13:11
  Speaker 1: when you're thinking about your asset allocation. All right, I
• 13:14
  Speaker 1: do want to get a sense of your take on
• 13:16
  Speaker 1: China strategy here, giving your intimate knowledge with the Chinese
• 13:19
  Speaker 1: government and how they approach things, it seems as if
• 13:22
  Speaker 1: there is a very deliberate targeting of areas that voted
• 13:27
  Speaker 1: for President Trump. This is the sort of farm belt, uh,
• 13:31
  Speaker 1: and sort of the steel country. This is where you're
• 13:33
  Speaker 1: seeing the tariffs. Put first, Does this matter to markets
• 13:37
  Speaker 1: or in other words, this definitely has sort of political
• 13:40
  Speaker 1: overtones with respect to what the midterm elections might look like.
• 13:43
  Speaker 1: If China is effective, does it? Do you care from
• 13:46
  Speaker 1: a market perspective? Sure, because you know it's it's not
• 13:51
  Speaker 1: a stock market, it's a market of stocks, and so
• 13:52
  Speaker 1: you want to be aware that these retaliatory measures are
• 13:58
  Speaker 1: going to be targeted at specific company some specific industries.
• 14:00
  Speaker 1: And it's not just China, by the way, uh it
• 14:03
  Speaker 1: is also the EU, Canada, Mexico. They're all crafting their
• 14:07
  Speaker 1: retaliatory strategies to try to maximize the political lever. So,
• 14:12
  Speaker 1: for instance, Mexico is putting a big tariff on cheese
• 14:17
  Speaker 1: exports from the United States, about four million dollars worth.
• 14:20
  Speaker 1: So if you're an investor, you have to, you know,
• 14:24
  Speaker 1: go bullow this. We're not passive investors, were active investors,
• 14:28
  Speaker 1: So we're not looking at the index. We're not just
• 14:31
  Speaker 1: looking at how the market overall is doing. We want
• 14:33
  Speaker 1: to go and look at specific companies, specific industries and
• 14:36
  Speaker 1: what their exposure is to these kinds of risks. Give
• 14:40
  Speaker 1: you twenty seconds, if you could get on a plane
• 14:42
  Speaker 1: and go anywhere to go investigate a potential investment in
• 14:45
  Speaker 1: an emerging economy, where would it be? I go everywhere
• 14:49
  Speaker 1: all the time. I just got you get to go
• 14:53
  Speaker 1: once in Europe, Eastern Europe. Most most interesting me. That
• 14:57
  Speaker 1: doesn't mean that I'm bullish on it. I just it's
• 15:00
  Speaker 1: I'm most curious about it all right, Well done, thanks
• 15:04
  Speaker 1: very much for being with us. UH. Patrick Chavannic. He
• 15:07
  Speaker 1: is managing Director, Chief a Strategist of Silvercrest Asset Management
• 15:11
  Speaker 1: and you can follow him on Twitter at p R Shelvanic.
• 15:16
  Speaker 1: That's h O V A n EC Right now. I
• 15:36
  Speaker 1: am very excited that we have David Carrington with us.
• 15:40
  Speaker 1: He is Jefferson County Commissioner UH and he joins us
• 15:43
  Speaker 1: here in our eleven three oh studios. David, I want
• 15:46
  Speaker 1: to start with a little trip down memory lane. Jefferson
• 15:50
  Speaker 1: County is known in the bond world for its two
• 15:53
  Speaker 1: thousand and eleven bankruptcy, one of the biggest in the
• 15:55
  Speaker 1: minicipal bond markets history in the US. I'm wonder rink
• 16:00
  Speaker 1: today as we see some of the struggles with Illinois
• 16:03
  Speaker 1: and Connecticut, would you recommend that they go down the
• 16:07
  Speaker 1: same path that Jefferson County ultimately had to pursue. Well,
• 16:12
  Speaker 1: it's surely a last resort. It's not something that you
• 16:15
  Speaker 1: want to do flippantly. UM. I continue to say that
• 16:20
  Speaker 1: after a year in negotiations, we had three gallons of
• 16:22
  Speaker 1: water and a one gallon bucket, and it didn't look
• 16:24
  Speaker 1: like we were going to go a larger bucket, and
• 16:26
  Speaker 1: we couldn't reduce the water, so we had to do it. UM.
• 16:30
  Speaker 1: The financial situation was one that was apparently unsolvable. With
• 16:36
  Speaker 1: that said, before I municipality entertains Chapter nine bankruptcy, they
• 16:42
  Speaker 1: have to first seriously try to negotiate their way out.
• 16:46
  Speaker 1: They need to recognize it's very costly. In our case,
• 16:49
  Speaker 1: it was a million dollars a month. We were projecting
• 16:52
  Speaker 1: thirty six to forty eight months. It actually we were
• 16:55
  Speaker 1: able to exit in twenty five months. You have to
• 16:58
  Speaker 1: be sure that the elected officials have the political will
• 17:02
  Speaker 1: to make the decisions that have to be made in
• 17:04
  Speaker 1: order to restructure UM the organization, and so UM I
• 17:09
  Speaker 1: would not recommend a community do this unless they have
• 17:14
  Speaker 1: an elected UH a group of commissioners or counselors or
• 17:19
  Speaker 1: senators that are willing to take the political heat. I
• 17:23
  Speaker 1: was told UH that if I UH file for Chapter
• 17:27
  Speaker 1: nine bankruptcy, my political career would be toast. And my
• 17:31
  Speaker 1: answer to that was, I didn't run to get re elected.
• 17:34
  Speaker 1: I ran to fix the problem. So you almost have
• 17:37
  Speaker 1: to have a mindset that this is UH something that
• 17:40
  Speaker 1: you don't want to do, but you have to do
• 17:43
  Speaker 1: in order to make the community sustainable going forward, and
• 17:47
  Speaker 1: just a quickly side of recap. In Jefferson County, Alabama,
• 17:50
  Speaker 1: this goes back to there was a consent decree having
• 17:53
  Speaker 1: to do with the city sewer systems. They needed to
• 17:56
  Speaker 1: finance the revamp of the sewer system. They issued. Then
• 18:01
  Speaker 1: it got really bad and there were lawsuits and several
• 18:05
  Speaker 1: people went to jail, and it was none of which
• 18:08
  Speaker 1: you are associated. And that's that's true. The day I
• 18:10
  Speaker 1: walked in the office was November the tenth of two ten.
• 18:14
  Speaker 1: We had three point two billion of sewer deet in default.
• 18:18
  Speaker 1: We had a sewer receiver appointed by the court, so
• 18:20
  Speaker 1: that was gonna double rates and then double them again
• 18:22
  Speaker 1: or g that was in default. Our audits were three
• 18:26
  Speaker 1: years past due. We had an indigent care hospital losing
• 18:29
  Speaker 1: ten to fifteen million dollars a year, a county home
• 18:31
  Speaker 1: losing two to three million dollars a year. So to
• 18:34
  Speaker 1: say it was a mass is sort of an understatement.
• 18:36
  Speaker 1: And uh then on our twenty second day in office,
• 18:40
  Speaker 1: a circuit court judge ruled that a tax that had
• 18:43
  Speaker 1: been passed for the county's general fund was passed illegally
• 18:46
  Speaker 1: by the state legislature, and we lost twenty of our revenue.
• 18:50
  Speaker 1: So that was our twenty second day. And then on
• 18:53
  Speaker 1: the last day of our first year in office, we
• 18:55
  Speaker 1: followed what was at the time the largest municipal bankruptcy
• 18:58
  Speaker 1: in US history. A year or two later, Detroit rallied
• 19:02
  Speaker 1: and surpassed us. And I've always been thankful for Detroit
• 19:05
  Speaker 1: for doing that. I'm sure that UH Detroit says you're welcome.
• 19:09
  Speaker 1: I want to switch gears a little bit because fast
• 19:11
  Speaker 1: forwards today and Birmingham is actually attracting some businesses from
• 19:15
  Speaker 1: places like New York and UH, New Jersey and Connecticut
• 19:20
  Speaker 1: and higher tax states. Um, to what degree have you
• 19:23
  Speaker 1: seen these businesses come? And UH, you know, are you
• 19:26
  Speaker 1: seeing it accelerate? Yes? Uh in the last seventeen months,
• 19:32
  Speaker 1: uh one to three, four or five, six, seven, eight nine, Well,
• 19:37
  Speaker 1: there's been eleven companies relocate into our community. And of
• 19:42
  Speaker 1: course the states doing well too, with the recent announcement
• 19:46
  Speaker 1: of Toyota in the Huntsville area. We have Airbus in
• 19:49
  Speaker 1: the last several years in Mobile, UH the Birmingham metro
• 19:52
  Speaker 1: area actually, in a recent Forbes report, UH has pays
• 19:57
  Speaker 1: the highest salaries in the guide states. Well might shock
• 20:00
  Speaker 1: people in New York, but when you combine our salary
• 20:03
  Speaker 1: plus our cost of a living, the dollar buys a
• 20:05
  Speaker 1: lot more in Alabama. And so we're a low tax
• 20:09
  Speaker 1: state with a high work ethic, and we have not
• 20:14
  Speaker 1: suffered as we were suggested with the bankruptcy. We now
• 20:17
  Speaker 1: have investment grade ratings on our GEO debt UH, and
• 20:20
  Speaker 1: we were told that would never happen. We just refunded
• 20:23
  Speaker 1: some debt in the last week last month at two
• 20:27
  Speaker 1: point five saving the citizens fourteen million dollars. And we
• 20:33
  Speaker 1: have redeployed that capital because we have a thousand fewer
• 20:36
  Speaker 1: employees today than the day I walked into the office,
• 20:39
  Speaker 1: so our expense structure is a lot lower. We've allocated
• 20:42
  Speaker 1: twenty five million dollars a year for infrastructure so we
• 20:45
  Speaker 1: can attract it, eighteen million dollars a year more for
• 20:48
  Speaker 1: our public schools, and ten million dollars a year UH
• 20:51
  Speaker 1: for economic development. So on top of tax in centers
• 20:55
  Speaker 1: which most people used to recruit businesses, we also have
• 20:58
  Speaker 1: a bundle of catsh that we can invest. We just
• 21:03
  Speaker 1: UH opened a truck manufacturer. It's a custom truck UH
• 21:09
  Speaker 1: seven fifty jobs and we needed about a million and
• 21:13
  Speaker 1: a half dollars for some infrastructure work. So instead of
• 21:16
  Speaker 1: borrowing the money, we now have a pool of assets
• 21:19
  Speaker 1: that we can use to do that. Like I said,
• 21:22
  Speaker 1: it's ten million dollars a year. It's a twenty five
• 21:24
  Speaker 1: twenty five year attack. So we've got a quarter of
• 21:26
  Speaker 1: a billion dollars to recruit and when we need a
• 21:30
  Speaker 1: little bit more, be it for a road or a bridge,
• 21:34
  Speaker 1: we can do that. Thank you very much for being
• 21:36
  Speaker 1: with us. Looking forward to having you again on the program.
• 21:39
  Speaker 1: Very interesting topics and thanks for your participation. David Carrington,
• 21:44
  Speaker 1: Commissioner of Jefferson County, Alabama. Rebates and drug Pricing. Here
• 22:04
  Speaker 1: to tell us more about the industry is Michael Ray.
• 22:07
  Speaker 1: He is the chief executive officer of our X Savings Solutions.
• 22:11
  Speaker 1: They're based in Overland Park, Kansas, but he joins us
• 22:13
  Speaker 1: here in our eleven three OHD studios. Michael, always a pleasure,
• 22:16
  Speaker 1: thanks for being here. Explained to people that may not
• 22:18
  Speaker 1: be familiar with the use of rebates when it comes
• 22:22
  Speaker 1: to purchasing drugs and how it has changed. Yeah, so
• 22:27
  Speaker 1: rebates kind of think of them like a kickback of sorts.
• 22:31
  Speaker 1: You pay a hundred dollars for the drug. Uh, the
• 22:34
  Speaker 1: negotiated price might be eighty uh, and there might be
• 22:37
  Speaker 1: a twenty twenty rebate on top of it, so that
• 22:40
  Speaker 1: the actual total costs in that scenario is is sixty dollars.
• 22:44
  Speaker 1: It's kind of this, uh, like I said, kickback of
• 22:47
  Speaker 1: sorts that that goes back to a pair. Why does
• 22:50
  Speaker 1: this exist? That's a great question. We live in a
• 22:54
  Speaker 1: very complicated world when it comes to drug pricing, and
• 22:57
  Speaker 1: the mechanics of how money moves has gotten more complex
• 23:01
  Speaker 1: over time. It originally, uh, you know, was a way
• 23:06
  Speaker 1: to give an additional discount to the payer, but what's
• 23:10
  Speaker 1: happened is it's been manipulated over time and profits have
• 23:14
  Speaker 1: have gone up extraordinarily for certain folks in the supply chain. Well,
• 23:19
  Speaker 1: we certainly, Uh. One of the reasons why we've been
• 23:21
  Speaker 1: paying closer and closer attention to this is because it's
• 23:25
  Speaker 1: become a political issue. And then the administration has said
• 23:28
  Speaker 1: we're going to reduce drug prices, and in response, some
• 23:31
  Speaker 1: of the shares of these big pharmaceutical companies declined. What
• 23:35
  Speaker 1: is the latest with respect to the administration's policy to
• 23:38
  Speaker 1: try to lower drug policy prices? Yeah, I haven't seen anything,
• 23:44
  Speaker 1: you know, really interesting since the you know, the announcement
• 23:47
  Speaker 1: by President Trump probably four weeks or so ago. I
• 23:51
  Speaker 1: did hear some or excuse me, see some testimony from
• 23:55
  Speaker 1: Secretary is Our last week that was focused on getting
• 23:59
  Speaker 1: rid of rebates. And I think if there is a
• 24:01
  Speaker 1: single thing that can happen to lower drug prices, elimination
• 24:06
  Speaker 1: of rebates is that thing. It is that important. And
• 24:08
  Speaker 1: there is a tremendous amount of money changing hands. So
• 24:12
  Speaker 1: just how much would that hurt pharmaceutical companies? I mean,
• 24:16
  Speaker 1: clearly they're I'm assuming they're the ones that are pushing
• 24:19
  Speaker 1: to keep these rebates correct. Yeah, you know, I actually
• 24:22
  Speaker 1: think that that pharma could come out better off if
• 24:26
  Speaker 1: these rebates go away. I actually, uh am of the
• 24:29
  Speaker 1: belief that they should be the ones proposing this. They
• 24:31
  Speaker 1: should be uh they should join together as a trade
• 24:34
  Speaker 1: group and say we're not going to participate because the benefit,
• 24:38
  Speaker 1: financial benefit that they received at the beginning has been
• 24:42
  Speaker 1: taken away. And I actually think that more competition would
• 24:46
  Speaker 1: would yield a better result. Can you give us an
• 24:49
  Speaker 1: update on what is going on with generic drug pricing?
• 24:52
  Speaker 1: Because there was a list that the FDA put out
• 24:55
  Speaker 1: that side of a variety of pharmaceutical companies saying that
• 24:59
  Speaker 1: they were doing just about anything they could in order
• 25:01
  Speaker 1: to avoid giving the information necessary to other companies to
• 25:05
  Speaker 1: produce generic versions of their patented or their branded drugs.
• 25:10
  Speaker 1: And yet it seems as though generic drug prices have
• 25:13
  Speaker 1: been increasing, not decreasing. It's a it's a tail to
• 25:16
  Speaker 1: two situations. You've got you've got some pharma companies blocking,
• 25:20
  Speaker 1: like you said on the on the patent piece, so
• 25:22
  Speaker 1: that generics cannot be made, the first generic cannot be made.
• 25:26
  Speaker 1: And then you've got other products in the market where
• 25:28
  Speaker 1: you know, a hundred ten different manufacturers make a specific
• 25:32
  Speaker 1: generic drug. In those situations, you're seeing more and more
• 25:36
  Speaker 1: you're seeing consumer prices go up, but generic drug maker
• 25:40
  Speaker 1: stock prices go down, and there's this mysterious pot of
• 25:43
  Speaker 1: money in the middle that no one seems to know
• 25:46
  Speaker 1: where it goes. So you know, lower lower, lower stock prices,
• 25:50
  Speaker 1: lower profits, but higher cost to the consumer. So I'm wondering,
• 25:54
  Speaker 1: especially given some of the focus on generic drug prices
• 25:58
  Speaker 1: and how they've been going up, I'm wondering this year's
• 26:00
  Speaker 1: record pace of pharmaceutical mergers and acquisitions is going to
• 26:04
  Speaker 1: play into drug pricing. I mean, is this going to
• 26:05
  Speaker 1: end up uh leading to more price increases because you're
• 26:09
  Speaker 1: getting consolidation of specifical sectors of the industry or do
• 26:13
  Speaker 1: you think that it might absolutely? Um, depending on the
• 26:17
  Speaker 1: products right. So um, you know, if there's three or
• 26:20
  Speaker 1: more competitors in a class, you're gonna get you know,
• 26:24
  Speaker 1: you're gonna get a pretty efficient market. If you've got
• 26:28
  Speaker 1: manufacturers emerging that you know, have the two products on
• 26:32
  Speaker 1: the market and they emerge into be the single single company,
• 26:35
  Speaker 1: that's not going to bode well for payers and consumers
• 26:37
  Speaker 1: in this country. Are there specific drugs that you're starting
• 26:39
  Speaker 1: to see inch up in price because of consolidations? Nothing yet?
• 26:45
  Speaker 1: And I just just only because I have attracted you know,
• 26:49
  Speaker 1: uh in looking at what you're doing at r X
• 26:52
  Speaker 1: Saving Solutions, I'm wondering if you just give us an example.
• 26:56
  Speaker 1: I know, for example, you work with the State of Kansas.
• 26:58
  Speaker 1: They've got their employee health benefits plan. What do you
• 27:02
  Speaker 1: do for them? And what has been the result? What
• 27:04
  Speaker 1: why are they using you? Yeah? So um, you know,
• 27:07
  Speaker 1: to give you a kind of an example, think of
• 27:09
  Speaker 1: a patient with high blood pressure and they go into
• 27:13
  Speaker 1: the doctor. The doctor diagnoses it and says, we need
• 27:15
  Speaker 1: to put you on this therapy um right now. They're
• 27:19
  Speaker 1: choosing and they're kind of shooting in the dark. It's
• 27:21
  Speaker 1: you know, there's forty choices, and they pick one, and
• 27:23
  Speaker 1: they don't know if that's a high cost one or
• 27:25
  Speaker 1: a low cost one. What we do is present all
• 27:27
  Speaker 1: of the information to the consumer and the doctor to say,
• 27:30
  Speaker 1: here are your forty choices, and here's every price that
• 27:33
  Speaker 1: goes with it. That allows a consumeristic decision to be made,
• 27:38
  Speaker 1: and it allows a consumer to take hold and consume
• 27:40
  Speaker 1: a real efficient market to take hold and drive down
• 27:43
  Speaker 1: costs while increasing outcomes because that patient actually has a
• 27:46
  Speaker 1: drug they can afford and they can fill and they
• 27:48
  Speaker 1: get healthier. So they brought us into lower prices and
• 27:51
  Speaker 1: that's what we've done for them. Thank you so much
• 27:53
  Speaker 1: for joining us. Always eliminated to speak with you. Michael Ray,
• 27:56
  Speaker 1: chief executive officer of our ex Savings Solutions, talking about
• 28:00
  Speaker 1: the latest in UH the effort to lower drug prices.
• 28:04
  Speaker 1: Really interesting about the rebates and a really interesting point
• 28:07
  Speaker 1: Pim that Michael thinks that if you do get rid
• 28:11
  Speaker 1: of the rebates, that actually end up ends up being
• 28:14
  Speaker 1: beneficial for the pharmaceutical companies. Well, maybe if you simplified
• 28:18
  Speaker 1: things and didn't create all these tangled webs, you'd actually
• 28:22
  Speaker 1: be able to see what you can pay for a drug,
• 28:24
  Speaker 1: and you wouldn't have to have a million intermediaries trying
• 28:26
  Speaker 1: to figure it all out. Oh you mean that's common sense.
• 28:34
  Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
• 28:37
  Speaker 1: You can subscribe and listen to interviews at Apple Podcasts, SoundCloud,
• 28:41
  Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm
• 28:44
  Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa Abramo.
• 28:48
  Speaker 1: It's one before the podcast. You can always catch us
• 28:51
  Speaker 1: worldwide on Bloomberg Radio