Latest / Bloomberg Intelligence / Fed Rate Hikes Are More Likely Post Trade Deal: Gaffney (Podcast)

Transcript

Fed Rate Hikes Are More Likely Post Trade Deal: Gaffney (Podcast) · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg PI and L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Brahmowitz. 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 and L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Bloomberg
• 0:33
  Speaker 1: News is reporting that China is said to offer a
• 0:35
  Speaker 1: path to eliminate the US trade and bounced to zero
• 0:38
  Speaker 1: by the year that trade and bounced to last year
• 0:42
  Speaker 1: at three billion dollars. To give us a sense of
• 0:45
  Speaker 1: what this means for markets, we are fortunate once again
• 0:48
  Speaker 1: to having our studios. Kathleen Gaffey is still with us.
• 0:51
  Speaker 1: She is a director diversified fixing coming at Eaton Vance
• 0:54
  Speaker 1: based in Boston, but she is fortunately in here with
• 0:56
  Speaker 1: our Bloomberg eleven three oh studio. So, Kathleen, the scene
• 1:00
  Speaker 1: is big. Um. It's something that I think a lot
• 1:02
  Speaker 1: of the market has been waiting for. What is your
• 1:04
  Speaker 1: initial read? This is big and it looks like it's
• 1:08
  Speaker 1: impacting bonds right now, and that means that the Fed
• 1:13
  Speaker 1: is back on This is volatility in markets, it changes
• 1:17
  Speaker 1: quickly and the markets tend to react in big ways.
• 1:23
  Speaker 1: We recently had more devish comments and the market took
• 1:28
  Speaker 1: all of the rate hikes out and even started to
• 1:30
  Speaker 1: think about a cut. Here we are, things are right
• 1:33
  Speaker 1: back on. What's interesting to me is you are getting
• 1:35
  Speaker 1: a little bit of yield curve flattening again. So to
• 1:39
  Speaker 1: your point, which is what you would expect, right, I
• 1:41
  Speaker 1: mean the two year yield is the one that's reacting
• 1:42
  Speaker 1: the most. In other words, people are looking at this
• 1:44
  Speaker 1: information and saying, if there is a trade agreement that
• 1:48
  Speaker 1: will give the market the boost it needs to continue
• 1:50
  Speaker 1: the growth, and that will give the Fed the reason
• 1:53
  Speaker 1: to continue hiking rates, which is a negative for the
• 1:56
  Speaker 1: bond investors. It is. It makes it very challenge. It's
• 2:00
  Speaker 1: a headwind, but the fundamentals a growing economy is always
• 2:03
  Speaker 1: good for everyone. And that's but that's consistent with your call.
• 2:06
  Speaker 1: You've not been looking for a rate cut? Is that true?
• 2:09
  Speaker 1: I have not been looking for a ray cut. The
• 2:11
  Speaker 1: Fed is on a mission. This clears the way uh
• 2:15
  Speaker 1: for them to get there. The cost of money should
• 2:18
  Speaker 1: not be zero. So how many more hikes with they're
• 2:20
  Speaker 1: going to be this year? Well, we still have a
• 2:21
  Speaker 1: lot of uncertainty out there. We still have breggsit um,
• 2:25
  Speaker 1: but we could learn a lot just in the next
• 2:27
  Speaker 1: week or two. You remove that uncertainty, and the global
• 2:30
  Speaker 1: growth story is not just the US and China. It
• 2:34
  Speaker 1: might be Europe too, and that's the rest of the world.
• 2:37
  Speaker 1: But let's talk about that, because honestly, it seems like
• 2:40
  Speaker 1: this has the potential to affect emerging markets potentially even
• 2:43
  Speaker 1: more than the US, because China is slowing. If you
• 2:46
  Speaker 1: remove the uncertainty of US China trade UH skirmishes, that
• 2:51
  Speaker 1: could really give a boost elsewhere. Does this make you
• 2:53
  Speaker 1: double down on your bed that emerging markets are going
• 2:56
  Speaker 1: to outperform this year in credit? I don't know about
• 2:58
  Speaker 1: double down, because we're all ready there. We've we've believed
• 3:01
  Speaker 1: that this is where it's going, mainly because the valuations
• 3:04
  Speaker 1: are there and the fundamentals are there. Many emerging markets,
• 3:08
  Speaker 1: not all of them, um, in particular Mexico and Brazil
• 3:12
  Speaker 1: where inflation has been coming down, so that's a positive
• 3:16
  Speaker 1: for fixed income investors. Where inflation is coming down and
• 3:20
  Speaker 1: growth is supportive, that's where you're going to see returns
• 3:23
  Speaker 1: that are higher than what the developed market, Uh, yields
• 3:28
  Speaker 1: are likely to experience as rates move higher. So how
• 3:31
  Speaker 1: about the emerging markets in Asia? Maybe? Given this news
• 3:34
  Speaker 1: in general, is there any aura, if you will, that
• 3:37
  Speaker 1: it improved China China trade transpecific trade with China. Are
• 3:42
  Speaker 1: there economies and emerging markets in that region the world
• 3:44
  Speaker 1: that you're looking at? Definitely, this really opens up that market. Um,
• 3:49
  Speaker 1: You've you've got competition going on right now. China is
• 3:52
  Speaker 1: saying we're going to spend. That means living standards and
• 3:57
  Speaker 1: income are going to rise there and they'll be looking
• 4:00
  Speaker 1: to be buying elsewhere around. Asia opens it up in
• 4:03
  Speaker 1: a really big way. We like in India and Indonesia
• 4:08
  Speaker 1: because there's good reform potential there. But now this is
• 4:12
  Speaker 1: a much broader support for emerging markets. So here's what
• 4:16
  Speaker 1: I'm trying to understand. The dollar Understandably, it would weaken
• 4:19
  Speaker 1: on this news, right, I mean the idea of being
• 4:21
  Speaker 1: that China and the rest of the world would strengthen,
• 4:24
  Speaker 1: and particularly Europe, as you're saying, because China such a
• 4:26
  Speaker 1: major trade partner with them. I'm just wondering though, if
• 4:29
  Speaker 1: the FED hikes more. Trying to put it all together
• 4:32
  Speaker 1: is kind of make my head spin it does. There's
• 4:35
  Speaker 1: just a lot going on, but if you just focus
• 4:38
  Speaker 1: on what's what's really important, and that is that fiscal
• 4:42
  Speaker 1: spending has picked up and the budget deficit is rising,
• 4:47
  Speaker 1: so that uh will weigh on the dollar. You've also
• 4:51
  Speaker 1: got Europe, which if we've got global growth going and
• 4:56
  Speaker 1: you have less concern about tariffs on Europe or China,
• 5:03
  Speaker 1: it clears the decks and that might remove uncertainty for Europe,
• 5:06
  Speaker 1: and that means interest rate differentials gives draggy or who
• 5:12
  Speaker 1: a little more room to reduce buying, and so you
• 5:15
  Speaker 1: can see rates moving up in Europe as well. I
• 5:18
  Speaker 1: think this is really big for fixed income so thin
• 5:23
  Speaker 1: and you think it's going to be a net negative
• 5:24
  Speaker 1: for fixed income in terms of returns, Yes, but it
• 5:28
  Speaker 1: gets us back to normal, which is just where we
• 5:30
  Speaker 1: want to be. You mentioned just and just briefly, you
• 5:34
  Speaker 1: mentioned Brexit, still uncertainty, any call there real briefly. I
• 5:39
  Speaker 1: always try to make it as simple as possible. This
• 5:41
  Speaker 1: is so complicated. I think Theresa May has done what
• 5:47
  Speaker 1: she needs to do, which is honor what the vote said.
• 5:51
  Speaker 1: But things have changed a lot over the two years,
• 5:53
  Speaker 1: and I think that there's more acceptance the millennials that
• 5:58
  Speaker 1: you've added. I think a million and a half of
• 6:00
  Speaker 1: millennials who can now vote UM. If we go to
• 6:03
  Speaker 1: a second referendum, I think you will see remain really yes.
• 6:09
  Speaker 1: All right, well, thank you so much for your time
• 6:10
  Speaker 1: and for your patience. Kathleen Gaffney, Director of Diversified Fixed
• 6:13
  Speaker 1: in Company in vance. Really interesting commentary. It does seem
• 6:16
  Speaker 1: like this news is a big deal for debt markets
• 6:18
  Speaker 1: as well as all equity markets. As well as the
• 6:35
  Speaker 1: government shut down, which is the longest on record, stretches
• 6:38
  Speaker 1: into the day. A big question emerges which employees are
• 6:42
  Speaker 1: hurt most by this, who are either being furloughed or
• 6:45
  Speaker 1: not paid. Joining us now to talk about the composition
• 6:49
  Speaker 1: of people who are employed on and and depend dependent
• 6:52
  Speaker 1: on the federal government for their income is Paul lighte uh,
• 6:55
  Speaker 1: Professor of Public Service at n y U, New York University,
• 6:58
  Speaker 1: Joining us here in our Bloobrigader Active Brokers Studios. Paul,
• 7:01
  Speaker 1: thank you so much for being here. Really interesting focus.
• 7:05
  Speaker 1: You highlighted in a recent Wall Street Journal article that
• 7:08
  Speaker 1: there has been a growing roster of contracted employees of
• 7:12
  Speaker 1: the federal government even while the full time roster stays stagnant.
• 7:17
  Speaker 1: Why well, we use contractors and grantees as well, um
• 7:22
  Speaker 1: as a surge tank, uh in a search tank model.
• 7:25
  Speaker 1: So during wars and economic crisis, when we're pumping the
• 7:29
  Speaker 1: economy with stimulus and were when we're buying weapons, we're
• 7:33
  Speaker 1: fighting battles, we go to the contractors. The federal workforce
• 7:37
  Speaker 1: full time equivalent workforce has been at about two million
• 7:41
  Speaker 1: since nineteen fifty, and there is a de facto ceiling
• 7:44
  Speaker 1: on the number of Feds you can hire. Uh, you don't.
• 7:47
  Speaker 1: You can exceed that by a hundred thousand here and
• 7:50
  Speaker 1: there over time. But contractors provide the real slack in
• 7:54
  Speaker 1: the system. They expand quickly, the numbers expand quickly, and
• 7:57
  Speaker 1: they contract quickly. Surge press surge compressed. So, so what
• 8:01
  Speaker 1: types of jobs typically are being contracted out these days?
• 8:06
  Speaker 1: You know, you'd think it would be metal benders, people
• 8:08
  Speaker 1: who make stuff. It's not. About two thirds of federal
• 8:12
  Speaker 1: contract employees are delivering services, whether that's consulting, whether that's
• 8:18
  Speaker 1: computer programming, back office work. They're doing soil testing for
• 8:23
  Speaker 1: the Environmental Protection Agency. They're doing vehicle repairs. They run
• 8:27
  Speaker 1: the repair depots for the Department of Fence. Uh, there's
• 8:32
  Speaker 1: a misperception here that it's all things you buy at
• 8:35
  Speaker 1: the store. It's not. It's a lot of labor that
• 8:38
  Speaker 1: we're buying. And that's where you get these big numbers
• 8:41
  Speaker 1: of people who work for the federal government indirectly as contractors.
• 8:45
  Speaker 1: How many people is that overall for the entire federal
• 8:48
  Speaker 1: government four point one million by my contract, full time
• 8:52
  Speaker 1: equivalent contract employees. So there have been a number of
• 8:55
  Speaker 1: articles talking about how these four point one million contractors
• 8:58
  Speaker 1: are a subset of them are not getting any income
• 9:01
  Speaker 1: as a result of this partial government shutdown. Uh, and
• 9:05
  Speaker 1: that there's a question of whether they will be compensated,
• 9:09
  Speaker 1: whether they'll have more work later and then it will
• 9:11
  Speaker 1: just be a wash in the end, or what do
• 9:15
  Speaker 1: you think is going to happen with these count Federal
• 9:17
  Speaker 1: employees are now guaranteed by law. President Trump signed it yesterday,
• 9:21
  Speaker 1: I believe day before yesterday. Maybe. Uh. Any any fad
• 9:25
  Speaker 1: who is working right now but not getting paid, they're
• 9:28
  Speaker 1: going to get a paycheck at the end of it.
• 9:30
  Speaker 1: All contractors, We're not sure. Depends on the business. I mean,
• 9:34
  Speaker 1: if you're a big consulting firm, are you gonna front
• 9:37
  Speaker 1: them some money if they're not doing anything. I mean,
• 9:39
  Speaker 1: businesses have a different pressure, right, So the people who
• 9:44
  Speaker 1: are working for contractors but not doing anything, I mean,
• 9:47
  Speaker 1: they're on the payroll, but they're idled. I don't see
• 9:51
  Speaker 1: that they get paid at the end of all of this.
• 9:53
  Speaker 1: Do they What types of recourse, if any, do you
• 9:55
  Speaker 1: think they have. I would think going up against the
• 9:58
  Speaker 1: government would be something quite for a small shop that
• 10:01
  Speaker 1: you just suggested. You know, if you've got no work
• 10:03
  Speaker 1: order from the federal government, you've been told to stand down,
• 10:06
  Speaker 1: like we have at the Federal Emergency Management Agency, You've
• 10:10
  Speaker 1: been given a stop work order. That's on you as
• 10:13
  Speaker 1: the contractor. The federal government is going to step in
• 10:15
  Speaker 1: and help you give your employees, uh, you know, back
• 10:19
  Speaker 1: pay for work they didn't do. You know, these are businesses.
• 10:22
  Speaker 1: They rise and fall based on their income and flow.
• 10:25
  Speaker 1: So somebody would argue, I mean, if their contractors, so
• 10:28
  Speaker 1: they should expect this. Sometimes work comes and sometimes work goes.
• 10:32
  Speaker 1: And a lot of the companies that we're talking about
• 10:34
  Speaker 1: are not mom and pop shops, but are the formerly
• 10:37
  Speaker 1: named black Waters of the world who are actually doing
• 10:40
  Speaker 1: military complex work. I'm just wondering can you give us
• 10:43
  Speaker 1: a sense of the breakdown at all of of you know,
• 10:45
  Speaker 1: big versus small, and also you know whether what you
• 10:49
  Speaker 1: know whether these contractors have other clients or is it
• 10:52
  Speaker 1: really just the government paying for them? Uh? Fully great,
• 10:55
  Speaker 1: great question about of the contract employees are working for
• 11:00
  Speaker 1: mall businesses, A very large number obviously working for large businesses,
• 11:05
  Speaker 1: and they're often operating under soul source contracts. The real
• 11:09
  Speaker 1: question here is whether the federal government is going to
• 11:11
  Speaker 1: try to protect contract employees who are in essential jobs. Uh.
• 11:18
  Speaker 1: For example, two d and fifty thousand or so contractors
• 11:21
  Speaker 1: we think work for what's known as Top Secret America.
• 11:25
  Speaker 1: They're doing the high end intelligence analysis down in Virginia.
• 11:29
  Speaker 1: They're doing a lot of surveillance activities under contract. You
• 11:33
  Speaker 1: don't want to lose those analysts. So the question here
• 11:36
  Speaker 1: will be whether the federal government will step in and
• 11:40
  Speaker 1: try to maintain the strength of some of these big,
• 11:43
  Speaker 1: big firms that provide a lot of high end analysis
• 11:47
  Speaker 1: and consulting. So what has been the discussion in Congress
• 11:50
  Speaker 1: since the shutdown A starter may maybe even before the
• 11:52
  Speaker 1: shut down about that topic. I suspect that you're going
• 11:56
  Speaker 1: to have some very high end workers entities working for
• 11:59
  Speaker 1: the federal government that are going to say listen, I
• 12:01
  Speaker 1: expect to get paid. You can't afford to lose me.
• 12:05
  Speaker 1: I don't know what's going on. You know, Congress doesn't
• 12:09
  Speaker 1: really pay a great deal of attention to the contract workforce.
• 12:13
  Speaker 1: It's not on the agenda. We spend a lot of
• 12:15
  Speaker 1: time focusing on fetes. We know everything about the federal
• 12:19
  Speaker 1: employees down to their shoe size. We know very little
• 12:23
  Speaker 1: about contract employees, very little. I'm struck by this idea
• 12:27
  Speaker 1: where you started the conversation saying that contractors, the ranks
• 12:31
  Speaker 1: of them expanded during wartime and other extraordinary situations. We're
• 12:35
  Speaker 1: not in an extraordinary situation right now, but the ranks
• 12:38
  Speaker 1: of contractors have continued to rise or state at the
• 12:41
  Speaker 1: elevated levels. Well, it's compressed a little bit, but not
• 12:44
  Speaker 1: as much as you'd expect. The end of the Iraq
• 12:48
  Speaker 1: and Afghanistan, you know, the major fighting UH did drop
• 12:52
  Speaker 1: the number of contractors by three or four hundred thousand,
• 12:56
  Speaker 1: But the recent increases in military spending have up the numbers.
• 13:00
  Speaker 1: So we're making more stuff and we're doing more analysis.
• 13:04
  Speaker 1: We're going to build a new missile defense system. As
• 13:07
  Speaker 1: President Trump said yesterday, UM, so the contract workforce is
• 13:11
  Speaker 1: starting to surge as President Trump pursues this expanded UH
• 13:17
  Speaker 1: military presence. You know, it seems that, you know, this
• 13:20
  Speaker 1: is a situation the contractors and the government. It mutually dependent.
• 13:24
  Speaker 1: I can't My question to you was going to be,
• 13:27
  Speaker 1: do you think the shutdown will change that relationship. I'm
• 13:30
  Speaker 1: not sure it will because it seems like the contractors
• 13:33
  Speaker 1: depend upon the government and the government depends upon them.
• 13:37
  Speaker 1: So do you have any sense of whether that relationship
• 13:39
  Speaker 1: or interdependency may change. You know, we've had this government
• 13:42
  Speaker 1: industrial complex, as I call it UH since the very
• 13:45
  Speaker 1: beginning of our country UH contractors, UH, federal employees, federal
• 13:51
  Speaker 1: soldiers standing side by side on the battlefield. That's been
• 13:55
  Speaker 1: the history of this. And we had contractors delivering the
• 13:58
  Speaker 1: mail at the very beginning of our nation. I expect
• 14:02
  Speaker 1: it to continue. I may I may argue, I could
• 14:06
  Speaker 1: argue that we'll have somewhat of a downturn in the
• 14:09
  Speaker 1: number of federal employees UH as contractors step in more
• 14:13
  Speaker 1: and more. That that's a protective approach for future shutdowns.
• 14:18
  Speaker 1: We're normalizing the use of shutdowns as a regular way
• 14:21
  Speaker 1: of resolving budget disputes, and there may be a shift
• 14:24
  Speaker 1: somewhat to contractors because they are, in fact, uh more
• 14:29
  Speaker 1: likely to not get paid during a shutdown, which is
• 14:31
  Speaker 1: the point. I guess. It's like contractors are the the
• 14:34
  Speaker 1: temp workers of the government complex. Absolutely and uh from
• 14:40
  Speaker 1: the very bottom in terms of serving soup all the
• 14:43
  Speaker 1: way up to fighting wars and deploying troops. Wonderful, Absolutely,
• 14:48
  Speaker 1: thank you very much. Fantastic discussion. Professor Paul Light Paul
• 14:52
  Speaker 1: Paul that got her professor of Public Service at New
• 14:54
  Speaker 1: York University here in New York City. You know, I
• 15:13
  Speaker 1: like out of consensus calls as much as anybody. And
• 15:16
  Speaker 1: our next guest has a whopper of an out of
• 15:19
  Speaker 1: consensus called Dr Brendan Brown is a senior fellow at
• 15:22
  Speaker 1: the Hudson Institute. Coming to us from London. Dr Brown, welcome. Um.
• 15:27
  Speaker 1: You make a point that you believe that brexit or
• 15:31
  Speaker 1: a no deal brexit is the most likely outcome and
• 15:34
  Speaker 1: get this the best outcome for the UK and Europe.
• 15:37
  Speaker 1: Can you explain that no deal Brexit is not a
• 15:41
  Speaker 1: no deal Brexit. What it means is that from the
• 15:45
  Speaker 1: end of March um the UK would be negotiating week
• 15:50
  Speaker 1: by week or month by month um what it's going
• 15:53
  Speaker 1: to get in return for continuing to pay into the EU.
• 15:57
  Speaker 1: So it's going to be a series of lots of
• 15:59
  Speaker 1: mini deals. Now, why I think that's better than any
• 16:04
  Speaker 1: other solutions for present impact on the table is that,
• 16:08
  Speaker 1: first of all, if the UK was to agree to
• 16:13
  Speaker 1: anything like the present or a more diluted form of Brexit,
• 16:19
  Speaker 1: that would be a huge setback for the Conservative Party,
• 16:23
  Speaker 1: who's popular base does depend on working class nationalist support.
• 16:28
  Speaker 1: So if we see any further dilution, the potential for
• 16:33
  Speaker 1: a far left government in the UK increases quite substantially. Secondly,
• 16:39
  Speaker 1: any sort of diluted or delayed Brexit is a big
• 16:44
  Speaker 1: win for the status quo in Europe, in particular for
• 16:47
  Speaker 1: Chancellor Merkel. By contrast, if we have a no deal outcome,
• 16:53
  Speaker 1: that would be quite a serious setback, which answer Merkel
• 16:56
  Speaker 1: and could really bring change and a shift to the
• 17:00
  Speaker 1: right in Germany and a much more economic reform minded
• 17:05
  Speaker 1: type government. So those are the sort of considerations why
• 17:10
  Speaker 1: I see the no deal brexit as superior to the
• 17:14
  Speaker 1: other alternatives. What is your sense of timing. We know
• 17:17
  Speaker 1: that Teresa May has to come back to Parliament on
• 17:20
  Speaker 1: Monday with her revised plan. Um, what do you expect
• 17:24
  Speaker 1: that plan to be and what do you expect the
• 17:26
  Speaker 1: timing to be of whatever negotiations may take place between
• 17:29
  Speaker 1: the UK and EU. Well, there's a lot of bluff here,
• 17:33
  Speaker 1: of course, is as negotiations have been intrinsically and I
• 17:40
  Speaker 1: don't expect any serious concessions to be made from the
• 17:46
  Speaker 1: EU or for the UK government under Prime Minister May
• 17:51
  Speaker 1: to be making any big shift much short of Marche
• 17:56
  Speaker 1: one and probably after that. You see, I believe that
• 17:59
  Speaker 1: the YOU is now convinced that the May government is
• 18:02
  Speaker 1: so weak, Um, they really don't have to make any
• 18:05
  Speaker 1: concessions with the UK Government's going to move towards a
• 18:08
  Speaker 1: dilution or delay. So if the UK government is to
• 18:13
  Speaker 1: get anything better than what's on the table, um, they
• 18:17
  Speaker 1: have to prove it are serious. So my central scenario
• 18:20
  Speaker 1: here is that there maybe a few days or weeks
• 18:23
  Speaker 1: of a no deal Brexit and then the real talking begins.
• 18:27
  Speaker 1: So I guess the question that I have is couldn't
• 18:30
  Speaker 1: the the European Union pushed back the deadline? Right? I mean,
• 18:34
  Speaker 1: that's basically one theory is that they're going to push
• 18:36
  Speaker 1: back the deadline so that negotiations continue for the United Kingdom.
• 18:40
  Speaker 1: Why isn't that the best outcome? Why isn't it you know,
• 18:42
  Speaker 1: give them more time hash it out, maybe get a
• 18:45
  Speaker 1: new government. Yeah, go ahead, Yeah, we've already had two years.
• 18:50
  Speaker 1: Was obvious eighteen months. It was obviously eighteen months ago
• 18:52
  Speaker 1: that the German and French governments were not going to
• 18:57
  Speaker 1: be very accommodating to UK aspirations for a free trade agreement.
• 19:04
  Speaker 1: So another three months is a sign of weakness at
• 19:06
  Speaker 1: this stage. If the UK government is to impress on
• 19:13
  Speaker 1: the EU counterparts that they're serious and they're not prepared
• 19:17
  Speaker 1: to make any further concessions that are not going to
• 19:19
  Speaker 1: accept for present terms, then it's very delay is a
• 19:24
  Speaker 1: sign of weakness. And the other big news of a
• 19:27
  Speaker 1: day China. We we already see that to some extent,
• 19:30
  Speaker 1: in that delaying raising tariffs can be interpreted as a
• 19:36
  Speaker 1: sign of weakness on the other side. But that's always
• 19:39
  Speaker 1: a problem with the delay in in in high Wai negotiations.
• 19:45
  Speaker 1: So it seems like the you know, this is impacting
• 19:48
  Speaker 1: Europe as well. ECB President Dragging warned about negative rates
• 19:52
  Speaker 1: for the remainder of the year really quickly, Professor, I
• 19:55
  Speaker 1: understand you don't support that negative rate environment. No, the
• 20:00
  Speaker 1: negative rate environment in Europe is essentially there to be
• 20:06
  Speaker 1: a gravy train into Italy and prevent it's an Italian
• 20:12
  Speaker 1: exit from the European Monetary Union. And of course a
• 20:16
  Speaker 1: main backer and the essential backer of that is Chancellor
• 20:22
  Speaker 1: merk who who accepts negative interest rates for that purpose.
• 20:26
  Speaker 1: But negative rates in Germany are a total absurdity. Why
• 20:29
  Speaker 1: should German sabers be accepting negative rates when the economy
• 20:33
  Speaker 1: is at full stretch, although it was a bit weaker
• 20:36
  Speaker 1: in the second half of last year, and essentially they're
• 20:39
  Speaker 1: paying a heavy price for this. Dr Brendon Brown, thank
• 20:42
  Speaker 1: you so much. I remember when people thought it was
• 20:44
  Speaker 1: an absurdity, and now yet we have eight naf trillion
• 20:47
  Speaker 1: dollars of absurdity out there, of negative yielding dead outstanding.
• 20:50
  Speaker 1: Just shocking to think about it. Dr Brendon Brown, senior
• 20:53
  Speaker 1: fellow at the Hudson Institute, coming to us from London,
• 20:56
  Speaker 1: Thank you so much for being with us with the
• 20:58
  Speaker 1: non consensus view that they know deal brexit is actually
• 21:01
  Speaker 1: probably the best option given what else is out there.
• 21:03
  Speaker 1: Right now. A big story overnight, Elon Musk coming out
• 21:21
  Speaker 1: and saying that he has a very rough road ahead
• 21:24
  Speaker 1: of him. He's gonna cut seven percent of its staff,
• 21:26
  Speaker 1: highlighted the difficulties of making money and as well as
• 21:29
  Speaker 1: efficient electric vehicles in this current era. Joining us now,
• 21:34
  Speaker 1: Kevin Tynan, senior autos analyst for Bloomberg Intelligence, joining us
• 21:38
  Speaker 1: from Skullman, New Jersey. I'm just wondering, Kevin. I'm looking
• 21:40
  Speaker 1: at the shares a Tesla down nine percent today, bonds
• 21:42
  Speaker 1: hanging in there. What's your read on this cut in staff? Well,
• 21:47
  Speaker 1: this give Tesla the boost that it needs to survive. Uh. Well,
• 21:52
  Speaker 1: now that's not what's gonna do it, right. What's gonna
• 21:54
  Speaker 1: do it is uh having a larger addressable market with
• 21:58
  Speaker 1: more affordable vehicles. UM. So you know what strikes me
• 22:02
  Speaker 1: about um headcount reduction at this point in time, Right,
• 22:06
  Speaker 1: we're still waiting on model why a pickup truck, a roadster,
• 22:12
  Speaker 1: a semitruck. Right, so we have all these products and
• 22:16
  Speaker 1: supposedly capacity coming online, not to mention China. Um, yet
• 22:20
  Speaker 1: we're cutting back on headcount. Kevin. You know when you
• 22:24
  Speaker 1: and I have talked about Tesla in the past Um.
• 22:26
  Speaker 1: You know you've always said to me over the which
• 22:29
  Speaker 1: I thought made a lot of sense, which is technology
• 22:31
  Speaker 1: is easy, manufacturing is hard. And I think we've seen
• 22:34
  Speaker 1: that time and time again with Tessa. Obviously have a
• 22:36
  Speaker 1: fantastic products, consumers love it. What are you know, is
• 22:40
  Speaker 1: there a scenario where you see Tesla being able to
• 22:44
  Speaker 1: scale its manufacturing to really satisfy the demand? Is that
• 22:49
  Speaker 1: demand grows out there? Right? And and that's the key word,
• 22:51
  Speaker 1: paulse scale, right, And in the automotive space, that's it, right,
• 22:55
  Speaker 1: There's no margin here. It's all about scale. And again
• 22:58
  Speaker 1: this goes back to the idea of this thirty five
• 23:01
  Speaker 1: thousand dollar which is roughly the average transaction price in
• 23:04
  Speaker 1: the US of this thirty five tho dollar Model three,
• 23:07
  Speaker 1: because you know, up in fifty thou dollar range plus
• 23:11
  Speaker 1: where where Model threes are transacting mostly now, you're adjustable
• 23:15
  Speaker 1: market is very different than what it is at thirty
• 23:17
  Speaker 1: five thousand. Now, the issue is you can you can
• 23:21
  Speaker 1: sell thirty five thousand dollar electric vehicles arguably, but can
• 23:25
  Speaker 1: you do it profitably? And I think this is the
• 23:28
  Speaker 1: what's interesting, you know, and you mentioned it with in
• 23:30
  Speaker 1: the lead in is that this makes them look like
• 23:33
  Speaker 1: every other automaker, right, And that's been my other point
• 23:36
  Speaker 1: on them is that they are an auto manufacturer. They're
• 23:39
  Speaker 1: going to have autom auto manufacturing issues. They're gonna have
• 23:41
  Speaker 1: margin issues, they're going to have demand issues. So the
• 23:44
  Speaker 1: idea is if they can get to thirty five thousand
• 23:46
  Speaker 1: dollars for a Model three and do it profitably, then
• 23:50
  Speaker 1: they can get to scale. So Kevin, one aspect of
• 23:53
  Speaker 1: this is the tax credits the US suffering to own
• 23:56
  Speaker 1: electric vehicles that it got cut in half. How my
• 24:00
  Speaker 1: is that part of what's driving this latest bout of
• 24:03
  Speaker 1: weeks is a Tesla? I think it's part of it.
• 24:07
  Speaker 1: I've I haven't been um, I haven't looked at it
• 24:11
  Speaker 1: like that's a real demand killer or driver for them,
• 24:15
  Speaker 1: just because of where the transaction prices have been. Right,
• 24:18
  Speaker 1: this is this is um typically a buyer that is
• 24:22
  Speaker 1: not hinging on that tax credit to make a difference
• 24:26
  Speaker 1: of whether they're buying or not. Now at thirty five
• 24:28
  Speaker 1: thousand dollars, is that a different scenario maybe, But I'm
• 24:31
  Speaker 1: not sure if you have, you know, a thirty five
• 24:34
  Speaker 1: thousand dollar vehicle buyer that you're even eligible for that
• 24:37
  Speaker 1: full credit anyway in most cases, So UM, I haven't
• 24:41
  Speaker 1: really modeled that in as being UM as much of
• 24:44
  Speaker 1: a demand driver or killer as maybe others have. Look
• 24:49
  Speaker 1: and again, the transaction price is a big deal, uh,
• 24:52
  Speaker 1: the credits expiring. But you know there's fundamental issues with
• 24:56
  Speaker 1: recharged times UM. You know that infrastructure where that just
• 25:00
  Speaker 1: the the daily management of keeping your vehicle charged UH
• 25:06
  Speaker 1: is probably as big a concern to a lot of people.
• 25:09
  Speaker 1: So Kevin, just give us a quick summary of what
• 25:11
  Speaker 1: the big global audio manufacturers are doing an electronic vehicle market. Yeah,
• 25:16
  Speaker 1: so so, and we've talked about this a ton. To Paul,
• 25:19
  Speaker 1: is that is that? And I think there's this misconception
• 25:22
  Speaker 1: between inability and an activity. And I think a lot
• 25:26
  Speaker 1: of the automakers are looking at what Tesla does and
• 25:28
  Speaker 1: you know that P and L and saying hey, look,
• 25:30
  Speaker 1: I'm in not in a huge rush to run into
• 25:33
  Speaker 1: that market. If this proves profitable at average transaction prices
• 25:38
  Speaker 1: in the range where we want to be, maybe that's
• 25:40
  Speaker 1: thirty five dollars will invest in that strategy. But you
• 25:44
  Speaker 1: gotta keep in mind, right, this is different production footprint.
• 25:47
  Speaker 1: You you have factories that are used to making internal
• 25:49
  Speaker 1: combustion engines and body panels that house those combustion engines.
• 25:54
  Speaker 1: Now you're you're looking at changing that whole footprint to
• 25:57
  Speaker 1: say we need factories specifically tooled for these kinds of vehicles,
• 26:02
  Speaker 1: and you just haven't seen that commitment yet. Kevin Tyn,
• 26:04
  Speaker 1: and thank you so much for being with us. Kevin
• 26:06
  Speaker 1: Tyn and senior autos analyst for Bloomberg Intelligence, talking about
• 26:11
  Speaker 1: that with Tesla. Thanks for listening to the Bloomberg P
• 26:17
  Speaker 1: and L podcast. You can subscribe and listen to interviews
• 26:20
  Speaker 1: at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
• 26:25
  Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
• 26:28
  Speaker 1: on Twitter at Lisa Abramo wits one. Before the podcast,
• 26:32
  Speaker 1: you can always catch us worldwide on Bloomberg Radio