American Air’s Lackluster Profit Impacts Industry

just off their loads of the day. Thank you American Airlines, right, Mattie, I mean always thank you to American Airlines, but especially for giving us this really interesting story on potential forecast for airline earnings as they come up in the weeks to come. Watching the space on our Bloomberg Intelligence team is George Ferguson. He's senior Aerospace, Defense and Airlines analyst and he joins us from zoom in New Jersey. George, thank you so much for being here with us this afternoon.

Let's start on the American Airlines news. What did you think was surprising to you on this news? I thought that everyone was flying, so I'm a little bit confused. Yeah, so you know, I think that the expenses kind of came in line with where we expected it. You know, we haven't been the most bullish on fairs, but there's a lot more people in the marketplace that have been and so I think the top line was probably weaker than most people wanted. And so I think that's why

you see some of the response here. I don't think it I don't think it was terrible, but I think there may have been a lot of people in the marketplace that think fairs were even better than they than the airlines were letting on and potentially a you know, a source for for over performance here in the first quarter. George, what's going on with fairs? Because I mean I've been looking into some different things and I feel like, shoot, it's also expensive, but our fears starting to tick down,

you know. So we we have a data set from Airline Important Corporation. We get it once a month. The last time looked at it in February, it actually looked quite strong. It had a nice rebound after what I would call a middling h January. But the bookings rates that we were seeing on you know, on this data set, we're about eighty percent of twenty nineteen where we have a lot of the airlines flying really close to one hundred percent of twenty nineteen schedules, So we felt like

the booking rates were lagging. So maybe the airlines have been trying to keep fares higher, hoping that that booking rate would come along. You know, American didn't give us all the detail, right, they didn't give us all the fair detail. But I'm wondering again. I think that you know, the airlines are trying to hold fares up. They have higher costs coming down the pike. Right the pilot unions

are in for pay increases. Delta has agreed to it already in eighteen percent pay increase or pilots quite sizeable, with another five percent coming for the pilots at the end of the year. We think that'll happen at the rest of the full service carriers and that they'll all all you have to step up to those higher costs. So they need to keep fares high because they've got higher costs coming as well because of comes this wage inflation. So again, we'll see when we get more detail on fares.

But I suspect that's part of the problem is there's not enough demand to fill airplanes at that higher fare. So in your research note, you know a lot of issues that American airlines could be facing, Like you just said, labor, airline fares, capacity, potentially oil coming down the pipeline. But what would you say is the single biggest factor that's impacting profits for American airlines? Is it those increased labor costs? Yeah, well, I think it's really that fares aren't keeping up with

the increased labor costs. But the increased labor costs they're kind of already here, and I think it's a it's a big challenge for all the airlines because to give the pilots that kind of wage increase, you're going to need to keep decent fares in order to pay for it. I will say, you know, oil prices have been coming off, you know, they're lower than we started the year out right, and they've relaxed, and that's a little bit of a tail for the airlines. It's if it stays down, continues

to decline as we expect. Potentially, you know, the thing talked about a potential recession this year that could relax oil prices and that could be a positive for these these accom statements. Again, it's gonna be really difficult to keep fares high, especially in an economy that's slowing as well. Right consumers are already squeezed, especially lowline consumers, they won't want to spend as much on air travel. That will be the big challenge as fair as I think, George,

how do you think about this cycle right now? And I think about you know, pre pandemic airlines had gotten so smart. I feel like in squeezing out excess capacity, they've gotten so good at charging me for every breath I take when I get it on an airplane. So help me out here, like, what is the cycle we're in? I think it's interesting what you said about higher costs in terms of unions and salaries, But how are you looking at this more broadly, at the space in terms

of this airline cycle? And so we recently published a note on the airline's balance sheet to spend a little bit of time on it. They have a lot of cash US airlines do, so I think they're they're ready to weather a down cycle. They haven't sort of gotten rid of all that cash they took on during the pandemic.

They do have more debt than they have they haven't had, so that's that's an additional challenge, but you know, it's it's pushed out, so we kind of see them again able to whether the cycle here and that will see a recession really hits you know, I think usually you'd think that the full service carriers would be you know, would be have the most difficulty in a recession because I think, you know, the consumer would drive to a

lower price point. I will say we have not seen business travel come back to the twenty nineteen levels, still not as of February. We were kind of sixty five percent issues what we saw, So that could be a tailwin for the full service carriers as well. But it hurts out to have those full service travelers back because they're u you know, they pay the big fares, and you know, I'm hearing a lot of companies now talking about return to work more than three days a week, right,

four days a week, maybe five at some companies. I think that will help business to travel out as well, because I think that's part of the drag there. But again, I think we think they're generally ready for a down cycle, especially if it's not too dramatic of a down cycle. You know, but it's going to be a challenge to fill airplanes when you've got a consumer that's a little bit squeezed, and that's gonna that's gonna, you know, it's

gonna cause earnings pain. Hopefully not for the summer, because you know, the money making portion of the year is two Q three Q. We're into the heart of that. We'd like to see the consumer not running a gas during those quarters. Airlines could book decent profits in there if it doesn't, if they don't run into gas winter months or you know, they're always kind of challenge. Yeah, it's funny that you say about coming back to work.

One of the most read stories in the Bloombergers about JPMorgan Chase telling its managing directors they now must be in the office every week day, so ending a hybrid work practice that rose during the mid they'll get back. Having said that, not all airlines are the same. So I'm looking at the S and P Supercomposite Airlines Index, which is down about four and a half percent or so. American obviously is the biggest lagger, down almost ten percent.

Ul's down more than seven percent. But I look at Southwest, it's down about two percent, Delta is down about three percent. Who is best position to weather what's to come. Yeah, I think what you're seeing today is against some of those local cost carriers, not some of them, right, all of them are performing better than the two worst performers, Like you said, United in American on the day. You know,

those low cost carriers. A squeezed consumer budget means the consumer probably looks to get more out of their air travel for less money. I think that you know, that helps the South Less, the Jeff Blues, the you know, the spirits, the frontiers, if you can, if that's the way you're willing to fly. And I think generally Delta does a better job in revenue than United An American we looked at Delta the other day, just posted a

new earnings outlook for one queue. We thought they were a little bit you know, the cost of fuel was a little bit high and some of their guidance we lowered that it's a bit of a tail and for them. So maybe their one queue looks a little bit better and based on where they started their guidance. But yeah, I think the low cost carriers though, are probably the ones today. So heading into earning season we get Delta tomorrow. What are you going to be listening into on that

earnings call. We have about forty five seconds here. Yeah, we're going to be all over domestic fairs, right, that's the most important thing for every US airline. Will be all over the split between that premium and non premium passenger and how that's holding up. And then probably the most important international markets will be looking at you know,

the European Transatlantic is just a big market. Pacific is still you know, really low right now because China isn't fully open, and Latin America kind of applies more to you know, to American, but it applies to all of them. But we'll watch your European a lot. Well, thank you so much. We've got a really great setup now as those learning start to kick in. As Mattie said, Delta tomorrow, George,

thank you, thank you, thank you. George Ferguson, senior Aerospace, Events and Airlines analyst at Bloomberg Intelligence, joining us on Zoom in New Jersey, SkyWest, by the way, with the smallest decline in the S and P Supercomposite Airlines industry index, it's down just about one point three percent, so, as he said, you know, some of those lower costs. If you're willing to fly. I'm sorry. It was just bad,

he phrased it. If you're willing to do it, don't eat new pillow, be squeezed, any tiny, tiny chair for tiny people. So many. Right, you're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from three to six Eastern Listen on Bloomberg dot com, the Ihard Radio app, and the Bloomberg Business App, or watch us live on YouTube. We mentioned Ward Buffett today waning in on banks and dumb decisions by bank managers. Excuse me.

HE'SO called the electric carmaker by d Company extraordinary and said hit manufacturer ts MC Taiwan semi a fabulous enterprise. But Maddie, he has been actually selling shares of them, which is so interesting because I love one of the things. In our next guest note, she says that he loves b of A because he's friends with the CEO, and he just he likes the CEO. He likes Brian, So you know, all power to warm Buffett on on that

being the decision maker there, but really interesting. We're going to get some thoughts on the company with our next guest, Kathy Seaffert, CFR, a research industry analyst. Kathy, thank you so much for joining us to talk about this. Let's just start broad here. What stood out for you most in Buffett's comments other than you know, we like to joke about the dumb decisions quote? But what was most

important to you? Oh? Sure, and you know it's I've followed Berkshire Hathaway, I hate to admit it for almost thirty years now, and you know, from from the perspective of an analyst like myself, it's kind of frustrating when you have to sort of chase down these media reports because Buffett doesn't conduct analyst interview, so we're sort of forced to sort of hear what's on his mind. Um, you know in interviews like this. Um, so just to kind of frame some of the things that he said. Um,

I think his comments about the banking space were accurate. Um. You know, I think he was spot on that. You know, the house view at our firm is that, you know, we're sort of neutral on regional banks. There is a problem or a potential problem at some firms with some of their assets liability management, and there's an accounting process that some banks sort of play a little fast and loose with UM, which doesn't necessarily portend that every bank

that's going to do this is going to fail. So I think it's important to sort of look at that within the context of or more muted framework. I mean, but I think his second point about bank failures is that the SCIC is there is a back stop. I think the risk is if you have an uninsured deposit, and that was sort of, you know, one of the challenges at Silicon Valley Bank, which I don't necessarily Again

I'm not a bank analyst. I followed Berkshire, but I don't I wouldn't necessarily say that they were a microcosm for the rest of the bank. Well, Kathy, if I could just jump in for a second, and again we should be fair. These comments were in an interview with CNBC in Tokyo earlier today. He's been actually talking to the media and he's been over in Japan, and Japan is another thing that has certainly been on Buffet's radar.

You know. One of the things that we all kind of just you know, wait on everything that he says with bated breath, is that gives US an idea of maybe where he and his team are making investments are not. So does what we've been getting from him, whether it's on by D, whether it's on TSM, whether it's on his interest in Japan, Like, what does it tell you about kind of where he is allocating money and his

interest is right now? Well, it's interesting because there's sort of like the adage, look what they do, not what they say, and see your point. Um, you know they the first quarter holdings filings haven't been released yet, so the publicly available data is as of the end of the year. And based on that, you know, he's lightened up his position in a couple of bank stocks. He sold Bank of Nee York, he sold Ally Financial, he sold US Bank Corps, kept his BAVE holdings. In fact,

um Bave is one of his top holdings. Um, he did sell his time on semiconductor holding. UM. I think because the other you know, the purpose of the tip trip to Japan hands to sort of have this meeting with all of these trading company heads. And I think that was an interesting transaction and that's kind of classic buffets. These are companies that are conglomerates. Despite the fact that they're called trading companies, they're really conglomerates life workshare half away.

The conglomerate structure is kind of an antiquated model here. It's more popular in Japan, but they also tend to sell it discounter valuations because it's a complicated structure. So in some respect, that transaction was sort of classic Buffet. You know. The other thing I would note is that we're coming into a situation where equity market conditions and

economic conditions look like they're poised to weakend. I mean, we had some decent inflation numbers, but then some of the Fed minutes, you know, showed that the Fed is concerned we're going into a recession. This is sort of a prime environment for Buffet to start striking deals. And he's got over one hundred billion dollars. It's pass that he can deploy. He's not going to deploy all of it. So what you know, big or little? Right? Like? You know, he does a lot of a lot of buys a

lot of smaller companies that aren't necessarily public. But where do you think he might be interested? Um, So it's I think it's important to separate his equity purchases, which tend to be in industries that he doesn't necessarily want to operate, So I would look for his equity holdings to be in you know, diversified industries, financial services, technology. I mean, Matt seems to be his equity holding strategy. On an operating basis, it tends to be more energy,

consumer staples, consumer discretionary, and industrials so an insurance. His latest significant purchase, which I think they had a lot of sense, was Alleghany, which was kind of a Nini Berkshire. So, you know, I think from looking at those areas and as you know, as equity valuations perhaps deteriorate, I think it's you know, we could see him start to make some deals. I heard you say a continued interest in tech and one of the things that he talked about

was AI and chat GPT. Do you see an acquisition in that space potentially happening or is that too out of the ordinary for him? I see, if he makes any acquisitions, I would see it as an equity investment, not a consolidated operating investment. I think they've been pretty clear in delineating what they feel comfortably what they feel comfortable owning when they have operating control versus what they'll

invest in as investors. And again, you know there has been a changing as changing of the guard at Berkshire, and you've got to investment managers who are a generation younger than Warren, with a little bit of a different perspective. So I wouldn't be surprised to see them go down that route. But as an equity investment I love the passwords that Warren Buffett has used to describe bitcoin specifically. I think on in CNBC he called it a gambling token.

I think he's also talked about not having any intrinsic value and so on. But it is you know, Kathy that gets to a good point. And he did talk about his air apparent and sending him some nice compliments. We're talking about Grey Gable. I do wonder about the conversations that around the table at Berkshire specifically because you know we've talked in the past about Berkshire getting into Apple at one point, you know that names that you would have never thought. But you're right, it's a younger

guard and some different thinking there at Berkshire. Yep, absolutely, which means what then where do you think it leads? Potentially Mattie mentioned Ai specifically, but where do you think it maybe leads then Berkshire. It's interesting because I think it's going to be interesting, and I don't want to sort of speculate too much, but I think it's things to see what happens in a post buffet era, and I think that it's not out of the realm to see whether you know, I think number one, the role

of chairman and CEO is likely to be split. There's actually a proposal right now that will be voted down. For sure controls, you know, the biggest block of voting. But there's a proposal at the annual meeting in a couple of weeks to split those roles. So I see that role being split. I see the consolidation of power that currently exists being spread out more like that of

a typical corporate structure. But and again this is a little bit out there, but I don't think it's out of the realm to see an activist come in and call for a breakup of half Away to unlock some value. I mean, you know, for stock trades at a decent multiple, it's a premium to the market. But you know, if we kind of go along a conventional thinking that's not out of the realm as well. But your point about you know what to expect. I think we're already seeing

some evidence of a changing of the guard and that's fair. Yeah. Yeah, hey, listen, we've got to run forgive us, just running out of time here, but really appreciate you weighing in on that flurry of headlines earlier today as a result of that Buffet interview with CNBC Kathy Seyffert, thank you so much. Industry Alice at CFRI Research joining us on the phone

in New York City. It's just fun to talk all things Buffet, just his views on things well, he said earlier, the only thing chat gpt can't do is write a joke. And then someone used chat gpt to write warm buffet dairy queen jokes on Twitter. So go check it out if you want to have a little laugh this afternoon. It's a really good place. Yeah. You're listening to the Bloomberg Business Week Podcast. Catch us live weekday afternoons from three to six on Bloomberg Radio, the Bloomberg Business App,

and YouTube. You can also listen live on Amazon Alexa from our flagship New York station jose Say Alexa playing Bloomberg eleven thirty. Check out this company's website and they are making a promise to their customers. It's all about making gear for good out dear gear, clothes that are in their words, as ethically and sustainably as possible, and then paying it all back. It's an idea that we know, we talk about increasingly matters to shoppers and society at large.

So let's get into it. On the company, on the mission and the outlook. Joining us is Grace Sunset. She is Chief People an Impact Officer at Code of Paxi, and she joins us here in our Bloomberg Interactive Broker studio. Full disclosure. We met at a dinner or again at a dinner earlier this year and I'm like, you gotta come on, you gotta come on. How are you. I'm doing well. It's so great to see you. It's so great.

Tell us about the company. And as I said before we got on air, you know one of our colleagues, it was like, oh my god, I can't believe you're having them on. I love their stuff. Tell us about Code of Paxi. Code of Paxie is an outdoor gear company that makes the majority of its products out of remnant, recycled and responsibly sourced material. So we start with that.

But the most fascinating thing about Cotapaxi that draws people into the brand is that one percent of our product sales goes to the Cotopaxi Foundation that sole mission is to eradicate poverty in our lifetimes. So we're really broadening that definition of human sustainability to include people in society and ways that are new for the outdoor industry and certainly new for the fashion industry at large. Your supply chain and you talk about sustainable because before we got

going again like the fashion industry not good on the environment. Yeah, how resilient is that supply chain? And talk to us a little bit about it and how it all works. Yeah, you know you're supplying from definitely, so we are supplying

from you know, global markets like many retailers are. The way in which we make the products out of this remnant, recycled repurpose material means it's less resource intensive, it's less water intensive, it results really and less waste because of the quality of the product that we're bringing to market. And we're very transparent in fact, Less than one percent of our net revenue is attributed to the carbon impact

that we have in our brand. So we measure it, we're transparent about it, we own it, and we have a phenomenal product design team that's always looking at new and better ways of making great products out of remnant material. And I feel like I love that so much. And I feel like when I've spoken with other CEOs, they always talk about the importance of partnerships in achieving those goals. And I know you partner with the IRC other big organizations.

How critical has that been to your success in achieving your goals? It's been huge. You know. How we define sustainability, we think about it as human sustainability to meet the needs of the present without compromising the ability of future generations to meet their own needs. It's a much broader remit than just thinking about the environment or climate change or global warming. It involves people. And so when we

think about our impact partners, we look at outcomes. We look at the organizations that are really driving outcomes, whether it's in access to water clean water, if it's fighting malaria, which is only grown with increased temperatures and spreads of diseases, and impoverished communities. We look at education of young girls, so things that we know that are proven to result in outcomes of alleviating poverty and getting people on a better track grace. How easy or hard is this to do?

Because you know, I think and I can't remember review and I talked about this a little bit, but I always do feel like love companies like this, and I do think consumers increasingly want to shop and buy from companies like this. As a company in terms of thinking about okay, but you gotta make money too, right, You got to keep the business going. So how easy or hard is it to have this mission and do good and then also make it a profitable company? Right? So

it is hard because there are trade offs. There would be easier ways of doing things. What's the biggest tradeoff? Well, I think the biggest tradeoff is probably being more intentional about that product, supply chain, nate how we're making the product, and we could probably have shortcuts or other ways of

doing things right. We would rather do it right. But I think one of the biggest trends that's happening around ESG that's fascinating to me at least is the rise of the public benefit corporation where the best interest of the corporation. Historically it has been thought as maximizing shareholder value, but public benefit corporations allow for this broader discussion on stakeholders and they include society and environment. So we have a board, we have a management team that we are

a public benefit corporation. CODEAPAXI is a public benefit corporation, and we have the legal structure that actually enables us to behave this way. And oftentimes you see ESG put in a corner, put in a department. Maybe it's a part of marketing or a part of the brand, and it's not integrated in the business model. And that's what I think is so exciting watching that people keep talking, well, that's right, and that's what I think is so exciting

about CODAPAXI. It plays a role in our recruiting and our retention, getting people on board to be a part of something that's truly bigger than ourselves. I was going to ask about it exactly that, because I've also heard from different employers that talent retention and climate goals are directly linked because young talent they just won't sign on for a job where that's not part of the business mission. Are you hearing that from the folks that you hire

as well? Oh? Absolutely, And I think, to be honest, I think that's what draws a lot of talent to the outdoors industry in general. We have a pretty good reputation for being leaders in that area. But what's unique about Coda Paxie is it's creating, through its color and its optimism and its joy, a much more inclusive approach to this as well, and attracting underrepresented communities to kind of join us and have the outdoors be a greater

part of their life. That's not always the case, because right, sometimes the outdoor industry can be right, a little exclusiontimidat averse communities, right yeah, Right, You see someone that doesn't look like the three of us here, you know, scaling a mountain or doing something heroic, and you say to yourself, well, I can't be a part of that. So Coda Paxi's brand mission and brand goal is to allow for adventure to be anywhere in all different types of forms, and

that we can do good everywhere together. All right, So you know we're bloomberg. So I'm going to ask you, I mean, what's kind of the conversations you guys are having about the current kind of consumer environment, economic environment, market environment. You know, internally we talk a lot about, you know, how can we preserve our growth. I mean, Codapaxy was very lucky last year. We grew nearly one

hundred percent year over year in our top line. There's something that we're doing that's working, and so we want to double down on that. We want to be true to our core values and be mindful and sensitive about dynamics that are you know, out of our control. You know, we air fraighted you know, some product and we didn't like doing it last year. We're going to be doing it less of this year, and I'm looking at opportunities across our supply chain to have that impact that's true

to our mission and our vision. And it's global, you say, right, and your your supply chain. Yes, we work. We work with suppliers all over the world in designing our product, and we empower our workers that are affiliated with our brand, with our in our supply base to make you know, even better design decisions around our products. The Delda bag, which is known for its bright colors and its remnant material,

is often designed by the workers at the site. We empower them to come up with the designs and the way that things should look. So we have a smaller supply base, kind of a concentrated group of suppliers that we work very very closely with. We'll work with them on in setting projects we've done, you know, organic gardens, in different sorts of projects to improve the quality of life, living wages, and working with Fair Trade USA to certify some of our suppliers to uphold their standards as well.

And I guess what I was curious about that in this line of questioning, is is it getting easier meaning that there's more, you know, entities out there around the world that do have a sustainable mission or thinking about their impact on the environment and impact on people. Are there more out there that give you more choices? Is that growing? I'm going to be optimistic and say we're removing in that direction. And I think in the industry

it's still tough. But in this industry, you're seeing a lot of great brands come together to try to grow the pie and work together to create solutions, which I'm really optimistic about. And that's where COTAPAXI plays. I think that's that's so cool, and I feel I also wanted to talk to you about like inflation and consumer demand, but we're a little low on time to get into all of it. With the inflation is still a problem

for you guys real quickly. Oh for I mean for sure, and I think that we book at pricing and we look at what's reasonable to charge for a jacket or a pack. We've always been, you know, really thoughtful about how we managed the P and L, how we manage cash. We've been profitable for years, which is sort of less heard of in a high, high growth consumer business, and we've been super you know, kind of sensitive to passing along any increases that we're having to our fans and

our consumers as well. So much fun, Come back soon, Thank you, Thank you for so good. Grace Sunset, she's Chief People an Impact Officer at CO of Paxi. Joining us here in our interactive Folkers studio. You're listening in watching Bloomberg Business Week, and this is Bloomberg Radio. This is Bloomberg Business Week inside from the reporters and editors who bring you America's most trusted business magazine, plus global

business finance and tech news. The Bloomberg Business Week. Punk asked with Carol Messer and Tim Stenebec from Bloomberg Radiomen, yes, Tamen, all right everybody. Yeah, we're going to talk about the taxmen and women that are out there, truant taxpayers, decrepit technology, and a broken system that former IRS tax auditors say that cannot be fixed with the eighty billion dollars it's

been allocated by federal government to do just that. This story found online up Bloomberg dot com slash business Week and on the Bloomberg and at Bloomberg dot com Slash business Week. I said that twice on the Bloomberg terminal. It's that kind of a day. Um anyway, It's not like I'm going to get an audit or something and I'm freaking out here with more. Let's get to it. Bloomberg News Wealth reporter Ben Steve Roman incredible deep dive

along with the editor of Bloomberg Business Week. Do Webber here in our Bloomberg Interactive Broker studio. Yeah, that would scare the heck out of me. That audits coming. They got eighty billion dollars to play with at the rs UM. But actually, what we set out to find in this story with Ben Steeperman at the Helm, was you know, what's it really like to work there? How bad is it? Really? We know it's bad, that's a given, but like, really, really, really,

how about is it? And you know, if you were to fix it or to you know, give some pointers to people normal Americans, what would those fixes and pointers be And would you find? Ben? What I found was that part of the issue here is money. Obviously, UM this these are folks who have been suffering through decades of budget cuts. Um. It's the agency is a shadow of its former self in a lot of ways. It's probably the worst funded government agency. Um. Technology doesn't work,

systems crash. We've been running on nineteen sixties computer programming languages. It's just basic analyzes auth or is that like cards? Like what is it? Sorry, I don't know the name of the language, but yeah, it's like one of these things where you need special training to uh, well they have they have these like veterans who like learn this stuff, and um, it's not very applicable to other software tech companies. And so it's it's bad and money can help. But

there's also a culture problem. There's a culture shift that needs to happen there because this is like, this is an agency that's been demonized for fifty years, and they have this bunk i mentality and they have a really hard time even communicating with the public or or had to call that I RS. I understand what they're dumonized. Yeah, and yet there's this incredible loyalty that you kind of

discovered among the people who have worked there. A lot of a lot of the people you spoke to were farmers, and that just really stuck out to me. It was like, yeah, you know, you blugend the heck out of an agency that until it's like despised, and yet the people who are there, like I feel like they're like clinging to each other almost. Yeah, it's like they're like bonding in

the trenches. Maybe. But I think what realized what surprised me maybe was I think because of the demonization, there's a sense that like an IRS auditor, Oh, there's somebody who would be like politically motive, seemed politically motivated, or or like might want to squeeze tax the rich taxpayers. I mean, maybe that's why you go into it, because you get to like take rich people down a peck

I didn't get any of that vibe. In fact, what I got from these people is that they're big tax nerds, Like they just love the tax code and there's something really fun about if you're if you are a tax nerd of like being in government service and working on that and the hours are saying, it's a union shop, retirement benefits are good, Like, so all you have to do is understand this really complicated tax code. Yeah, it

just gets more and more complicated. Right, and also like be kind of embarrassed to tell people where you work. And I'm only saying that because you put it in your story, So this is this is editorially sound, but like that's kind of a tough pill to swallow. Yeah, So when multiple people told me, I kept asking, what do you tell people if if they ask you what do you do at a party and they're they're like, oh, I'm an accountant or I work at the Treasury Department.

They had also, everybody had like a different strategy for like basically killing the conversation and not basically trying to trying to sound boring, and so people move on to a different conversation. Right, but everything's going to change, right eighty billion dollars. Well, they have a new commissioner, they do have eighty billion for now. Republicans in the House at least would like to rescind a lot of that money,

especially for enforcement. Um, they're probably not going to get their way at least in the next couple of years, but we'll see. But yeah, they need to hire a lot now, and that's a child lee. I mean, the onboarding process can take months. And also they're paying government a government pay scale, and they're competing against the private sector, which obviously unemployment is low. And if you have some SAX skills, you can make a lot more money by

going to an accounting for a meal law firm. But one thing I don't understand is that it's important like how many tax sheets are there? Are there estimates because I would think that a very rigorous IRS would be a good thing in terms of bringing tax revenue, justify revenue. In part of the goal here, right, it's like maybe modernize this place and let them do the job that they're supposed to be doing exactly correct that spot they

can hire that could maybe of them out. So there is one study that the IRS does and it just came out. They do it every every few years. They found that almost five hundred billion dollars is missing compared to you know, if you compare what is owed to what is actually paid. They think it's peggeted about five hundred billion. But that is an estimated that is several years old. It is based on random audits that might

not be conducted very well. They're they're not that asn't include crypto, it doesn't include all sorts of offshore game playing that that could be happening. So there are people who think, like academics, who think that much much more money could be hidden from the IRS by wealthy people in business owners. To be clear, like salaried workers like you and me find it very difficult, if not impossible, to cheat because our income is reported directly to the IRS,

and that matching software is actually very simple. What they want to develop is some kind of AI and machine learning and really crunch the data on what's going on with investment flows and wealthy people and try to find cheaters that way and be much more sophisticated, sophisticated about

who they audit in the first place. Okay, so you actually did get to talk to some people who had recently joined the agency and recently left the age and then yes, yes, so what was their experience like because uh, you know they came in for maybe different reasons, but you know these are these are new hires and new exits, right,

so what was their experience? Yeah, so you know you could argue that well, one of my sources did argue that auditing is basically the toughest job you can possibly imagine. I mean, you're going in there and you're trying to figure out is there something like you're investigating somebody, um, based on their tax return and that could be thousands of pages, and then you're comparing that with the tax code and that can be that is like tens of thousands of pages, Like how do you find how do

you find that? And to begin with um so um. Unfortunately, the last few years, especially with the pandemic, it's really been hard to bring people on and train them in that and training virtual training in taxes like can you imagine it's so apparently they have very good instructors, but um, you think that it would be Anyways, I am I was in awesome of these stories these people told about coming in and basically it's sink or swim and they

sunk like it was really hard. It was emotionally stressful to deal with taxpayers, especially low income taxpayers who are it's often connected with health issues, financial issues like poor people, um, and then all the way up to the higher I'm

thinking about everything. Jamie Lee Curtis is not or and it's like so sad, but I mean we've been joking, but in all seriousness, you do profile people who talk about going into people's lives who are struggling and having to fight them on their taxes, like and and add the ad in the political environment right like you are

a representation. Literally the talking point from folks on the right in the last year has been that this is Biden is creating this new army of IRS agents that's going out there with weapons to poke through people's finances. That can feel very threatening if that's the message that's going out there, and if if you believe it, and then someone shows up at your house or your business

and these people are not armed. To be clear, the vast vast majority, except for some criminal investigators, a very very few, they do not have weapons. They have basically a laptop and that's it. And maybe that laptop doesn't work. There was some amazing stories that, like one guy said his laptop broke and then they didn't they didn't have

the budget to like buy a new one. There wasn't a replacement in the office, so he had to mail it from Florida to Texas to be repaired and then wait for it to be sent back, and he was he did not have a job to do for three weeks, because you can't do a job without a computer in

twenty twenty three or whatever. It does speak to another element of the story that I found fascinating, which is so much of the job is actually the agents and auditors taking them upon themselves to do things and learn things that maybe they haven't ever been exposed to in the course of the job, right, So talk about those contours, because that it takes a certain someone to be like, Okay, I'm gonna government job, and actually I need to like do a little bit more work to understand what I'm

supposed to do. Yeah. I found many instances of people paying for a course out of their own pocket. Again, these are tax nerds, so like that they're interested in it maybe to begin with, but also they felt like they couldn't do their job. And that's the running theme, is it. And so many of these people at the RS just told me I did not have the tools to do my job properly. And that can be very demoralizing. Even if you get along with their colleagues and like them,

it can be just really just demoralizing. You can't fulfill your mission. What do they get paid. It's a government pay scale, and I think it's capped it like the hot like high hundred thousand basically, yeah, yeah, yeah, one hundred thousand or so, one hundred thousand or so. I could be wrong about that. There might be some bumps.

The IRS now that they're hiring is thinking, well, maybe we should hire because of remote work, Maybe we can hire more in like markets that are less expensive, like other than DC, New York, the Bay Area, like higher auditors in other places. And maybe that's one of the strategies are coming up with to try to get some talent in there. But like, it's basically these people can leave in DC or New York and get paid four times more, five times more by going to the private sector.

It's interesting too that you know, in terms of the things that IRS is doing well diversity. It seems like they're killing it on gender equity and you know, just having an inclusive hiring practice. What did you make of that? Did that surprise you? Surprise me a little bit? Um?

What I heard from veterans is that they maybe they came out of law school in way back in the eighties, the longstanding thing, you know, they maybe they came out of law school in the eighties and it wasn't was not a top tier law school, and they were able to get a job at the IRS and um, and then found it pretty meritocratic. And I think that basically almost I think almost a third of the workforce is black. There's two thirds as women, so it's a very diverse

workforce and it much more than other even other government jobs. Right. I just found that so surprising and interesting. Yeah. The other thing that is worth mentioning here is one of the main reasons, in addition to being able to leave and get high paying job elsewhere, is retirements, right, which has been a huge force of change at DIRS because so many of the people who are there and have have effectively tenure are retiring. So you know that there's

this drain loss, brain loss, draining brain, brain drain, brain drain. There. It is that And I'm curious what you're reporting bore out about that topic because that can have huge not only kind of cultural implications, but also you know, institutional ones. Yeah, so people told me about what the time when they joined the organization, say two decades ago, there would be a guy who was in an office in the DC in DC who was the expert on section forty two

point k what they were the world expert. And that is actually an advantage for the tax collector that the private sector doesn't necessarily have. They have the ability because it's it really is eighty four thousand people in this workforce. It's a big workforce, much bigger than any firm. They have the ability to really master the minutia of this

incredibly complicated tax code. Well, if those people leave, and they have been leaving in droves because basically in a lot of departments, the IRS didn't high for years and years and years. Um, we actually think that there's going they think that there's going to be about fifty thousand of those eighty thousand employees are either going to quit

or retire in just the next several years. So no more audits than for us, like so it just underlines how much they need to hire to replace these people and how and then it's going to take several years to ramp up. I mean it's amazing. Yeah, now that these people are on the outside, a lot of them are helping clients deal with the IRS, and they're saying

they're just holding their heads. I mean, they are just in horror of what they're encountering because they're encountering auditors who've been on the job for a year or two and they do not know what they're doing. And we brought all this to the IRS and they did not push back on this. I mean, there is worse incompetent audits. Um, you just get stuck in this customer service hell and never exited. Unbelievable. Ben Steverman, Wealth reporter at Bloomberg News,

Joe Weber, Editor Bloomberg Business Week. Check it out online. I'm Broomca a journal radio now, but you let me drive? No, no, no, no, honey, please, I'll do the riding gravels. I want to drive. It's good question. This is the drive to the globe down timulate things well, jog down on Bloomberg Radio. All right, everybody, just about eighteen minutes left in the trading session. We've got stocks definitely off their best levels of the session.

As Charlie just mentioned, down across the board, UH tech stocks once again taking the biggest hit on a percentage basis, just down about seven tenths of a percent. So let's get to our drive to the closed. Guest Brendo O'Connor want us is with us. She's senior vice president and financial advisor at UBS Global Wealth Management based in Florida, but here in our Bloomberg Interactive Broker's studio here at Bloomberg Headquarters. So nice to have you here. How are you?

Thank you? It's I think I brought the good Miami weather to New York, so you guys can thank me for that. Thank you, thank you. We really appreciate it. Having said that, maybe clear outside in terms of the weather, it feels like at least for today, But the cross currents on the markets are pretty tricky, and I think that's why we have such a tight range, or we have for the last couple of days than low volume when it comes to the equity trade, and even treasuries

feel like they're tight. Trying to figure out what's next. What do you think is next? Right? And obviously today it's all about the CPI numbers. There was a fixation a few days ago on the payrolls on Friday. All seems to be trending in the right direction when you look through the headline and focus on the core, though the messaging is not as clear, and so I think that gives ammunition to the FED to raise another twenty

five in May. The problem is May is a long time away, right, So there's a lot of additional data that can come out here that can shift the narrative. And we're going into earning seasons, so that is an interesting place where that narrative could be shifted again. Yeah, well in one of those potential you know, another issue in this hurricane of data is the credit crunch. So I wonder what you're looking at and what clients are asking you about when it comes to the credit crunch

and the impact that could have on the FED. Right, So I think two things here, And in terms of risks, we are looking at domestic risk for the first time in a long time. We're not focusing on you, Crede, We're not focusing on China, we're focusing on the knock on Its amazing right in a year like go Ahead, we're focusing on the knock on effects from the banking

crisis as well as the dead ceiling. So I would say in terms of the credit crisis, you know, we have relative stability now, but the fact is the price and availability of credit has changed. So we're going to see some of that permeate some of the bank earnings, maybe not this session, but maybe in Q two. The bigger stress is what does this due to other parts of the market and commercial real estate becomes really exposed.

You know, there's a comment of I think was Jeffrey Rosenberg on black Rock earlier today and surveillance, and that was this whole point. We know credit, we know what's going on in terms of credit. We know it's tightening up, we know the direction, we just don't know the magnitude. And I do feel like what we get let's go back to earnings, which you talked about at the top bank earnings, how key is that and kind of getting a tone of maybe how much things are kind of

being brained in when it comes to credit. And I think that more than usual, investors are going to be paying very close attention to the bank earnings because the messaging of how this will impact the broader economy is going to be We're going to start to see that. And I really think about it in two ways. So, first of all, we see evidence of tightening lending standards. Number one, how does that change the calculus for the FED? Because we know that credit contraction is deflationary, So how

are they going to incorporate that into their thinking? How is that going to impact the path of ray cuts. The other bigger thing, and you highlighted this a little bit, is what is the economic contagion in the broader economy specifically to those small and mid sized businesses. We know that they are so dependent on access to credit, which had some stories already about a bally. So how pervasive

is this problem? And we won't see that on Friday with the big bank earnings, but as we go through the cycle here, we're going to see that in some of the regional banks. Are you concerned about contagion into the tech sector specifically when it comes to that credit crunch? Well, the tech sector is interesting, and I bring this back to what we've seen in the market so far. You know,

the narrative in Q one was not what people were expecting. Everyone, or for the most part, a lot of market participants were expecting a softer q Q Q one and Q two with market strength in the back half, and that wasn't the case. You saw this broad based rally at first glance, but when you look under the hood, it really was driven by seven names. These were all big talk, big tech, and that really was driving a lot of

the games. And so, you know, we've seen tech rally, but I don't think that we should assume that that rally is going to stay permanent. Brenda Having said that, how many times do people like it's not in the gross docks. You gotta get out of them, and then investors pile back in and that is where you see the growth though, when it comes to top and bottom line. So I do wonder how you think about that. When I think about my world, what it's you know, made of,

it's a lot of apple stuff. I use Google all the time, Like I think about that a lot. How do you think about the tech space in terms of where the real you know, next wave of growth opportunities are. Is it those big established names or is it going to be names we just don't know about yet. Well, I mean, big tech is not necessarily the real growth and a lot of those names are now consumer staples. That's true. So you know where there's going to be

really interesting opportunity is in the earlier stage stuff. It's at times when markets dislocate that some of these really innovative and creative technologies emerge. So they're going to be earlier stage. I just think that from a broad equity positioning. You know, it hurt us a little bit that we were underweight growth in tech, but I still think we're only one quarter in. There's still a lot of this year we need to see. So where do you want to be right now? In terms of strategy? Right so,

I think fixed income is the big call. I know you've had a lot of conversations about bonds, and I would say they're in fixed income. We're in fixed income, and so I think that really we're staying away from high yield, we're staying away from senior loans. We're doing two things. We're doing high quality investment grade and we're extending duration. And if you think about it this way,

fixedencome was not a good investment last year right. I saw the USAG down thirteen percent through zero diversification benefit there, but that's we've been re established, so investors will benefit

from that. Also in terms of what the Fed is going to do, no one knows the clear timing, but you know, for the CPI data showed us today that we're closer to that ninth inning, and so there's an opportunity again high quality to lock in attractive yields and also benefit from capital appreciation as the FED potentially comes down later in the air. So high quality corporate, high quality corporates. Yeah, okay, no sovereign or no treasure. Well,

so treasuries, we do have an allocation. You're doing kind of a carbel approach on treasuries. I think the interesting thing that we're watching in this space has to do actually with the deat ceiling. So in terms of the debt ceiling, unfortunately, we think this is going to go down to the wire simply because the Democrats are not going to be willing to do any of those speciss how it plays exactly. A deal will likely get done, but we're looking at the treasury market for indication of

any pervasive weakness. I think next week could be interesting as those tax receipts start to come in. We don't really have a clear understanding of the drop dead date, but we could in the coming weeks really smart, so real quickly. SVB didn't change your calculation on fixed income now, I think broadly what it did is two things. So for investors, it really just reinforced the view that you need to have multiple providers. And there was also a

movement towards a bigger bank, more established bank names. So it did not really affect our calculus. There are so many other drivers now that are going to impact both fixed income and equity movement people though, investors, and I got about fifteen seconds comfortable committing new money right now. Yeah, so I think there is And you know, you have to do a few things. So you have to still invest in short term treasuries, okay, to keep your powder dry.

You can selectively go into parts of the equity market non us. So you're seeing, you guys are still seeing that absolutely your money come in interesting come back soon. Let's say, Travis, please, Carol loved it. Loved it. Brend O'Connor want us, Senior VP, Financial advisor at UBS Global Wealth Management. As we said, based in Florida, but here in our Bloomberg Interactive Broker studio. This is Bloomberg. This is the Bloomberg Business Week podcast, available on Apple, Spotify,

and anywhere else you get your podcast. Listen live week afternoons from three to six Eastern on Bloomberg dot com, the iHeartRadio app tune In, and the Bloomberg Business App. You can also watch us live every weekday on YouTube and always on the Bloomberg germital of them