Risky US Rail Strike Looms

You can also listen to our radio show at two pm Eastern Time on Bloomberg Radio or watch us on YouTube search Bloomberg Global News. So among the things on our radar, it's also on investors radar. It is among our most right on the Bloomberg Today about the looming US rail strike that threatens to push inflation even higher across the country. And Tim, this is coming, of course, excuse me after we saw this morning's pp I report

where prices jump more than expected last month. Yeah. Look, railroads account for a significant portion of goods that are transported within the US, more than a quarter of the goods transported here, so that would cause a real snarl, to say the least. Let's get into it with Katya Dmitrieva. She's U S economy reporter for Bloomberg News. She joins us this afternoon from in the field just outside of Washington this afternoon, Katia, how are you. I'm doing well.

How are you good? It's good to have you with us. Hey. Um, before we get to what the strike is about, I want to dig into the economic implications of this because it's something that that you wrote about earlier today. UM, give us some numbers here. What would happen if rail workers went on strike? Well, the stakes are definitely high.

As you mentioned, Uh, just over quarter of all goods are transported by rail in the US, and that includes everything from consumer goods uh, to basic inputs that businesses used, really all businesses used, like oil, even like oil, like coole, like timber lumber. I mean, you name it, and it's probably on one of these trains that could be you know, stopping as as early as fatty if there isn't a deal reached. Um, the estimates in terms of the economic impact,

we got it. Goldman Sacks note just recently actually a new note showing that it's one point eight billion dollars potentially at stake in one week for the Class one rails. That's just in the first week of if there's a stoppage alone. Broadly, we have an industry group saying that it's two billion dollars of cost per day UM and that's for the entire U S economy, and they factor

in things like worker productivity and wages, UM. You know, all of the related organizations and companies that are involved. Because if you can't get goods on a train, you're not going to need people to take them off the train to get them onto trucks to get them then elsewhere. So the costs are really going to be adding up every hour of every day. No pressure, President Biden and your team. UM, let's talk about that. Because US Labor

Secretary Marty Walsh has been holding conversations. You've been posted outside the US Labor Department today. What do we know about those conversations? That's for Yeah, I'm here right now. The conversation started just after nine am this morning. So it's the two sides, the railway companies and the representatives

and the unions. UH. And then Marty Walsh and his team kind of acting as the the broker middleman and and as you just said, I mean, the stakes are high and there's a lot of pressure to get a deal across. So what we know is that they've been talking NonStop since this morning. Uh. You know, at one point we were supposed to get uh some commentary from the secretary. We still expect that at some point today. Um, but he hasn't been outside the building yet. Uh. And

they actually kept negotiating all through lunch. So according to someone familiar, uh, they just ordered lunch in and and continued talk all throughout that. And you can tell from from that kind of a pace of talks that this is this is pretty serious. We're getting down to the wire.

TikTok though when we look at the clock. Um, Under the Railway Labor Act, right, Congress can step into the imposer resolution based on a Presidential Emergency Board plan that was submitted in August or order the trains to operate as usual while the two sides continue to negotiate. So is that likely to happen even if they don't come to some agreement. Yeah, that's right. That is that continues

to be an option, right. So that's what they did in in the ninety nineties to avert a real strike back then, which would have been equally as as catastrophic to the economy. UM. And politically that's still an option on the table, UM, but as my political colleagues and White House colleagues have reported, it's not necessarily something that they want to do. UM. The ideal situation here is that they come to an agreement the two sides and uh,

you know, hopefully hammer something out. But as far as right now, as far as we know, UM, you know, the likelihood of that happening right this minute is not high. I mean, we had another union, a smaller union UM involved, find out a press statement earlier today saying that they don't agree to the current deal and UM are kind of holding out UM and could strike later. So uh, yeah, a big goal, Kata. How big is the delta between what the rail workers want and what the companies are

willing to give? In thirties in the last thirty seconds we have, Yes, Well there's a lot of thirty seconds. I mean there's that, there's wages, there's the ongoing wages and benefits issues, but I think scheduling is the is

the top thing. So you're hearing a lot from both sides with the companies saying, you know, we're giving a lot as we can on scheduling, and then you hear the unions and the workers saying, well, actually, we need more flexibility and we need more, um, we need you to give more, essentially, and that's that's really the main sticking point here and probably exactly what they're discussing right now.

And we do want to mention we have a headline crossing Amtrack is canceling all long distance trains starting September fift so, UH talk about some additional pressure, certainly on our individuals in the United States as well as our economy. Katia dmitriev uh US Economy Report at Bloomberg News Outside the US Labor Department. You're listening to Bloomberg Business Week with Carol Messer and Bloomberg Quick Takes Tim Stinovic on

Bloomberg Radio. This is one of those stories that we have come to love Business Week for It's one that taps into some of the big themes of our time but may not be on your radar but should. And Tim, it's about a prime spot between Mexico's industrial capital and the US board that's become a haven for Chinese manufacturer. It's in Monterey, Mexico. It's if you look at a map, it's just south of the border with Texas. Uh. It's an area of the country that has really changed a

lot in just a few years. Writing about it in Bloomberg business Week Magazine, as this issue is actually this is story is gonna be featured in the upcoming issue of Business Week Magazine. Read it now though on the Bloomberg and at Bloomberg dot com slash business Week. The editor of this piece is Christina Lindblad. She's Global Economics editor. She's with us in the Bloomberg Interactive Broker Studio. Also here is Joel Webber, the editor of Bloomberg Business Week.

You can follow him on Twitter at Joel Webber. Show this area of Mexico, northern Mexico, just south of the border with Texas. What did it look like a few years ago? Joel? Well, it was a little quieter than it is now, with fewer factories. And uh lo and behold. Uh, China became very interested in sort of a side door to the US there, and so we have seen an explosion of factories there and uh it is effectively a workaround of Trump's tariff policy, which the Biden administration is

basically kept in place. Um. And so it's interesting about that is that you know, you basically have gained the system. Uh. And so things going forward may not be manufactured in China as before you find some cheap real estate uh in other countries. Mexico is not the only version of this, but certainly the closest to the U. S UM. So, how's this, how's this working out? As uh as a little bit of arbitrage Christina, Well, that's the globalization as

always rash, right. So I think when we interviewed companies that are based in one particular industrial park that we focused on, they most of the Chinese firms preferred to emphasize the you know, proximity to the US market and this and this savings on shipping. But when pressed they admitted that, you know, for example, one furniture maker was facing taffs of twenty when they were shipping from China and now uh qualified for duty free shipments into the US.

What blew me away is how quickly they were able to do that, right, Like I always feel like when we're talking to CEOs and like, well, the shift you know, if we have to shift our production elsewhere, it's going to take a long time. I mean, they moved pretty quickly, and it reminds us that they are still the manufacturer to the world. Yes, and I think some of these

companies are pretty I mean, they're not all big. I mean one of the manufacturers is a really big manufactor in China, but like so they are nimble and they you know, um, as a policy, China has been basically willing to shed kind of low mar in manufacturing businesses as it you know, as it focuses on high end stuff like you know, new new fuel vehicles and biotechnology and semiconductors. So I think that the first wave went

to places like Vietnam. But now you know, you can see, like you know, businesses are moving further away, you know, from those comfort kind of locales where they first landed. And um, yeah, I mean I think what I thought it was kind of funny was that do you remember when Trump tweeted basically ordering American companies home, and I said, what came floating across like the Pacific or Chinese Chinese

plants didn't exactly work that way. I don't know, it seems like there could be like a way for the US to close this loophole. I mean, they know what these Chinese companies produce, and isn't there a way that they can say, Okay, well we know that it comes from a subsidiary of a Chinese company, and you're not sticking to the spirit of the role. Um, we're going to attack on that tariff. Do they want to? Oh? I don't know. I mean that might cause issues with the U s m c A right like the successor

to NAFTA. I mean, I think Mexico would have legitimate reason to say, well, what are you doing? You know, as long as they meet the content requirements, which they are and to do that. I mean, we should be clear that this applies a certain amount of effort on the part of these Chinese companies because they're having to source products from Mexico, could be even North America. There. They can't just import assemble everything from Chinese parts and

shipping across. Yeah. The other thing to keep in mind here, you know, Belt and Road is a very top down initiative in China. This is not that this is just grassroots, grassroots effort by Chinese exporters to be like, how do

we it's kind of simple, but it makes so much sense. Also, I mean, we talked to some companies that off the record explicitly said, part of the reason we're doing this isn't just cost savings, is that there's political risk, I mean policy risk rather in China in recent years, we've

seen like crackdowns in tech and other sectors. And so, you know, so we talk about the Mexico saidators to AMLO being obviously UM, the president of Mexico has been you know, very eager to try and get employment whatever there can be employment. How is this shaping out domestically for him? Well, the interesting thing is at the federal level, Mexico has never really actively courted Chinese investment because they

see Chinese exporters as rivals in third markets, right. So, but the state, at the state level, they like states have so Nueo Leone, which is where you know this particular industrial park, uh, and these are a lot of these companies are setting up shop. UM has has done and they're building a special road for example, from like

you know, the UH from the industrial park to the border. Uh. And so yeah, but I think that some people have said that Mexico might have actually seen even a bigger in the fall of this kind of investment if am Low was being less nationalistic on topics like energy and you know and things like that. But I mean, this is great for Mexico, right, Like the number that really jumped out at me here is UH near shoring. UH could boost Mexico's exports by thirty five billion year, a

bit over seven percent. I mean that's like real asformative. Yeah. Also, I mean while the Chinese investment, like like the most recent figures five million dollars a year is not huge, there is there are a couple of deals that could happen this year that would be transformative that that we're talking about billion dollar factories. One of them is there an e V engine maker that's looking at two different sites in Mexico. And those kinds of investments pulls supply

chains you know around them. You know, so that kind of that kind of thing I think would take it to the next level suppliers that play into it. Hey, um, you guys point out in the story, though Chinese companies aren't the first to seek shelter from US, Terra Japan did. It went back in the similar playbook when Reagan started layering all these different restrictions on Japanese cars, and then when NAFTA took effect, they saw, well this is a

great export platform now. But I think it's interesting right in terms of the globalization conversations that we're having about what's going on. What I forgot about that? We haven't talked about that forever. An the way I think about it, Well, we didn't use the word friend shoring. Friend shory. Yes, that's when you go to friendly countries like you know, I haven't heard that refriend shoring where you can have a special edition on Won't Talk, Stay tune to come

all right, we gotta go, guys. Jill Webber, editor of Bloomberg Business Week here in our Interactive worker studio, and Christina Limblad, she's Global Economics editor. This story, it is a Bloomberg Big Take, and it is in the upcoming new issue of Bloomberg Business Week magazine. It's un newstands tomorrow. This is Bloomberg Business Week with Carol Messer and Bloomberg Quick Takes. Tim Stinovic on Bloomberg Radio, Well shares of Walmart.

I think little change down the day at list. When I checked at last this is the world's largest retailer, gets ready to offer up checking accounts. Yeah, this is a really interesting story. Jenny Seraine is with us. She's finance reporter for Bloomberg in here. She's with us in the Bloomberg in her active brokers. I mean, it kind of makes sense. When you know a company like Walmart wants to continue to grow, it has to get into other parts of business. The question that I have is

who are these checking accounts meant for? These bank accounts been for? Walmart has more than one million employees. Have they been kind of like trialing this with the employees? What's going on here? Yeah, so that's what we're actually expecting to see in the coming weeks. UM. So Walmart last year actually set up this outside fintech startup UM, and they've been super secretive up till now, and we're basically expecting them to roll out these new bank accounts

UM in the coming weeks too. For now, a small set of Walmart's employees here in the US, and even UM a small percentage of their online shoppers. So it's kind of in test and learn mode right now, but pretty soon, UM, they are expecting to roll this out to one point six million Walmart u S employees and all Walmart shoppers as well. First of all, kudos to you. It's an exclusive. It's among the most read on the

Bloomberg so really really well done. What's interesting to me, and it also speaks to me that it's they're going after what many would say are an underserved part of our population when it comes to the financial infrastructure here. It's it's kind of super smart. Yeah, I think that's exactly right. Walmart is very keenly aware of what all of its customers really need and kind of the gaps that can be filled, and so they've talked a lot about how they want this to be something that's affordable.

UM So you can, you know, imagine that there probably won't be lots of fees attached to this new account. Um. So yeah, I think it's a very interesting move for them. I will say they've tried this in the past, so this is not Walmart's first foray into finance um and they haven't always been successful. So I think they're taking another back at it. They're trying to go a little bit more digital, a little bit more flashy. So we'll

see if this time makes a difference. How long ago was their last attempt do you know it's it's been a while. So they currently have a bevy of financial services products, so you can get a relttable debit card,

you can change money. The reason the reason I ask is because we're in a mobile first world right now, and that's a big part of the you know, quote unquote disruptors who are coming into fintech and Jenny, you've written a lot about these companies, like, you know, companies like Dave and Chime and other one word you know, so called neo banks. Right, So, even though you know it could be a smart move from Walmart, this is a really crowded field already because a lot of companies

are going after that underbanked consumer. Yeah, no, that's exactly right. I do think the fact that they so one of the big problems facing those other companies right now is they have to spend so much money acquiring customers. And these guys have kind of the built an advantage. You know, they've got the world's largest retailer with five thousand plus stores ready to advertise this, put this in front of their shoppers, put this in front of their employees. So

that helps a lot. It means their expenses will be a lot lower um and maybe they can spend that money on something else. All right, can I can I just share with the audience that before we got going, you and I were talking, we're talking about Shark Tank that while I was home, I kind of did a little bit of a deep dive and did a little bit of binge watching. I like Shark Tank, but Shark Well, it's fascinating because this is so much the backbone of

our our our country and our economy. These all these small companies, but so much they talk about customer acquisition, and I think if I am an individual and I shop at Walmart, I know the brand, It's a company that's been around for a long time, and I would be first of all comfortable with it. And then I think about for Walmart, right, they're right there. It's not going to cost them a lot to get to these additional customers for financial services. Yeah, no, that's exactly right.

I mean, I think the one of the most interesting stats was Walmart has more locations than most of the major all four of the major biggest banks in the closing them exactly. So you know, if you're really thinking about a subset of customers who will mobile first, do like that kind of in store experience, this kind of chuck saw the boxes for them. Okay, so well, I don't know it just dumbfounded that I like did a deep deve on shark Tech. Ye, JENNI are bonding on

this anyway. Jenny like Shark Tank too. I know it's fast. Everyone like Shark Tank. So so what does this end up looking like for Walmart's bottom line? Here, because this is something that investors certainly want to know about it. In the past, large companies getting into financial services didn't always end well, I'm talking about you know ge. Yeah, no, that's actually a great point. I think the way they structured this is super interesting. So they set up this

outside fintech. It's completely independent, um, but they are the majority owned shareholder or majority shareholder, and they're also a lot of their executives around the board of this outside fintech, so they have a vested interest. But it is a separate effort. So I think we'll see I can't imagine that like right now, the financials are what's most compelling.

I think it's the idea that when you're a consumer, you can go to Walmart now and basically get anything not just you know, your groceries or your gas, but also your bank accounts. So it's Amazon model, right, Like, you've already got how many users embedded in your system? What else can I offer them? I actually think a bit more of like the Ali Baba model, because that those guys really started out in retail and then slowly

branch their way into every other thing. And um, so you're starting to see those models kind of make their way here in the US. But it makes so much sense, right, You've already got this installed base, and like, how do you how do you monetize it even further? Um, As we said, it's an exclusive thanks to our Jenny Surrene, finance reporter at Bloomberg Music is among our most read

on the Bloomberg. So if you want to read it and it's entire to be sure to check it out and check out Jenny also on Twitter, She's at Jenny Surrene. I'm bro journal. Yeah, but you let me drive, no novels. I want to drive. It's a good question. Good drive ride to the clothe bloom Bird radio all. I just got about ten minutes left in today's trading session. Yep, chopping and sloppy is how Charlie Pellett called today's trade. And it's really accurate. We're bouncing off our lows, but

well off our highs. Call it little change tim overall for today's equity trade, you're gonna hear what Megan Horneman has to say, Chief investment officer at Verden's Capital Advisors. Megan this afternoon, joins us on the phone from Hunt Valley, Maryland. All Right, Megan, you've had twenty four hours to breathe that after yesterday's route, certainly a different story in today's equity markets. Um, I mean, how are you looking at this?

Are you looking at today's trade? Well? I think today you're going to see and and even up to the FED meeting, you're going to see a lot of this chopping. Is it's just going to be an ugly market over the next week, the markets just waiting for that FED report, and then even between now and then, we have quite a bit of economic data to digest. So I think you're just going to see a very sideways choppy market until we get a little bit more clarity on exactly

what the Fed's gonna do. Hey, Megan, what do you make of You know, we were talking earlier with some of our TV colleagues about the significance of you know, we had quite a route yesterday, very impressive, uh, the SMP basically giving back all of the games that had made in the previous four sessions. But we didn't see a huge surge in the VIX right the fear gage, which some meant to mean that maybe the sell off was a recalibration of those expectations rather than panic selling.

How do you see the VIX again down almost three quarters of a point today? Yeah, I think you're exactly right. The fact of the matter is that the market continues to be in this whipsal mode where you know, something like that CPI report comes out and then they readjust the expectations for the federal Reserve. The risk I see right now is yes, that the VIX still hasn't really spiked up. You need to see that VIX much higher to say that we've really reached that full capitulation mode.

But forty, we need to hit fourty or what I think you need to hit forty consistently and stay above that. I mean, we haven't been above hit forty since the pandemic, and we've seen quite a bit of daily moves, some daily volatility, but we haven't really seen it translate into that vix. That's what we want to see to say, hey,

we might be getting in this capitulation phase. Yeah, Carol, were you the one who said a few weeks ago that with all the economic data we get and then the FED, it's like we're jumping from stone to stone in the pond. It's like a little kid, you know, skipping stones across a block. That's what it feels like here, because it's like, and I hear time and time again, Megan, it's like, Okay, we just wait for the next data

point and then we're gonna get some clarity. We wait to hear from the FED, and then we're gonna get some clarity. But it seems like every time we get to one of these other stones, as Carol's sort of metaphor points out, we're still waiting to jump to that next stone. I mean, what are we going to start to see like a good understanding of what's coming in the U. S. Economy? I think we have to get a little realistic and there's certain areas of the market

that I don't think are realistic right now. For example, earnings haven't been translated. The weakness we've seen in the economic environment as well as what we expect over the next year isn't really fully reflected in the earnings expectations for this year and next year. And then when you look at the FED funds futures market, they're looking for prem FED rate cuts as early as the first half of next year. The FED flat outside they're not going

to do that. You said, they're gonna keep hiking and then they're going to stay there. So I don't understand it. It really doesn't make a lot of sense to me on how the fixed income market can be translating this into FED cuts as soon as early next year. As long as that continues that there's not realistic up expectations in fixed income or earnings, you're going to get see

this whip songing along with economic data and FED rhetoric. Yeah, and think speaking of going from you know, the point to point stone to stone, I think about going from earnings to earnings, and I am curious again when we get to the next earnings round, Megan, what ceo s and their teams have to say about the outlook and what it means for a reset in terms of earning the growth, revenue, growth margins, what kind of pressures we continue to see in whether or not that leads to

evaluation resets. And I think we've got to look at what they're doing for the future. So I think you want to hear not just about you know, what interest rates mean, but are they going to slow down hiring? Are they cutting jobs? We're starting to see that now already, especially from some of these mortgage related jobs. You're already, you know. I feel like every day we have a company that comes out and says and maybe some of them are very company specific stories, but nonetheless we talked

about it with a lot of the big tech names. Right. It feels like we went through a period to him where it was every big tech name talking about slowing hiring, right, And maybe we'll see this reflected intomorrow's you know, weekly jobless claims. But you know, you know, Megan, we're still not seeing the weakness anecdotally that we're hearing from these companies reflected in the monthly jobs reports, right, And again, I think that's going to take time because we still

are dealing with a pretty tight labor market. I mean, you have almost two jobs out there still for every one person unemployed. So there's still is a very job plentiful environment. I don't think you're gonna see that really translated into that job. There's jobs and numbers, and we hope it that we don't. That's why some people are still holding onto the soft landing environment over the next year, because we do have such a good labor market. All right.

So as I look with about five minutes to go in today's trading session, we're seeing some buying into the clothes um kind of a straight lineup. We're still just up about eight on the S and P still down about twelve on the Dow, twelve points that is an up seventy two. So but again we are seeing some buying into the clothes. Megan, what should investors be buying at this point in your view? So, what we've been looking at is those areas that have really reflected at

a lot of the downside risk. So and I would avoid some of those you know what they call your growth at any price, those very expensive tech growth memes. I think there's still is some more discovery for them from evaluation and intence like, what are some names in that category? I mean, I wouldn't. I would just look at the sector as a whole. I'd be I'd be cautious there at the sector as a whole. We have not seen that really decline as much as I would like.

I would also focus on those areas, like you're small and mid cap stocks that they've been very underloved. We've started to see aside from yesterday, some bottoming there in the in the Russell two thousands, so I think that you're starting to get some people coming in buying there because again they were pricing in worst case scenario down. So I would focus on that right now, wait for the large cap space to wash itself out a little bit more, and then maybe look at some area's there. Yeah,

like the SMP that down the nestack. We are seeing investors moving into the Russell too. It's up about one quarter one percent right now. To look at that, well, you know, up and down. Um, you got me thinking, Carol and pulling up the comp function on the Bluebird terminal looking at the the Russell two thousand because it's kind of unloved. Yeah, absolutely, can we often talk about it? Um? Hey, Megan, Um,

what what keeps you up at night? Here? When it comes to the investment out looking just got about five seconds, Um, fiscal policy leave it right there. Okay, Yeah, that's a lot. That says a lot, um, Megan, think so much. Always fun to check in with you. Megan Hornaman. She's Chief investment Officer at Verden's Capital Advisors. They are a wealth advisory and multi office, multi family office firm. Joining us

on the phone from Hunt Valley, Maryland. Funny to hear say fiscal policy when you know monetary policy is also keeping a lot of people up right, A lot of policy keeping people up at this point, doesn't matter if it's taxes or interest rates, it's keeping people up. Thanks

for listening to Bloomberg Business Week. Download the podcast on iTunes, SoundCloud, or Bloomberg dot com, and you can also listen to our radio show at two pm Eastern on Bloomberg Radio or watch us on YouTube search Bloomberg Global News