Bloomberg Audio Studios, Podcasts, radio news. This is Bloomberg Business Wait 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 Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
Tim, let's get to one stock that is definitely on our radar big time.
Yeah, that's Starbucks. The stocks soaring the most ever on an intra day basis as the company's board orders up a half cath latte with a new CEO. And that CEO is one well known to the fast casual space and with writing a ship that's got some pretty big issues.
It's an individual that's really well known to us. It's Chipotle CEO Brian Nicol. We've talked to him a lot. Named the top job at Starbucks, will take over as CEO on September ninth, replacing the existing CEO, who was ousted after less than a year and a half at the helm. Through Monday, shares in the coffee chain had plunged twenty percent this year, following two straight quarters of comp sales declined. Shares of Starbucks, though right now we're
up twenty two percent today. So let's get into it with Bloomberg News consumer reporter Dina Shanker here in studio, and also with us is Bloomberg Intelligence senior credit analyst Jody Lori in Bloomberg Got Intelligence headquarters out in Princeton, New Jersey. Dina, I want to start with you to the news. What do we know? What does this mean for Starbucks? And what the Chipotle CEO, who will soon be the Starbucks CEO, Brian Nicol brings to the table.
Well, one analyst called him a dream hire.
For CEO I believe was the quote.
He really turned things around for Chipotle, and Chipotle is just outperforming the rest of the restaurant industry. So yeah, if you're sitting in a boardroom of a restaurant company and things aren't looking so good and you're like, who can save us?
He would probably be at the very top of the list.
So that was a great hire for them and any someone who's also had to deal with a company that was under stress for many years, had to beef up their digital strategy and came to the company.
I'm thinking about Chipotle just as the pandemic was hitting and so he really had to learn how to kind of shift the ship, if you will, at Chipotle, and he's kind of got to do some of that here.
Yes, definitely. I Mean, one thing that all of these restaurant companies deal with is productivity and how quickly can they turn an order into food and put that food into a customer's hands. And Chipotle has really improved on that. Starbucks really needs that kind of improvement. So I expect that that is going to be a big priority for him once he takes the job.
Hey, Jody, come on in here. Just because Brian Nichol was able to succeed so well at Taco Bell before going to Chipotle and then totally exceed expectations I think of a lot of investors of Chipotle as well, doesn't necessarily mean he can do the same thing at Starbucks. What are the challenges that he faces at Starbucks? Given the environment over the last couple of years.
I think there's actually quite a few challenges that they're facing. I mean, first of all, they have a reputational risk, right They've gotten hit by different headlines over and over. So first you had the union issues, then you had the grassroots effort to sort of, you know, rake Starbucks through the mud as it related to Middle Eastern conflict.
And then you now have China, which was sort of their investment arm where they were kind of going to next and so all these sort of components just ended up in not the best situation for them. So I think what they're really hoping is that he will provide that expresso shot that they're hoping for that the prior CEO didn't quite get a chance to do over the past year and a half.
Jody, what does the Starbucks balance sheet look like?
Starbucks balance sheet? So, taking a step back, the company, you know, went through the pandemic, like all other companies, took on a bit of debt to have a little bit more cash going through the pandemic, and once the pandemic ended, they focused on deleveraging. They got leveraged below
three times, which was their target. But now the expectation, if you look at MODL on the terminal, the expectation is that it will hit to three point four to three point five times by the end of the fiscal year,
which is September. So definitely a reversion from where they were in terms of improving the balance sheet that said, it's not a company that we're necessarily worried about at the moment, being a triple B company, but it could be an issue as activists get involved and as management sort of gets creative and how they turn the company around.
Okay, so let's talk a little bit about how the company gets turned around, Dina, and think about this from the perspective of you know, a company that I think, for a lot of people, over the last thirty is ish years, reinvented the way that coffee was consumed and delivered here in the US at Taco Bell, Dorito's, Locos, Taco at Chipotle did a lot, as Carol mentioned, with digital. Starbucks already has a robust digital platform and it has for years. There's the China element too, and the weakness
that they've seen in China. What are the challenges that he has to overcome to turn Starbucks around.
So one thing that I think is particular to Starbucks that he has to think about is that one of the ways Starbucks really differentiated itself out of the gate was they were going to be committed to high quality coffee. When they started to branch out into lots of other things like music and movies and Teddy Bears in the restaurants.
Howard Schulz came in, came back and said, you know, we're a coffee company. We're going to focus on coffee.
We've now seen them once again branching out into lots of other things. They have lemonade refreshers, they have energy drinks, but.
A lot of people like those.
So I am really curious to see how new management wants to what direction they want to go, and do they want to go back to basics what worked wants or do they want to see what's working now and then maybe cut the fat.
I don't know.
We'll just have to wait.
And see new management. But yet they've got someone who has been associated with the company for a long time, and I'm thinking about Howard Schultz. He's not on the board, doesn't have a board seat, doesn't have a formal role with the company, but he's Starbucks' sixth largest shareholder, and obviously, you know this is his company, and for better or
for worse, perhaps his involvement. I mean, is it is that a good thing for him to still in terms of understanding this company, or is this a case where you have to have an outsider who under understands DITA the fast casual space kind of do his thing read new Blood.
I think the real question is whether the whether a new CEO wants to stand up to Howard, because just as an outside observer, it seems like Howard really likes to share his opinions on the company.
And come back to the company.
They come back in return over and over again, and so you know, they hired someone really strong. So hopefully Howard will take a hint and keep some opinions to himself, or at least give them a chance to run with some things.
And apparently Howard Schultz had told Melody Hobson, who was on the Starbucks board, that I guess she had told him about a week ago about her decision for Brian Nickel, and that Schultz apparently said, Melody, that's a home run. So she seemed he seems to like it. Jody, how do you think about this company? Obviously you focus on the balance sheet, understanding the finances and kind of what needs to be done there, but you know it all goes back to management and how they manage, and that
will ultimately play out in the balance sheet. How do you think about the leadership of Brian Nickel, maybe what he did at Chipotlet and what he can maybe do here or has to do here.
So I think we have to take a step back and think about when he was actually at Young right, he was the Taco Bell CEO, So granted he was not the Young CEO, he was not at the home. However, he did ride through the spin off of Young China. And I can't say that that's necessarily the direction that Starbucks is going. I mean didn't see that at Chipotle, but it is something that sort of lurks in the back of my mind of Okay, what's management going to do?
And if you remember what happened with them, not only did they spin off YM China, but they took that cash and.
Gave it to shareholders.
Now, Starbucks before this, going into this, had a three year plan of giving back to shareholders twenty billion dollars and they had the cash flow for it to some extent, but you also thought, okay, some of it might be financed with debt. And so I think my question is is do they pull back on that and go full on kepex? Do they get creative with how they sort of deal with licensed versus owned stores, you know, their
international business versus their their domestic. I mean, I think there's a lot of different avenues that he can look at. Never mind, of course, you know, the the transition into things like dorritos, locos, breakfast sandwiches.
I don't know, late, it doesn't really lat yeahs, I'll take the coffee upstairs. All right, guys, we got to run. Thank you so much. Bloomberg News consumer reporter Dina Shanker and bloom Intelligence senior credit analyst Jody Lori shares of Starbucks hovering, you know, their best levels of the session of almost twenty two percent. On the flip side, you've got Chipotle Mexican grill off its lows, but tim still down about seven percent.
Yeah, it was Donalds, which is fourteen percent. Scott Boatwright, the COO, was named Chappole's interim CEO. So we'll follow that company and let you know any developments there when it comes to their executive suite.
You're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from two to five pm Eastern Listen on Apple car Play and then Brout Auto with a Bloomberg Business app or watch us live on YouTube.
In Nantucket, there's a growing sense that the roughly fifty square mile island has become a casualty in the push for cleaner energy. So any accident, however minor it might be, involving the nearby farm, was bound to become a flashpoint in the broader fight over win.
And that's exactly what has happened. Here to talk more about the Nantucket rage over a broken wind turbine blade is Bloomberg News Energy and climate disasters reporter Josh Saul. He's here in our studio. Before we get too far into this, remind everyone what happened a few weeks ago on Nantucket with this accident.
We'll do. And I just want to mention everyone who can't see me. I did wear my Nantuckias sweater. It's pretty good, right, pretty good. No Nantucket red pants, though that's true. That would be a whole other step. Nope, just the Solomon's, just the dad shoes. So exactly, exactly one month ago, one of the blades on the Vineyard wind farms. So this is a big, big wind farm. It will eventually be sixty two wind turbines, each as big as the Eiffel Tower with the Statue of Liberty
on top of them. Will one single blade fell apart and fell into the water, and pieces of that were floating in the water. Pieces of it eventually washed ashore on Nantucket and created a real uproar on the island.
What happened though, beaches closed like what kind.
Of closed for a very short amount of time. People on the island were very angry. I likened it to annoy spill. It was almost like Jaws approaching the beach, like just a really big deal. And the federal government shut down both construction and electricity generation at the Vineyard wind Farm, which is still ongoing.
Okay, you're from Alaska, I'm from California. We've experienced oil spills in our day. Geographically, was this environmentally the same on the same level as an oil spill?
So far, it seems to be a lot smaller, a lot smaller impact. It definitely freaked people out, but we don't have any reports of dead animals. They're you know, in comparison, solid chunks of fiberglass are a lot easier to clean up compared to oil in terms of the way it spreads, the way, the way it sinks. So yeah, it seems like a much more small scale failure compared to an actual oil spill.
A couple of questions, I mean, how often are there accidents with wind farms. I'm just curious about the frequency of it. And also how important though, are these wind farms to power on the island in the region. How important are they?
Yeah, the so wind backers, the clean energy advocates view these is extremely important because what they're going to be doing is they're going to be sending clean energy, so carbon free energy to the shore kind of at exactly the times, like the windy periods of the day when
the grid really needs it. So you can have solar on land producing a lot of energy, you know, obviously in the middle of the day when the sun is up, but wind offshore can be sending energy in you know, in the morning and the evening and end at night when when that solar power isn't available. So it's seen as a really important part of the of the transition.
Josh, is it powered just to the island? Is it to other areas?
I'm just curious how far this stone actually the undersea cable will bypass Nantucket and Martha's vineyard kind of running right between them to the mainland, powering the equivalent, according to the companies, of about four hundred thousand homes. I mean,
these things can produce huge, huge amounts of energy. So instead of you know, instead of the you know, natural gas plants or other you know, fossil climate changing types of generation on land, while we would have you know, the offshore wind you know, these clean electrons right flowing there.
A big part of your story that you wrote along with Cam and the team at Bloomberg News has to do with the implications of an accident like this on other wind farm projects throughout the United States that are planned for the future. Talk a little bit about what's being planned right now, some community pushback to these and what it could mean to have an accident like this.
That's exactly right because under Biden, who said are very aggressive offshore wind target of thirty gigawatts by twenty thirty, there are a lot of other about of a total of eight projects in development something like thirteen gigawatts you know coming on, you know, and you can imagine, you know, a gigawatt is about how much nuclear reactor produces, So it's a lot a lot of clean energy coming on, but Vineyard Wind was really seen or is really seen
as kind of the marquee like kind of the first big, big project. There's been some very small pilot projects. There's a smaller a smaller wind farm off of Long Island built by other developers, but this was seen as kind of the first, like utility scale, like it produces as
much power as a big gas plant. And the worry is that even these kind of small even these kind of relatively small hiccups like this, produce so much anger, produce so much pushback against this new energy source that, especially with a Trump election, he could, as he said, come in on day one and kind of drastically change the landscape for these big projects.
I was thinking about that, how the outcome of the November presidential election, whoever is in the White House, that might determine the future path when it comes to wind energy, wind farms in the future, the growth of this industry or has the kind of horse left you know, the stable already.
The way we think about it, projects that are already permitted and in construction would be a pretty big deal for anyone, even a p is it to sort of you know, tear out of tear out of the seabed. But projects that are you know, still have any kind of permits left to get not particularly hard for a federal agency to drastically slow down or even stop that process. Trump said at a big rally in New Jersey, like
I would stop all this on day one. The worry with this is that the worry with incidents like this is that it just kind of makes it, you know, more at the forefront, more more top and hit, you know, in his mind or in his administration's mind. And just as Biden used presidential powers once he got to office to slow down or stop offshore gas and oil drilling, Trump could conceivably do the same thing with offshore wind.
One thing that I was thinking about in reading your piece, Josh, is that there's kind of no free launch or no silver bullet when it comes to solving the energy needs in a renewable way here in the US and around the world. And it seems like there has to be with every project some sort of given to with a community or with a location.
I think that's exactly right. No free lunch, no free energy, Like there's trade offs with all these projects, like you build, you know, even what we think of is, oh, a big solar farm in the middle of the desert. That's great. People who live nearby in Arizona are mad about, you know, all the desert tortoises being killed by the construction. And they're also like, hey, we like to ride our horses around here. It's more fun to ride your horses when
it's not a solar farm. Like basically, anywhere you want to build energy, there are these tradeoffs and that's you know, one of the conservationists we spoke to on Nantucket who said, by the way, like, yeah, this is completely changed turned the tide, but like completely changed how the island feels about it. Like the island is pretty united against offshore wind at least right now. And he said, you know, and he said, there's trade offs any and there's benefits and costs with any energy source.
You know, where does this leave Vineyard Wind?
Right?
This is the company behind the wind farms. And I also do think about like oversight. You don't want these things to fall apart. You want them to work, just like if you build a nuclear power plant, you don't want to melt down, Like you've got to make sure that there's oversight. Is there enough oversight or is it a company issue?
Is it?
What was it? And we just got about thirty seconds.
Here Vineyard Wind and then the turbine maker, Gieve Vernova have been very active about both cleaning and cleaning up debris and also checking checking turbines to make sure this doesn't happen again. This could change some oversight or the amount of money that companies have to put forward.
All right, something we're going to keep a watch on. Really good stuff, and the sweater totally appreciate that.
Thank you.
Josh Saul He is Energy and climate disasters reporter here at Bloomberg News. Joining us here in studio.
You're listening to the Bloomberg Business Week podcast. Listen live each weekday starting at two pm Eastern on Applecarplay and Android Auto with the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station Just Say Alexa playing Bloomberg eleven thirty Well.
Our Bloomberg News colleague Will Wade, writing this week that even as temperatures on Earth smash new records and scientists warn the climate is reaching dangerous tipping points, the amount of coal being consumed keeps on growing. The basic problem is simple. Whenever the security of electricity supply is in doubt, Will writes, the imperative to contain global warming slips down the agenda. Coal, we should notice, the biggest source of electricity.
It accounts for thirty five percent of the world's generation in twenty twenty three. That's according to Ember, a climate think tank.
All right, so Randall Atkins knows all about this. He's founder, chairman CEO of Ramaco Resources, a publicly held six hundred and fifty million dollar market cap company that produces metallurgical coal. It's the type of coal used in steelmaking companies, also, in their words, exploring domestic production of rare elf element rear earth elements, which is what we are super interested in to hear a little bit more about. Randall joins
us from Bluefield Coal Symposium in West Virginia. Randall, great to have you here with us.
Yeah, I just want to start with the nuance here because and this is what I wanted. This was a really important conversation that I had with Alex Steel ahead of this interview, because I don't talk about coal every day.
No you don't, but you guys were like going.
I did some research. I talked to Alex Randall. There's important nuance here. I talked about electricity generation in my intro. But when, because that's when we talk about coal that's used for electricity generation, we're talking about thermal coal. You produce metallurgical coal. So explain the nuance here.
Sure, well, as we say, first of all, we actually have come up with a new name. We don't call it coal. We call it carbon ore because we essentially approach it as to what its use is being from an underlying perspective. So you're absolutely correct. There's sort of three legs to the stool, as we call it for
coal use. One is obviously for combustion and power, one is basically to make steel used in blast furnaces, and frankly, the third and somewhat less understood use is what we call advanced coal products and materials, which also include critical men roles in rare earth. So that's that's sort of what we've been paying a lot of attention to for about the last twelve years.
Randall, Can all coal be each of these three?
So, in a simple answer, all cold are not created equal, so they're distinguished by chemical properties, and the chemical properties then somewhat dictate their best and high issues. But what we've discovered, at least for the third use coal to chemical coal to advance carbon products and materials. Those can be made from either thermal or met coal.
Okay, so let's move to rare Earth's and talk a little bit about what's going on in your mind where you acquired it for several million dollars. But there was this fascinating story in the Wall Street Journal back in the fall about how if everything sort of goes in your direction, there could be tens of billions of dollars worth of rare earths in that mind. What's going on there?
Well, the greatest expression it's better to be lucky than smart sometimes, isn't it. So we bought this old thermal coal mine, and frankly, it took about a year and a half to figure out that making a new thermal coal mine for utility use was somewhat of a losing proposition to deploy capital on. So we pivoted and frankly took a technology route to try to figure out what
else coal could be used for. That brought us into touch with a couple of the Department of Energy National Labs, and they worked with us on not only carbon products, but we're exploring, frankly, on behalf of the Defense Department where rarers might be found in the US. There's always been a thesis that they could be found in coal, but it had never been shown or proven. So we sent them some samples, took them about a year and
a half, lo and behold. They come back and said, look, we found higher concentrations of rare earth in your deposits and any place we've seen outside of West China. So that's put us on this odyssey to where we stay today, where we're hoping to actually be in a position to start a demonstration facility next year to actually go into production and refining of rare earth that we already have a permit on that come from coal and the carbon
material sort of around it. Most rare earth comes from hard minerals uraniums, cobalt, so lithiums, which frankly are radioactive when you mind them, and so that's why all the rare earths, frankly are sent to China for processing, which is sort of self defeating. So if we're able to actually produce rare earth from coal here in the US and process them here in the US. That's going to be a distinct advantage.
Randall, I'm wondering if it's fair to say that, if everything goes according to plan with the mine that could have rare earths, would you move away completely from traditional coal mining.
Well, I think the interesting thing is that it's frankly one and the same in our case, because we're mining the coal to get to the rare earth.
So, yeah, explain how that processing exactly works. I know you mentioned that glad to be previously sent to China, but how do you pull it off here in the US.
Sure, nothing simple, But the way it works is we basically mine the coal. The rare earths are actually contained in minerals in the coal, So what we would do is then process the rare earth out of the coal by frankly, a paralysis or a heating process, and then do various forms of separation. So, in essence, even though we're still in the coal mining business, the end product is really rare earth.
I'm looking at a stat that says China produces sixty percent of the world's rare earths but processes nearly ninety percent, which means that it's importing rare earth from other countries in processing them. So what you're saying is we not only have to produce them, but we have to process them. That that's really important. What I'm curious about is what's the potential of your mind, what's the cost to bring
it to potential? And what are the guarantees that you can actually spend the money and get to that potential.
Sure, but to kind of break it down, you know, what you do in a mind of this nature is you go through a fairly complex technoeconomic analysis which you know breaks down not only the mining but also the processing and refinement, and you know, discover what each part of that component production costs. Will have that prepared by the end of the year with Florin Company, who's kind of advising us on that, we've got a pretty good sense of it right now, so we know that we
think it is commercial. We obviously want to get down to the detail because for the public company we start throwing numbers out, we want to have some independent confirmation.
But we think it will commercial basically even at today's prices, which are a little bit manipulated by China who tries to keep all the competition out off the off the field, and if we're able to do this and process it in the United States, needless to say, becomes very important strategically because frankly, as I was just saying to this group here, you know, when the Defense Department needs to get rare earth for our hypersonic missiles and drones, they
unfortunately at this point have to call a procurement office in China, so that doesn't always work out quite well.
So what's the potential in terms of this MIND and what it might produce and what it might be worth?
Sure, so I think the initial numbers we have were that it got probably north of a million and a half tons of rare earth, which are concentrated mostly in the heavy and medium magnetic rare earth, which are the more valuable. For some context, the US uses only about ten thousand tons a year, so if we've got a million and a half plus, it's a long term supply.
So I think, you know, that's that's the critical advantage that the government is trying to insent us to pursue this MIND because it could solve potentially a lot of supply problems. And then in terms of the ultimate value. You know, needless to say, rarer earth sell for a great deal more than a ton of coal. Some of the critical minerals and rare earth we've got sell for
around a million dollars or more a ton. So compare that the coal that sells for thermal purposes out with for fifteen dollars a ton, or even metaur allergic coal for say two hundred dollars a ton, and you get kind of a sense.
Hey, Randall, we're talking a lot about the government, and one thing that comes to mind is what a change in administration would mean for your company. How are you thinking about the election?
Well, needless to say, in general, uh, as somebody who's you know, a student of the coal industry. Uh, times were a little bit more comfortable under Republican administrations than they have been under democratic administrations. I would say, you know, the main pushback, of course against coal is its use as a combustion fuel. There's less pushback for metallurgic purposes, and frankly, for rare purposes there should be none at all.
And I think the interesting thing, uh, you know, administrations may come and go, but as far as the strategic requirement, particularly for rare Earth. I think that cuts across political boundaries. So, uh, you know, obviously, uh, we're already permitted, we're in the process of you know, starting our initial development and uh, you know, we'll we'll deal with whatever you know, political landscape is out there.
Hey, Randall, the elephant in the room here that I kind of opened with this is climate change. And we it's it's it's own that coal is the dirtiest of fossil fuels. And I'm wondering how you think about that in terms of you know, quote unquote clean coal. How do you make burning coal release less emissions? Is that possible to make clean coal?
Yeah, well, we basically have come up with, you know, a lot of one liners, one of which is coal is too valuable to burn. Another, which is what we call the cure for coal, And essentially the cure for coal is that you've got to do several things at once. You've got to basically have a solution that speaks to
the decarbonization of the commodity. You've got to do something that basically, you know, supplies the value proposition or greater than it does now, and you need to be able to supply that in volumes that you know, make it sense for the coal business. That's why we've kind of turned to this use of coal as a precursor to
make advanced carbon products and materials. These are things like graphite, synthetic graphite, graphene, carbon fibers, a lot of things that historically have been made from petroleum, but you can make them chemically from coal, and you can make them from coal at a vastly lower price than using petroleum. The interesting stat is that there's the same amount of carbon and a ton of coal as there is in a
ton of petroleum. A ton of petroleum is like seven barrels, So you use eighty dollars a barrel, you're at, you know, five hundred and forty million permanent five hundred and forty dollars for a ton of carbon versus fifteen for coal. So when you think about use of things like carbon fibers, which have properties that are frankly, yeah, superior to steal in terms of lightweighting. Okay, that type of thing, it's a fairly compelling economic argument to use coal.
All right, We certainly could continue. There's lots more, certainly when it comes to environmental impact, but hopefully now next time Randall Atkins. We hope you can continue this conversation, founder, chairman and CEO ram A Co Resources. This is Blueberg brother Marco.
Journal.
How about you let me drive?
Oh no, no, no, no, honey, please, how do the riding gravels?
Let's mate, I want to drive.
It's a good question time.
This is the drive to the Globe.
Dot com for me.
I think we'll buy around on Bloomberg Radio.
All right, everybody, eighteen minutes or so.
To go until we wrap up the Treaky Friday. No, it's not freaky Friday.
I don't know.
I don't even know what to call it.
Taco Tuesday.
I'm looking for a Taco Tuesday. Thank you so much. Thank you to Pole. Moving on to Starbucks. All right, we're pretty much hovering near our highs of the session. We've seen investors move into both stocks and bonds, which doesn't typically happen, but here we go on this Taco Tuesday. So let's get to it with Aaron Cannon, co founder and CEO over at Clear Harbor Asset Management. They've got one and a half billion in assets under management. Joining
us once again from Stanford, Connecticut. Forgive us. It's a little bit of a wacky day, Aaron, how are you.
I'm doing just fine. Thanks for having me back well too.
We're hanging in there. The recent bat of volatility a week ago or so, we would have been having a very different conversation the three of us. Was that volatility that we saw one week ago yesterday noteworthy or to be considered expected considering the run up that we've seen in the overall equity markets and in particular in some specific names.
Well, that's a great question, Carol. I think at the end of the day, we're at a point of transition on a monetary policy front, and we may be at a point of transition on an economic growth front. And we know what we saw a week ago was a huge sort of shuddering of markets, and really what sparked that was a major transition in monetary policy in Japan. And you know, I think that while our economic picture
is decelerating, there's hope for a soft landing. We've seen nice disinflationary trends which are now leading the market to conclude that the FED is going to cut rates in September. They're even calls last week in the middle of the spike in volatility, to sixty five on the Vicks for the FED to cut inter meeting. But I do think the Fed should should cut, and I think they should probably start when they said they will, which will be September.
And I think where maybe there's some nuance that may be helpful to ponder is the degree to which the US dollar relative to the end could trigger another round of yen unwinding, the yen carry unwinding, and certainly monetary policy officials would would not welcome that, neither would investors.
And so that leads me to think that maybe the FED cuts in September, but it's a much more gradual cut unless the economic data really surprises significantly to the downside here in the US, so as to not you know, have a huge gap between rates in Japan relative to the United States, and therefore have the end be in
a position where will really appreciate quite significantly. We had a nearly eleven percent appreciation in the end just over the last couple of weeks, and I think that was, you know, to a great extent, what has triggered us so much of that volatility that we saw last last week.
Aaron, when you say gradual cuts, do you mean twenty five basis points at September, and then maybe two more twenty five basis points pass point cuts, so you have seventy five BIPs by the end of the year.
Yeah, and again I'm sorry of making this point that if the Fed is of the view which I'm sure they are, that yes, they have a dual mandate, but they have to think about what happens to employment and what happens to pricing, if volatility were to spike, if investors were to become rattled, if consumers therefore were to
become rattled as well. And so while I would be in the camp of, you know, without having to worry about the n on wine if that were not an issue, or global capital markets more generally, of maybe something more aggressive approach to cutting rates over the next quorder to two maybe they'll they'll they'll perhaps be taking their time so as to not alter this sort of relationship in
dollar end to any great degree going forward. We know the Bank of Japan essentially signal to the market after the twelve percent slump in the NICK just one day last week that you know, may maybe they'll be a little more cautious. They won't hike rates as aggressively and so that was an interesting marker across the pond for sure.
So I am curious to aaron our pullbacks opportunities to buy are are they time to rethink kind of your acid allocation?
I mean, I always think, you know, when in the context of an overall sort of multi asset class portfolio for types of clients that we manage money for here at Clear Harbor, sort of the high net worth ultra high net worth, non for profit clients, you always want to know what's your target allocation? Are you under that at the position level, at the asset class level, are you over it? Is there a time to sort of rebalance?
And oftentimes when there's a market swoon like that, it's a time to sort of think about, you know, adding to things that perhaps you were slightly underweight. It's also a time to think about, you know, correlations. When volatility rises, things tend to correlate again, particularly in the day when that spike occurs, but to sort of think about correlations during times of uncertainty, but also during times of normalization.
And so I think, you know, going forward to what we believe to be the case is, you know, on the fixed income side, maybe moving duration a little further out the curve. I think a lot of fixed income dollars with individuals and even some institutions is hugging the sort of one to six month part of the curve in the form of treasury bills, and you know, maybe moving away from that notion. If you look at treasury bills even today, you know you can go out to
three months and yield five percent. But now, unlike just a couple of weeks ago, you have a four handle on your treasury bills. So you may want to be thinking about moving out the curve, maybe not to ten years or thirty years, but certainly two, three, four, five years, because you.
Think we've topped out? Do you think we've in terms of rates along the yield curve, the US yeal curve, do you think we've you know, the idea of five or six which we were talking about not so long ago, more consistently, Do you think we've topped out here and that where we are right now? Or where do you think we are? You know when it comes to the two and the ten in particular.
I mean, the short answer is I don't know, but I do think that it seems as though the balance of risks would suggest more incremental weakness in the economy and more incremental weakness and employment, which would suggest that nominal rates could come down. But what I do know just by looking at the break even inflation relative to let's say the nominal tenure treasury rate, is that ten
year treasuries are not particularly expensive right now. They're not uber cheap, but within the context of the last two years, they're quite attractive, and so it gives some confidence to sort of say extending duration right now with the long term inflation rates where they are, tenure break evens are only two point zho nine to two ten on Bloomberg terminal. Today is sort of attractive.
Okay, we got CPI tomorrow, we got retail sales coming on Thursday. Gosh, we have even more. We've quite a bit with so much economic data this week. Yeah, we do aaron just thirty seconds, what could surprise to the upside and sort of like shatter the soft landing narrative thirty seconds.
Well, of course, if CPI is for some reason hot, which the market is not anticipating. With the treasury markets off what five seven basis points today, meaning prices are higher yields are lower and PPI was was on the softer side. That would maybe bring some pause, but it doesn't make a trend. I think the trend if you look at core inflation, headline inflation has been downward. A slightly elevated CPI number probably would spook the market too much.
I still think September cut is in the cards. I think retail sales would be a surprise if they're really overshot, given what we're seeing in earnings, whether it's today with Depot or consumer staples companies, there's a lot of caution on the consumer fund right now.
All right, good to keep in mind as we go through those data points. Aaron Karn Aaron Kennon excuse me, co founder and CEE at Clear Harbor Asset Management, joining us as he has before from Stanford, Connecticut. They've got about one and a half billion in assets under management.
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