Aerospace Bulks Up

price tag. Joining us now Doug Rothacker. He is our Bloomberg intelligence expert when it comes to all things aerospace and defense. Uh, Doug, thanks very much for being with me. Maybe you could just explain what this is going to do, first of all, to the industry and the two largest customers, Boeing and Airbus. Yes, good morning, thanks for having me.

So the first thing is that this creates the world's largest aerospace supplier, you know, forty billion dollar portfolio stretching basically the inside and outside of the aircraft kind of knows to tail engines, avionics, interiors, communications, etcetera. So that obviously helps in protective pricing and competitive pressures. You know,

both among tiers and with Bowing and Airbus. And then the other point I would make is that you know, we've seen supplier consolidation pick up steam here over the past year, and I suspect this trend obviously not to this size you up and down the supply chain will will continue. The supplanting suppling is really getting squeezed by Bowing and Airbus from a pricing standpoint. So obviously this is a way that they can u combat those challenges with greater scale. Doug, maybe just give us a little

insight into how the industry works. Is it possible for a company like United Technologies, let's say, post merger, uh post acquisition with Rockwell Collins, to be able to go to Boeing and say, look, you know you want to buy these this Avionyx pack edge and you want to buy this seat upgrade package. We've got the b E Aerospace or what was formally b Aerospace in the portfolio. Oh and by the way, we'd like to sell you our geared turbo fan engines. Will give you, you know,

a discount if you take all three. Right. So I would say not only to Bowing Airbus, but also to the customers. Remember they the UH the one key factor with the b Airspace acquisition is the large exposure to direct consumer you know, the airline UH customers, So they can go right to airline customers with better pricing, you know, given this greater scale, UH And obviously you know there, you would expect them to be able to do the

same directly to bowing an airbus. So I think you, I think you hit the nail on the head, all right. So having said that, maybe just lead us now into what this does have specifically to United Technologies, because does it really need to be a conglomerate that has an h v A C systems business us A an otis elevator and escalator business, Right, So I think that will be the biggest question on investor's mind over the next

year as this plays out. They expect to close the deal by the third quarter of two as an eighteen. And it was a pretty pointed comment they had in the press release announcing the deal that after the close of the of the acquisition they're going to pursue any and all strategic uh, you know, opportunities for United Technologies. And I think that was a clear uh discussion or

a point to the potential for a breakup. Uh you know, they've talked consistently about how they feel their shares are you know, under appreciated if you will, in the marketplace and undervalue, and so obviously being able to split the companies up where you have larger multiples for the industrial uh peers is obviously a way to be able to

do that. So I think in the near term that's kind of on the back burner until they uh you know, a focus over the next year is going to be paying down a lot of the debt that they're taking on uh to finance this deal. Um. But I think when you get into mid end late next year that that will be really a focus among the investment community of what, you know, what this company looks like over

the next few years. And I suspect the possibility or the probability, I should say, of them breaking up is greater than not at this point, Doug, I beg your pardon just to just to remind me again which is the higher margin business and which demands the higher multiple. Sure, so they have otis elevator business and h fact business, and both of those uh peers in those industries command greater multiples than than what you would see in the

aerospace business. So would that embolden management to split off that business because they wanted what reward shareholders for having held those companies in the portfolio beg your pardon, no problem. They would just want to essentially unlocked the value that's basically tied tied down if you will, right now by being they're essentially gonna be overweight aerospace businesses by about

six percent. Now, So if you think about the multiple that could be extracted or or seeing what you know, high cash flow business and high margin businesses that you have with the elevator and HVACT businesses um either with a strategic barger excuse me, strategic buyer or in the public space, uh, you know, would likely be more than what they would realize as a conglomerate. Right. Yeah. The shares of UT actually United Technologies are down about three

and three quarters of a percent. Shares of Rockwall Collins up three quarters of a percent. Rockwell Collins earlier in the year, I believe it was April, they closed on that deal to buy b E Aerospace. So we're gonna see even more consolidation. Who's left, Yeah, I think big deals like this, there's really not many left. But I would say, you know, up and down the supply chain that there will be a considered effort to grain to gain greater scale. Spirit Aero Systems, although they've kind of

walked a little bit back on the discussion. You know, Spirit air Systems as Boeing's largest supplier, and up until recently they even said that they were looking for possible acquisitions in this space. So uh, you know, again, deals of this size probably are likely, but I would suspect that you would see uh, situations occur um for the supply chain to be able to gain greater scale and you know, fight the Bowing and airbus price and pressure

and after market pressure that they're seeing. Doug, just to give you about thirty seconds or so, I know that everybody's got a huge backlog for aircraft and we're predicting, you know, we're gonna add lots of new airplanes, quieter, faster, all that. This is a cyclical business, isn't it. It is. We're ten years into the airspace cycle right now, and you kind of wonder about the legs that are left.

I think, based on Bowing and airbus production rates, you know, we see a few more years of increased production, particularly with the narrow bodies, but we've seen wide body production come down, particularly with the transition to the Bowing Triple seven as they work into their their Triple seven X program. Um. You know, Airbus A Brady production is being cut. Um, So there's concerns in the wide body production rates and you know about the legs if you will, of this

aerospace cycle. We gotta leave it there at Thanks very much, Doug Rothor. He is our Bloomberg intelligence expert when it comes to all things aerospace and defense. Now we're scheduled to talk to Tom Hanlon. He is the global investment strategist that has sent private capital management at US Bank and he joins us from Minneapolis. Tom, thank you for

being with us. Maybe you could just start off by I thought this was an interesting point that you made that the U. S consumer appears indifferent to whatever the volatility is, whether it is US politics or geopolitics. American consumers are just going on their merry way. Where do you what does that amply? Well, good morning, Tom, and uh yeah, and it's not just the US consumers, it's

consumers worldwide. But you know, you look at the data, and consumers keep on consuming and manufacturers keep on manufacturing, no matter the headline is, whether it's domestic politics or geopolitics. And uh um yeah, yeah. I mean you look at the market action today. Um, you know, we're down a little on the SMP, but more on the financials um

than the broad markets. That tells us that the action is less to do with with North koreanda was over the weekend and more to do about people's perceptions of the FED. So where do you come down? I mean, do you buy this notion that the consumer is going to continue to spend and that manufacturing companies that continue to make things regardless of what goes on in Washington

or another political capitals. Yeah. I mean if you look at the just the underlying trends of just the broad economy or or labor market or uh you know globally not just in the United States but elsewhere. Um, it's it's fairly sanguine. I mean, it's not aggressive to the point where central banks are going to tighten aggressively. It's not so a weak that that you're getting concerned about the consumer. And you know, the synchronized recovery gets set a lot, but it's more like a lack of dispersion

in growth rates around the world. So everybody is low, everybody's slow, but positive and and that's a pretty decent back drop for kind of all participants. Okay, So if that's the backdrop and that's the position, are you and all in bull we have written, we have been and remain um pro risk in terms of client portfolios. We we still tilt towards equities relative to fixed income on our primary uh places where we look to invest are still United States, Europe, in Japan where we still have

the highest confidence about the economics fundamentals. Have you taken any profits lately? No, we haven't. We haven't many material changes to our to our outlook on I think our diligence and vigilance of risks is probably uh increased based on the political landscape and and also domestic politics. UM, but we still we still remain um kind of on our trajectory of the narrative that we have, which is pro growth and progres sense. So does that mean that

you're focusing on technology stocks? What specific industry groups can you share with us? The NASDAK is up more than this year. Yeah, I mean, we're still mostly broad market participants on you know, anything that that benefits from a low inflation um uh a fed's accommodative policy. So that's that's still good for free domestic us consumption. And because the global growth backdrop um U s exporters are still a good place to be as well, because then I

never seen that in the manufacturing data. Well, tell us about your view on the dollar, because that has been weakening after a run of strength earlier in the year. If the dollar continues to weaken or you're going to see increased commodity prices, but that will be offset by

increased sales overseas. I think that's probably a fair assessment. Um. You know another uh sort of backdrop of of a week or dollar that also tends to be good for UM four markets on you know, it's a good construct for emerging market equities to have a dollar sound more of a weakening trend and a than a strengthening trend.

And and uh, you know the dollar and you may see it the act today coming out to Labor Day weekend with the news, um it's actually weaker rather than stronger today and the end's not really acting um terrely volpal today, So again it tells us that's more about the Fed and people trying to price in whether there's a rate hike between now and your end than anything else. Well, do you believe that there will be a rate hike

by the Federal Reserve this year? Our base case has been that we were likely to see one before the end of the year. UM, And we just continue to monitor that and obviously got a lot of speakers this week from the Fair Reserve as well to watch for it. But you haven't seen this wage growth in the United States? Does that temper your enthusiasm? Yeah, it's really been stubborn.

And it's not just the US phenomena. It's it's global and it there's probably um, it's probably bifurcated in different industries. You probably get wage growth in some industries where we have u not a lot of supply a labor, and then you know it's offset again in the areas where you've got kind of surplus of labor, so it kind of comes out in little wage growth. We still think

that we're going to see that. We still think that that in general, UM, with positive economic conditions and positive consumption, that that wage growth will come all right. I want to thank you for for joining us, Thanks for giving us your thoughts. You're you're a bull? Can we say that you're a bull? But with caution? Does that make sense? That makes all right? Good, We'll leave it there. Thanks very much. Tom Handling, he is the global investment strategist

at Ascent Private Capital Management at a US bank. Joining us from Minneapolis. Well, in addition to immigration or another topic that has drawn the attention of lawmakers as well as the administration, of course, is North Korea. Joining me now is Dr Robert Pape. He is the author and a professor of political science at the University of Chicago, and he is the director of Chicago Project on Security and Terrorism. Dr Pape, thanks very much for being with us.

You've written that the economic sanctions will not work with North Korea. Tell us a little bit about your reasoning. Um, China is not going to enforce the tight sanctions that would really bite. And the reason is because China does not want the North Korean regime to collapse. If the North regian North Korean regime collapses, there's a very good chance that US and South Korean troops would rush right into North Korea, possibly up to the border with China.

That's exactly the scenario that led China to intervene in the Korean War in the nineteen fifties. This is a vital national security interest to China, and so bullying China threatening to cut off trade with China, this is not going to work, um and so we really need to look for an alternative track because at the moment, Trump's strategy of coercive diplomacy is backfiring. So what is the

alternative track? In your opinion, the alternative track is to build on the cooperation among the six parties that worked in the second part of the Bush administration. The best we've gotten, the most we've frozen the North Korean regime's nuclear program was from two thousand and six to two thousand and nine when the Bush administration. This is no wimpy administration, UH engaged in six party talks which actually had quite a bit of effect all the way through

the end of Bush's presidency. This is something we need to restart, and in fact we can involve. We could evolve our current policy of pushing forward tough stenctions into a common economic policy on North Korea, common among China, Russia, the United States, South Korea, Japan. This would create a real alliance against North Korea that would have some bite over time. Well, how likely is that given the current administration and the rhetoric that you've heard, not only from

the President but also from the Secretary of Defense. Well, I think what you've seen over the last month is actually the administration, Um, speaking of two minds. When you hear Secretary Tillerson and you hear Secretary Mathis, they really are moving more in the direction of deterrence, containment, working with allies. Um. I'm afraid President Trump's rhetoric has not been particularly helpful. And in fact, in the last two weeks, Um, what we've seen is the North Korean have increased their

threat to the United States. It's still far, it's still not you know, it's not today. Um. But nonetheless, we need an alternative track, and I believe that Secretary Tilorson and Maddis actually um uh would are are seeking such a track. Are they finding any willing partners? Well, Um, what we see is that with North ko with North Korea, noticed, the partners are pretty obvious their China, their Russia, their Japan, and their South Korea, UM Secretary Tilerson, that's where he

has been. He has been with our partners, working with them. So UH. The the what has really become quite clear now is that the current strategy of heavy handed coercive diplomacy is simply backfiring. UH. This continuing a failing strategy is only likely to cause South Korea and Japan to lose confidence in US leadership, which could create more instability in the region. So the alternative is to work with South Korea, Japan, China again toward a common economic policy

on North Korea. Well, I'm sure it's not lost on either the Chinese leadership or indeed the Russian President Vladimir Putin that nuclear weapons, while aimed in a specific direction, you don't necessarily have complete control over such such weaponry. And China and Russia are awfully close to North Korea. Are they not concerned about any fallout from any potential

military activity that would hurt them? I think they are. UM. In two thousand, UM twelve and thirteen, I was involved in some talks in Beijing UH at the People's Liberation Army National Defense University where they were openly and explicitly concerned about North Korea's uh nuclear program, and for very much the reasons you suggest, which is um it is um um. North Korea's nuclear weapons don't pose simply a threat to the United States. They pose a threat to

all of those parties UM. And in fact, the fragility of the North Korean regime. If if the North Korean regime were to collapse, you have a loose nukes problem, which is going to scare everybody in Beijing as well as in uh, Tokyo or Soul. So you have a situation where the six parties here really have a tremendous amount in common. Uh. They are ready are talking with

each other. Um. And what we I think would be very helpful would be to evolve the current set of discussions away from essentially a failed strategy toward a more productive outcome that we could see over the next two or three years. Really um providing stability among the key allies that we need if we're ever going to get a grip on the North Korean problem. Thank you for joining us. Dr Robert Pape is the author and professor political science at the University of Chicago and director of

the Chicago Project on Security and Terrorism. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm Pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio