BlackRock Shows Disproportionately Big Passive Gun Ownership: Balchunas

Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Following the latest school shooting in Florida, there has been a spotlight on who owns the shares of the world's biggest gunmakers, and it turns out, perhaps not surprisingly, it is the largest asset managers that have a lot of passive funds, or funds that seek only to track indexes that have gained a ton of assets in the past few years.

Here to talk about the implications of this, Eric Beltunus, who is an expert in everything and anything related to funds, but he specializes in E t F Senior et F analyst for Bloomberg Intelligence, and he happens to be here in New York today in our leven three studios. Eric, let's start with how significant is passive ownership of gun related shares? Okay, so I crunched the numbers before coming on air today and I will have a note coming out thank you for the inspiration. Um. Yeah, we're looking

at passive ownership. Let's say if the SMP in general is about right, that's the average passive ownership. It's about double for some gunstocks. So r g R right, that's owned by passive funds. AO b C, which is the one everybody's really honing in on, is owned by passive funds. VISTA vs. T O is the ticker that one is owned by passive, and then half of that is ETF. Remember passive is index funds and ETFs combined. So that's

where you get. So we're looking at a quarter to a third of these big gun stocks are owned by path of funds. Why why do they own Why do passive funds own so much more of these gunstocks than they do other stocks. Here's why these gunstocks aren't that big. Right, when you're a mid cap, small cap sized stock, you end up getting into a lot of e t s. Those are the ones that usually have bigger passive ownership

than say like Apple. Here's why. So like black Rock, for example, you look at American outdoor brands, that's the one everybody seems to be focusing on. Black Rock owns eleven percent of that company, It's by far the biggest owner. Why half of that ownership comes from one tick or I t A, which is the Aerospace and Defense ETF, which is now a six billion dollar et F. Why Well,

because it's crushing the SNP. It's up like thirty five in the past year, it's doubled in size, and term's gotten flows and the asset prices have gone up, which begs are really a question for black Rock. You have an aerospace and defense ETF, people would buy that. I'm assuming hoping you include those companies. Are you going to kick out or try to get the index to kick out a gunmaker from an aerospace and defense ETF. This is a conundral them that Larry Fink will have to

figure out. I think that you connected that just perfectly to where I'm going next to me, Because black Rock is saying they're going to engage with gunmakers. What can black Rock and other passive managers like Vanguard or you know, Fidelity, what can they do if they really aren't going to kick a name out of an e t F. They can't. What can they do? Yeah, they are married they cannot get divorced. It's like the old days. We're not getting divorced.

We're gonna stay married. Um, so look, you're gonna have a black Rock. I'm a big fan of setting the tone. Larry Fink's got a big megaphone, right, so just saying things out loud, getting people like us to talk about it. This helps move the needle in a public relations aspect. Does it do anything to the ownership of the stocks and the e T F s? No? Will it? Maybe will these companies maybe look to imple implement some programs. Maybe the bigger thing they can do and what they

have done in the past. There was a big issue with dual class shares that where company basically once your money but not your vote. Where they you know, the tech companies do it. Black Rock and Vanguard got the SMP SMP people to basically ban dual share classes going forward, so Snap will never be in the SMP five hundred because of that. That was a big win and that directly affects a company like Snap and other companies moving forward.

If they were to want to exclude gunmakers from the big indexes, they that would be the way to really do it. However, then you've got Larry Fink making political decisions for you, and that then is that right? Then then you're gonna have that's you know, people worry about passive so making the capital markets turn into like socialism. This seems to be a slippery slope going that direction. Right. Well, that's that's what I was going to ask. You know,

how political can they go? And and you know, do we have any inclination of what investors really want? I mean, do most investors care? Right? So? I think they care. There are options for them, Like there's a host of e s g ts that purposely have come along and say we can either give stocks that are good for E s G or will eliminate government. They need a new acronym that that's part of the problem that they haven't been a hit. I think the acronym is needs work. Well.

Impact investing is a big one. I just think they should call liberal values because that's who they're appealing to anyway. Um, you know there's an e t F that's um the GOP stock track or et F that will that will hold a bunch of gunstocks. You also have other types of e t fs that purposely hold those like industrial ct f s. That's fine, you go there for those. You can go to E s G if you don't

want them. The question is this middle ground of like the SMP five hundred, and that's where do you want Vanguard and and black Rock to basically take up their issues. My view on this personally is that when you hire a passive manager, I think what you really want them to do is just make sure that the uh sort

of the boundaries and the rules are really set. You have an independent board, you're pushing for good E s G policies, But do you do you take up an issue that's important just to that person and force a company out of an index. I probably, I don't know if that will happen, but having his voice in there definitely affects the public relation aspect of this entire issue. Although he has to be careful because, as you said, a lot of people are worried the E t F

so sort of a slippery slope to socialism. So if he starts weighing in on big political and politically polarizing issues, uh, then he risks some political interference. Thank you so much. Eric Belchin is always enlightening. Eric Balcin a senior E T F analyst for Bloomberg Intelligence, and black Rock is saying that they will engage with gunmakers that they own

the shares for after the Florida shooting. So it is that time we take a look at the municipal bond market and it's a particularly interesting time to do so. Borrowing costs are going up. What does this mean for states and local governments that are looking to borrow money? And Eric Kazatski is joining us right now, easy municipal bond strategist for Bloomberg Intelligence. Thank you so much for joining us. Eric, Can you just give us the big

picture so far this year? What have we seen a municipal bond markets and what does it mean uh for states and local governments? Sure, good morning, Thanks for having me. So we put out a note a couple of weeks ago and we equated the mini market this year to the upside down from stranger things. You know, it's it's almost been a confluence of events where nothing is behaving as it really should from an intuitive standpoint. Um, we've

had consistent flows into the sector this year. We're almost up nine nine and a half billion dollars um and yet we're looking at losses UM across the board in the indicase, and that's more a function of us just following where treasuries have been on a rate basis. But you know, your original question was what does it mean for state and local governments? It means the cost of

borrowing is going up as rates are taking higher. So it's I think that in your note you said about half percent higher the yields are on a musable bonds right now. And this is interesting because there has been such a flood of cash into municipal bond funds. Um. Is this enough to derail any financing plans by any local governments? Not that we're hearing. I mean, pipelines as far as public finance are are still pretty thin right now. UM. But I think that borrowers they need to borrow, I

mean on a on a net basis. The barn and cross are still low. When you look across historical rates over the last twenty thirty years, UM, they just look higher compared to the last let's say twenty four months. UM. But you know that goes both ways. You know, for people who have cash on the sidelines are looking to enter the market. Um. You know there are some decent entry points right now because they can take advantage of higher rates. All right, So what are you focusing on

is a possible good entry point. I mean, we're looking right now at ratios and double A and single A rating classes compared to like graded corporates, and so you get further out the YO curve in like ten thirty years, Um, you can actually pick up some decent spread over those. Um. We're seeing that in both revenue and geo bonds, um.

You know. And what we do is we compare the ratios of the tax exemple rates to the actual corporate, just like buyer would deal if they're evaluating tax exemptly inssible to treasury um, you know, just to sort of lease as a litmus test of you know, are they cheap? Are they rich? And most of the ratios that we're looking at her above their fifty two week averages. UM. You know. One thing that I'm struck by as you talk is that you're saying there is a flood of

money coming in from investors. There isn't that much issuance from local governments, and yet still yields are rising. That seems odd and it seems like a red flag. Can you speak to that. Yeah, I mean yields are rising to a much lesser degree than where treasury rates are going. UM. And we've seen this particularly in the short end of the curve. And you know, in my opinion, that's where the investors are sort of be the rotating out of long duration bonds or they're sort of finding out in

that short area of the curve. You know, just with all this interest rate uncertainty. So you've seen rates you really sort of take off in the two year treasury and demand has been so high in the muni sector that if you sort of look at where rates have been in a two year space, they've been fairly flat. Over the last let's say two three weeks, so UM,

the ratios have ticked down UM. And so you've seen that reflective and spun flows as well as some of the money market funds have seen a nice uptick in

cash coming in. You know, I'm struck by the end of last year when people were talking about how are actually the year before, the end of the year before, and people are saying, well, you know, tax reform is going to come and it's going to cut taxes on people, and then they're not going to want to buy municipal bonds because that a lot of people go into this debt for the tax benefit. And I'm wondering what happened to that narrative, because we did get a taxed, we

did get a tax overall. Yeah, I mean, I think on the margin for individual and ushers, the tickdown in top tax straight from thirty nine point six to thirty seven percent UM. I don't want to say it was in nothing burger, but you know, based on the cash is coming in, it didn't really seem to deter the investor appetite UM. And and there's still benefit there when you look across some other asset classes and that you know, coming in and buying meanings UM on a comparative basis.

So I think that the biggest change we've seen from a tax reform basis is just the dearth of supply that we have right now. We pulled so much supply into seen based on the fear factor that we didn't know what was going to happen with the final version of tax reform, and now the market, which is a supply drive, the market is sitting around looking for where that supply is going to come from. Now, so, uh, just a real quick do anyone care anymore about the

pension deficits? I do? Good, I just want to, I mean, honestly, there is a tweet by a former Cowper's board member basically saying that Cowper's is heading towards insolvency. CalPERS the biggest public pension plan. You care about this? Of course we do, UM and one of the things we look at, obviously, when we looked at UM, the individual credit ratios of a bar where is one of the things we look at is obviously they're their leverage ratios and pensions are

one of the things that factors into that. UM. I think California has some issues coming up as far as some some court cases which UM, depending on the outcome, and I'm certainly not a legal expert. UM, you know, might have ratifications across pension plans, you know, across the US. We are listening to President Trump. He is speaking at the Conservative Political Action Conference in Maryland. His speech sounds like it is sounding a lot of the notes that

he sounded during his campaign. Talked about coming through with a lot of his campaign prom us. Is one of his comments that drew the most applause was when he asked the crowd, which would you rather, tax cuts or the Second Amendment? Uh, And they seem to cheer for the Second Amendment and say they take away the Second Amendment, which we will not allow to happen again. A standing

ovation right now. I want to bring in to Lou Oloronipa, our White House correspondent for Bloomberg, to Lou what stood out to you the most so far with the speech? Well, it's how much the president is comfortable and willing to

go off script when he's in a friendly environment. That the president has very low poll numbers, but when he gets in front of his most ardent supporters and the conservative movement, he really lets loose and he talked about a number of things that were red meat for the base. Talked about the national anthem, talked about the Second Amendment and how you know, beating Hillary Clinton and helped to save the Second Amendment from being eliminated. The president is

really reverting to a lot of his old ways. You're hearing a lot of the stories that he told on the campaign trail and shortly after winning the presidency, even talking about, uh, the Yellow Electoral College versus a popular vote. So we're not really seeing a president that has changed very much and really grown into the presidency. We're seeing, uh, the vintage Donald Trump that we've long talked about and and and seen on the on the on the you know,

on the world stage. He hasn't really changed very much. It seems like he's very much doubling down on a lot of the policies and strategies that he's used in the past. Uh. And this gun debates, he's recently talking about, you know, wanting to arm more teachers and get rid of gun free zones. He's really talking about it in

a way that it's more plaudible to his base. He's not talking about the gun control measures that he wants to implement, including, you know, raising the age first, you know, the purchase of some firearms from eighteen to twenty one, expanding background checks and even taking on mental illnesses and maybe making it harder for some people, uh to get to get guns. Can you give us a sense of who is at SPACK? I mean, who is the audience there?

These are very servatives, activists, members, a lot of young people, uh, people who are from the right wing of the party. So members of the House Freedom Caucus that would be very at home among this crowd. These are people who like the red meat that the president throws out. They're very active on social media and and they want to you know, sort of the Donald Trump from the campaign trail who talked about building the wall and you heard

the pants of block her up during the speech. So these are the President's that this is really the president's space, the people that he's really been catering to for the majority of his presidency. And you said that it is interesting that he feels really comfortable able to go off script. Even made a note that his scripted speech was too boring. Um, I'm wondering from your perspective, did he say anything that you think will be controversial among congressmen who are part

of the Republican Party. Yeah. One thing that we we saw and this isn't too shocking for the President Trump, but uh, he took a swipe at the Senator John McCain, who is back in theres a fighting against brain cancer, has been fighting for his life for the better part of uh four or five months now, and President Trump attacked him over his vote on Obamacare last year. Uh, this is something that it really has rubbed a lot of senators the wrong way, and we've become a little

bit desensitized to it. But the President really went after Senator McCain, who is trusted and very revered member of the Republican Party. Uh. He attacked him by not by name, but everyone knew what he was talking about. And I think that's something that Republicans UH are are are going to really not be too happy about, because this is someone who's really struggling and really going through a tough

time and there thinking about him and positive ways. And here you have a president sort of getting up the crowd to boo uh Senator McCain, who has long been known as an American hero for his time in Vietnam and for all of his time serving the public in the Senate. So I think you'll hear more coverage of that and the days to come, maybe even here some senators UH talk nealy about the President's decision to go against one of their own, and it'll be interesting to

see what the reaction is to that. Tolu laurinovall let you go and listen to the render of the speech to Lu Laarnova, White House correspondent for Bloomberg coming to us from Washington, d C. Speaking about President Trump's comments at the Conservative Political Action Conference. We will bring you headlines if he says anything that you need to be aware of. 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