Consumers May Balk At Paying For Outage-Proof Utilities

about the situation. It's is Kit Contllege, our senior industrials and utilities analysts for Bloomberg Intelligence. He joins us here in our eleven three oh studios. Kit is always a pleasure to have you here. Give us an update on what you know about the utilities response to the hurricane well him. The utilities gear up obviously days ahead of time, and in recent years, in response to criticism in the past, they've kind of, if you will, over prepared for these situations.

They call in thousands of backup linemen from other utilities around the country, so they should be well prepared. Obviously, once the lights start going out. Now I think they're up to about half a million outages now, and we'll see how rapidly that goes. Uh. Everybody expects there to be outages, then the utilities tend to get measured on obviously the safety of their operations and also on how

quickly they turn people back on. So one thing that I'm wondering is just in general, are utilities that are relatively close to the coast prepared for more storms like this, given the fact that it is expected that we will see more of them, right, Lisa, While they uh, you know, they tell you they are so uh, it's the proof

is always in in what they do. I think I think it's fair to say that certainly after Ukushima in Japan, they got very focused on making sure that the truly critical infrastructure, the nuclear plants in particular, uh is safeguarded from uh, you know, anything they can think of in terms of really outside of normal conditions. Uh. But look, it's a long coastline. There's a lot of stuff that can go wrong, and I think we just have to see each time are they prepared or are they not prepared.

Talk a little bit about the responsibility that utilities bear during natural disasters, but also when it comes to disasters and catastrophes such as the one that is at least currently being experienced in Massachusetts and Lawrence and and over north and over with gas seemingly gas explosions. What is about the liability issues that's important to know? Right well?

The the usual rule that investors think about and that utility managers think about is that, uh, they're there are natural disasters that you can't of course prevent, uh, but you can do something about and you're judged on how well you respond to them. Like a hurricane. Uh, when a gas pipe explodes that you're operating that's never supposed to happen, clearly, so immediately, I mean that stock of the company that owns that nice sources down ten or

eleven percent today. Uh. And and naturally people are concerned, as they should be, and the local population is concerned about how bad the pipes are in the ground. You know, one thing that I'm struck by just with natural disasters, I mean, obviously and an explosion that shouldn't have happened

that caused death is a whole situation unto itself. But one thing that I'm struck by is even when there's a strong windstorm you often hear of people losing power off in thousands, especially with congested area is like the Tri State area right around New York City. I'm just wondering, I mean, what is the move going forward going to

be to try to ensure longer access to electricity? I mean, it seems like it should be better that you know, that's a that's a great question, because there are solutions to it. Unfortunately, they're very expensive. Every time there's a hurricane in Florida, for example, Uh, somebody suggests, let's bury all the power lines. Well, you know that, Well, it would work if you wanted to spend ten or twenty

billion dollars. And but it's also, as we know, uh, pretty high water table in Florida, So how well the wires would survive for how long you know, is another issue. So I think it's fair to say that there's a trade off there, right, I mean, the society as a whole has decided that some outages sometime are worth it because the alternative of making it completely uh you know, bulletproof to to operate under any conditions is just too expensive.

You have systems like the nuclear plants communicating with each other, or military uses then there are situations where not just electricity but any other communications or energy, etcetera, are are very hardened. Uh, but that's an very expensive way to go, and maybe more than people want to pay. I don't know. Every time I hear about the thousands of people who lose their power when there's like a little bit of wind, my my in laws have a situation. I heard about

it for weeks. Anyway, Cottee, thank you so much for being with us Kit Conteledge Senior Industrials and utilities analyzed for Bloomberg Intelligence. I'm sure you'll be filling us in as we assess the damage. It will be important to track although at a certain point you have to wonder. Right now, really our thoughts are with people whose homes are getting flooded and who are uh, you know, potentially going to be losing a lot of things. Is a devastating storm with the storm surge that is, and all

the people who are stranded. We're thinking of you and hoping that you are safe as well. Maybe you know travelers and someone that are hopefully safe and out of harm's way. Yeah, and in shelters. I saw a lot of people in schools and things with their children. It's very disruptive and I'm sure alarming, so our thoughts are

with them. Emerging markets has been a big question mark over the past few weeks, a huge fall as Turkeys financial crisis or i should say currency crisis got underway, and Argentina seemed to be heading towards a similar direction than a pause. And over the past two days we've seen a little bit of a rebound today a little bit flat. Joining us now to find out whether this is a time to buy developing markets assets or time to sell. As Michael Brandon's chief of US was tragist

of each how private bank it is Latin America's biggest bank. Correct, that is correct? All right? Thank you so much for being with us. You've been covering emerging markets for a long time, and credit in particular, and I'm wondering as we view developed the developing world right now, are we looking at the beginnings of a protracted sell off as a fed raisers rates or is this what we've seen in the past few months, a hiccup that is a buying opportunity. Well, I mean, and first of all, thanks

thank you for having me here. It's it's real pleasure to be back the current I would say the current window of opportunity is still representative of more stress to come. I think a more tractive window is opening up. So I I am constructive about e M. I would say in the medium term, but in the very short term, while we're encouraged by what happened to Turkey yesterday, by the surprise hike from Russia today, uh we think that there is a willingness for emerging market countries to address

inflation concerns and the volatility and their currencies. It may be just a little early, um to start adding back into exposures. Looking at the performance of the Brazilian real, the chart seems to indicate that things are not getting better, that the value of the currency will continue to deteriorate

against the US dollar. What's your call, Well, I mean, what's happening with the real h is representative also of we have we have presidential elections coming next month, which is very uncertain, and then the volatility happening more broadly in currency market. So our view is that we should see the real top out here. Uh. We we think that we're our target is still for about a three point nine against the dollar, which would be a little

stronger than where it is right now. What we need to see, though, beyond the domestic geopolitical uncertainties, we need to see less currency volatility more broadly, maybe a softening the US dollar, maybe a little lower in US trade tensions. But the fundamentals in Brazil are still quite sound. I'm struggling with something that you said, which is that you do see more pain ahead for emerging markets. There's some positive steps being taken, but there is more downside here.

How do you, as a portfolio manager and a portfolio constructor with a huge focus on e M, how do you invest? Then? Well, what you do is you look for the brighter spots, You try to be more selective about your exposures. You manage your currency risk to the best extent you can. So how do you do that? Well, you do that. Let's say you look at hard currency versus local currency UH debt uh, and we look at opportunities let's say in in Russia or Colombia, probably more

uh sustainably positive than places like Turkey Argentina. So you're out of Turkey and Argentina. Turkey and Argentina, well, Argentina, UH. We you know, we we think that the I m F package, there's been talk of getting that expedited act um. We were more positive there than in Turkey, where I think the political risk is really different from what President Mockery has presents to the Argentine Republic. But again, the pain near term is going to be difficult, so we diversify.

We look at diversifying that risk into the developed markets and in hard currency debt. Where do you find the biggest challenge to liquidity Right now, the biggest challenge of liquidity is in well in e M broadly, we're seeing flows come out and and part of this is this is challenging because what does that mean? The bid and ask spread gets wider and wider. That's right, So the bid aspread has widened, the level of trading has diminished, and what that does also it has an impact and

the ability to generate new supply. So one of the one of the problems in the technical side of the market going forward is that on on on the corporate or in the credit side of e M, we have a calendar of supply that's supposed to come up, but at the same time you have investors pulling back because of the volatility we discussed, and that is uh affecting

price discovery. Right, So when markets that are less liquid, you need this price discovery, You need new issuance to demonstrate that there are prices that you can buy and sell at. You know, it's interesting that you say you would diversify more toward developed markets. In certain cases, that seems to be actually the opposite of what some people

are saying. And for example, Jeffrey Gunlock of Double Line Capital when he said he actually thinks that the US markets could underperform after an incredible outperformance and suggests moving to more global exposure. I'm just wondering, um, how do you sort of defend against your position, and especially considering the fact that a lot of people are saying the US markets have gone so far so fast, diverged from

the rest of the world and it can't continue. Well, you know, if if we're talking about I mean, there's equities and there's fixed incomeing out to speak briefly in the equity side, and and you know, we've been positive on the US equity mark, and we talked about equity US equities and Japanese equities, and on the US equity mark, is interesting. I have to give a shout out to

a former colleague of mine, Tobias left of It. You did some great work on this when he talked about there are a lot of clients right now or investors are talking about the Schillar cape and they're saying, oh, it's very expensive and it looks like valuations, why would you even buy the US market here? Now? Again, a pullback is plausible, There's there's no doubt about it. But Tobias had made the point in a recent report that said, you know he's there. He doesn't integrate in this measure

a cost of capital. And if you look at cost of capital and CAPE and you integrate that, valuations are full, but they're not necessarily rich. So I think there is the way you do it is you manage expectations. You don't expect the kinds of returns that we've had in the past uh to go forward, but you manage that also on a risk adjusted basis, we would expect there to be less volatility, you said CAPE, and you've got to just explain the cyclically adjusted of PE ratio, which

which tries to normalize this over time. Um, I'm not going to go for technical explanation him as you know, you're going after my vulnerable spot here, which is which is I'm a bond guy at heart. But I'll get your definition by email. No, I just just wanted to set out the parameters Robert from Yale, this is his his benchmark that everyone follows. Do you perceive that there's

going to be any intermediary risk? And I go to this issue of liquidity again, because it is not just the actual instrument or asset that can be at risk. It's sometimes the middleman, the traders in between. They might not have the liquidity in order to withstand any rapid movement. Well,

it's a good point. And it's a good point because as we know since Basil three and Dodd Frank and Vocal rule that the primary dealers in the US and financial institutions elsewhere have less ability to absorb or buffer these transitions and volatility because their trading desk can take this on and they have to hold higher quality capital against their risk. It's a very good point because at this time we have the Federal Reserve, which of course

it's balance sheet is starting to shrink. UH Bank of Japan maybe ten or twenty years ago in our lifetime. I don't know, but certainly ECB had just announced that they're going to cut their UH purchases in half UH and go to zero at the end of the year. So this is going to be a challenging UM. So we are looking at it. Thanks very much for being with us. Always a pleasure. Michael Brandis, Chief investment strategist

E TAU Private Bank. This is Bloomberg. The Treasury Department has weighed in on a potential for tax reform two point oh For example, Treasury Secretary Stephen Manuchin has said that the Department may be able to make a big capital gains tax change without congressional approval. Here tell us more as Chris Mackie. He is the founder of Solution Nomics. Chris, always a pleasure. Thanks for being with us. Tell us what you know about this potential change to the tax

code and what you believe it will mean for the country. Well, good morning, it's great to be with you. Thanks for having me. So what we're talking about here is, when you cut through all the details in the minutia, we're talking about a reduction, a further reduction in corporate tax rates. Now we've already seen a significant reduction in corporate tax rates, and unfortunately, UH the results have not been as advertiser

as expected. So the idea of further cutting corporate tax rates in the hope that what hasn't happened, namely, UM a greater improvement across the board without significant increases and deficits. UM, that just doesn't make any sense. If they really wanted to do a tax reform, they would have the greatest economic impact, then focus more on the consumer, and specifically the middle income and lower consumer, because they're the ones that are going to go out and spend, which will

then cause companies to hire even more. So I'd love to get your perspective on what Kevin Hasset, who is an economic advisor to President Trump, would he put out there earlier in the week where he was talking about the economic boom. I think it was late last week that the tax cuts have caused for the United States and how really President Trump's tenure has marked a turning point for the economy. Do you think that that that you wouldn't get more of a boon if you did

it more permanently. What I think is that there's a big difference between what's you know the rhetoric and the reality. Let let me just give you a quick stat here. So we've been hearing a lot of talk about greater wage growth, but we're really talking about is the illusion of greater wage growth, because real wage growth, that is wage growth when you count for inflation, is actually down

since the tax bill was passed. Just this recent August, wage games were up two point nine percent, which sounds good and sounds better. However, inflation is up two point seven so the consumer actually got point two increase in real wages versus August of last year before the tax cuts, wages were up two point six percent, but inflation was only two percent, so they actually got a point six percent increase. So we're not even getting what was hoped for.

And in addition to that, we're gonna pile on more debt for the consumers. So no, I don't think that actually is the best way to go. But we've got is the equivalent of a sugar high financed by death sits. It's it's unsustainable, and it's not even as good as the rhetoric. Chris. The one trillion dollars of additional debt that was taken on, did that equal anything. When it

comes to wages per week. I understand you've written about this in the past, and it looks as though it was an increase of maybe twenty five cents an hour. That's what it translated into. I'm so glad you brought that up. So actually, if you look at the increase from July to August, we're talking a whopping dime ten cents um. Now that's not gonna pay for college. But

here's what's even more concerning. If you look at the increase in wages after tax cuts for the eight month period from the end of sev to August, they grew fifty two cents an hour. But the eight months prior to the passage and the tax bill there and he grew forty seven cents an hour. So the actual real increase in wage growth after we took on that additional trillion dollars and what they're talking about being even more

was a nickel. So no, there's not a lot of bang for the book, and we're just adding more and more debt, and specifically more and more debt on the consumer, which eventually is going to catch up to them and they're not going to be very happy about what about the effect on business investment. So on business investment, that's very interesting. Everybody likes to tout the increase in business investment,

but I haven't checked the most recent revisions. But the last time I checked this, the rate of increase in business investment is actually down. So yes, business investment is increasing, but it was increasing before the tax cuts. It's just now it's increasing at a lower rate than before the

tax cuts. You know, Chris, I'd love your opinion. Since you do contribute to the Fed's Beige Book and have a consulted with the Federal Reserves, you have an intimate knowledge of policies on a range of different fronts, as well as from a range of different ideologies. I'm just wondering, you know, Elizabeth Warren coming out the Senator saying today that she thinks the big banks should be broken up, you have calls for more regulation on the democratic side.

I mean, do you think that that's the way to go? I mean, do you think that do you? Do you do you kind of agree with the basis of having a fewer government interventions and and sort of cutting the taxes if possible, if you could also cut spending, or do you just disagree fundamentally with with with sort of in general, cutting taxes in orders for growth. No, I don't disagree with cutting taxes. What I disagree with is cutting taxes without any connection to um actual wage growth

or employment growth. So, if you really want to do tax reform two point notes, it's just very logical. You say, companies that increase hiring in the companies that increase wages, they get the biggest tax cuts. What we did instead was we had a home based tax policy. We cut taxes for all corporations across the board and hoped they would create more jobs and hoped they would increase wages. Now some did, but a fair number didn't, but they

got the same tax break. So if you wanted to get a better r a better return on investment, tie each company's tax rate to each company's rate of employment growth and wage growth. That's how you get the best bang for the buck for the American citizen. Chris, could you just do about thirty seconds or so on trade policy, because I know you've been active in following the trade negotiations between the United States and China, but also trade

negotiations between the United States and the European Union. Certainly, boy whish we had more time for that one. But here here's the summary. Look Um, something needed to be done about trade policy. The tariffs are unequal. We're getting the bad end of the deal. We should at least have reciprocal terms. My concern with what's currently being done is it's being done two suddenly. Corporations need time to

be able to adjust the logistics supply chains. So I agree that something needs to be done, agree that we need to level the playing field, but he needs to be done more gradually so the corporations can adjust on their supply chains. Chris Mackie, thank you so much for being with us. Really a pleasure. Chris Mackie founder of Solution Omics in New York. He has been checking out the economy in the US for decades and advising the

FED as well as their Beige Book. Here's a question we hear about some companies heading into the cannabis sector. They tend to be alcohol companies and not tobacco ones. What gives here? Why wouldn't tobacco be the national participant here? Joining us now as Tara la Chapelle, A column is covering deals and all of the consumer aspects of our world and for Bloomberg Opinion as well as Christine Oram. She is a news reporter coming to us from Toronto

for Bloomberg. Christine, let's start with you, what do we know so far about how much tobacco has tried to get into my irjuana and just how much that contrasts with alcohol's interest. Well, we haven't seen a lot of interest from the tobacco industry so far, and you're absolutely right. Compared to UM the investments and indications of interest from

the alcohol industry, tobacco is virtually non existent. Um. We had one very small investment from a company from Imperial Brands, the British company in a very small, closely held company called at Oxford Cannabinoid Technologies, so small that they didn't actually even give a value of that investment. And Alliance One also has a stake in a Canadian cannabis producer. But other than that, there hasn't been a lot of interest,

especially from the major players in the tobacco industry. Okay, So Tara, come on in here, and from a strategic standpoint, why wouldn't the Philip Morris is Morris is the world flock to the cannabis industry, right it seems like such a natural fit. Um. I think there's probably a couple of things going on. It could be that behind the scenes they are working on this. We know in the past ye iss ago that they started to um, and I think maybe they're waiting for federal legalization before they

really make a big move. And they've also got a lot of other things on their plate right now. You know, they've been trying to get into vapors, which is probably cannibalizing a little bit of their cigarette sales. So I think you know they're dealing with that right now, but you know, it could be that they're throwing force and labbying efforts behind the scenes that we don't know about. And I mean, that would make a lot of sense

to Tara. The Food and Drug Administration has already targeted vaping right there, alarmed by the increase in use among teenagers, and they've declared that teenage use of electronic cigarettes has

reached what they describe as an epidemic proportion. Is that also one of the reasons why you believe that tobacco companies are going slow It could be I mean, that's been a pro and con for them really, because on the one hand, the FDA is going after the amount of nicotine in these products because that obviously makes it very addictive and they want to reduce that, which hurts

the major tobacco companies. On the other hand, going after the flavors in products that jewel Cells, which is a new upstart competitor for them, and a really big competitor that's done a lot of marketing, a lot of advertising. I mean, that could be a boon for the big tobacco companies if they could get this other competitors sort of keep them away a little bit off their turf. Christine comes in here because you know, what Terras says is really compelling that maybe the big tobacco companies are

working on the cannabis industry behind the scenes. Suggests that they would want to do it in house. It would be homegrown. If you will, Christine, can you give us a sense of what kind of competition that would pose to the existing cannabis companies given how well their stocks

have doing. I mean, I'm thinking of till right, which is up six percent since it's I p O. Yes, they've seen some some ridiculous stock moves in the space, and that you know that what really generated those moves with canopies deal with Constellation brands, which is of course the company behind Corona Beer, Robert Mundabby Wine, many other brands that were familiar with us, and that has sent stock storing. So that was because of the alcohol involved

into the space. Of course, if if a major tobacco company got into cannabis decided to start doing its own work without partnering with an existing company, that would pose a potentially a pretty big threat because they have a lot of resources and and frankly cash behind them. However, there's also the issue of reputation that you have to

take into account, and this goes both ways. I was talking to an analyst recently who looks at both tobacco and cannabis, and he was saying, you know, he's gotten the sense that a lot of tobacco companies have been wary about getting into the cannabis space because they're worried about the damage it could do to their reputation, which is sort of ironic because I don't think the tobacco

companies have much of a reputation to protect. On the other hand, you could see from a cannabis company perspective. They're trying to put forward right now, this sort of holistic, healthy view that cannabis is good for you, it has medical properties and so on. By having a tobacco player in the industry, a lot of those companies may not want to partner with a tobacco company because it could

actually potentially damage their brand as well. Christine just could to expand a little bit on how Canada is legalizing the recreational use of marijuana and who's controlling and running that aspect of the business. So yes, legal legalization will happen on October seventeen, which will open recreational use to all adults across the country Canada. Canada will be just the second country in the world after Uruguay to legalize on a countrywide basis. UH. This is very much a

government initiative. Our Prime Minister Justin Trudeau stated about five years ago that he was in favor of legalization and made that a priority as soon as he was elected UH in twenty fifteen. So this has been underway for a while. UH. But it's also generated a huge private

industry here. We have over a hundred and twenty companies that are probably traded in Canada, including a lot of companies with US operations because currently those American companies can't list on US stock exchanges, and so a lot of Canadian investment in her stock exchanges companies, uh, you know, and sillary businesses have arisen around this industry in Canada, at least for the time being, has established itself as

a global leader. I think the question is, you know, if and when the US does legalize on a national level, on a federal level, whether Canada can maintain that leadership position, because of course the American market is so much bigger well, and tera that raises a question of what the barriers to entry are and if tobacco is going to get in, do they have an advantage because of the distribution networks or are they at a disadvantage because they're coming to

it late in the game. I think, no matter what, they'll always have a big advantage just given their experience, you know, coming over regulatory hurdles, working with the government. I mean, I think it would be unwise underestimate big tobacco's power in the market. On the other hand, I think it makes so much sense that companies like Constellation are looking ahead and seeing you know, sales of liquor

and beer and wine. I mean that's it's a tough market and it's not growing as quickly as it used to. It makes a lot of sense to start looking at this and while you know, I'm sure that they have an eye toward the US market, which is huge there, it makes sense to start in Canada and get a foothold there, and I think these early movers are getting rewarded for it by the investors. Now, I want to thank you both very much for joining us and enlightening

us about this issue. Bloomberg's Christine ram Area, Canada Cannabis reporter, and of course October seventeenth, as she mentioned, the moment when it will become legal in Canada for recreational marijuana and our thanks also to Tara la Chapelle, Bloomberg cover columnists covering all sorts of deals and the media, telecommunications Berkshire Hathaway for example, and now of course cannabis. 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 to Bo