'Dumbstruck' by Trump on Puerto Rico

expected wage gains, So a kind of convoluted picture. You've got. Trader has taken the better information out of that and trading on that. Meanwhile, you have Jonathan Pharaoh of Bloomberg Television saying this is just confirmation bias that traders are trading off of. Here to weigh in on that and perhaps confirm that or perhaps debate that, Constance Hunter, chief economist at KP joining US. Now, Constance, do you think that it's totally ridiculous to try to trade around number

that is so hard to decipher given the hurricane disruption? Well, I think that depends on how good you are trading, So for some people it might be worth it. While others, it might not be um. Certainly for a retail investor trading around this number is ridiculous. And and there's there's looking through the long term data, and I think I think what we're seeing here is not just the traders of trading on the wage games, but they're trading they're

looking through this long term data. So if we look at, for example, comparing this to one of our last major her train hurricanes, Katrina. In Katrina, one point five percent of the workforce said they were either not at work or at work part time, but they usually work full time. Due to the hurricane, and with the combination of IRMA and Harvey, that number jumped to almost three percent of the workforce. So that is a lot of lost jobs. But you can also see that it's temporary, right that

these people are going to come back to work. The biggest sector that lost jobs was leisure and hospitality a hundred and eleven thousand workers. And obviously those institutes, those establishments were closed, they're going to reopen, those people are going to go back to work. So if you look forward, you can see that the momentum in the economy is still there. What I tweeted out earlier this morning is the streak is broken, but the economy is not. I

thought that was a great headline. By the way, Constance, I thought, yeah, once in a while there was really a commend you because it really captures exactly, you know, the perspective that you're offering. And in that context, I'm wondering if you can offer your thoughts that these one off events that are no longer seemingly one off, whether they are natural disasters, uh, like hurricanes or um you had of course, uh, I think back to Fukushima in Japan.

You have these events which you know, you always hear those debates about whether they're more frequent or less frequent. But to put that aside, the fact that they exist on a semi regular basis, does that mean that you need to adjust your focus when when you're thinking about where to put your money? Well, I think certainly there's uh, there's a there's a perception that they're more frequent in the data would suggest that with the warmer water temperatures,

they're going to continue to be more frequent. But in thinking about the economy overall, what you have to think about is is the economy strong enough to withstand the shock that such an event would prevent but would cause. Rather I'm sorry, or I was going to say, or big enough. I didn't want to give it any characterization, just that the U. S. Economy is so big and the country is so big that it can it accommodates

these large shocks. Yes, it can. If we're if we're in a period of strong growth, if we're in a period of wheat growth, it could have a it could

have a greater effect. And understand, we haven't seen the full effect of the hurricane, so you know, our estimate is that it could shave zero point eight two off of GDP in the third quarter, and a lot of that is going to be from this lost income that we've had UM, and a lot of it's going to be from the fact that a lot of these people that were hit, certainly in in Harvey, we're not in flood zones, so they were not appropriately insured. Uh So it is going to take a bite out of GDP.

But um, overall, I think the economy is strong enough to withstand it. The big question mark is if you look at the pressure point in the economy in terms of employment, it really isn't that construction sector so we've seen wages grow up in that sector, we see scarcy

of workers in that sector. And if people are deployed down into UH, Florida and Texas to take care of this rebuilding, it's going to put pressure on the rest of the economy and that sector throughout the entire economy, and you could see ripple effects that that do impact the entire economy. So constant, we're probably going to get this muddy data from the hurricane for another couple of months, uh,

at the least. Frankly, I'm just wondering, from your perspective, what are you looking to in the meantime to already get a better read on the true economic progress being made. Well, let's let's just take this job report in general, right, So you have the household survey, where you saw big improvements in the labor force participation rate, you saw the

unemployment down to four point um. You can look at a lot of real time data, so you you can look geographically around the rest of the country, not just in in Florida and Texas. But if you look at the rest of the economy and look at some of the regional data, you're able to see the strength of

the economy overall constants. Earlier today, Martin Feldstein, who is President Emeritus at the National Bureau of Economic Research, he was speaking on Bloomberg Television and one thing that really just struck me was he said that the US needs a corporate tax overhaul. He said they need this overhaul and that it is crucial if the US that increases and that we have to bring our practice is in line with other industrialized countries. Do you agree with that

and do you think it will happen? Uh? Well, um, So, Martin Balstein has been giving a series of talks. He um he gave a tract at the National Association for

Business Economics last week in Cleveland which address this. And so, just to put in perspective, he's looking at a at a headline rate of about um is what he thinks is realistic and and of course keeps in mind the fact that we don't want to increase debt levels or increase our our budget deficits substantially, but we do want to bring our tax um policies more in line with the rest of the world. I have a little bit of a disagreement though on the worldwide income taxation. I

think we should have a holiday. I think we should get that money back on shore. But we are also the only country in the world that is the reserve currency, and that is a privilege that costs money. Um it is a benefit to all US companies. They are able to transact in dollars, means they're they're exposure to currency risk is much more limited than other other countries companies,

and and and this costs money. It costs money to maintain a military that that um it works all over the world and and guards the trade of those goods. And so I think something like a three or five percent permanent tax on offshore income would be reasonable. And there are a lot of other countries that do this. They give a much lower tax rate the money earned off shore. UM. So that that would I think would

be one disagreement between me and Marty Felstine. But but he he is right that our code has become overly complex. It's overly comtelex for individuals, it's overly complex for firms, and so simplifying it would certainly free of resources to

be used for other things of the economy. Yeah, I just want to just make a quick note that US Treasury yields are actually coming in, and there's a bit of a rally in treasuries, and one trade or noted that it's because of new reports coming out that UH Pyongyang, North Korea is preparing to test a missile capable of reach in the U. S. Coast. That is according to a Russian lawmaker, and so this is what people are

attributing into. So well, we will certainly keep keep abreast to that and bring up any news headlines that are related to that. Of course, I want to thank you very much. Constance Hunter is the chief US economist at KPMG, giving us her views about the jobs report and the potential for any kind of corporate tax reform. Right now,

I want to turn our attention to markets. We saw a real sort of gain in treasuries, yields come down after news was reported that a Russian lawmaker says that North Korea may test long range missiles that could potentially hit the West coast of the United States. The stock market unphased. Really nothing can shake this market. Really talk

about that. I want to bring in Ernesto Ramo's head of Equities for BEMO Global Asset Management, portfolio manager of the BEMO Low Volatility Equity Fund, which trades under the ticker m l V e x um Ernesto. I'm struck by the fact that you're seeing a longer lasting effect from these sort of nuclear scares in the bond market then in stocks, and and in stocks just shrug everything off.

What do you make of that? Well, that's one of the things that I've been personally surprised about how much the stock market has ignored the potential for geopolitical risks and conflagation. But what's driving the market is earnings to be to be honest with you, if you look at the SMP five under the earnings growth that consensus estimates for next year is strong double digits closer and for

the following twelve months is another ten percent. So that kind of earnings growth, if it comes down to t to fruition, will continue to drive the market higher. Now, of course, if you actually get some kind of a war with North Korea, um that that that that scenario will will definitely not happen and and you're gonna get

some some serious retrashment in the market. And that's why the Low Futility Fund would be a good way to stay exposed to the market, but with a fair amount of downside protection because that's the way we've designed it to to behave ter national Can you use the stock the company aligned technology as an example of the kind of company and investment that you look for for your fund.

They make the Invisiligne UH dental product. Sure Invisiligne it's actually the as you said, They make the the the seamless braces without without wires, and the two things are driving their growth. Number One, they're starting to penetrate the team market. They had previously been focused on the adult market because adults on one wires in their mouth to show.

But now UH teenagers are also becoming very very self conscious and aware that that the this technology can help them stay less less visible in terms of their braces, and they're embracing that. That's in the US, they're also beginning to tap into overseas markets. And as you are aware of you travel around the world, you are aware the United States has the best teeth in the world

and everybody else not so much. So there's a huge market outside the US for better looking smiles, and that's what investil Ligne is starting to tap into and deriving a lot of growth from that, ernesto, is it possible to create a low volatility fund without using derivatives? Sure, we just focus on h First of all, there's two parts of our process. First of all, selecting the stocks and they're combining them in a way to reduce the risk.

And UH we what we do is we have a lot of data and a lot of computing power to at our disposal. We look at the risk in five different ways and we're able to rank the stocks from highest to lowest risk and then also from highest to lowest in terms of a return potential. And what we do is we seek a good combination of very low risk stocks with attractive return potential. And that's what we deliver in a very well calculated and balanced UH portfolio, which is is what our fun turns at the end

of the day to be. I'm sorry to just keep you in the weeds about invisile line, because I'm always interested in how much something costs, right, and so you're willing currently to pay fifteen billion for a company that does a billion two of sales and has net of about two hundred and forty million. That works for you. That math works for you. How fast they have to grow to justify that. So yeah, so our scoring system, I know it trades out about fifty times next your

learnings and that it seems very expensive. But our scoring system for for return potential has three parts fundamentals, valuation, and sentiment. And they scored not so well in valuation, in fact, rather poorly, but well enough in terms of fundamentals and the sentiment part that the overall score is still attractive enough to make the grade in our fund.

And we're very very disciplined about not trying to second guess our our scoring system and and and we will stick to that because that's how we've achieved that kind of performance that we've delivered so far. Well, we want to appreciate you coming in and shedding light on this. Uh, this is an interesting fund. M l uh c i X is the symbol for the fund. Thanks very much for being here. That is the BEMO Large Cap Growth Fund. And I want to thank Ernesto for being here. He

always great pleasure. Ernesta Ramos. He is the manager of the funding co manager as well, okay co manager as well. He's the head of Equities at b MO Global Asset Management. We want to learn more about municipal bonds and that means we need to learn more about Puerto Rico. And joining us, of course, is Joe Maiasac. He is the editor in charge of our Muni Brief product, and Joe, I want to just read you the quote that from President Trump when he was in uh, Puerto Rico recently.

He said, they owe a lot of money to your friends on Wall Street. We're going to have to wipe that out. That's going to have to be you know, you're gonna have to say goodbye to that. I don't know if it's Goldman Sachs, but whoever it is, you can wave goodbye to that. What was your reaction when you heard that? And then tell us is there a basis for using any of that in order to make the situation and the lives of the people in Puerto

Rico better? Well, when I h I missed the first go round of that, and about three am, when I was looking to put together the brief, I saw that comment and I was dumb struck. I just said, this is historic. I've never heard of president sort of take out the whole entire municipal bond market, which is as you know, uh, sort of based on law, the rule of law. Um, would it make the people's lives on

Puerto Rico would have improved there a lot. I you know, if you somehow thought that the president ruling by FIAT and taking away all the debt, I don't know who would lend to them? Well, okay, So, so stepping aside to sort of improbability and the unprecedented nature of the suggestion that President Trump threw out there, let's talk about the reaction right. Bond prices plunged on Puerto Eco's dept, particularly the general Obligation bond that matures in, which is

sort of their benchmark issue. Uh, there is a big question as to why, given the fact that pretty universally it's totally understood that President Trump is does not necessarily have the power to throw out this debt, or does he have the inclination to do so. The administration walked back his comments subsequently, and yet prices are still depressed from where they were, and I'm wondering what we can

make of this. Does this mean that all of a sudden, in some ways the bond market is actually getting more realistic with respect to what recoveries are going to be like with the Puerto Rico debt negotiations. All right, see now you've you've put your finger right on it. Um. You know, bonds trade thirty sixty or ninety above. Everything is fine, sixty, bonds are getting into stress. Thirty that's sort of the salvage value. People are speculating at the

salvage level. And at forty four cents on the dollar, which was the the day previous, I guess was Tuesday, at forty four cents on the dollar, Puerto Rico was probably still too expensive. Those bonds had not dropped enough. Uh So perhaps that you know, perhaps it was the Trump comments. Perhaps it was also final realization that well, there's a lot of damage in Puerto Rico, and there's a lot of devastation, and people are leaving the island. And finally, you know, there was that break and it

was a funny. It was not funny, it was it was a very interesting thing to watch because the thirty and a quarter price was uh that was you know, on a four hundred and seventy five dollar block of bonds tossed out at nine sixteen in the morning. You're talking about the low point that we saw in these general obligation bonds, which is one slice of the seventy four billion dollars of deat the Puerto Rico has, right, So thirty and a quarter some dealer throughout that, you know,

and and the owners what kind of what kind of volume? Um, this was a four hundred and seventy five thousand dollar block. So that low price was was printed at nine sixteen in the morning. So a lot of the coverage you saw made you think that there was this horrific uh, you know, people are rushing for the gates, but the volumes were high. By the end of the day, I was about eighty five million dollars traded, which was a

very large amount for that bond. Haven't seen that much volume in the eights and two thousand thirty five in you know, certainly weeks and weeks, probably months, um. But what really happened was that there wasn't this rush for the gates at the end. In fact, there were twice as many buyers as sellers of these bonds, and the

prices started climbing, you know, after that thirty and a quarter. Basically, you know, they banged around a little bit, but it was very orderly and uh, you know, by the end of the day, I think we were up, but you know, around thirty nine cents. So what does that tell you? I really do not know why someone is buying Puerto Rico geos at this point, and yet they were buying

and in all various sizes. Well, but somebody could argue that if the US federal government does give money to Puerto Rico to help restore its structure and keep people there, uh, that this will actually be a net benefit for the island. Down the road, there's still those clinging to the hope.

What's the rebuttal to that. Well, the island did say the debt was not payable and entered into the Promisa and Title three bankruptcy, and they the island, you know, says we need some relief here, and uh, there will be negotiation. What are you gonna get? Obviously, the people who are buying at thirty three and thirty four and thirty eight cents are are betting on a higher recovery value, maybe fifty cents, maybe sixty cents. Who knows, um, but

it's it's difficult to imagine. Uh, you know, for the longest time, the hedge fund guys were saying geo's at par and they really believed it. Well, not anymore, Joe Mi Sac, thank you so much for joining us. It's always a pleasure. 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 wits one. Before the podcast, you can always catch us worldwide on Bloomberg Radio.