Eisenbeis Doesn't Expect Fed to Sell Off Mortgage Assets

to buy? Let's ask Bob Eisenbis. He is the vice chairman and chief monetary economist for Cumberland Advisers, and he joins us from Sarasota, Florida. Bob Eisenbis, thanks very much for being with us. Let's jump right into it. Give us your analysis of what you believe will happen tomorrow and what the questions will focus on following the decision by the f MC, Because Janet Yelling, chair, the FED

is holding a press conference which we will carry live. Sure, I think given the sort of parade of f MC participants that began about February two, or they're abouts with Governor Paul, we've seen a pretty remarkable parade of people's suggesting that they're going to be a rate hike tomorrow. So I think and markets believe this. They priced in essentially probability that there will be a basis point rate increase, and so I think that's what we're going to see.

The interesting thing is that that will be a rate increase following the one in December, and the December GDP number, which is the most current one that will be available, essentially was baked in the cake before the December meeting. So the decision is really not based on GDP for the first quarter of this year or anything else. It's really hinges on the employment and inflation situation. And I think they will declare victory as far as their objectives

are concerned, and that will be their rationale. Bob, you know, we've had a number of analysts come on and say that the market is inadequately pricing in inflation and the possibility of the Federal Reserve unwinding their balance sheet unwinding their balance sheet, or the Treasury Department potentially selling fifty or one hundred year debt. In other words, thirty year body yields are too low. According to a lot of analysts. Do you agree, and if so, where should they be? Well,

I mean, clearly we are in a disequluminium situation. So if the FED were to return policy to normal, we'd be looking at eel curve that would be higher than

where it is. But I don't think it would be too too much higher, simply because our normalization would take place in the context of a world in which other central banks are still pumping liquidity into the marketplace, which I believe while it would contribute to while the FEDS moves would contribute to a more of a movement on the short end, I think you'd see a longer end that would be um uh flatter than might be the

other circumstances. If you think the economy can grow at something on the order of the rate of productivity growth plus the rate of growth growth and population, you're looking at something like two and a half percent, And if you put two inflation on top of that, you're looking at somewhere between four and four and a half percent. So what are you advising your clients to do. Well, We're pretty cautious at this point because there's still a

lot of uncertainty. We're not sure about what's going to happen as far as fiscal stimulus and how this will all happen. I think when the Fed means gradually, they mean gradual, and it's going to take them somewhere. I don't see them rushing to make multiple policy moves the way some of the people are pricing in And I think,

is this a five or ten year program? Well, it's going to take a while to run the balance sheet off and the I just don't see them selling assets because, um, in order to do so, they would have to sell mortgage assets. Really, because you're looking at an equilibrium FED balance sheet somewhere around one point four trillion or thereabouts to keep, which would be consistent with past history of keeping the deposit to the currency to GDP ratio relatively constant.

The economy has grown enough that that's sort of an equilibrium level. And uh, the only way they can get there is all emmently by winding down the mortgage securities. Otherwise the treasure you'll all run off. So it's gonna be an interesting kind of thing. But I don't see them selling assets off the balance sheet if they possibly can avoid it, right, Well, Um, you know Bobby mentioned earlier that a lot of what happens will depend on

some of the stimulus efforts around the world. And earlier today, about an hour ago, Wolfgang Scheibel, who is Germans Germany as Finance Minister, was speaking to v K you lobby in Berlin and he said interest rates are too low. He's but he acknowledged the adjusting to a rising rate environment will be challenging. But this sort of builds on this feeling that even in Europe benchmark rates are going to rise. I mean, how much do you think they

will rise? What will the effect be here in the US? Well, first of all, if the if the FED raises rates right now, they have negative infrastrates in Europe. So if you're a foreign if you're a bank, UH, and your choice is either paying seventy basis points thereabouts to one of the regional central banks or getting one to one and a quarter percent here in the United States, that's a pretty significant arbitrage show. A slight movement in rates and UH Europe is not going to really damage that

arbitrage opportunity. And people don't really realize it's something on the order of of the excess reserves held at the FED are now in the sense owned by foreign institutions their domestic US domestic affiliates, and those reserves count towards the basle liquidity coverage ratio. So movements in Europe, at least on the short term, aren't going to affect us much at all, particularly when you've got this arbitrage sitting there.

Thank you so much for your thoughts. Bob ice and Bis, vice chairman and chief monetary economist at Cumberland Adviser, is coming to us from sarah Sota, Florida, where the weather is much better than it is in New York City. In our Bloomberg eleven three oh studio, a new estimate shows that fourteen million Americans could lose health coverage by next year under the gop Obamacare proposal, leaving House Republicans in a bind with a dire picture of the bill's

effects heading into the eighteen congressional elections. Here to tell us more is Anna Edney, healthcare reporter for Bloomberg News, joining us from Washington, and thank you very much for being with us. I want to start off with perhaps a strange question and ask you if you can tell us who is Keith Hall and why do you, why might he feel that he is between a rock and

a hard place. Surett, Keith hall is the Congressional Budget Office Director, and he, you know, has taken well, his office really has taken a lot of heat in the last you know, a few weeks because the Republicans and um, the President have wanted to sort of prepare people for a score from that office on this health legislation that isn't it doesn't look that great, particularly um for how many people will be uninsured under Republicans plan to replace Obamacare.

So Keith Hall, Um, you know, has sort of had to take the take that criticism and and sort of deal with the fact that, you know, Republicans and the administration are basically saying that CBO isn't good at its job, even though it was Republicans who actually put him in charge of this office in the first place. In well, hold on the first let's let's just talk about some

of the things that it found. It found that about twenty five million Americans would lose coverage under the plan that basically would reduce taxes for wealthier people, it would increase the premium that people would have to pay UH typically would fall to UH less well off Americans. UH. And so you know, it raises the question, you know, yes, it does make the proposed replacement for Obamacare, UH look

not so great for a lot of people. And you know, Mick Mulvaney, the Office of Management and Budget Director UH, came out today saying I don't believe the facts are correct. He said this on MSNBC's Morning Joe. When asked for his take on the CBO report, he said, I'm not just saying that because it looks bad for my political position. I'm saying that based upon a track record of the CBO being wrong before, we believe the CBO. CBO is wrong now. And at first, let's talk about the track

record of CBO. Has it always been wrong? Certainly when it came to Obamacare. When the CBO was assessing uh that when it was you know, in legislative form in two thousand nine and in two thousands ten, it made some predictions that were off it. UM, CBO predicted very high numbers, for um, the number of people who it's sign up for Obamacare plans through the marketplaces that the law created, and those didn't come to fruition. And that's

where a lot of people are focusing right now. One interesting thing I noticed in the CBO report that came out yesterday is that CBO tried to address this a little bit and said, yeah, we um, you know, underestimated some stuff. We overestimated some stuff before, but we're learning from those each time we go and we really try to take those lessons into account when we assessed this

piece of legislation. The current Health and Human Services Secretary Tom Price, I believe, said that this about Keith Hall and started harp on this, but I thought it was interesting. He has previously said that his vast understanding of economic and labor policy will be invaluable to the work of CBO, and the important role will continue to play as Congress seeks to an act policies that support a healthy and growing economy. This is the current How and Human Services

Secretary Tom Price. Why would he change his mind so directly? I think that's a great question. And you know, the situation that has changes. You know now that Republicans also have the White House and are able to craft their own legislation. You know, sometimes it's it's very hard to take what CBO is telling you, and and they they want to be able to get this through. They want to get it done in the House at least UM before members go on Easter recess, which is just a

couple of weeks away. And so, you know, for Tom Price to sort of change his tune on on the CBO UM would make sense for what they're trying to accomplish now versus what the landscape was in And the CBO is an independent group, it's bipartisan. Is there any other agency, any other group that has the known kind of bipartisan appeal to give an additional independent review of the Republican healthcare plan. Well, we're sort of looking out

for that UM. Tom Price had mentioned that there would be other groups that we're looking to assess this UM and that might have different numbers than what CBO came up with. They haven't released those, but there are you know, other CBO directors who worked under previous Republican administrations, UM take Douglas whole teak in for example, who might be able to make assessments for them that would you know,

work differently. And CBO has their own way of estimating these things, and not every economist agrees with it, So there could be other groups that would do this differently.

Anna Ednie, thank you so much for joining us. Anna Edney, healthcare reporter for Bloomberg News, coming to us from Washington, d C. Talking about the latest GOP proposal to replace Obamacare and the Congressional Budget Offices report saying that fourteen million Americans could lose healthcare coverage by next year and UH four million people would lose it by six bringing

the US uninsured rate to a record. Puerto Rico UH, the Fiscal Oversight Board that was instated for Puerto Rico as it grapples with seventy billion dollars of debt, approved Governor Ricardo Rosselo's plan for pulling the island out of a fiscal crisis. The only problem is bond holders might have to take bigger haircuts than they have been pricing in. To give us more perspective, I want to bring in

Daniel Solander. He's lead to portfolio manager of municipal bonds for Lord Abbott in Jersey City, New Jersey, which oversees about seventeen billion dollars in acids. Daniel, thank you so much for joining us. What was your take on this plan that was approved by the Fiscal Board. Well, first, thank you for having me. Um. You know, the take at this point is that it's it's a real accomplishment

that they've agreed to anything. At this point, it seemed like it was going down to the end there where the governor and the Cisco board we're not going to come to agreement on the plan. So I think it's

a big positive they actually came to agreement. I agree on the revenue of the expenses and a plan going forward for for a bondholder of perspective, the numbers are a little bit lower than they were before, so there's still a lot of uncertainty going forward because there's other revenues that could come in that aren't part of the plan, and there's a lot of ways of structure bonds that it can be more creative and still need a lot

of negotiations. So it's good they came to agreement. Bill still a long way to go before they have agreem

with bondholders. Could you just go were some of the major portions of the agreement because it includes furloughs as well as well public corporations and parties and legislator and judicial areas as supposed to also cut back and they still have a problem with the budget because the Ernst and Young reports says that they exceeded their budgeted expenditures by between three hundred and sixty million and eight hundred

and ten million. Maybe you can also tell us why is it such a divergence, Well, the government there is for a long time, there's been a lot of difficulty getting good financials and gained understanding and they has been they've been way way behind their audit, so a lot has not been clear. Uh, there are kind of a few things at the end. They were on the expense side, they didn't need to cut expenses more than the governor originally wanted to the fiscal boards, that a lot more

needed to be done in order to go forward. A lot more needs to be done the expense side to reduce the size of the government. And on the revenue side, there were issues with some of the forecast being maybe a little too optimistic in terms of what kind of news they could get in different opinions on economic growth. So those were kind of some of the things that

had to come together at the end. And yes, there're the other there were some things the governor didn't want to do, such as furloughs, and they have a whole Christmas bonus system. And there are some agreements now that um, if the governor can come up with other revenues, he doesn't have to cut as much. But right now he has to cut some of the things he didn't want to cut for the for the people working for the government that that originally he hadn't planned. Daniel, how big

is the portfolio of Puerto Rico debt that you oversee? Uh, well, we have a high yield fund in our one of our portfolios. So we have more than a hundred million dollars of Puerto Rico bonds in our portfolio and um, but you know it's a little small percentage, but it's it's interesting part of the high yield market because in municipals fears back. Remember Puerto Rico's investment grade, they dropped to the high yield market became a big part of

the market. UM. So they're decent part of the portfolio. But also there there's job the gate sins, their sales tax bonds, are actor constewer bonds, their power storry about the whole bunch of different sources of revenue, so they're not just one credit are you Are you under water? What's surprising is the Puertorico bonds have actually some of the bonds have performed pretty well. Last year within the menisal bond market, the Puerto Rico index was the highest

performing index. So kind of what happened after things really we're going bad a few years ago, bonds really dropped the distress prices and they rebounded a lot now coming in the last year or so, so some ownings are again the summer and losses they were kind of all over the place. But you know, there are still some of losses, definitely because when they brought the last deal proprice their way down from the last deal. Daniel, is there anything about the recent proposal that would encourage you

to go and buy more right now? It's it's it's. I guess it's hard to I can't really speak exactly what we're gonna on the trading side, but you know, it's it's it's not right now, there's a lot more details for a bondholder to be positive. Because the numbers did come out a little bit lower than expected for bond holders. In the secondary market, bonds were traded down in the last day or so and there's still a lot of our disagreements among different crediting classes, whether it's

sales tax and general obligation. But so right now is a lot of It's tough to really get very optimistic at this point. But the only positive enemy you could get is there is progress. Now they have physical plan, maybe they can negotiate more seriously. Thanks very much for being with us. Daniel Solander is lead portfolio manager of municipal bonds with Lord Abbott. They're based in Jersey City,

New Jersey. They manage over seventeen billion dollars under management. Well, the Trump administration has a plan that would slash corporate tax rates and that could free up more than ten billion dollars a year for US oil explorers. Let's find out more from Rob Barnett. He is our senior energy policy analyst for Bloomberg Intelligence. Robert's always a pleasure give us the information and the likelihood that this will actually

come to fruition. Thanks Pim. That's right. There are numerous Republican tax proposals out there that aimed to lower the tax rate paid by corporations here in the United States, and so the current top marginal rates about thirty and Trump's proposal is to take it as low as fifteen percent. There's a House Republican Land backed by Paul Ryan, that would take it down to And this has a big

impact potentially on US oil and gas producers. If you look at the companies in Bloomberg Intelligences North American Independent E n P peer groups, so basically the domestic oil and gas producers, they could see up to a ten billion dollar cut in their aggregate tax bill if you really were to go from that kind of thirty range

down to range at least according to our analysis. So that's names like Conco, Phillips, Pioneer, Natural Resources, Devon, companies like that that have a strong domestic presence here in the United States. Is all of this money going to basically UH sponsor more production and cause oil prices to go lower? In other words, is this what's behind the oil price drops that we're seeing today? We know daily volatility in the oil prices influenced by so many things.

I wouldn't try to pin any near term movements in the oil price on on sort of big broad tax discussions, But I think your intuition is right. If you reduce

the tax cost for US oil and gas producers. You you potentially make it more attractive to produce oil and gas here in the US, and you potentially could see, in our view, especially some of the large integrated companies taking more interest in the US because this could make producing oil and gas here in the US more attractive relative to other parts of the world if we truly do lower the tax costs that some of these companies

have to pay. Now, you know Harold Ham who was the chairman and the chief executive of Continental Resources, he said at a meeting it was the I h S Market meeting for Sarah week Uh, He's he's the billionaire Sheryl oilman. He said that the US industry could kill the oil market if it embarks on another spending binge, and he said US production could go pretty high. Is that possible? Well, I certainly think that a number of

policy factors may influence whether that outcome actually happens. And so a lot of the tax discussion or policy discussion around energy really comes down to the details. So when you look at the broad tap discussion, they're talking about taking that top rate and lowering it again to fifteen. But in exchange for that, there is also a strong chance that the energy industry would lose a lot of

its favored tax deduction. So that's the UH the ability to expense intangible drilling costs, the manufacturer's tax deduction, all kinds of things like that potentially go away in this world. The other thing to keep an eye on is that there's also discussion around tax and increasing UH taxes at the borders, this border adjustment tax. That's not necessarily good news for the industry. So it could be a wash if we sort of lower corporate rates but then add

a border adjustment tax. So it's a lot is going to depend on the details of the tax discussion. UH overalls, lower corporate rates tend to be viewed favorably by most big bisness is. But the devil will be in the details on what happens with these deductions or what happens with border taxes as part of that overall framework. Let's say the tax cuts do draw in more interest from integrated companies UH and ramp up or cause some smaller shell drillers to ramp up production. How many new jobs

could that create. Well, I think a lot of this discussion is centered around bringing jobs back to the the US and over the last couple of years, Uh, there's been a big pullback in jobs in the oil patch, mainly driven by the decline in prices that we've seen, but you know, uh over the over a multi year period. So you know, as a whole, the industry employs hundreds

of thousands of people. So if if you were to to ramp production, uh, it may scale somewhat literally, although I keep in mind that because of the pullback in prices, the oil and gas companies and the service providers have gotten more efficient with how they spend money. So the day rates uh for drilling rigs things like that have actually come down, and that's mainly because they've gotten more focused on personnel and other issues and trying to manage costs.

So if you see a rise in production, uh, it may be done in a more efficient way that doesn't doesn't quite have as much labor associated with it. Again, that's uh, that'll be seen in the marketplace if these things actually happen. But I wouldn't you know, I wouldn't pend too much on this. You know, the oil and gas sector is an important employer in the overall economy,

but it's by no means the largest. I just asked you a quick question, Rob Barnett, give you a fifteen seconds, tell me the state of the liquefied natural gas market llenergy and exports absolutely well. Uh, you know, we haven't seen a whole lot of action there under the Trump administration, but by and large the administration has indicated they're going to be pro l en G export and we'd expect them to sort of continue to push to see US increase its exports there. Rob Burnett, thank you so much

for joining us. Really informative and important stuff. As always, Rob Burnett is our senior energy policy analyst at Bloomberg Intelligence based in New York, talking all about the potential tax cuts for the oil and gas industry. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter

at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio.