Fed Won't Have Your Back, Salient's Hunt Says

But here to tell us perhaps why is Ben Hunt. He is the chief investment strategist for Salient and they're based in Houston, but he joins us here in our studio. Thanks very much for being here. Been great to be here, Thanks for having me. Maybe you can sort of unpack my very short description of what is going on. This is a rally in stocks, dows at a record today SMP two. Uh. No one likes this rally somehow? What? Why?

Why is that there's no feeling of exuberance? Is there? No, there's no feeling of exuberance, And I'll tell you why. It's It would be as if you had a housing market that was just going gangbusters. And an all time high and housing prices and housing activity, and yet real estate agents were having a miserable time. But that's the situation we have now because we have the markets at all time highs. And yet and yet anyone who's been in this business for really more than a nanosecond doesn't

trust it. They don't like it. Why not because it doesn't depend on fundamental factors, right, The plain truth of the matter is that fundamentals right, what what I'll call stock picking, buying good stuff and avoiding the bad stuff. That hasn't worked for eight years. It hasn't worked since March of two thousand and nine, when the when the Feds. When you say it hasn't worked, and what has it not worked? I mean because you think about companies like Facebook, like, uh,

you know, I pick a Microsoft for example. I mean, there are companies that have returned. But no, No, My point is that everything is up right. So the SNP has tripled over the last eight years. But if you look at you know, you can the bad with the good, the bad with the good, right, because this this massive amount of buying that's been going on right right now, Exchange traded funds that are typically packed with not just

one stock obviously. Well, well, well that's true. Let me let me let me come back on the whole et F question, because they're there there. I think there are two main factors here that make this such an unloved market. And it's an unloved market by stock pickers because against stock picking hasn't worked. Trying to pick the good from the bad on what we've all been trained to believe should be the deciding factors between the good and the bad.

That hasn't worked right. It used to work, It really did right, So you can look at all these actors like quality and value and the like. It it was able to you were able to to to pick one set of stocks avoid another set of stocks. That doesn't work when everything goes up together. And that's been that rising tide that lifts all boats. That's come from this massive wall of money that central banks have plunged into markets.

About fourteen trillion dollars that's how much the central bank balance sheets are today, and they're adding about two trillion dollars a year, so it's it's a massive amount of money now. But here's the thing. Something changed last Wednesday with the fat announcement. What what we're really seeing is that the FED is changing and I'll use a ten dollar word, their reaction function. And basically what that means

is the FED going forward. I don't think they're going to be your best friend like they have been for the past eight years. What leads you to believe that just because they might raise rates what two maybe three times? Well, it's it's it's a it's a whole different, uh way of looking at the world. And that's what I mean by this, this this economist phrase, right, reaction function? What what? What does that mean? It means that what sort of

data is the FED looking at? What do they say that they're looking at, and how do they react that new data? So what we've had so far this year is actually pretty not so good data from what they typically look at, things like inflation, things like industrial production, all those have been pretty pretty not so good. Right, Employment is good though, This is the thing, and this is this is the shift, Right, So the shift is now really focused on the unemployment rate. The shift is

really focused on the potential for wage inflation. And so this is why the FED gave a very hawkish talk, uh not just in what they announced, but then in

the press conference afterwards. So what what I'm saying is that this this, this pattern that we've been so well trained to respond to over the last eight years, of the FED and the other Central b is doing more and more and more, that pattern shifts has shifted, and it's it's look, this this is what always so how and I want to give you the time to do this. It explained how investors should shift their thinking in order

to accommodate this situation well to to respects. The first is that that the FED is not going to have your back anymore in the way that it has. So what we've we've been really well trained over the last eight years, and whenever there's some sort of scary moment, right then the response has always been, oh, the FED will do more, they'll buy more, they will lower interest rates. If it's not here, maybe it's the ECB. So I'm saying that's changed. What's the second thing? Give you thirty

seconds there. So the second thing is this, when everything was going up together, stock picking, active management didn't matter, right, and so that's why you saw all this money go away from i'll call ittively managed mutual funds into e t s and the like, because it really didn't matter. When this rolls over with the the fat not being your best friend, it matters again, and it's just at the moment of maximum capitulation both by practitioners and investors

here in this market. I want to thank you very much for your insight. Very interesting. Ben Hunt is the chief investment strategist for Salient. They are based in Houston, Texas, and you can follow a Ben on Twitter at epsilon Theory and you'll be able to find out exactly all the details about how that theory is put together and how it applies to professional investing. Well done, Thanks very much,

Ben Hunt. I want to bring in Stephen Gandal. He is a columnist for Bloomberg gad fly covering equity markets. He can be followed on Twitter at Stephen Gandal g A M. D. E. L. Alright, so tell us, Mr gad flyer, what about this deal that Amazon taking over the Whole Foods. What effect do you believe that that

has on the grocery store industry? But I want you to see if you can connect that with this initial public offering that we've been speaking about Blue Apron, which is the prepared recipe, base delivery, cook at home food business. So clearly market thinks it's gonna have a lot of

effect on the grocery business. All the stocks fell uh if you look at it, and and and so some people use that to bridge to say that maybe the government's gonna look at this anti trust if if investors are so worried about Kroger's and Safe Supervalue and some of the other ones. But I don't think that's really case. It's very It's relatively small. The the in terms of

sixteen billion. I think in terms of sales uh food food right right have eight hundred billion in the grocery business and billion for Amazon at a twollions for Amazon. But Amazon has eight billion in the in the grocery business. So it's still small. It's a bigger portion of the online grocery online business. But because that's because you have to if you broadly define what Amazon, because Amazon sells

everything online. If you say everything that could show up in a grocery store, called that Amazon's online grocery business, that's a lot of stuff that maybe isn't they've never really thought of. It's not Amazon Fresh, they've really ever thought of that as kind of grocery delivery. So but

clearly the the market is concerned about that. I'm not sure how concerned they should be about in what way the stocks all felt, I mean the competing groceries, the competing grocer stores right, a little bit up today, but okay, yeah, a little rebound on let's say Krogra for example, right exactly.

So for for Blue Apron, this comes at a very bad time, right, because they're trying to price their I p O. You can imagine that Whole Foods would do a service of whole meals where a customers would get free delivery, and that is uh and and also Whole Foods is seen as a premium fresh food brand. So you can see there's a big negative for for Blue Apron. I keep thinking of one word, and I don't know whether it should be one word, but it's called peepot.

Remember peepod. Yeah, well, originally it was a victim of the dot com bust. There was an operation that was designed to deliver food to your home in just this manner. And well I think peopot still around. There was a web in well they have a new a new version of anyway, The point being that what has changed in the food preparation and delivery business that makes this a good business now, whereas let's say, seventeen years ago, it

wasn't such a good business. I'm not sure. I mean Amazon was first of all, Whole Foods did not think this was a good business. They weren't in it. They partnered with instant Cart, so they said, you know, we'll let someone else kind of do this part of the busines. Instat Cart is a delivery another delivery service that it or two uh Amazon Fresh or what people think Amazon's gonna do with Whole Foods. So hope it said they didn't really want to be in this business and and

Amazon had trouble getting into it. I mean they they they have kind of dabbled in it for a few years and then kind of decided, I guess with this that couldn't do it on their own. Blue Apron has made the case of this is a really good business, but they haven't really shown that it can be. I mean, the idea with the commerces that it can bend the cost structure, right, you don't have to have stores, you have to distribution. We've done in their short stories. You

can be a lot more profitable. But that doesn't really the case in in groceries because the inventor you have goes bad. Right, the main problem with the grocery store is that your food is always spoiling. And and Amazon or Blue Apron sorry, hasn't been able to show that they can hold lower inventory than their traditional grocer. Right. Their inventory is going up, has been going up, it hasn't been as a presentage of and spoilage costs have

been going up. So it's not clear that, uh, when it comes to grocery business, the e commerce is really a better business model. So having said that, what makes Amazon dot Com think? Do you believe that this is a growth business or is it just to take more market share? And then you know, you'll read a recipe in the Washington Post, which is owned by Jeff Bezos, and you'll be able to order it through some app

that will automatically connect you with content. I mean, all these marketing options, right, I Mean, one thing you could say is just this is a bigger test. You know, He's it's not much money for Amazon, as you said that, in terms of the market kept, it's not very big. So they're just they're doing another test. They tried with on their own for a test. This is a bigger one.

So that's one way to look at the other way look at it, I would think is the play is that Amazon just wants to be more and more part of your life. Right you wake up? I wake up every morning and say Alexa, good morning. Right, And so if I'm getting my groceries from Amazon to even if it's not producing a lot of profits for them, you can see how they want to continue to integrate and is on into your daily life. And if you get your food from Amazon, that's a big part of it.

Do you think that there's a greater risk of a food delivery company versus a restaurant company? And I'm thinking about the food scare that took place with Chipultle over the last couple of years and how that really knocked their stock and caused the whole bunch of problems for the company that they are still struggling with. I think whenever you're trying to do fresh on a mass scale, uh and again Blue Apron, if you look at them, they've had inventory issues, problems trying to get the food

fast enough to um consumers before it spoils. I think you're you're you're going to run into this problem the

same way Bold they ran into the problem. So yeah, I think it's an issue, and I think if you again, the Amazon deal for Whole Foods comes at a bad time for the Blue Apron because Blue Apron, it's supposed to have a higher profit margins, so they're they're multiple is supposed to be a premium, but they have about the same profit margins as Whole Foods, and Amazon's only paying is paying like a little bit less than one

time sales. Blue Apron today announcing their I p O. They want to go in about four times sales right that they really have to uh and some of that because the Blue Aprons construct uh sorry growth, but they really have to ben that cross structure and show they can, which they haven't to say that we're worth four times

whereas Whole Foods only with less than one. But I'm just wondering if you there's a Devil's Advocate position to take, which is that this is actually a good thing for Blue Apron because it confirms that there is big money behind the food delivery business, and Whole Foods of course comes with its store footprint, which something that blue Apron

doesn't have is either a plus or a minus. I agree there is some validation to it, but there's validation at a quarter of the price, and with that validation comes a very big competitor after you. Yeah, and just want to have you tried any of these home delivery

fresh Direct in New York. I sort of like it in a lot of boxes, like so, so you lose is the time of shopping at the store, but you um or you don't have that time, but you do have the time of cutting up boxes and uh, at least in New York City, uh, tying together so you can get the guardsman to take them away. Well, well done, thank you, and good for you for being so uh environmentally conscious. Thanks very much. Stephen again del He is

a columnist covering equity markets for Bloomberg Gadfly. Go ahead and follow him on Twitter at Stephen Gandal g A N D E L. I want to bring in Alex Brinka, our initial public offerings reporter, to sort of add into this, because you're not necessarily going to take a company that is losing money. I think it's doing about seven dred

and eighty million in revenue. Uh, this is a food delivery home preparation company called Blue Apron scoring public alex A pleasure tell us what you know about this I p O. I think it's gonna They said, what five seven million, including the overlap montunder writers, right, so right now they're marketing slower, They're they're marketing sorry you know, I mean, I'm in the weeks that I relate, I get excited pim um. They're marketing thirty million shares um

for fifteen dollars to seventeen dollars each. That's according to the filing that they updated us when they filed this morning, basically announcing to the world that they're going on the road show for this I p O. Interesting timing though, and not necessarily Blue Apron's fault. So they they operate in the food delivery industry. As you said, they send boxes Amazon exactly. You know where I'm getting Amazon Amazon,

Amazon exactly. So they send food and you remember last week Amazon agreed to buy Whole Foods for about fourteen billion dollars. So that kind of big looming specter over this whole grocery industry is out of the control all of Blue Apron. They've got to get this deal done.

But you know that happened just last week. Now they're going to have to go out in front of investors for the next two weeks and answer questions about the industry, about where their competitive edge is, and you've got to think a lot of those questions are going to include

that word Amazon. I'm wondering if you could just speak a little bit about the people or about some of the details of the company, because I was reading the s one and these are very accomplished executives who are running it the albeit many of them in their thirties and forties. It is a young company. It's a New York based company. UM. It was founded by Matt Salzburg. He used to work at Bessemer Venture Partners in exactly, and it's one of the early investors in Blue Apron

as well. UM. He's been around the block for a while UM in the tech kind of startup space. He also worked for Blackstone. The CFO came from under Armor UM where he was of the VP of account exactly Bradley Dickerson. So they there is some big name experience here. Again, the constant question is going to be for a lot of these companies, this one will only be valued at three point two billion dollars if it sells its shares at the high end of that range compared to you know,

the giants out there. The question will continue to be in this space. It's an eight hundred billion dollar grocery market. How what's the market? What's your target audience for getting these home kits delivered to you? Is that enough? Is

there growth? There? Is that enough? Well in the S one and DA if you can even come in on this, you know, looking at the charts that they show that are going to be part of the road show, it has you know, a nice big bar chart that shows that the biggest demographic is the youngest age group cohort and that I think something like or the total customer base is made up of these young people and maybe

they just don't know how to cook. And that's you know, that's the book case and that's what they're pitching, and that will be so important for these deals for these companies that are losing a lot of money. Investors want to know where is the growth? Why do I trust my money with you at this young age? Where is the growth going to be? They say? Blue Aprin says, they only address less than one percent of the total addressable market for customers in the US, so you can

see there that there is room for improvement. But the bear case, I still got to say those millennials, I'm of the category we're still buying on Amazon. I was going to ask you have you had a Blue Apron I have. I've tried to be a good reporter. I've tried Blue Aprin. I've tried sun Basket, which is another company that, according to our sources, has hired underwriters for a potential I p O moving to go public. So

you can see there are some copycats here. So competition is going to be the key word thinking copycats uber left Gee, it's an interesting tech economy. Thank you very much, Alex Brinka, our initial public offerings reporter, and you'll be following Blue Apron Force and Dave Wilson Bloomberg Stocks. Colmus, thank you very much. Let's turn our attention now to banks and the potential payout of thirty billion dollars here to tell us more as our senior writer for Banking

and Finance, y'am an owner on for Bloomberg News. Yeahm and always a pleasure to see you. Thirty billion dollars. That's Um, that's real money, isn't it. Yes, it is? And where does it come from? And where can it go? I mean it's not new money. It's not more money that that the banks are going to make as profits. But it's the money that they will be able to uh distribute to their shareholders in addition to what what they did last year. So this is just an increase

individends and buy backs. And that's crucial for shareholders of banks because, um, you know, many years after the crisis, they really were so stingy. The banks were stingy. They had to be stingy. The regulators didn't really let them distribute any of the money they kept holding onto them and improving their capital levels. Now finally those payouts are slowly inching up. We'll tell us about Stephen Manuch in

the Treasury secret terry and his role in this topic. Um, you know that this sort of the easing of the stress test where where this you know, this is why some some of the banks are increasing their payouts. It sort of predates Trump and munition things. Things started happening even last year because partly because banks have managed to increase their capital levels over the years, so it's not as bad as it used to be uh, and regulators

have have sort of eased up on them. But munition under Trump's executive order is reviewing all the all the bank regulations and and in his recommendations that came out last week, he suggested that they should get even you know, easier on the banks during the stress tests and and make them ever two years you know, dropped the qualitative uh portion of it, which is very tough. So so going forward under regulators approved appointed by Trump, things are

probably gonna get even better for the banks. Now. The regulators that actually administer these stress tests they from the Federal Reserve. Yes, this is a federal reserve institution. It has become. They started in two thousand nine. Um. I mean it was very much hand in hand um with the government at the time who wanted to to restore confidence in the US banking system. Um. But then it

became a big, big federal reserve institution and um. Dan Trullo, who was in charge of regulation at the Federal Reserve was a big proponent of this and and led this effort for years. So he is out. Um. There will be new people appointed by Trump to the Fed Um, so if those people are are more industry friendly, you know, this could get even easier. When you say get even easier, you mean to actually change the terms of the stress test. For example, have it done every other year for example?

That is one way and um other ways are um. You know, banks have complained a lot about how untransparent some portions of this. In other words, that you know everybody does their own stress test. They say, okay, if there was a big crisis financial economic meltdown, how would be fair? And then the FED takes those and then

runs its own calculations using its own secret models. They don't tell anyone, and and the banks keep saying, we never know what you're really looking at, and so more transparency, for example, that the Fed starts giving about these things, the banks would like that. Well, one thing that we know that is transparent is that if you have two hundred and fifty billion dollars in assets or less, you can be exempt from this from parts of it, I

mean the qualitative section that that I mentioned. The qualitative section is where not only the numbers, but they looked at every risk management tool that the bank's had and really cracked down on them, on on small little things that they found lacking, which again the banks hated. Uh dotcha banks. Trust Bank, which is a very small subsidiary in the US, kept failing that portion for a few years. Um,

they're not going to be in it this year. But Dortche Bank and other big European banks are gonna be um consolidated. I mean they have consultated all their US operations under one roof according to other federals. And so those big consolidated entities in the US will actually come under the stress test next year. So it will be tough for them again. So they will be under the spotlight once more. Um, and and they might then we

might see failures there next year. UM. But still as we go forward, you know these things are not gonna miss harsh. There will be more transparency and the banks will probably know better how to deal with them or game them. Well. Thanks very much, I know you're gonna be watching both of those potential scenarios, y'all. I'm an owner on senior writer Banking and Finance for Bloomberg News, speaking about less stressful tests how thirty billion dollars could

be unlocked for bank shareholders. 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