Government Should Be Borrowing As Much As They Can Now: Stern

Here to tell us More's Joel Stern. He's the chairman and the chief executive officer of Stern Value Management. Joel Stern, thank you very much for being in our eleven three oh studio. It's a pleasure to have you here. So answer this question for us. The level of government debt is causing a lot of people to opine about the future prospects for growth. What's your thought, Well, they are wrong, they are wrong. There are two ways you can tell. Take a look at real interest rates if the level

of debt. Look if the bond rating of a company goes down, what do you think happens to the rate of interest they pay? It goes skyward. The thirty year government bonds, they're yielding three point one or something. So there's gotta be there's gotta be a retort to that, and I'll tell you what it is. You don't look at book value. You will look at market value. The market value of assets in the United States, not just the stock market, hey, real estate, gold, diamonds, all kinds

of assets. They are very very high. If you take a look at the debt ratio, the amount of debt in relation to the market value of the assets we have, the debt ratio has actually gone down quite considerably. Okay, So, Joel, you're making an argument saying that it is perfectly fine for the U. S. Treasure Department to be selling a

record amount of debt each quarter going forward. For right, so you've got new debt, right, new debt, Yes, new debt, additional issue in uh So, given that argument, we got the Treasury funding announcement earlier today, do you think they ought to be selling longer dated debt and more of that because they're focusing so much on the front end with a new two months two months a note as well. Well. Keep in mind that government debt, as I understand it,

has no call protection. Whatever rate of interest, for whatever period of time, you're stuck with it in the government. Well were we as citizens are stuck with it? Okay, we can't call the debt and retire it early. Okay, we can buy it up in the market place, but there's no call protection. I remember back in the early eighties when the Gut when the inflation rate was very,

very high Underaggan, he inherited that was something like twelve percent. Well, would you believe thirty year government bonds was suddenly being offered at fifteen point two percent? Okay, fifteen percent? Well, what does that mean? It means that the government officials, the economists, they believe that the high inflation was going to continue for the next thirty years. Okay. A Beryl Sprinkle, who was the under Secretary of the Treasury, I called him at that time and I said, hey, Beryl, what

do you think? He said, I'm not I'm not a risk taker on this. I'm just a government official. I don't have any bonuses paid to me based on whether or not my guesses are right. Whatever the market wants, that's what I'm gonna do, all right. It's one thing. If it's fifteen and a half percent. I'm looking at three point one percent for thirty years in US yields. Right now, you're suggesting that the US not necessarily issue thirty year debt at these types of yields because they

could go lower. Is that correct? No, I would say that I would not be a betting person that for the next thirty years we're not going to have any significant inflation and therefore I'll get paid back in cheaper dollars. If I were the US government, I would never have gone to the route of the ten year. I would have stayed with the thirty year because the difference right now, for example, between the ten year and the thirty year is a drop in the bucket. It's about fifteen basis

points well at that rate. For goodness sake, they should be borrowing as much thirty year money as they can, and they should be refinancing short term money into that. Because I believe that the economy, as you know, is going to be stronger going forward. I think we could have growth rates in between three and three quarters and four and a quarter percent, and if we do, interest rates are going to be higher. And if they are higher,

take a look at the budget. I mean, the interest is something like seven percent of the entire federal budget, so we don't want it to become twelve percent or fift in percent simply because the rates go up. Let's lock the rates and now, well the Federal Reserve phrase interest rates consistent to what economists are predicting three maybe four times. Yes, I think so. But the keep in mind that right now, because short term rates have already been increasing, the Fed has to raise the interest rate

they charge banks. Otherwise the banks are going to get at another subsidy. They don't deserve it. In other words, that they can borrow at the discount window. They have to raise the discount rate just to keep it competitive with treasury rates. Otherwise the banks have an unfair advantag So I'm trying to understand if you're saying, and you've been consisted in this, and frankly you've been right that

the U. S economy will continue to accelerate. Um, what do you make of the earnings we've gotten so far, particularly Caterpillar, which sort of was the key moment in this earning season, coming out and saying this may be as good as it gets. I am not one for taking a look at one quarter. Okay, you've got to take a look at this thing over a period of quarters and see what's really happening. Keep in mind, too, the slashing of the tax rate is one big effect.

There's a slight offset though. Remember what did what did Trump do with regard to capital expenditures? You right off the capital expenditures all in the current year. Remember we would normally depreciate them over time. Well, one of the ways they thought to stimulate the economy would be an immediate right off, and it would be. But the question is, then, what happens to comparability on accounting information if you're measuring

return on investment or whatever. Now the investment is lower because it's been written off immediately, and the profits are lower because it's been written off against the profits. So it's gonna be we're gonna go through a period when we're gonna have comparables against the prior year for cooperations

that are not going to be very meaningful. I would like to ask the people at Caterpillar to what extent was the new tax law, if it had any effect at all, And to what extent the tax law is going to have an effect in the future, and that's true for all capital intensive companies. I want your thoughts on inflation and why we seem to be at maybe two percent inflation officially, and yet you talk to anybody, their perception is inflation is much higher. Know that you

have to talk to me. Inflation is much lower. Can I tell you why? Very interesting. Let's assume the price of peace goes up and you switched to string beans, and say string beans have not yet gone up, then the average price you pay is not as high as the index indicates. In other words, the the index assumes that the market basket of goods and services that people buy is unchanged. There's another reason. I remember I was

on the board of a company called Vivatar. We made lenses, flash equipment, thirty five millimeter cameras, and one of our board members walked in and said, look at this, and he showed us the new Sony camera that had no film in it. Okay, and he goes click, click, click, He takes a few photographs, and I said, where is the film in there? Oh, no, no film, just a microprocessor. I said, how much does that camera cost? Two thousand four D? I see, and when do you think it

will come down to a decent price. Oh, it'll get down to eight hundred within a year, and maybe it'll be down to three hundred in a few years. But here's the problem. People start then buying it big time, and guess what happens. It's not yet in the market basket. And by the time they put it in the market basket, all those price declines that take place from down to

the three hundred, they never show up anywhere. Keep in mind, too, we're getting improvements in the iPhone or in the other phones, and the result is we're not it's not being priced in to the consumer price index I'm suggesting, and it's difficult to do it. Don't get me wrong. I feel badly for the Commerce Department and the Bureau Labor Statistics because it's difficult to do these calculations. And at the same time we have to realize that the inflation rate

is almost permanently overstated. Joel Stern, we love having you on. Thank you so much for being with us and sharing your thoughts. Joel Stern, Chairman and chief executive of Stern Value Management, very respected person in the market, long term voice who is uh sounding a note of optimism on all this caution and concerns that the best is behind us and woe upon this credit cycle. And Lisa Brom what's along with my co host Pim Fox, And this

is Bloomberg Radio. Oh Apple, the gift that ends up giving despite people's doubt about whether or not it could deliver. Here to talk about the earnings and what's to come. John Butler, senior Telecom Services and Equipment analyst with Bloomberg Intelligence, joining us in our eleven three Oh studios. John, is there anything negative here or was this just an all out and out amazing, wonderful blockbuster that shows that even though Apple is tied to the smartphone, it doesn't matter.

They can still blow it out of the water. There was not a lot to worry about this. Come on, they defied the skeptics, um, you know. Rolling into the quarter, there were all these reports coming out of the supplier community that Apple was cutting orders for the iPhone X iPhone ten, I should say, and there was a lot of the concern was at that iPhone ten is helping Apple bring up the average selling price of the iPhone,

so as unit chip and slow. If your average prices going up, you're gonna get nice revenue gains, and we saw that this past quarter, right, iPhone shipments were up around three percent, but the revenue group four. And I think what really encouraged people was Cook's commentary that the iPhone TM has been the best selling iPhone in every week since its launch, and that has never been the case in the past with a new phone. That that

really is a record for them. And I hate to use the word record because every company has record quarters and record this and record that. It gets overused and overblown, but I think it's really fair to take note to that. I think that's an important trend here because it lends confidence in the fact that there is a market for a thousand dollar plus phone. And I think the iPhone ten is proving that it's pims, it's Pins family. Right. Can you tell me about margins? So the margins were

flat if you look behind the curtain. What's going on with Apple and a lot of other companies, as you've had memory costs rising pretty considerably, and they were asked about it on the call and the answer was, we really believe we've sort of seen the peak in in nand and de ram prices, which are the memory chips

and so margins should improve going forward. The one thing I looked at in particular is I'm very focused on that Apple margins where i'm services revenue, pardon me, and there are potential to expand margins because they're very Those sales are very acreative to Apple's margins. So as services increases a percent of revenue, I think it's going to

bring the margin up. How about the inventory levels. The inventory levels, according to the CFO were higher, by the way, uh, five to seven weeks versus normal channel inventories of four to six And the answer was, we did some buying to take advantage of some component costs, so they were stockpiling at moments during the quarter. I think when they thought they had an advantage on chip prices, spot market was as you know, PIM was spot market prices. They

move all over the place. They sort of chose their points and bought components and and built to those um those purchases. So I want to talk about share buybacks because the numbers kind of blew me out of the water. This morning. Uh, they announced one hundred billion dollars of additional share repurchases, but they also showed that the amount of money that they spent on their own shares in the first quarter was equal to all of the shares of any one of two hundred and seventy five members

of the SMP five hundred. At what point is this counterproductive in the sense that, yes, the returning shareholder of money, but they're not investing in anything new or acquiring any of a companies that could potentially diversify their business away

from the smartphone. I share that concern. That's really my only answer there is I saw the size of the buy back and I thought, you know, I realized to them, Apple shares are attractive, but there have to be higher return projects out their higher return potential acquisitions, particularly Sinceri in particular has sort of lagged its its rivals Google Assistant,

for example. Why aren't they out buying companies that are doing natural language processing better than they are or A. I. Um, you know, a lot of the companies in those areas are very small, so it doesn't take a lot to buy them. But I'm with you. I think they should have kept some dry powder for M and A. Well. I just I think it was up from seventon that most people thought it was going to be the announced share buy back, so they actually increase they would over

what people were expecting with capital returns. Just to put it into perspective, it's not just that they were returning capital to shareholders as people expected. They blew the estimates out of the water, right, I don't right, So again I was a little bit concerned about that in the for the same reason you are, which is you know, they could do a transformative acquisition here. Not that they

need to transform, but they could diversify more. In the latest quarter, for example, iPhone sales were sixty of the total and probably a much higher percent of profits. So they're still highly dependent on a single consumer electronics product line. So I'd love to see more diversification there, particularly in services to I didn't mention that they could make some key acquisitions there. Content. Perhaps I've got to have you back. We've got much more to talk about. What Thanks very much,

John Butler. We found something to worry about. There's always something to worry about. John Butler, senior Telecom services analyst for Bloomberg Intelligence, much appreciated the fund that our next guest manages is up more than six percent so far this year. I want to introduce will prove it. He is portfolio manager of the Fidelity Latin America Fund. The symbol there is flat X, that's f l A t X and it has about six hundred and fifty million dollars of assets. And he is based in Boston, but

joins us here in our eleven three oh studios. Will thanks very much for coming in. Maybe just give people a little bit of your background as to how you came to manage this particular fund. Sure, thanks for having me, guys really appreciate it. Um So, I joined Fidelity ten years ago. UM, you know, spent the first eight years looking at various sector so did a couple of years in global consumer, looked at the beverage and tobacco stocks,

luxury goods companies, um CAN. Spent a few years looking at the commodity space, so the medals and miners UM, and then another couple of years looking at emerging market financials. And then two years ago took over. Took over this fund. All right, so let's dig into Latin American equities. Obviously, emerging markets had been on a tear. I have seen a little bit more of a soft patch of late. I want to talk about a couple of countries in particular.

Let's start with Mexico. A lot of question marks. Right now, we're heading into the election that is highly contentious. What's your outlook? Yeah, I mean, if you look at the recent polls, AM low so Locus obdor Um is in the lead by a lot um and you know, the elections in a couple of months. So you know, I think that the odds are increasing that um that that he's going to win that election. Um, you know, napt

uncertainties continue. Um. You know, I don't really have a call on what's gonna happen with with NAFTA or with election. So how do you how do you actually bet on specific companies if you don't have a call on these massive macro issues. Yeah, good questions. So I look at good I'm looking for good quality businesses at cheap valuations. There are a lot of great companies in Mexico, and there are a lot of cheap companies in Mexico. But there are not a lot of great cheap companies in Mexico.

So I'm underweight that market anyway, just given the lack of value that I see there. So I don't really need to make a call on these macro issues. UM. What I'm really hoping is, you know, if UM, if AMIL is elected, or if there's a negative resolution to NAFTA, that the market comes down, I get the opportunity to pick up some of these some of the local equities at cheap values. Just give an example of a couple of equities. You have a credit company, credit finance company

in the portfolio from Mexico. Plus I believe also you have sort of a medical lab company as well. Yeah, I mean so UM in Mexico. The sector that I most overweight is financial services UM. So I'm not sure you're talking about critical reality is one. Yeah, So financial services in Mexico are very underpenetrated. It's one of the most underpenetrated markets in the world for for credit products.

So that is a small cap company which does payroll lending to government employees, so very secure UM kind of lending. UM been able to grow quite quickly at very high returns historically. And that stock UM I think is either the most or or one of the least expensive maybe bottom two or three stocks within the within that market. And so I think it's good quality company, very very

cheap UM with good growth prospects. Let's head south. Let's go to Brazil, because this is an economy that has been in turmoil and been into the deepest recession, uh forever. So what's your what's your approach to Brazil? Are you overweight? Underweight? And uh what can you illuminate? Yeah, so I'm overweight Brazil since end of so after Timor came in and they were able to pass the first fiscal reform um. So I've been overweight that market. So you look at Brazil.

What's really interesting about Brazil is it's the only major economy in the world which is early cycle. So every other market in the world, at least significant one is mid or late cycle. Brazil, all the economic indicators are showing now is recovering from this recession. So you look at unemployment, inflation, interest rates. Him he's basically saying it

can't get any worse. And I think that that's a relevant point because it is difficult for many people to recognize that you want to be purchasing quality assets when no one else believes they are quality assets. You don't want to buy them when everybody is already aboard. Absolutely, I mean paying top dollar. And this is why I think just being aware of where you are in the

cycle matters. Like I'm not trying to call cycles, but if you are at an early cycle stage and you can find cheap assets or even mid cycle multiples on on assets at early cycle, that's a great place to fish. If you are a late cycle and you're playing top dollar, that's bad. Alright. So is Brazil where your most overweight right now? It is? It is so within Brazil, I mean the financial space I think is very interesting. The banks there are exceptional. Um, it's interesting, like you compare

emerging markets versus developed markets. In developed markets, banks are now at least social businesses sometimes cover the cost of capital, sometimes they don't. Brazil consolidated market, high margins, great businesses.

So I'm trying to get a sense, given the trade war concerns, where is Latin America as a bet And I know you're completely biased because you focus entirely on this region, but you know where in the cycle if you could say it is the region, I mean it's it's a more important issue from Mexico obviously compared with Brazil.

So Brazil exports commodities for the most part, They're not a big finish good exporter and the commodities are metals, UM commodity, UM, soft bodies, so pulp and paper, soy corn, that kind of thing. The export everywhere. China is a big customer, but they also export to Europe in the US UM. So you don't think it's going to be that big of adition. I don't think so. I don't think.

I mean you could argue that they would. They would benefit from the trades spat between the US and China, right because if China is putting tariffs on imported soy from the US, Brazil is actually the largest soy export in the world, is going to help them all right, Will Pruett, thank you so much for being with us and coming in from Boston. Portfolio manager for the Fidelity Latin American Fund uh managing about six hundred and fifty million dollars of assets, and he has headed to Chile

in less than a week. Have a great flight. Welcome to the Megan economy. I'm talking about the marriage between Prince Harry and Megan Marco, which has the potential to transform the fashion industry, if not forever, perhaps for a few years. Joining us now, James Fallon editorial director for Women's Where Daily, joining us here in our eleven three our studios, James, thank you so much for being here.

So tell us about the Megan economy and just how significant this marriage will be two retailers another in the fashion world. I think it will be very significant. The initial projections by UK Consultancy where that the marriage would inject five hundred million pounds so six hundred plus million dollars into the British economy. They immediately raise that and they're now expecting it to be almost a billion pounds um.

And anything that Megan Marco wears more or less flies off the shelves or gets back ordered on online, etcetera. So okay, so let's put this into context. Prince Harry is not going to be king unless his brother dies, right, So he's six in line. He's sixth in line, right, so he's there's and five other people have to go before he becomes king. Megan Marco is a an American divorcee who is older than him, and they're getting married in a relatively private affair. Uh. Not a lot of

media is going to be allowed. Does this affect the economic impact or is the fascination with soon to be Princess Markle too significant. It's that's the fascination is too significant. I mean they're going to be tracking it one way or the other. And I'm sure the British coverage is already breathless and it will become even more breathless as they build up to the May ninete date. Um as the American coverage will become more breathless too, so it'll

be significant. And then you're also seeing Prince Harry in a way is more popular than Prince William, even though Prince William is heir to the throne. I think everybody kind of identifies with the bad boy image a little bit of Prince Harry. He's very personable. Um. And you're also seeing a difference where, you know, as much of an impact as Katherine Middleton has had, she now has three children. She's not an actress can Marco as an actress.

So the public, being fickle, will immediately switch their attitude and focus on Megan, and poor Kate will be like, oh, she's a mother who cares baically. Wow, way harsh. They're tough over there, clearly, Okay, I've got the Bride the bridebook dot co dot uk. Countdown clock here sixteen days, twenty hours, fifteen minutes to the Royal wedding. Estimated cost

about forty three million dollars. One of those costs is supposed to be uh two dresses the wedding dress that the bride will wear a plus the dress that she will then wear in the evening celebration. Estimated costs there about four hundred thou dollars. Yes, who will make the dress? That's the questions, um, I mean that's the question. I mean that the odds makers at the moment have this British designer Ralph and Russo is this is one of the shortlists. Um. It was a designer named Air Deem

for a while, but he seems to have faded. No one will know until she steps out of the carriage and they get that brief photo of her. Um. And it can have a significant impact. It will have a significant impact on whatever that person's businesses. Whether that impact lasts remains to be seen. I mean, the Emmanuel's who designed Princess Diana's wedding dress, built a career that lasted maybe fifteen years, and Elizabeth Emmanuel still designs. But it

then kind of disappeared. Um, if I give you a quiz to name the designer of Sarah Ferguson's wedding dress, I dare to say neither of. You could probably say that you're talking to such the wrong person because he is her name, um, and she had a career. So but who do you think will I think probably it might be rough and Rousso I think that that's the sort of focus that everybody's on. But again people are saying, maybe it won't be a British designer, maybe it has

to almost be a British designer. What she may do is she may go transatlantic, So the designer of the wedding dress might be British and the designer of the evening dress might be American. Let's talk besides the wedding dresses, just sort of the fury over anything that she wears. Uh, just out and about have we already seen the Megan effect, particularly with a lot of the younger Canadian labels she wore, because remember Suits was filmed in Toronto, so she sort

of took up a lot of young Canadian brands. Um, and I mean one of them was jotted down a note. One of them was this brand called mackage, and so she wore a suit from them and they saw one point six billion impressions after that, like boom. And I mean it's just phenomenal the impact that she has. And she knows how to wear I mean it sounds kind of wrong, but she knows how to wear clothes. I mean she looks very stylish, makes fabulous, she's a beautiful woman,

and she wears them well and carries herself well. And so she's a good mom. Yeah no, And I think I think that she's bringing up again not being critical, Kate Middleton, but you know, Kate Middleton was not an actress. You know, she was just a quote normal person. So you know, she looks very stylished and closed. But you're you're dealing with someone now and Megan Markle who is used to being in the public eye. And I think

that's the difference. Estimate of four thousand guests, seventeen thousand glasses of champagne and wine, thousand canapas, and an eight tier banana cake. I'm intrigued by the banana case. It's very odd. I think them I'd be surprised IF's only um so little champagne, because they didn't. Well, the drinks are estimated to cost about two hundred and sixty thou dollars. Yes, will will there be souvenirs, of course, that will And I think that's part of the billion pounds. Yeah, that's

part of the billion pounds. You'll have the plates, you'll have the cops, you'll have the hats, you'll have whatever. The bespokes silver plated fanfare trumpets, as well as a drone destroyer for security. Well, I want to I want to talk about the Royal wedding and whether there's anything comparable in the US or whether this is its own base. When it comes to its effect on the fashion world,

there really isn't anything comparable. I don't think that um where you have one person trickling down and having that impact. I mean you have celebrities of course who you know, Beyonce or whomever, who have their own clothing lines and can influence it. But there really isn't anything where there's one event that everybody looks at and it's like, oh my god, do we care what dress she's wearing? You know the Oscars, yes, but those are every year other

than the Canadian brands. Just real quick, are there any other brands that have benefited from me. Mark, I mean, she's worn J crew and and that's buckled up. She's she's warn Jason wu Um. And it will be interesting to see how she mixes the balance, because you know she will be a British princess, So how does she mix the balance of promoting Britain but also remaining America. Well, we've got sixteen days and twenty hours and fifteen minutes to find out. Our thanks to James. Okay, don't rush it.

They're still sewing. James Fallon, editorial director, Women's Wear Daily, thank you very much for being with us and and lightening us about this upcoming a royal wedding. 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

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