Markets, 5G, And Supply Chain Bottlenecks

about banks here. We've got banks earnings are gonna be kicking off this earning season in a few days, and can be really interested to hear what these banks CEOs talk about or how they phrase their business outlook in term of a rising interest rate environment. Dave Ellison, he's a portfolio manager at the Hennessey Large and Small Cap Financial Funds Day, thanks so much for joining us here. We got that inflation print today kind of in line

with expectations. We have rates rising both on the short end and a little bit now even on the longer end. How do you expect the banks to kind of talk about their business, you know, when we get these earnings calls over the next week or two. Well, I think the anyway, good morning, But to everyone, I think when it comes to the banks, I mean, they're you know, not much different happened in the fourth quarter that happened in the third quarter or the second quarter. So the

erneys are gonna be good. Credit is going to be fine. I think the story is going to be that loan demand is getting better and that's going to drive I think the narrative for you know, the rest of the year. Rates are a factor, but you know again, they FED hasn't moved rate yet, and rates take a while to bleed into the margins or the erne's of these companies, So the impact of a rise in rates this year really won't impact us until the fourth quarter of next

year or beyond. And I don't think they're going to go up enough to really make a difference to the demand for credit. So, uh, you know, the most important thing here is loan growth. And if the FED is going to back off growing their balance sheet and actually shrink it, then the bands have an opportunity to fill in that hole at the bank that the FED has been filling for many years now by providing all of this credit and liquidity and start to use their excess liquidity,

which will drive earnings higher. Will they make any money on that? I mean, if there's no net interest margin out there, what's the point. Well, I think it's you know, there is a decent margin out there now. You know, they're not lending at the ten year rate. You know, most loans are going on at two and a half to three and a half percent. Yeah, the cost of funds is not you know, at forty or fifty basis points,

it's more like zero or close to it. So, um, so you can make you know that the profitability of the industry is very good here. It's not bad by any means that. Having been in this business since the early eighties, believe me, things are really good right now. Uh JP Morgan's making a billion dollars a month after tax I think they're doing fine. The issue is how do they grow that and how do they get their

multiple up? And actually, you know, for people that invest in these names, you know what makes them go hired and it's going to be long growth and so yeah, that's kind of where I wanted to go to. I mean, if I have a rising interest rate in environment, steepening yielder presumably um as we go through the year here, um, do I want to own the big money center banks and JP Morgan's, the b of A's the cities or or maybe the regionals. How how do you think about that? Well,

I I think you know. My view is the bigger banks are the place to be in general because they have the profits, they have the in a sense, the Fang network effect, and they can make investments in technology and stay ahead of this sort of PayPal square or now Block, you know, movement against them in terms of

taking share. So I you know, I favor the bigger banks because I think they have the opportunity to to grow loans, to the investments, to stay relevant against this massive move of tech names trying to get into this business and and take away the low hanging sort of high profitable fruit that's out there. Do you I mean, if they go out there and buy the technology that they can't build or don't want to embark on, do you then try and pick those names before they get

um taken up by the banks. I don't think that's gonna happen as much. I think a lot of the companies. Again, what I'm hearing from the bigger banks is they're going to build it in house. Uh. They have the ability to hire the people, they have the money, and uh, you know, I think they have Again, they have the

network effect to test it and see what works. So I think this idea that Bank America or JP Morgan is going to buy PayPal, and somebody's going to buy Block, and somebody's going to buy a firm, and somebody's going to buy whatever other you know, I just don't think that's going to happen. The value ations are too high and and the regulatory structure just doesn't allow these guys

to do that anymore. So again, it's going to be a build, make it work for themselves, retain customers, build a good mobile platform, make it better, make it better than Square, PayPal or some of these other guys, and and just you know, go for it and try to get the customers back. And I think they have the

ability to do that. So Dave, on the bigger banks, do you prefer the ones that have a big capital market slash investment banking franchise like a JP Morgan um or maybe more of a retail commercial corporate bank presence like a Wacovia. Well, I think you can own and

I own all of those names. Uh, for that reason, I think I think the most interesting story now or the two most interesting stories are Bank America in terms of their ability to you know, play the retail benefits of the growth in loans, and then of course have some exposure to the very profitable capital markets business now. But I think the other one is City Corps. Everybody's talking about Wells Fargo now, and everybody loves well Fargo, but I think City Corps is in a significant transition.

That is, you know again, they made that sale yesterday. The stock is very cheap, They've got tons of capital, they're very profitable, and I think the question is what is that company going to look like in a couple of years, And I suspect it's, you know, it's it's the company will look better and the stock will be appreciably higher than it is now relative to book value and earnings. Dave, great to get your picks and your take on the industry. Thanks so much for joining us.

Dave Ellison there um from Hennessy Large and Small Cat Financial Funds. Let's bring an Alex jail Off right now, co head of investment Strategies at Bernstein Private Wealth Management, and I got a lot of talk about with you. Alex.

First off, I was pretty excited about. Bernstein is one of the banks that's overweight UM energy stocks and they're just trading at a huge discount, especially the European energy producers trading at I think a discount to the stock six hundred and forward earnings are so much higher UM than the benchmark index. Do you like oil producers too? Well, first of all, let me just go back to the

beer conversation. I will see your Pilsner in Prague and I will raise you a Guinness in Dublin, which I I still think is the just the number one beer experience. I mean, I love, I do love Guinness, especially the extra cold, which I think is four degrees colder than the typical task. And it is different in Dublin than and it's different, it's a million times. Look, it's a good segue to talk about what's going on in Europe,

and you mentioned energy producers. If you want to find the intersection of what's cheap today, and look, you have to look hard to find anything that has a reasonable valuation. Europe is exceptionally attractive today on a valuation basis, and there's a dynamic that's going on within Europe that we

think is very interesting it's around dividends. There's been a lot of dividend cuts that have occurred in the midst of the pandemic, and our view is in the first quarter and second quarter of twenty two, you get reinstatement and you get a pickup in dividends. So some of the energy story revolves around dividends. But I would say, more broadly, European dividend reinstatement and increase. That's that's a

trade in itself. So Alex, just generally speaking geographically, you like Europe more so than the US, well more so than the US is is a little bit more than what I would say, because what the US is clearly the most powerful economy. UH. Even with the inflation readings

that we've seen today, there is real strength. There's a strong view that will have good growth this year, higher growth in the first half than the second half, but good solid growth throughout the year UH, and that inflation as it comes down, that will allow consumers UH to continue to spend and companies to have expanded their margins over the period. So the US continues to be the market that we want to have the highest exposure to. But look, we continue to maintain Uh, a pretty meaningful

exposure to foreign markets. And we are circling in pencil, but circling Europe as an opportunity for two and what what what let's get back to the US. I wonder what kind of industry groups you like here. Well, if you look at the backdrop, you've got to start with rates. And as rising rates is a big part of our forecast. Not not dramatically higher. This isn't gonna be uh, something that's going to overwhelm the market and the economy, but

rising rates very strong indicator for banks. So financials have to be part of the program. If you think about the mid cycle recover bree that we're in from an economic perspective, cyclicals are interesting. Uh And and so there there's continues to be a favoritism around quality and earnings and cash flow generation with that cyclical tilt. But I'll tell you it's no longer this discussion of which one is going to win value or growth. I think that's

an outdated notion. And in fact, we'd look at companies that generate reliable cash flows with great visibility into the next few quarters, if not the next few years. So it's it's a little bit of everything. It's a mixed bag. We we favor balance over trying to make a style call. But it's all coming back to cash flow, all right, Alex, thank you so much for joining us, too short of

a visible. We'll touch based with you soon. Alex shall off Cohed Investment Strategies, Bernstein Private Wealth and Management likes his Guinness uh in Dublin, which is always makes him a friend of this show. All right, let's talk about five G. It's rolling out all things great. Everybody loves five gun. Be able to download a movie in like a nanosecond. But apparently there's some problem with airlines and planes and I know, the electronics and stuff like that.

Let's bring it in an extra because I really don't understand that. Diana firtch got Wroth, adjunct professor at George Washington University, joins us um. Diana, thanks so much for taking the time. Can you explain the concerns that the airlines have about five G? Yes, yes I can. And before that, I just want to say the best way not to have your car stolen is to have a manual transmit. That's a great People can't buy them, most

people can't drive them. So the concerns are with these devices called radio or radar altimeters, which are NAVIGA part of the navigation systems of planes, and the new five G deployment could interfere with these radio altimeters. So the f a A, which is devoted to keeping aircraft and passengers safe, wants to put in place safety measures such as not having higher antennas or higher power around certain airports.

The problem is that while of companies such as A T, T Arrizon and T Mobile paid a collective ninety four billion dollars last year to roll out these high pot five G systems, and they do not want to be told that they should be dialing them back or lowering the power or not having them close to airports. So that's where the problem is. The f a A has convinced these wild of companies to delay rolling out five G for another couple of weeks, and then after that

we will have to see what happens. I mean, isn't it kind of binary? Either it's dangerous or it's not. Either there's a possibility that it ruins the altimeter sensors and the plane crashes on land, or it doesn't, which is it? So it's not exactly. Bine, Well, I mean it is binary, but the problem is that under certain circumstances and in certain planes, it is dangerous, and in other circumstances it isn't. So it's not all radar altimeters that are affected. Some of them are more tied into

the plane's navigation systems than others. And it's not a matter of old ones or new ones. Some of the older ones cause fewer problems than the new ones because the newer ones do automatic things such as affect the planes landing gear, for example. So how how is this going to play out here? Interesting and terrifying? It's interesting, terrifying, absolutely, because it kind of feels binary. But it is this something that the airlines can fix? Is this something that

the telecom companies need to adjust? Do we have to work together? Is there? Uh? Well, this isn't going to be fixed right away because, as the manufacturers of Boeing and Airbus planes have said, you cannot just swap out one radar altimeter for another, like you can swap an easy pass out of your car and put another easy

pass in it. These take time to take out. The f a A is committed to keeping passengers safe That means if they think that there is two high five G par at one airport, they will ask the plane to be diverted to another airport, or they might cancel that particular flight, which is going to wreck havoc with airline flights. We already have problems with not enough crews and existing delays. This is going to add more delays. Probably.

It has very high stand It has very high, very very high standards, and the FA is going to make sure that everyone is safe. Are they higher? Are they higher than French standards? I mean, how does this work in other countries? Well, five G is already being deployed in other countries, but the US air space is the most complex in the world, and the f A holds itself and our aviation sector to the highest safety standards.

In other countries, five G has lower power levels, It has antenna's tilted downward to reduce potential interference to flights. It has different placement of antenna's relative to air fields, It has frequencies with a different proximity to frequencies used by aviation equipment. And what the f A wants to do is have mitigations on the five G spectrum rolled out here, similar to in other countries. For example, a month ago, Canada just put limits on its five G deployment.

It said antenna's could not be pointed up, they have to be pointed down, and they could not be in certain waves of spectrum close to where the radar altimates are. This was not a problem I wasn't that aware of. But now I say, and now I gotta pay attention another problem out there. Great Diana Firsch got Wroth acting

Professor George Washington University. She's been in government before that. Um. She was the chief of Staff at the Council of Economic Advisors at the White House, former Acting Assistant Secretary for Economic Policy Department. Let's bring in right now, Oscar de Bak. He is the CEO of d h l's supply chain. Uh and man, the supply chain is incredibly important. I don't think any of us realized until the pandemic how key it is. I mean, it affects everything in

markets because this is what's behind inflation. And you know, most importantly, it affects my ability to buy the car that I want or the truck because they're just not in the lots right now. UM. D h L however, still gets you your stuff on time, which I know because I use it constantly for shipping. It must be hard Oscar. You know all these manufacturing companies are finding it so difficult to get pieces and parts around the world.

How much has it affected your business? I mean, is there you know, an average delay for DHL package of a few hours compared to pre pandemic or is it unchanged now? I think I think the timings we is unchanged.

We still are able to meet the timelines and to meet the But the thing is, obviously the availability of products, as as you already mentioned, can be an issue, and we can help our customers there by by managing their supply change looking at that time and make sure that the forecasting has done in such a way that we preepack earlier and and capacity earlier. Luckily, we can for our customers buy capacity easier and that helps a bit obviously in today's very complex supply, but it's got to

cost a heck of a lot more. I moved to Germany in two thousand sixteen. I brought a poor show with me because it was pretty cheap. It was a few grand. Now, when I moved back to New York last week I had to sadly, heartbreakingly, tearfully leave my nine eleven behind because it just doesn't make any sense with the today's prices to ship it back. I might as well just sell it in Berlin. How much are you seeing in terms of price appreciation? Yeah, I know,

you obviously see it. And I think you could probably sell the pores really well because of the scarcity of coarse in Germany. But but yeah, no, that is it. But you know, for effect, ocean freight prices depending on the faith but have gone up four times, are fraid and times. So it is. It is a situation that we have at the moment. We're not yet out of that. UM. I think that is something that gradually during the year

will well, we'll start to happen. But it will require better planning, It will require a better use of data.

I think it will also. We for instance, made made specific investments also in robotics, in data analytics, UM, because the availability of people is a topic as well, and so it's it's it's important that we made the investments ahead of girth and that helped us for instance, now in the in the last quarter in the US because of the two thousand robots that we had there to be able to actually still meet the demand in the in fulfillment operations UM and still be able to UH

to attract people UM that we needed for those operations. Oscar, does this call into question that the supply chain challenges we have? Is this call intent question? Just in time inventory that seemed to be, you know, a basic tenant for much of the global trade over the last generation or two. Is that now called in the question given what we experienced over last year. Yeah, I would say so.

I think just in time is getting reinvented. UM. I think what we've seen here is that just in time when went a little bit over the top, and then with the disruptions that we've had over over the past year, you can clearly see that it now takes a long time to resettle that. So the whole definition on how much talk you take you need to keep, how close to the customer you do, do you do you need to steer to keep the stalk, how well do you

need to be able to forecast? That is at this moment as we speak, changing and only if we start to redefine just in time, then the ectual disruption of supply change will gradually stop. What are you seeing in terms of UH energy inputs? Paul and I are sitting here, you know, jaws a gape watching Brent crude and imax trade north of a D and I wonder how how much longer that holds on? So so it can be

specific in the question. No, I mean we we've just seen a massive run up in oil costs, and you know this must be one of the biggest inputs when you're trying to figure out um your budget for the year. You've got your energy costs, you've got your labor um, you've got the equipment that you rent, the boats and absolutely,

so what do you what do you think? So there's a clear there's a clear as as you as you know, there's a clear inflation, there's a clear coast increase that that is happening at the moment, and I don't I don't think it's going to go away. What is going to be important is UH is still in this case to help our customers to find ways on how we

can optimize supply change. But but the extreme invasion, labor cost, energy cost, it is there as it's there to stay for for for the coming period, and we need to make sure that we find ways on how we be more efficient in the way the way we manage our subbrojects. What about labor cost oscar You know, um Jamie Diamond, the CEO of JP Morgan the other day and he has never seen such pressure upward pressure on wages. Are

you seeing the same thing? Yeah, we do. We do see that because that um, labor be couse specifically in the US, specifically North America, and labor couse increase is substantial and it depends a little bit in which data and which which with scarcity there is, but it can we can go up to ten percent. So that is definitely there at the moment, and that is obviously driving part of the inflation um and that's not going to

go away. UM. I actually think that this, as with many of the trends that we see at the moment, those trends actually started already pre Corona, but during the crisis that has actually accelerated it and now become even

more visible. But the fact that there is less label labor available for for certain type of type of jobs was already a signal that was there before, that's still there today, and that drives actually the closed up and that's why it's important, like what we have been doing to make the investments in alternative ways in automation, in globotics, because we need to be innovative in the way we manage for install filming centers and by having for instance,

for Kift truck unmant for Kift trucks, by having picking robots. Um then by having collaborative robotics meaning that people work together with robots, not replace the work together with robots, that actually helps tremendously in UH in solving the issue of not only labor costs, but labor scarcity as well. Right, Hey, Oscar, thanks so much for joining us. Really appreciate getting your perspective here on this global supply chain continues to be

a challenge for the global economy. Oscar Debak, CEO of d h L managing their supply chain and certainly the person that I'm sure he gets a lot of phone calls from a lot of his customers saying where is the stuff? Um, But it's really been extraordinary how the global supply chains really been challenged here by the closure of the Global account me back in twenty then the rapid reopening and rapid re acceleration really kind of threw that into disarray for many industries, and we see that

across the board. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three. On false Sweeney, I'm on Twitter at pt Sweeney Before the podcast. You can always catch us worldwide at Bloomberg Radio.