P&L: GOP Is Pushing Trump to Cut Obamacare Benefits

fully implement repeal of Obamacare. Not only is it going to take a while, but it will actually be incredibly complicated. But there are some steps that the new Republican lead administration can take in order to limit Obamacare. UH. For a look at what those maybe, I want to bring in Zachary Tracer of Bloomberg News who covers healthcare sector. Zach, what are some of the measures that Republican aids are talking about doing right when President Elect Trump assumes office.

That's right. So folks in d CRE are starting to realize that it's going to take a while to repeal Obamacare, and they're looking at what ways they can use regulations uh or or changing regulations to sort of chip away at the Affordable Care Act over the next few months

and a few years. So one big target of that push has been, uh, the benefits under the c A, so figuring out ways to limit some of what's covered in ways that might bring down the cost of plans or get rid of things that some on the right really don't like, things like contraceptive coverage, for instance. Is that great? What about the idea of repealing it but

not repealing it. You repeal it in name because it's a politically expedient thing to do, but on the other hand, you kind of leave in place many of the exchanges. Because I understand that more than six million people have signed up for obam Care policies through the federal exchanges, and that's four thousand more than had selected policies a year ago. But your parton six point four million people, that's a record, that's right. So we're seeing sign ups

proceed pretty much at pace. I think right after the election of Donald Trump, there was some worry that maybe people wouldn't sign up, you know, given all the rhetoric about this law is going away, we're going to repeal it. But it turns out that so far, sign ups are on pace, and the government has said they think thirteen point eight million people will ultimately sign up by the

deadline at the end of January. So if some of these benefits are cut, would it lower costs for the actual people who are getting the insurance plans or would it lower the cost just for the government. You know, that's a really good question. So they talk about cutting these benefits in part as a way to limit costs. So if you take coverage out of waait cost to

the government, well, it's it's it's both. So that the government pays for a big piece of of the a C plans, I give subsidies to individuals with low incomes the individual man date, that's right, So individuals do have to buy health insurance under the law, um and and the government gives them subsidies to help them do that. So what cutting these benefits would do theoretically is maybe lower the cost of this health insurance. The big open

question is what do you cut? And we should be really clear about this because these essential benefits are things like hospitalization. There are things like your doctor's visits, labs, pregnancy and maternity care, um you know, emergency services. So these are You know, the question is, as one person put it to us, you know, where's the fluff? What are Republicans really going to cut? And that remains to

be seen. What's um, Let's say they do make some of these cuts, even the ones that are more politically fraught like contraception. Um, what are the chances that a Republican administration might maintain some incarnation of Obamacare once it

has been sort of neutrog in certain ways? So what we're hearing right now is it looks like, very broadly speaking, there's gonna be an immediate push to do a repeal of Obamacare and delay big pieces of that for several years to give lawmakers time to come up with a replacement. So you could see Obamacare persist, either in full or in some sort of limited form for at least two years, maybe three or even four years. Some have said, as as lawmakers work to figure out what's next, what about

the ratios that exist for premiums? Because I understand that if you use the ratio that currently exists, this is a regulation. This is not something that you can just you know, quickly get get away with. And aren't they going to try to avoid any kind of filipbuster. I mean that would ultimately maybe die in in the in

the Senate. Right. So a big reason that Republicans want to repeal the law using what's called reconciliation, using the budget process instead of um, you know, full Senate vote, is they only need fifty one votes that lets them avoid a filibuster. So, you know, with with a pretty split Senate, UM, it'll be tough to figure out how to replace this law in a way that you can get to sixty votes. Thank you very much for coming

in and spending time with us. Zachary Tracer is our healthcare reporter for Bloomberg, giving us some insight into the Obamacare Affordable Care Act and what it's likely to look like under President elector Donald Trump. And uh, it's going to be in Congress. It's going to be pretty complicated to unravel this thing, and so it's gonna be interesting to see how they chip away at it. That's why you have to follow Zachary on Twitter at z Tracer t R A C E R. Thanks very much. All right.

Here to tell us a little bit more about where to put our money is David Kotak. He is the chairman of the chief investment officer at Cumberland Advisors, David ko Talk. How are you, sir? I'm terrific, and I think we should have an index that samples New York City's finest cheesecake. I'm willing to volunteer terrific, terrific conversation. All right, well you while while you track cheesecake, I'm interested in tracking investments. Where do you want to start?

You want to do bonds first? Tell us whether this bond sell off means it's time to buy or should you stay away. I'm looking at the tenure right now at two fifty three and the thirty year at the three ten. We're getting a little bit of a bit on both of them. Um, We in our shop are not buyers of treasury intermediate or long. Here we think there is more likely a little higher rate sometime next year, possibly evento a three on the tenure. We are buyers

of high grade tax freeze. When high grade tax free sold off, they sold off twice as viciously as the taxable treasury bond. They went from eighty five of the treasury yield to currently a hundred and thirty percent of the treasury yield. I don't care what Donald Trump does with the tax code, it's highly unlikely it's going to be completely repealed. So four percent high grade tax free is in the market today, even as the Treasury backed up fifty basis points long Muni's over a hundred and

there a bargain. Yeah, you know, this has been u an ongoing kind of question out there. Are muni's oversold. Municipal bonds sold off dramatically after the President elect Trump won the US election because there was this idea that lower taxes, particularly for wealthier people, would reduce the appeal for these tax free municipal bonds. Talking about municipal bonds,

I want to talk about Puerto Rico. I know, David that you have a strategy that focuses specifically on Puerto Rican bonds, and we got news, uh that that Perto Rico is now facing a budget shortfall of sixty seven point five billion dollars over the next decade. That's almost ten billion dollars more than previously projected by the islands governor um At this point, would you be a buyer of Puerto Rican bonds or do you think that this is just sort of just a quagmire that is not

worth it. Oh, it's a terrible quagmire, Lisa. We we believe in that the only bonds that we will own in Puerto Rico are very specific ensured bonds and those that have internal credit structures that have to be researched. There's seventy billion in debt, as you know, outstanding in Puerto Rico, and we go through every insurance contract, every bond indenture, and every cross collateral claim. That's the only

way to participate in Puerto Rico debt. And if you don't dig deep into the weeds, it's better to avoid it. If you'd have the resources, then there's opportunity. We have some Puerto Rico bonds which have three and four layers of credit enhancement in addition to the claim on a Puerto Rico agency. But you've really got to do the detail work to do it. The politics of the island

have to change. And whether it's sixty billion or seventy billion forward budget deficits, the notion is it's big and it requires political change, and it will be imposed on them by the board that will now run Puerto Rico's finances instead of the local government. David can I just take you to Muni bonds just complete that. I want to understand a little bit more. What kind of maturity are you talking about? Because I'm looking at a tenure in California two point seven one, tenure in New York

two point four seven. Are those the kinds of bonds that you're talking about? Well, those bonds, those bonds are competing virtually at parody with yield on the treasuries. But if you go long, were on the curve all the way out to thirty. That's what I want to I want to go thirty for California three point six three, New York three point four. I would go thirty years in Muniland today when the yield is higher than the

taxable treasury. Absolutely. I think if you take a Californian at a maximum new tax Brackett three whatever it's going to be plus California taxes, you gross up to a return that is very appealing for a high grade credit. How concerned, David are you about the looming pension crisis, or at least that's what many people believe. We have California's biggest pension, actually the biggest public pension in the US.

Helpers saying this week are basically that it was probably going to lower it's assumed rate of return over the next a few decades to seven from seven point five percent. A lot of people think that this still is an unrealistic target. As a result, California will probably have to add to two billion dollars per year to this fund. Aren't you concerned about this? Of course I am. It's the unfunded liabilities of SATAN, local governments and others are

are huge. California, which was at one point a triple B credit, has taken steps to improve its financing and a realistic reduction of the earnings assumption to bring it in line with markets is another positive step, and added funding is another positive step. The worst state is Illinois. New Jerseys not far behind. Other states which have difficulties include Connecticut, Kentucky, Louisiana. We have states and gradations in our shop, and there are states like Illinois general obligation debt.

We will not own it for a client. Closed and bond funds. Are they attractive? Maybe, but you've got to look at what's inside. As we both know, PIM, what's in the fund? The details are you know, the devil's in the details always always is stocks. Ah, Now we have the major question. Every dollar cut in the thirty corporate tax rate equates to about the dollar dollar and a quarter permanent shift of additional earnings in the SNP

five hundred index. If that rate is going to go from thirty five to twenty or twenty five, and you're going to permanently add ten, twelve or fifteen dollars year after year to SMP five hundred earnings, then you have to say, I need to reconsider the valuation of the stock market. What the details will be in that tax code change is another devil that hasn't been revealed, all right, and we got right now price earnings ratio for the SMP five twenty one with dividen deal of about two.

So I guess that would change all of that as well. David co Tech, I'm so glad you could join us. It was the tweet that sent alarms all over the Twitter sphere and potentially beyond. President elect Donald Trump yesterday tweeted that the United States must greatly strengthened and expand it's nuclear capability until such time as the world comes

to its senses regarding nukes. That prompted many people to have some catastrophic responses, including the circulation of a nuke map where you could figure out how you would be affected by a nuclear problem. I want to bring in for some perspective and some real talk, George Ferguson, senior Aerospace and Defense analyst for Bloomberg Intelligence. Um, George, what did you make of of sort of President elect Trump's insinuation that the US would be rebuilding its nuclear stop stockpile?

Uh so, good morning. So I think that a lot of this work was probably going to get done anyways under um, under potential president Hillary Clinton to you know, there's a number of you know, we have a triad, we have way have blistic missiles, nuclear missiles on ships, airplanes, and ground based and a number of the triad are worn out, i'd say, having been built a lot of it in the Reagan era, and I think we had to upgrade it anyways. The ships are the submarines to

the I think the most prominent of that spend. There's been some discussion about revamping those submarines, and so I think frankly that Hillary Clinton would have done the same thing. And so I don't really get the sense that a president elect Trump is going to go further than sort of the way the current um that deter stockpile looks. But I think he was just reinforcing the idea that he is going to spend money on that on those programs. George,

let's turn on attention now to another defense program. This is the Joint Strike fighter, the F thirty five, and the request, or at least the mention on Twitter by President elect Donald Trump two put together or at least to have Boeing put together a competing bid for a competing aircraft to update the F eighteen. Can you explain what this is all about. Yeah, I think he's looking

for opportunities to to foster more competition. I think he I think he is committed to spending defense money, and I think he'll probably spend more defense money than President Obama did just just because of the question other challenges inside the defense budget. Um. But I think he wants more bank for his buck. To use the old expression which it gives applete fits here, and so I think he really wants to find a way to foster more competition. We've gotten to the point now where we only have

a handful of defense primes. They get a bit specialized in what they do, and we're not getting as much competition as we had back in the days of it. But je, let's just stay specifically about this, this particular program, because I mean, the total defense budget is like six d and twenty two billion dollars that was this year, right, It's forty of the global total is spent by the United States, Right, So six billion go into defense this program,

the F thirty five Joint Strike Fighter. It's the only plane I understand that the Marine Corps flies. Uh, the Air Force doesn't even fly. The U is not interested in flying the F A teen. So why would you come out and say you want a proposal to update the F A teen when two of the three branches of service don't even use it well, And that's what I'm saying. I think there's a bit of um posturing

going on here. I don't think the F A team could be upgraded, changed, altered to perform the mission, you know, an Air Force strike fighter mission or the Marine Corps vertical lift mission. Right. The Marine Corps uses the vertical lift harriers. So I think he's trying to get a wedge in here to try to find a way to drive down costs. But Lockheed right now is the only game in town when it comes to fifth generation fighters,

and that's a challenge. George. I'm wondering the people who you're talking to, how concerned are they that President elect Trump is taking some of these issues, which are a matter of national security to Twitter. Uh you know, Uh, it's definitely interesting days. I don't think anybody's terribly disturbed by it, but it's definitely interesting days. It seems like

public posturing. Well, but I mean the reason being that, you know, yesterday's Twitter post about nuclear weapons certainly had a pretty big reaction globally, and there were concerns that we're going to be restarting the Cold War. Uh. You know, I'm just wondering. And it's certainly helped the stocks of some uranium companies, right I mean, for example, I was looking at Uranium Resources. It was up thirty one percent

after this tweet. Yeah, I mean, I guess the challenge here too is we still live in a world where Russia. Russia has nuclear weapons. Other countries around the world have nucular weapons, so we're definitely not going to abandon them. Whether it belonged on Twitter. Um, you know, that's a

different debate. But again, I think we thought that the money is gonna get spent anyways, It's a function how much that's it's honestly, Um, I really appreciate the perspective, George, because I think it's important to have a sort of realistic look at what is going on, you know, whether this really does indicate a restarting of the nuclear arms race or whether this is just simply a chest pounding exercise for something that we would have already done. Yeah,

that was my take. Well, I mean, and also it brings into question the whole issue of whether our allies are going to continue to buy the F thirty five joint strike fighter, right. I mean, Canada has already delayed what they say they were going to buy it. Now the new prime minister they're saying maybe not. They're going to upgrade the F A team, and we know that other countries like Israel, they're already taking deliver at the F thirty five and that's a major defense project. Thanks

very much, George Ferguson. He is senior Aerospace and Defense analyst for Bloomberg Intelligence. One of the big stories of the year, in my opinion, has been the tremendous increase in libor rates in the US. In other words, the rate the banks charge each other to borrow dollars has risen to the highest level since two thousand and nine. This is largely due to money market reform, and this same brand of money market reform maybe coming to Europe.

I want to bring in Henley Smith, senior vice president at Vanderbilt Avenue Asset Management in Greenwich, Connecticut. He's here with us in our Bloomberg eleven three oh studio, Henley, Uh, let us tell us, first of all, just give us an update. How is the money market reform implementation going? And do you expect librrates to continue to climb from here as a result of them? Well, first, thanks for having me in. Uh. Yeah, the implementation went fairly smoothly,

no hiccup, says we could see. But I think that trade is still unfolding and will continue to unfold because we haven't had any of these funds test those new rules. But I will say in that library thing that obviously since November eight, the trade has definitely gone from fear to greed, and we're seeing that being reflected in the in in the library rates have they pushed up to one percent this week, and I think that's something we

talked about last time I was here. We expect expected that and we continue to expect to see that move and I think that's a big reason for that is because of you've seen a massive movement out of some of these prime money market funds which they invest in commercial paper and other types of instruments that are based on library and so the demand for those instruments has really dried up, and that's what one of the reasons

why library rates are pushing up very high. And the Justice review, if we can some of the most important aspects of this money market reform. Prime institutional money market funds, those that are investing in short term corporate debt, is just to described as well as institutional municipal money market funds. They have to allow the value of their shares to fluctuate to reflect the current market price. Right, absolutely right.

I don't think that that's a problem. I think that that sheds more transparency on the fact that these are investment accounts, not savings accounts, which I think a lot of investors, retail in particular, thought that they were you know, safe liquid all those things, which they are, but they are investment portfolios. But your money can actually be locked up if there is a big move in volatility. Perhaps

that's correct. The SEC will require some of these funds, the prime funds and missible funds that we've talked about, to actually gate or uh stop redemptions for the matter of thirty days, and that could be a tremendous amount of problems. So you're seeing a lot of corporate treasurers who typically invest in these prime money market funds move out. So you've had a massive movement out of prime money

market funds into US government only money market funds. And as I said, I think that that trade is still going to unfold over the next year if any of these funds do get any kind of liquidity stress. How these rules will actually play out, you know, so the US rules have been largely implemented. Whether the effects will continue to be seen and you're saying they probably will, but it will be it sounds like orderly, uh much to the its difference. Uh, there was a there was

a fear that it could be somewhat disorderly. Uh. That said, the European Union is about to impose their own set of money market reform rules and it might be somewhat just eruptive. What rate are you looking at for those new rules to affect? And you know, how do investors trade around that? Well? Again, yeah, I think those those rules similar to the US will come into play over

the next year two. Um, it will be interesting because you have an EU that's in flux, uh, you know, with the Italian bank in the headlines this week being rescued by the Italian government. Um, you know, how are the basically I have a lot of prospects less clients that are very concerned about European money market funds because a lot of them invest in financial instruments, financial commercial paper, CDs,

those types of things. So as those rules get implemented, Uh, and if we still have some concerns about the banking system in the EU, I think there could be some real hiccups here. So yeah, we'll continue to look at LIEB or I. My guess is that will have a similar type of of of movement out of these funds that are affected, and that could create some dislocations, which I think, you know, for investors like myself, it's not such a bad thing. It's an anomaly that I can

take advantage of. How would you do that? Explain? How would you do that? Right now? We've got two whales. I mean, we do that through separately managed accounts, and we've also have a private cash management trust that we've set up for investors that is actually stepping into the

vacuum that's been created. So what do you buy? Can you give us an example of something that is unpopular that you've seen these outflows that you might be able to take advantage of because two things, you know, commercial paper being one, because US government funds can't invest in commercial paper obviously, so that that's created a dislocation or an anomaly that you've seen. The spreads between the risk free curve and the and lieboor spread spread wide too.

Its broadest level we've seen it. And let's just say so commercial paper is sort of the short term loans that companies take out and used to rely upon for just their liquidity needs and was very popular and has shrunk substantially as a market as a demand has demand

is shrunk, So you've seen those rates move up. Uh, those investors that invest primarily money market funds prime you are not in that market now, so that gives investors like myself a real opportunity to move into that market, either through separately managed accounts or private cash management, trust that we can take advantage of those yields without all the restrictions that the redemption rules are are now presenting

to the investors. And with respects of Europe. Uh So, earlier this month the Council of the European Union approved rules and locally domiciled money market funds. They'll impose stricter liquidity requirements, limit redemptions, among other measures. And only I was struck by your talking about the fact that there are European financial instruments in these money market funds. Um, what kind of dislocation could we see in this market? Uh, not only as these new rules come on board, but

also as potentially banking issues increase in that region. Well, the two things you have to look at of just absolute yields as they spread versus a risk free curve the U S treasuries as an example, and the bid between the where you can buy and where you can sell to the bid mass because those wide now there could be some problems and that's just an expression of liquidity and One of the things in the real paradox of these rules is you've got liquidity money markets and

it's all of a sudden it's locked up for thirty days or whatever um. That creates a real concern for a lot of investors. So I could see the similar type of thing happening, and with the banking system being a little bit more influx in Europe. Now remember again a little well, are you buying? Are you buying? European money markets are staying now, We're staying domestic right now. We want to see how these rules on unfold before

we step into that market again. I think we'll just we'll be focused on the prime space, but we have to remember as well. Uh you know, last I saw twelve trillion dollars of sovereign debt is negative still, so how that plays into this whole equation is going to be very interesting as these rules get get phased in. Thanks very much, Henley Smith of to Build Avenue Asset Management. They're based in Greenwich, Connecticut. Thanks for listening to the

Bloomberg pian 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