Political Risk Not a Major Threat to Globalization, Datta Says

bring in tap On Data. He is global head of asked Allocation for and Hewitt in London and tap On I want to just sort of get a sense zooming out, how do you model for the political risks that we're experiencing or seeing, whether it's France's election or whether it's potential attacks that disrupt a feeling of colm among investors and residents alike. Yeah, well, to just to the chase. I don't think it can be. I don't think it's

model able. But what you can do is do a range of scenarios which which capture the uncertainties that are involved. So you work on very rough rules of them in terms of probabilities of this or that's happening. Murray and the pen winning in France or losing, and you look at potential market outcomes from that stant point, it's not the best signs. What particular models are you creating right now? What scenarios are you forecasting that are maybe out of

the mainstream consciousness, such as Alla pen Win. Yeah, Well, one of the scenarios we're working with is that the spopulous bandwagon essentially gathered steam, and we have a number of such political upset which essentially bring in a strong move towards what we call the integration in your that is a rollback of kind of European integration and more widely,

you know, thinking about US developments as well. We work we're working on a scenario that rolls back globalization, you know, takes us back to a couple of decades, not necessarily back to the thirties, but certainly a rolled back, much more decisive rollback in globalization over and beyond what we've already seen over the last few years. I mean, there's already been some of that we shouldn't forget. But the scenario we're working with takes us back some way further.

And that's what we're really talking about, and that is probably probably not a very good outcome for financial markets because generally speaking, asset prices have gained on the back of greater global integration, more trade, more foreign investment, more capital flows, all of that has generally been market positive, and a decisive set back to that potentially brings brings some harm to market conditions. I don't want to take you back decades happen. I want you to just go

back to June of and the Brexit vote. Prior to that, what was your view as to what would happen in the United Kingdom. Well, we were working on the idea that it would be a close from things, but we hadn't in common with the consensus majority of view. We hadn't worked on the idea that that Brexit was actually going to happen. Okay, so you missed that one. We

we definitely missed that all right. Now, if you what did you learn from that one that can be applied currently to people's actual portfolios rather than the big thing thirty foot view. Great, I know there's a lot of uncertainty. No one knows has a crystal ball. We got all that, but as a professional, you've got to make decisions. I think it's a matter of behavioral biases because we kind of take certain things to grant it and you you one of the things that's that's that that has done.

It's really questioned the question the role of the hidden biases that you have in your pots. You think, well, this is this, this can't possibly be happening because you know, Brexit is going to make a lot of folks worse up, so it can't possibly be voting for it. But actually, as it happens, um they did vote for it despite the fact that that they were going to be worse off from the result. So right now happen a on Hewitt, what is your base case scenario and how are you

advising people to allocate their money? Look, our base case scenarios that the world muddels through, that this populous bandwagon does not um as it were strengthened, but that it's they're out there and it is a risk that we face and periodically there will be setbacks. But we're not working on the view that the globalization is seriously threatened. I think as I I mean my earlier as aurom,

my earlier mass. We think that globalizing, the basic globalization has clearly slowed, But we're not working on a big reversal U and on the back of that, UM, it's difficult at this point to argue that there are major, major risk to markets from that phenomenon, from the from the phenomenon of more political upset. Does that mean full

and nonstocks and and and sort of sort of normal. Yeah, that tells us that the political risk is a factor, but it's not necessarily going to be a UM something that that really knocks the setting out of stocks, and stocks could be vulnerable for other reasons. You know, rising interest rates, UM. We can think of a number of other factors that could come into play. Well, they're always going to be a lot of factors, we know this, but it just look, can we just focus for just

a second. What is the market that you see in

Europe right now that is shunned by investors? The market that is shun by investors, Well, the markets that have been more recently shun by investors are European sovereign bombs, where essentially spreads with the safe haven play off Germany have risen because the market is concerned that Italy or or even France mike away and that the sell off has not been on a particularly large scale has to make them particularly attractive markets in terms of that play.

But certainly those are markets that have been showing. Look, I think the issue is that I don't think that I think the markets working on a view that that this that European political upset are not a serious factor. So it depends which side of that debate you're on. We're on the on the side of that debate in such a way that we regard these political factors as being out there, but that they don't completely upset the

apple tot. We're not working on what's going on. What's the number one most attractive asset class to you right now? The number one attractive asset classes in a broad market, tom text remains equity markets were in particular in in in England, in in the US, OH in a regional context, we we prefer the markets that that are that have more value, and there we were merging markets and merging my keets in Japan standouts as having long term value. Syncrisic value in terms of we we look at markets

is strongest for those markets. Um, the US probably comes out at the bottom of the pile, simply because by by every valuation indicator that you use USS are simply expenses, which doesn't mean that it will roll over tomorrow, but it does mean that expect returns from the US market over the next few years are likely to disappoint. Whereas we look at em or, we look at Japan and to a degree in Europe, you know, taking into accounts local I'm certainly know a few other factors like Brexit

into accounts, Europe doesn't look too bad either. The US comes off relatively poorly in this in this way of looking at markets. All right, thanks very much, it's happened. Data Global head of Asset Allocation a On Hewitt joining US from London him. You know, there's one big issue that a lot of people have been pointing to as evidence that consumer credit worthiness is deteriorating fairly rapidly. We have seen an increase in losses on UH subprime auto loans.

We have seen an increase in lost provisions by some of the biggest consumer finance lenders. We're talking about Ally, We're talking about Santan Dair, We're talking about Capital One. A lot of these new a lot of these UH captive non captive finance arms have been definitely suffering, and we want to talk a little bit more about what this might mean for not only the banks and the lenders that are you know, extending credit to some of these UH companies, but also what this means for the

broader economy and the auto industry. I want to bring in Ryan O'Connell. He's a senior analyst for financials covering the Allies of the world, the Capital Ones UH and UH. He is here with us. He's from Bloomberg Intelligence and he's with us in our Bloomberg eleven three oh studio in New York. Ryan, thank you so much for joining us. You know, I was struck by allies latest results where they increased their their expectation for loan losses. They also

decrease their expectation for resale values of used cars. Can you tell us a little bit about the most notable aspects of this and how severe uh this could potentially crimp their earnings in this coming year. Oh great, Well, first of all, thanks for having me on the show, Lisa. Uh So with regard to Ally, and I'd say the read through is also for Capital one UH and other

other owners like that. And i'd breaking into two parts, I think, starting back in about June, of last year, we started to see cracks in the market for subprime borrowers, and so that's what this is really all about. So no need to sound the alarm on prime borrowers. They're still fine, healthy economy, etcetera. The reason why Allies spooked people yesterday and they did is a couple of things. One, they keep jacking up their estimates of how much their

credit losses are going to go up. And too, just as you mentioned, use car sales are plumbering much fast and people expected. Uh So people have been expecting about five percent, it's about seven heading in the wrong direction. So why is that important. A couple of things. One for people a big leasing portfolios, which by the way, is not allied. Obviously, if the prices of cars go down when it comes off lease and you want to resell the car, that can create some earnings hits. Uh,

Well that would be more of the captives. Uh. Capital One actually has a fairly large leasing portfolio. I don't cover them. JP Morgan is also involved in leasing. Uh So those kind of companies could be looking at that. Uh. And then the other thing is that even if you don't have a big leasing portfolio, if you have to repossess a car, and every once in a while the allies of the world do. Then obviously it's the value

of that falls that can increase your credit provisions. Has this all been can put into the context of the price either of the bonds or the stocks that in others, of the valuation that investors are seeking. Well, yeah, great question. So I covered things on the bond side. Uh uh, and there there has been a bit of a reaction. So if you look at say Capital One, you know, big large bank, all that kind of stuff, its bonds are trading let's say about twenty five bases points behind

JP Morgan. They bounced around. Uh, you know, at the wides they were liking about seventy five. They've come in a bit. They've got squeaky clean on top of JP Morgan people who we thought about it, and and they've moved out allies below investment grade. So they trade about a hundred fifty oh behind JP Morgan. Uh. Those bounds of bounces around a lot. At the worst they're about two hundred. They squeaked into about US a hundred. Now we're back

to hundred fifty. Can you put the increase in provisions for for loan losses into perspective. I mean, yes, they have increased, but how do they compare to historical periods, not you know, necessarily the best of credit times, like we've seen a great question. So I think, well, if we step back in two thousands fifteen Allies loan losses, we're running about fifty basis points a half a percentage

point in the portfolo, so really pretty great. And then in June of last year, Allies started saying, well, you know, life is changing a little bit. And so they ended the year at a run rate of about let's call it a hundred basis points, so from about fifty to a hundred in one year. Uh. And then this year where they're saying, well, we thought it was gonna be one twenty, might actually be more like about one forty.

So it is trying to ratch up a lot. What you say, one basis points, So it's like one point four percent of their overall loan books or what is that? What is that equal to? Is that? Sorry for the Lisa? So yeah, about one point four percent of their auto lease book auto loan book, which is really Ally's main business. They have some other businesses, but they're they're not really

that important. Ryan, Is any of this connected with the very long duration loans that were available during the financial crisis? So I think what we're seeing here is that there has been more competition. They own a loan market, um and uh so they've been lengthening the terms of their loans. Uh So, for example, some cases they are going out to seven years. And bear in mind that a lot of these loans are on used cars. So an allies case,

for example, about the loans are used cars. You start out with the car that's already been out for about three years, unless saying Ali does this and you tack on another seven years. That's a lot of lifespan for a car. And thanks very much for joining us my pleasure of giving us the detail. Ryan O'Connell is a senior analyst financials for Bloomberg Intelligence, telling us about the

automobile credit market. Pim Fox. We were talking this morning about Beyond Meat and this is a plant based burger, and you had the great question. You look at me and you said, what is this? What is it meat? Out of Um? To answer that question, let's bring in the CEO of Beyond Meat, Ethan Brown. He comes to us from Los Angeles, Ethan, let's start with that. What is beyond meat? Well, first, thank you very much for having me on the show. I appreciate it. And um,

it's a great question. So so what we're after, if beyond meat, is taking all the great things about animal protein or meat and building those directly from plants. And if so, if you think about what meat is, meat is essentially five things. It's amino acids, it's lipids, it's very small amount of carbodrates, it's minerals, and its water. None of those things are exclusive to the animal. They're

all present throughout the plant kingdom. And so we're doing is essentially taking all of those resources from non animal sources, and then we're architect ing or building them in the same way that you would present animal protein. So we're basically bypassing the animal and delivering a piece of meat directly from plants. We're not suggesting it's a fake meat or something like that. It's simply a meat that's been

built directly from plants. It has all the same parts, it presents in the same form, statiates in the same way. It provides the same interditional benefits well, eat and I'm maybe just like you could explain what plants are actually in this meat or this meat meat? What what's what is it made of? Sure? And so what's interesting about it is once you start to think of the plant kingdom as a source of direct protein, not as a

source of feed for animals that then converted into protein. Uh, you can pick uh, and you can take amino acids or protein from a huge variety of plant sources. And so in this case we use P protein, but you could literally use hundreds, if not thousands, of different crops to pull the requisite set of amino acids that you need to create a piece of meat. All right, now you say you use P protein. Is this food engineering?

Because isn't part of the whole reason to focus on vegetables and fruits is that it's natural state is what is important in terms of how it delivers the nutrients to your body. Sure, And so that's a really great question. And so the way I think about this is a

tale of two processes. You can either take protein directly from a plant, and you can use what we do, which is heating, cooling, and pressure to essentially align it in the form of muscle or meat or you can take that same plant matter and run it to an animal and then that would be presented on the plate as a piece of meat. So we argue that's actually a more direct and less processed way of providing protein

to the center of the plate. Now, it does take protein out of one form and put it another, but if you've had pasta, or if you've had any number of products like a snack bar or something like that, it's run through the same system. It's essentially applying heating, cool and pressure to align the proteins. They take on the same texture and presentation of of animal protein or meat. Even how much has your business expanded over the past

few years, you know, it's been amazing. So when I started the business in two thousand nine, um, it was definitely a push, you know, it was something that we had to go out there and try to convince people of something has happened in the last i'd say even two to three years, whereby the American consumer is actively looking for the solution they wanted to work. And that's to our benefit because you know, we are not perfect yet, right, We still have miles to travel with respect to perfectly

replicating a piece of animal protein or meat. But the consumer is hungry for the solution. They want to continue to enjoy uh, you know, burgers and hot dogs and steaks, et cetera. But they're beginning to understand that there may be a better way to produce uh those products. And so we see an amazing level of interesting what we're doing.

And with every kind of senemy an improvement we make, we welcome in hundreds of thousands more people to the brand as a product get better and better, and so we're growing, you know, at a clip of you know, this year over last year. Um, we've had you know, consistently over the last year problems filling orders. So it's a wonderful position to be in and one that's very gratifying.

Is there any evidence that suggests that the combination of amino acids, lipids, water, carbohydrates, and saw on the trace minerals that you're describing, is there any evidence that reconstituting them in this form of a processed food is any better for an individual, not the environment right now, but for the individual consuming the product and consuming the actual

meat if that's what they choose. Sure, And and so the way I would look at that is, UM, what's missing, right, and so we can again, we know the blueprint of meat, we understand its composition, and we have access to those materials from the planet Kingdom. But what can we leave out? We can leave out cholesterol, for example, so products have no cholesterol, and I think there's a very well established medical literature around cholesterol and and uh. And so that's

just one example. There are other examples of the ways which we feel we are are healthier than a piece of animal protein. But that's the most obvious ethan. One thing that I thought was notable is that Tyson, known for its chickens, have a five investment a minority stake in Beyond Meat. What was their reasoning when they when they made this investment? Why why do they want to go basically against the whole thesis of their company, which

is the people like meat? Right? Um, So if if I can maybe offered just one comment on that, so I don't view it as going against their thesis. Um, their thesis is they're going to provide protein to the world and UH, and our thesis also that people love meat like so that we're not in conflict in either

of those UH agendas. We just feel that just like you know, um, most people are using UM mobile phones over land lines today, that there can be a transition to a new form of meat, and Tyson sees that. I think they're excited about it, and I have to plaud them. I mean they are of all the companies out there, they are leaning in heavily too. We want to be a protein provider. We're not gonna get hung up on the fact that you know, they have to come from animals. It can come from directly from plants

in the case of beyond meat. So they're making an investment and what I think they believe is a shift toward more plant based meat. How much does this cost compared to meat, traditional meat? Yeah, so it's an interesting questions. So you know, if you if you look at our production facilities, we are you know, extremely small relative to global meat processing right. So, um, you know we're going

to have a premium because of that. But as we expand, there's nothing to stop us from lowering our prices to the point where we can compete and even be lower than the price of meat because we're taken out the middleman. If you've taken any economics course, which I'm sure you have, Uh, you know the number one thing they say in operations is you get rid of the bottleneck. Uh, you know, generate efficiencies and you can lower costs. And if you think about the animal as a bottleneck, we've taken out

a pretty big bottleneck in the production of meeting. No, we're gonna have to leave it there, Thanks very much. Ethan Brown is the chief executive of Beyond Meat based in Los Angeles. Well, President Donald Trump, he was in Detroit this week. On Wednesday, he announced a rollback of fuel economy standards for cars and trucks and this was all put in place by the Obama administration. The goal fifty four and a half miles per gallon by twenty five.

Here to tell us more about this is Dr Richard Newell. He is the president and the chief executive of Resources for the Future, based in Washington, d c U. Dr Neill, thank you very much for being with us. Maybe you could just lay out the cost connections related to these fuel economy standards and what is in your mind going

to change now? Yes, well, fuel economy standards have been set for several decades now by the Department of Transportation in order to increase the energy efficiency or fuel economy of the US passenger fleet and UH In two thousand and eleven, the Obama administration combined these fuel economy standards with standards on carbon dioxide emissions, which were required by a you know, a judgment of the Supreme Court that

these emissions needed to be regulated. And so since two thousand eleven, we've had joint actions by the Department of Transportation and the Environmental Protection Agency to reduce gasoline consumption from automobiles really for a few different purposes. One purpose is to simply save people money by requiring that the automobiles that are available for purchase um will use less gasoline.

So that's one key attribute of these standards. Another is to reduce their carbon dioxide emissions, which is views an important um element element of these regulations to address global climate change. And finally, another aspect of these regulations is to improve US energy security by reducing oil imports. And so during the standard setting process, each of these different factors is considered by these two agencies in order to figure out what the right level of the standard is. Well.

Dr Newell, as Pim mentioned earlier, So President Trump is talking in Detroit with some of the leaders and is talking and saying that he will roll back some of these provisions that were implemented implemented by former press it in Obama. Just how big of a rollback will this be, Well, it will. They will need to go through the same types of analysis that we're we're done, you know, in two thousand eleven by the Obama administration, by the Department

of Transportation and the Environmental protection agencies. So uh uh, standards of of this type when they're put into place. There's many different analyses that go into it. One important one is called a regulatory impact analysis, where the benefits

and the costs of the regulation are weighed. And so they look like they intend to um open open up for midterm review the corporate fuel the corporate average fuel economy standards, and so what they will presumably be looking at is changes that have taken place since these analyses were first done in two thousand eleven. What has changed since then, and what direction of change in the regulations

might that motivate. So if you look, for example, a key attribute here was going to be changes in the price of gasoline, and since the original analysis, the price of oil and the price of gasoline have dropped by about in real terms, So other things equal, this would tend to to tend to point to a rationale for weakening the standards relative to what was originally put into place.

Another another key factor, though, is the UM, the value of reducing the carbon dioxide emissions that come from burning gasoline UM. There's a number called the social cost of carbon, which is the value the monetized value of reducing carbon dioxide emissions UM. Since two thousand eleven, the number that has been used by the federal government has increased actually by about so that would point in the other direction in terms of strengthening the standards. However, I'll add a

very important caveat there, which UM. The Trump administration has signaled its intention to also reduce the value that it places on hither addressing climate change. That's been quite evident in a number of their remarks. And so depending upon what they do there, that could point you know, I would I would guess they would change then the way that would point downward in terms of the regulatory stringency.

Just real quick, Dr Newell, what has the frustration been like among your peers about that last point that you

talk about with respect to this administration's approach to climate change. Well, they're very clearly not just on corporate advage fuel economy standards, but on regulation of emissions from electric power plants under the Clean Power Plan, UH, the approach towards budgets, UH, federal budgets that invest in research related to climate change and invest in, you know, actions taken to reduce carbon

dioxide emissions. UM. You know, there's any number of different changes that the administration has either already put into place or appears ready to put into place that really just don't take the climate change threats seriously. UM. And that's you know, there's any number of remarks made by both the President himself as well as major leaders within the Trump administration point in that direction. Dr Richard Newell, thank

you so much for joining us. Dr Richard Newell is the president for President of Resources for the Future, talking about the Trump administration's rollback of emission standards. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter

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