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Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside my co host Matt Miller.
Every business day we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market moven News.
I'm the Bloomberg Markets podcast called Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. Let's look at in. I'm mix here, soft landing, hard landing. I don't it looks like the Fed's trying to help us out Here? We welcome Francis Donald here. She is the chief economist at Manual Life Investment Management. She joins us Life here in our Bloomberg Interactive Broker studio. We
appreciate you coming into the office. So, Francis, what are you guys over at Manu Life thinking about this economy? The markets just un last five or six weeks just said this thing's rippen here. I mean, we have the yields on ten year treasury we go from five percent to now less than three point nine percent. I mean, what's your call on economy for twenty four.
Well, there's a lot of questions in there, because if you ask me what do I think happens in the next month, we couldn't possibly have a better economic setup.
Right.
You've got growth holding in there, the consumer hasn't given up just yet. Inflation data globally just coming in downside surprises every morning when we wake up, and a FED that said, you know what, we don't even need a recession to cut. We're ready to cut even into this soft landing. You get support for equities, you get support for bonds. Just about every asset class does well there.
But remember your investment horizon, because we are still looking at a material slow down in the middle of twenty twenty four, recession risk is still elevated. And even let's just throw out that term recession stop thinking about is a two quarters of negative GDP one quarter of negative Markets don't care as much as headlines do. We're going into a growth slow down middle year. So this is a tactical goldilocks, a nice air pocket that you can trade.
You can also still believe there's a recession on the horizon. Two things can be true at the same time.
The people who are calling for a soft landing right now, what do you think they're missing? What are they not seeing in the data that maybe you are noticing?
Right Well, there's a whole difference of opinion is too And this is the core question. Is this time really different? Because if you look at the wealth of leading indicators that have traditionally helped you forecast a recession, every economist
knows those are flashing red. The difference between those calling for a soft landing and those calling for a hard landing is really how much of a factor do you apply to saying there are things at play that are different than past cycles that will mute or mitigate And frankly, even those shops that are calling for mild recessions, And if you look at a list of consensus calls, it's
either soft landing or mild recession. You don't have very many who are actually calling for a traditional deepercession, and you don't have very many that are calling for this reacceleration in twenty twenty four. But if you look at that, what they are effectively calling for is that the feed is easing a little bit. This time is different. It's going to be very mild. So this is really a difference of opinion, not a difference of data sets.
How important is the labor market here, because the labor market has just been incredibly resilient here. I even had a tick down in the unemployment rate last month, which I don't think many people were forecasting. It's kind of tough to have a slow down in the economy if everybody's got a job and wages are going up.
A job full recession. Have we had the jobless recoveries coming out of the GFC. Now this concept of job full recession, but there's a few things going on there, one of which is you don't actually need the consumer to be in a recession for the US economy to have two quarters of negative GDP that can come from housing capex. Let's not forget manufacturing is in a recession globally. We've actually had the longest manufacturing recession, one of the
longest ever. So there are sectors and pockets of this economy.
Existing home sees, rotation companies will tell you they've been in a good recession.
I don't have to convince anyone who's on the good side of the business. I don't have to convince small cap portfolio managers that we're in a recession. They believe me. And frankly, I don't have to convince anyone in Germany, Canada and Japan or outside the United States that we're in a hard landing. This is a US story very specifically, and it's about services holding on. How much do jobs
matter here? Well, one of the big challenges is jobs always break last, and they don't break in a linear fashion. It's a hockey stick, forgive my Canadian reference. It goes hard and fast upwards. And if you take a look at some of this underlying data, life continuing claims, if you look at that big drop down in vacancies, the risk is that the unemployment rate rises. Now when you're an economist working for a bank or the cell side, You've got to come out with a forecast. You've got
to come out with conviction. When you're in a role like mine, you work with portfolio managers every day. They don't really care what my point forecast is. They want to know what is the balance of risks. And the risk is not that the unemployment rate declines and the job market strengthens from this point, it's that the job market weakens, and it's really asymmetric risk going into twenty
twenty four. Does it matter for the economy, absolutely, But here I would say this is the difference between that mild recession soft landing and a worse recession. It's not about upside, it's about what downsides are not being recognized.
So then against that, what do you make of all of the Fed speak that we've seen recently. I mean, first Powell kind of not pushing back on that idea that financial conditions have loosened, and then in the wake of that, a few officials coming out and maybe trying to walk back those expectations just a little bit.
Yeah, you know, we're always trying to get a sense of what exactly is the FED watching as if they sit in a secret room. Well, I guess they do have a little bit of a secret room, and they have this magic formula, and we're all just trying to guess exactly what that magic formula is. I don't think it's that at all. I think, just like economists and strategists and portfolio managers, the weight that they put on different factors changes. But again, if I'm sitting at the FED,
what is the balance of risks? Here's a risk that I haven't heard anybody talk about downshooting on inflation sub two percent inflation. Why are we not talking about that risk when we see this material decline in inflation expectations, energy costs, there's a wide range of goods prices that are dropping really quickly. That's not my point forecast, but it's a risk that need to be assessed and has to be taken into account by the FED. At the end of the day, I don't know how much it
matters why they pivoted. It just matters that, as I've been saying, the toothpaste is out of the tube. It's real hard to walk it back. And I hear every day, Oh, but they're pushing back. They're saying they're not talking about rate cuts. Well, how come every day I turn on my news, my Bloomberg terminal and I see all the talk about how we're not talking about not talking about rate cuts. It's too late. And even you know, the ECB and the Bank of England they try to push
back as well. The market says, we don't believe you. We don't believe you because you get UK inflation this morning. That just says you can walk that talk as much as you want, but the data is not supporting that. We are not in a disinflation and growth slow down type of environment.
Stepping back a little bit from a global perspective, how concerned are you about China? Because it's just been a lot of soft the data coming out of China. The reopening wasn't what I think a lot of investors anticipated at the beginning of twenty twenty three. As you look forward to twenty twenty four, how do you feel like China is can impact maybe the global economy the US economy.
Yeah, So we think about China in terms of fat tails, and by that I mean that the distribution of risks on both the downside and the upside are quite large. So on one hand, we you know, as I said earlier, we're talking so much about soft landing hardlining in the United States. The rest of the world is already in hard landing territory. Emerging markets lad interest rates higher coming
out of COVID, and they are now actively cutting. China is in a very significant fiscal and monetary easing cycle. We've got a range of emerging markets that are already in easing. The FED and the rest of the developed market central banks are laggarts. When it comes, they will be the last ones to go. So following China through this disinflation, I think is really clutch. And let's also remember China is in deflation. They have negative CPI right now,
so they are a really important leading story. What I think is telling about China is that they've put the pressure on the fiscal side to ramp up support. That's an upside risk to the global economy, But fiscal doesn't impact your economy overnight, so that's more of an upside risk to later twenty twenty four into twenty twenty five.
When you look at the lags between Chinese economic activity and US economic activity, China's slow down becomes very impactful to the United States in the first the next six months.
Right interesting and just we had some you know, some data that just came out at ten o'clock today. The consumer, the Conference Board consumer confidence came in much better than expected. So the consumer still hanging in there.
Good.
You know what, the consumer loves lower gas prices. How interesting is it that we are always talking about, you know, the central banks they have to contain infleetion expectations. You know, I worked at a central bank and when I did, I told some friends and they said, oh, you must be a bank teller. And I tend to think about that because the perception is that what a central banker does meaningfully moves infleetion expectations. And that's true in some components.
But if you track where consumer expectations are for inflation, they just track on top of gas prices. That's what people see over time.
And I can tell you it's three dollars at the huahwah and Wall township. Francis Donald, thanks so much. We appreciate it. Chief econmis Menu Life Investment Management joining us Live Instituto even after being lin on television earlier today. So we appreciate that commitment.
You're listening to the team. Ken's our live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot Com, the iHeartRadio app, and the Bloomberg Business App, or listen on demand wherever you get your podcasts.
I want to get to the latest on former President Donald Trump. We welcome Caroline Frederickson, Distinguished Visiting Professor at Georgetown Law. Caroline, can you encapsulate for us, summarize for us what you think the risk is here to former President Trump from this ruling from the Colorado Supreme Court taking mister Trump off the ballot.
You know, the risk obviously is not so great for him in terms of winning Colorado in the general election, because that wasn't really destined to happen in any case, there has been a Republican who won that.
State since two thousand and four.
But nonetheless, it's such a precedent for the other states and there will be, no doubt a number of other states deciding this same issue about whether or not Trump
can appear on the ballot. And for those in those states where there's actually a viable race, which is most states in the country, you will actually have a significant effect because if other states are going to rule that Trump can't be on the ballot, and we have a situation where it's obviously very closely divided electorate, it could be the difference whether he wins or loses.
How do you see this situation faring out in the Supreme Court?
Well, that's really hard to say. This is a completely novel question.
This has never gotten to the Supreme Court, even involving someone of a lower level, let alone a president, presidential candidate and former president. So I think it's quite complex because the issues have never been addressed. There have been some lengthy dueling larvae articles trying to explain the meaning
of the provision. It's the insurrectionist clause in the Fourteenth Amendment, section three, by the ball The bast bulk of scholarly opinion is that President Trump is squarely within the sights of that provision. But you know, there are those questions are open, and we you know, we can only think that the Supreme Court is going to have to approach them.
Anew, are there other states that you're aware of that are maybe in advanced stages of doing something similar to what Colorado did?
Well, there is an appeal from a ruling that kept Donald Trump on the ballot that is going up, I believe in Michigan to their Supreme Court, so that one could pose a problem for him. Michigan is a you know, fierce battleground state. So and I think the advocates and the voters who've been bringing these cases are surely looking at every opportunity now to make to use the Colorado ruling as a president because it was very thorough, it was very thoughtful, so it will be weighed very carefully.
Ya other or other state courts.
Can we backtrack for a second, What does it actually mean that Trump is not on the ballot?
Well, I just it will be an empty line, I suppose. I mean they haven't printed the ballots. This is still for the primary in Colorado, and it will mean that the other Republican candidates will be listed and Donald Trump will not.
This is only for the primary, or he can't appear in any election for public office.
It will be any election right now, it's just the primary and the court itself. The Colorado Supreme Court has held its opinion until early January because it's very possible the Supreme Court might be able to we'll decide whether to take an appeal and will rule very quickly, but after January four it will go forward.
So you know, is Caroline, what is the kind of the real legal argument that if it gets to the Supreme Court or maybe put to simply, what did the State of Cholrador court find that A he was an insurrectionist? And be the Constitution says insurrectionists can't be elected to office. I'm a little unclear as to the legal issue.
So there are two elements here, and it's basically that for someone who has taken an oath to the Constitution,
they cannot be an officer of the United States. So that is Donald Trump took an oath to the Constitution when he was president, and then under the factual analysis of the trial court, he engaged an insurrection, and that judge used the January sixth report and its extensive evidence of the ways in which former President Trump had been fanning the flames of the insurrection to find that he
had engaged an insurrection. But that judge on the legal question, which is is Donald Trump is the president one of those officers that is barred from being a candidate, And it seems pretty clear I think to most people that the president is an officer of the United States.
But that's the legal question, all right.
If we step out kind of and look at former President Donald Trump's legal issues in mass I have, where is the greatest risk do you think to him? I guess as it relates to the election. Not personally, I guess, but just in terms of his ability to run and potentially you know, be elected.
Well, I really think the actually biggest risks to him are the other cases. I mean, you know, it's a you know, certainly an important finding that he engaged in insurrection, you know, really just taking up what the January sixth Commission had already had already done.
But I think the other.
Cases, the Georgia case involving election interference and the the case in DC involving January sixth then an election interference, I think those are the ones that really could well bite him, because even you know, the kind of the most hardcore MAGA voters may start to question their candidate if there's a rock solid criminal case against him and it's moving forward and he's losing.
And just one final question here, Caroline, does he get good representation? I Mean, it just seems like I don't know any of the firms that he hires these various things. They're not firms I've ever heard of. And do you think he gets quality representation?
Well, you know, I think just ask Rudy Giuliani how he's doing. I think he's got some big bills right now and I don't see Donald.
Trump stepping in to pay them.
So, you know, I think, you know, one of the problems is the kind of relationships he's had with lawyers over the years haven't really meant that those lawyers have been able to succeed in their businesses. So I think a lot of very more serious, US reputable lawyers have stepped away.
It's it's a dangerous place to go.
Interesting, all right, Well, there's a lot to follow there. Caroline Frederickson, thank you so much for joining us. Caroline Frederickson, she's a distinguished visiting professor at Georgetown Law. Kind of breaking down some of the legal issues surrounding former President Donald Trump in Colorado, where they had the state has removed him, at least at this stage from the ballot
for the upcoming primary. So another issue for the former president deal with from a legal perspective, and it's tough to keep tracking. You need you need like a you know, Bingo card to kind of keep track of everything.
You're listening to the tape. Can's are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa play Bloomberg eleven thirty.
Bed X, f d X stocks down eleven percent. It was up like fifty percent yesterday day on year to date, So a big surprise here company before to earnings disappointed with their financial results. Here at lead Lascow, he covers all the transports and logistic stuffs for Bloomberg Intelligence. Second day in a row in studio. How about that man, what's going on in FedEx?
Lucky me? Lucky? Yes, how you doing? Yeah?
So FedEx, it's really the express business.
If you think about their air freight business.
So they have air freight ground and express is that how expresses.
The air freight ground is the stuff that comes to your house, and then freight is the less than truckload business.
Okay, and the express business that most of us think about.
Yeah, kind of the planes, because that's what they were built on.
They were first an express company that built out a ground network, where UPS was a ground network that built out an air network. See because fred Smith kind of invented that air network.
So what's going wrong with that network?
It's just gotten too big. So they're trying to do a lot of cost savings, but the cost savings aren't coming up to the I guess they're servicing in the ebit line because they're facing some headwinds, whether it's demand headwinds from just consumers not buying as much. The US Postal Service was a big customer. They're actually using less air more ground and so that's not great for FedEx. So there's a lot of headwinds that they're facing and
it's really impacting their overall margins. And their margins were you know, below two percent wow, which is not great, and it was about two hundred and twenty basis points less than what analysts were expecting.
For the quarter.
What did we learn about the health of the US economy and the US consumer from these FedEx earnings.
It's a great question.
I didn't learn much because I was more or less focused on you know, their businesses, you know what we But what I would say is that.
You know, we are recalibrating demand.
We're still coming off of those creamy highs in the pandemic, so we're still normalizing and that's going to continue to take time. But you know, the consumer seems to be in a pretty good spot. They mentioned that their peak season was running relatively well, but it's also worth noting that they were expecting probably more volumes in their express business and that kind of misaligned costs and kind of added to the margin pressure that they faced in their physical second quarter.
So during the pandemic, everybody started shopping more and a lot more packages were going through the FedEx system. Did they add a bunch of fixed costs to service that demand and now we're at a point of, oh, now we've got to take someone's fixed costs out of the system.
No, it really wasn't that for them.
It was really about getting people and technology in the right places. Because I mean they had the sorting facilities, they had the planes, they had the trucks. You know, what they needed to do is just be a lot more productive in terms of the throughput of their overall system. And it's a very tough business because you know they do they try to predict as best as they can a couple of weeks out, but you know, things happen.
Demand happens, and supply chains shocks happen, like we're seeing in the Red Sea right now.
I hear the term shipping recession a lot, and we're in a shipping recession. I'm a little confused. I mean, everyone in my apartment complex is getting about ten packages a day. My doorman is completely overwhelmed with all of the packages. But can you talk a little bit like what does that mean and how we've seen them?
So we've been in a freight recession for quite some time. If you think about it, you know twenty twenty two was the peak. If you look at any earnings of any companies that I cover, whether it's a railroad, a trucking company, a parcel provider, a marine shipping provider, you're going to see peak ear earnings for most of them in twenty twenty two, and fantastic earnings in twenty twenty one. And that is really was just purely driven by the pandemic.
And again we're normalizing right so you know, Paul All, I'm sure you're going on vacation soon, so instead of maybe buying new furniture, you're going away. And so people are doing more the services aspect, and then all of a sudden, interest rates are higher, so people are buying less houses and so you're you're filling the house with less stuff because when you buy a house, usually buy a lot of stuff that goes along with it. So just people are just maybe still on the services side
more and less on the product side more. The good news is that the d stocking that we saw over the last twelve months seems to be coming to an end, and so that would mean to us that normal seasonaley are going to go back into forest in twenty twenty four, and we should see more normal seasonal patterns next year. And you know, for most of the companies that we cover, in the markets that we cover, we are expecting growth north of where GDP expectations are for.
So for FedEx, the stock was up fifty percent as of yesterday's closed now down ten percent today. What was the market if we are in Ober session is a market looking forward to saying, hey, twenty four and twenty five are going to be more better years relative to twenty three. I guess yeah.
So the reality all the Aesthetex was a poor performer before twenty three.
They did a lot of.
Let's call it, they didn't execute on a lot of their plans. They disappointed consistently. That has kind of changed. Management has you know, I would say they are making progress and showing the street that they.
Can execute on their plane.
I think there was some confusion over the express network. They talked about, you know, changing their their air fleet into three different networks their color coding it. One's an express network, one is more of a deferred network, and one is a network that they're going to rely on third parties.
I think people are trying to.
Wrap their heads around how that's going to actually benefit costs and how quickly those costs can come out.
All right, let's talk about I think the transport logistics topic of de du jour, which is really the red sea global shipping. I had to actually go to Google Maps, you know, a week or so ago and figure out where the heck this thing is. And it's right smack in the middle of a lot of stuff. I mean, it's there in the Suez Canal, that kind of it all came back to me.
I hope that's not where you're going on vacation.
No, that is not where I'm going on vacation. But if you're merishk how much of a hassle is it? Do you like to say, I'm not going to go through the Red Sea in the Suez Canal. Now I got to go around all the way down the Cape of Africa. I mean, economically, that's going to be just a real negative.
Well, adds ten to twelve days of voyage times and so that adds costs. Time is money, and so you're going to see shipping rates increase. We've seen an increase in rates.
So it's going to impact Europe more.
It's going to impact the United States because the Suez Canal, a lot of the goods are going into Europe. Because still the best way to send freight from China or Southeast Asia to the United States is the West Coast ports or some of the Western Canadian ports like Port Prince Rupert So that's still the best way to get stuff into the States. During the pandemic, there was some share shift. We're seeing that coming back to the West Coast.
But anyway, so it's going to impact Europe more and so that's going to add to.
Costs and what we've seen since I think it's the end.
Of October, costs up around like thirty percent to ship a forty foot box from Asia to Europe.
But this is good for the shipping stocks. I remember back when that boat got stuck in the Suez Canal, I wrote an article about I don't remember the name, but the carrier of the boat. The stock went up like two hundred percent in just a matter of weeks after the blockage.
Yes, it was fantastic for memes as well.
And you know, yes, it's good.
The container liner industry is facing a difficult next couple of years, probably through twenty twenty five. They're probably not going to make any money because rates are depressed right.
Now and depressed because demand is lower.
It's just so again I use this word a lot, creamy highs.
We were like, okay, we were ridiculous highs.
You know, rates are down eighty percent off their peaks for the liner industry, and they're down around twenty nine to thirty percent versus last year, so they're nearing break even below break even, so their EBIT levels are gonna probably be pretty negative for most of these companies throughout most of this next year in twenty twenty five, assuming that there's not a huge shock that we saw during the pandemic, which you know, knock on wood, that's not gonna happen.
Wow. All right, So I guess for twenty twenty four, the railroad's my favorite topic. What's kind of your outlook for kind of you know, demand there for the railroads because I don't know if we're going to recession or not, but your companies really have a feel for it.
Well.
As we talked about earlier, we have an inter freight recession. Yeah, so intermodal has been negative. Intermodal has been trending down around mid single digits on the negative side.
And that's where they put trailers and containers on flat cars, right.
And they come in from they come in from the ports, and those are called international intermodal, okay, And when they come from a to the rail to a truck, that's domestic intermodal.
Yep.
So I'll be on the test later yep.
And so we'll we're expecting this mid single digit growth again, probably more than GDP. You have easier comps you have better rail service again, knock on wood, and that should drive more conversions of truck traffic onto the rails, because if you're a shipper and you're thinking about, why do I want to do truck or rail like? You know, yes, rail is the emissions are less, it's better for the environment.
But you know, trucking, I know it's exactly when it's going to get to the dock within a couple hours. Rail there's a little more variability. So there's a trade offf you have to make. And so if rails are able to improve their service get as truck like as they possibly can, They'll never be as good as trucking, but they can get pretty closer. If that trade off makes sense that a ship is going to go that.
Way, you know what you should do. You should do a podcast.
That's funny, you should say that.
Ball You've got a podcast talking transports, just tell us about that. Already trying to.
Get I feel like retail investors, people on financial Twitter actually really like this subject.
Yeah.
I launched it in October talking to great CEOs of public and private companies.
My latest episode was Tuesday.
It was with the CEO of arc Best, which is a large LTL carrier. Judy mcrenolds, she's fantastic. She's one of the first female female shows in trucking. Before that, Derek Leathers a great character. He's the CEO of Werner. You know, he's a very insightful person and I love spending time with him. I've been able to talk to the head of the ATA, the American Trucking Associations.
The great thing about talking transports is it gives you a good sense as to what's going on in the economy because the transports certainly know about it. Lee Clasical covers all that stuff from Bloomberg Intelligence.
You're listening to the tape Canser live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York's Just Say Alexa playing Bloomberg eleven thirty Family.
Today Paul Sweeney.
We are live here in at Bloomberg Interactive Broker Studio, or also streaming live on Youtubes. Ahead over to YouTube dot com and search Bloomberg Radio. A nice trade in the insurance space today m and a trade here a On agrees to buy NFP for about thirteen point four billion dollars in cash and stuck. Let's break down this deal with Matthew Palozola. He's a senior analyst Property and Casualty insurance for Bloomberg Intelligency joins us here in a
Bloomberg Interactive broker studio. It looks like he forgot to shave today, but that's okay. He's a player, Matt. I see the stock is down five and a half percent today, so I'm not sure what's going on there. What's Aon trying to do here with this acquisition of NFP.
Sure, so it probably bears taking the step back. So these companies are insurance brokerages, right, Okay? They a On, particularly their art rival Marsha mcclennan. I know that they are intermediaries for large businesses that need insurance. Okay, okay, So Bloomberg even buy insurance and they would help you do it.
Okay.
One of the more particularly attractive parts of the market is the middle market, so smaller companies actually, okay. Marshall mcclennan has been building a business in that space for a long time. Now a kind of let it go and ignored it. Aon now suddenly feels the need for a lot of scale. So they're buying NFP, which is a big player in that mintal market space.
Are they getting a good deal? Thirteen point four billion dollars for NFP Corp.
So if you look at the it's funny. When Aon announced the deal, they talked about it on forward earnings, the forward ebada basis, and they said, oh yeah, it's a really attractive price on a forward ebada basis. They're building in a nice jump in that ebada as well. If you look at the estimated twenty twenty three, it's about twenty two times, which is more expensive than what other the deals of this size, but what smaller deals are going for.
But there's earnings dilution here. I don't like earnings dilution. What's going on here?
So it's earnings solution upfront.
Is that typical for an insurance deal upfront?
Yeah?
I mean it probably takes like two years or something.
They're not talking about. Like I was looking for the synergy sentence. I didn't see these synergies. I saw the expects about four million dollars in one time transaction and integration costs. Your industry is different than my media industry.
So there's some there's some synergies. Always weary of revenue synergies on the side. They're going to cut a bunch of costs out UH and they did identify in the back of the the UH investor presentation some revenue synergies.
I think it might be a.
Bit high, to be totally honest, And yeah, so it's it's diluted in the first couple of years. They're taking on some debt for it as well. The margins of this business are not as good as their business either, So I mean there's a bunch of headwinds. We had calculated their free cash FOW yields actually higher if they don't do the deal, Okay, which why you see it's selling off.
Are we going to see you know? Another question Being a former banker, you know, when I see a deal in my space, I start picking them on the phone and I call everybody saying, hey, we got to do a deal. You saw what a on did? We got to do a deal? Trying to write some tickets here. Do you think you'll see more. Is the structure of that part of the jury ripe for any consolidation.
Okay, so what's happening in the space, and we wrote a note about this in the past, is private equity likes these insurance brokers. They're cash cows, right, So there are a bunch of them that are owned by private equity. The valuations of the deals, a lot of deals take place. Valuation is probably peaking a bit this year and maybe on the downturn. So we do think it's a nice time for them to perhaps get out of this business. Truist Owns won. They sold twenty percent of that business,
so you could see more. AND's been on the hunt though, I mean something was going to happen. They tried to buy Willis, which was a rival a couple of years ago, and that deal fell through due to anti trust concerns. I don't think the same thing happens here. This is a much smaller deal. But since that Willis deal fell through, they've been losing more ground. It was I think inevitable that they were going to do something.
Do lower interest rates a FED pivot. Is that going to help spark some more m and a in your industry? Specifically anymore.
I mean for insurance brokers, that might make it again more attractive because they can can lever them up. And the rise and interest rates probably hurt the valuation of deals. For insurance carriers, it probably makes it maybe a little bit less likely to be honest, there's still interest rates are still higher, insurrates still earning through, so still helping
earnings probably into next year. Past that then you might see them going the other way, so investment income going down, maybe less likely to reach on an underwriting deal.
Aon based in Chicago, fifty thousand employees got to mark a cap of about fifty nine billion dollars, so a pretty pretty big company. I'm looking at this stock here and a year to date it's off about one and a half percent. Again, off five point six percent today, probably on the dilution would be my guess. All right, let's step back here. I know you guys at Bloomberg Intelligence you really always have your your year head outlook around this time you publish your twenty twenty four outlook.
What do you think is the best in your coverage property and casualty insurance? Where do you think some of the best areas of investors should be looking at.
So maybe there's there's a couple of spaces, right, personal lines, commercial lines. Then you've got these insurance brokers and reinsurance. Probably one of the more attractive spaces, the more most room for improvement is going to be in personal lines and insurance. So that's companies like all State and Progressive Auto insurance costs have been higher than they've ever been. It's been the kind of worst couple of years ever.
For some of these names.
Okay, we're starting to see that thaw.
Towards the end of the year.
The stocks have responded to that, But all of these other spaces, they're at probably peak margins and their valuation is probably peaked before there aros do. So you know, it's gonna be tougher for the other spaces to improve much fundamentally in twenty four. So I think the personal line space probably is the place to be, all right.
To show you my ignorance, do falling interest rates are the net positive or net negative.
For insurance, they're net negative, so they take in premiums, they invest them, and they make money on that float. So the rise in interest rates has been good.
So it's a net interest margin kind of story that Allison Williams has taught me about for banks a little bit.
I mean it's it's not a spread business, you know, it's just you know, higher or low it can it can support underwriting a little bit. But I mean, int net, it's just a positive inflation going up. Modest inflation is actually good because it increases insured values, maybe increases interest rates. Runaway inflation probably bad because you are paying claims from stuff you may have wrote a couple of years ago, so things are more expensive.
And just correct me if I'm wrong. Knock on wood. We haven't had a ton of like natural disasters kinds of things. I mean, I'm thinking Florida, I mean fires and things like that. So how's that impacted your business in a lift, It's.
Been good business for particularly reinsurance companies, so they're most exposed to these large.
Insurance companies that ensure the insurance industry.
Leave Paul, So yeah, it's been good for them. There's been weird weather events, but none of them have risen to the level of impacting the reinsurance company. So it's been an abnormally good year for the reinsurance companies.
The primary carriers.
Did see kind of larger cats midway through the year, but the fourth quarter actually looks to be shaping up even better.
All right, Matt, thanks so much for joining us at Matthew Palozola. He's the senior analyst. He covers the property and casualty insurance companies for Bloomberg Intelligence.
Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three and on fall.
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