The Supply Chain, China, And JetBlue (Podcast)

Senior portfolio manager Federated Hermes Joins US. R J talked to us about this year today performance we've seen in the US corporate bond market really really noteworthy declines. Well, good morning. Noteworthy might be an understatement. Yeah, I think you me, most of your listeners have not seen this kind of performance in fixed income. You know, nine four used to be an infamous year for bond returns. This dwarfs that, um it. It spans across really all the

major sectors of fixed income. Uh, you were mentioning, I believe the Bloomberg Investment Grade Corporate Index down thirteen point four. You know, overall the agg of which that's a component, it's down nine seven. Treasuries are down just about nine. Munies are also down comparable amount. Ten percent means a

terrible month of May. By the way, I think that the key concern now from an asset manager standpoint is trying to call when do we hit some stability on rates number one UH and number two dealing with what has been and outside redemptions as investors are sort of fleeing the losses they've already taken. And I highlight that just because they've already taken these losses, we are probably closer to the end of the sell off them. We

are at the beginning for sure. When you consider that the treasury yields have risen, you know, all across the curve hundred fifty almost hundred eighty basis points UM. We still are short. We think there's another like to go up and yield, but the worst blosses that we've sustained are already probably behind us UM, and we're getting a little bit more optimistic as we start to look forward at this point. First of all, shout out to the i n GO function on the Bloomberg Journal. I end

go is so helpful when talking fixed income. It just shows you all the indexes um that you can get. Thank you another well, R. J. Just rattled them all off as well. Um Uh. There was a great story r J by Liz Cappel McCormick and Alice Gledhill. Bonds suddenly looked like a smart hedge again. Um is the headline, and you're saying you expect another leg up in yields.

But in a way, I find this so exciting because you know, for so long in my adult life, UM, I couldn't get that much yield from bonds, and now I'm starting to see levels that I would be comfortable with. You know, I'm perfectly happy buying UH bond with a five coupon. I mean, that sounds great to me right now.

It's a great point. For much of the last ten years, which in a sense we're book ended by the global financial crisis and the pandemic, we had extraordinary economic shocks that were met with extraordinary monetary policy measures that drove yields down and caused price for short and intermedium periods of time to be your source of return. Uh. The direct implication of that is that yields got very low uh, and and they muted the perspective long term return and

fixed income. As a result of the measures that were put in place by the central bank facing the economic crisis that I just mentioned. At this point, you know, fortunately the economy is growing. There are many challenges globally, and uh, the inflation story is a very very troubling one to fixed income returns. But now the bonds have repriced higher and yield to incorporate the very hawk ash central bank. Uh, we were getting closer to a period

where there might be some symmetry and returns again. You get some income that historically has always boosted your fixed income total return income as a component of your return after all, um, and going forward, I think that the fact that we've seen bonds start to behave somewhat more normally where on a risk off day stocks are down, uh,

bonds can actually be up again. For a while, They're everything was falling, which was a very adversarial investment climate for traditional diversification, you know, diversified bonds of the stocks. It wasn't working. You know, sixty portfolios weren't working. Um. So now that you've reset yields sharply higher, you're getting

that income cushion, You're getting better perspective prospective returns. Excuse me, I would argue we still think that the tenure Treasury is going to end a good bit above three UH in this calendar year. UM. You know, right now you've had a bit of a retracement lower. By the way, what does that mean, r J, What does that mean for what's the spread usually like to UM investment grade corporate? Well,

I g um. You know, we've actually recently gone more cautious on I g um investment grade even though the economy is pretty good. You know, the sad fact of the matter is, but the inflation being so hot and the FED having to be so hawkish, the prospects of recession UM in you know, next year or UH certainly

have grown. UH. I think that what the volatility or the underperformance is probably a better way of saying it, that we've seen now in investment grade corporates are starting to price in that that sort of shift in the fundamental macro outlook. For a while there, we were recovering from the depths of the pandemic economic shock. The FED

was pouring on its demand for bonds. You know, investment grade corporates had a really nice total rate of return UH, And now we're living to the flip side of that point. If you look at the last five years the OS on the Bloomberg Corporate Index, and when we were talking about down thirteen percent year today, you know, the five year averages around one fifteen UH. Currently as a Friday's close, it's now at a one UH and the spread has

been widening quite a bit really for much of the year. UM. We still think that that could get a little higher as we price in the risk of procession UH and as rates continue to drive somewhat higher and cause flows out. All right, r J, thank you so much. We appreciate r. J. Gallas,

Senior portfolio Manager, Federated at Hermes. What we've all become a fairly smart at during this pandemic is this whole concept of the global supply chain and logistics and all that stuff, because boy, every company out there blames the supply chain one way or another during this pandemic for UH.

You know, some challenges out there, and there's no better place to get the latest UH than with Gene Shiroka, Executive director of the Port of Los Angeles wife, because the Port of Los Angeles is the busiest container port in North America. Gene, thanks so much for joining us once again. We'd love to get an update, and let's just start with your port. Give us a sense of how many ships are waiting to get into your port

now versus maybe six months ago. UM, maybe some other metrics that you look at in terms of getting stuff out of your port and into the economy. Gives us just an update. Good morning, man and pauled a couple of things. First number one, first quarter busiest on record at the Port of Los Angeles. Month of April, second busiest April in our hundred and fifteen year history. The number of ships is about thirty right now waiting outside the one and fifty mile marker on their way into

the ports of Long Beach in Los Angeles. That's down from a hundred and nine vessels on the ninth of January. We continue to work that backlog and have record throughput at the port. The most interesting number to me is two hundred thousand, and that's the number of containers on a rolling thirty day average we're pushing out of the port to the interior of the country. That's at about recorded highs right now. We've got to keep pushing that

efficiency and getting the cargo into the domestic economy. So you're doing more than ever and demand is still probably stronger than supply, and you know logistics terms, And I wonder about the morale of the industry, Gene, because you know, as Paul pointed out, we all now know more about the supply chain, more about logistics, and more about just how important it is for the American economy and for

the global economy. Do you think that, you know, people working in this industry feel a lot more respect, you know, a lot more pride to what they're doing. Well. I think across the board there's been a spotlight shined on this industry and it can never be too bright for us.

You've got dock workers who have been averaging six days a week on the job since the pandemic began, chassis providers, liner shipping companies, marine terminal operators working around the clock as well, with this deluge of cargo coming in and no shortage of areas that need to be fixed, improved or smoothed out to help this portion of the supply chain. Remember, the American economy is seventy you and me buying goods, and we haven't shown any reason to stop just yet.

Jane talked to us about what you're seeing in China. You know, there's reports of various levels of shutting down, reopening, and how does that manifest itself into kind of what you're seeing in terms of exports. Well, a lot has been written on this, but so far we've seen the number of ships leaving Asia and Central China at about the levels that we had anticipated. No real slow down because of the lockdowns in Shanghai. And I'll give you

a couple of reasons. One, I had work there in the early part of the two thousands for a number of years. Keep up my contacts on the ground and those relationships. I'm talking to these folks every night. We're seeing very good productivity out of the Young Shaan Deep Seaport in Shanghai. And for those manufacturers who are based west of town, the Hong Chow area, Hung Joe, Su Joe,

even into Junk sup province locations like Nanjing. They're almost equidistant between the port of Shanghai and the port of Ningbo. Ningbo over these last eight weeks, that's how long the lockdown has been in effect. Is up about picking up the slack where transport companies can't navigate in their normal lanes. So we're seeing about the amount of cargo that we did before the lockdowns went into effect. No precipitates, no precipitous drop off at some had a pint early on.

What about the US restraints that UM we've been seeing over the past year, for example, labor constraints, how how have those UH faired UM going into the second quarter. Three segments of labor, as we've talked about guys. One, the dock workers, they're out there six days a week, full employment of the fifteen thousand women and men that have been on the job for the past two years, with this heightened volume coming through. Second, of the truck drivers.

And as we've said, I don't know that we've got a shortage of drivers because the state of California has issued more than six and forty thousand commercial drivers licenses, and of the nine thousand port dra age drivers that called the port at least once a week, we could probably use a few more, but they've gone into other sectors, whether it's parcel delivery, working in other segments of the

transportation network. What we have right now, though, guys, and the thing that I look at, most fifty three percent of our truck gates go unused every day. We've got latent capacity to haul more containers out. We've got to take advantage of that. The third segment is the warehouse

US workers. With two billion square feet of warehousing under roof from the Pacific Ocean to the desert region of southern California, there's still about ten thousand job openings for the folks that handle all this product, and with less

than one percent vacancy rate, that warehousing complex needs considered attention. Hey, Jean, A lot of folks, just you know, economists in general have been saying, what this supply chain issue that we've all been experiencing over the past couple year is, what it may suggest is we need to maybe rethink this global just in time inventory strategy. Any customers that you talked to, uh, say that they're reevaluating that or maybe trying to tweak it going forward. Yes, and a number

of conversations taking place. A lot of folks what we've witnessed over the past couple of years have been ordering just in case, not just in time. They didn't want to be known as the paper goods company of two. So we see a lot of product flowing through quarter two, as I've shared with your audience before, or was designated to be the inventory replenishment time period. This is normally our slack season, so folks wanted to build up those

safety stocks. The inventory sales ratio nationwide had been as low as two thousand eleven. A lot of focus on that, and then thirdly, trying to segment these products from the parts and components which make up twenty percent of our imports that need to get the factory floors, goods that need to get out in the market versus those that can continue this inventory replenishment are the segments that we've got to monitor very closely now and push them into

the market place on the time basis that are needed. Gene, always great to get your insight. Thanks so much for joining us today. Jean Siroka there is the executive director at the Port of Los Angeles, North America's busiest container report. Boy, we know from past experience that lockdowns are not good for economic activity, and just take a look at some of the recent data out of China. Industrial output unexpectedly felt two point nine percent in April from a year ago,

while retail sales contracted eleven point one percent. In the period. That's weaker than it projected six point six percent and drop. Let's get to the bottom of this and see what is really going on underneath the numbers in China. Chia Kazi joins US managing director China Basebook International ches tough numbers coming out of China. UM, give us your lay of the land about the Chinese economy. Yeah, thanks for

having me on look over night. Numbers were incredibly disappointing, But if you're watching China closely the way we are, this should have come as no surprise whatsoever. When we put out our note in April based on our brand new numbers, the sentence up top red these are the worst economic data out of China that we've seen since

the initial COVID downturn. At that point, every major sector was hurting, Every major economic indicator was turning down UM, and it was becoming very clear that the pain that began in March at the beginning of the lockdowns had made its way into April. Has lockdowns got more severe. Businesses were starting to pause activity, and consumers were being forced to stay home. Why is she UM sticking to this? Um?

You know, even amidst pushbacks I mean, it's clear what this does to the economy, and I'm not sure how it works out for the health of the nation after Yeah, that's right. Look, I mean, right now, the problem that the that that she and others are facing is that they don't have access to vaccines that with high efficacy rates. They have a real problem getting their adult senior citizens,

serious citizens vaccinated. Their health infrastructure cannot simply handle if they were to see the type of outbreaks and and and and cases the way that we saw them here in the United States, specifically how we suffered here in New York a couple of years ago. So, uh, if that were to happen, I think you would see just a breakdown of the health care system there, and he would also see the white uh you know, divide between the half and the have not take place. It would

be pretty brutal. I think avoiding that as priority number one, if it means taking a hit to the economy right now, then that's clearly a cost of the party is willing to suffer, despite the fact that they keeps saying that maintaining solid economic momentum is a priority of theirs this year, She's give us a just an update on kind of where the discussions are or are not between maybe some of the Western pharmaceutical companies and the Chinese government about

maybe getting some higher, uh some better vaccines into the country. But we've heard some stuff about you know, Fizer Pills, et cetera getting approval. There's a domestic MR and a vaccine that has now gotten approval. But even if this stuff were to happen today, uh, this the rollout would not take place uh for for months and months to come. You know, we can safely say that as far as zero COVID is concerned, which by the way, it's a lot more flexible today than it used to be back

a couple of years ago. But even in its current form, it's going anywhere before the Party Congress. It is an all important time. That is where all eyes are when when President she gets his third term, um and so. And just continue to assume as if you're an investor that these types of lockdowns uh and and especially the reversion back to lockdown, even if there is some opening up, is going to be part for the course of the rest of this year, probably getting into early next year.

What do you think we should the market should be thinking about when this Party Congress convenes later in the year, what what do you expect to come out of this the look I mean politically speaking, I don't buy some of the noise sets out there about opposition to the too too she and and so forth. I think that it seems quite likely that that their term is very much guaranteed. The real question is what happens in the applemath of that, what moves are done around the Party

Congress is stabilized. Big stimulus is not happening in China. We know this. It's clear and Shana age data, it's clear and official numbers. What amounts of fiscal stimulus perhaps takes place in the second half of the year to help energize the economy. Does the you know, do they move a little to do the ease up on the property market? Is a property market? Get it some additional breathing room, Um, that's possible. What's the nature of the

tech wrapdowns? Are they done for good? Highly doubted? What form do they take next? So I think continuity of policy is going to be there. We just have to watch it very very closely on the ground. How is it being implemented rather than just coming up with theories, as sometimes China watchers often do. Alright, great great stuff was really taught me to get you on the phone.

Cha Kazi, managing director, trying to bage book Internet for getting the latest from continuing challenging economic ayor coming out of trying to amid the lockdown. Fascinating news going on. One of the coolest stories is the Jet Blue hostile takeover for Spirit. And it's not just uh, the US airlines that I find interesting because we had an interview with Michael O'Leary Ryan their earlier UM and he was also saying, like, you know what, there's going to be

a recession. People are going to go towards the lowest costs and that's us. UM. That's that's at least his bet there. And I'm not sure exactly what's going on with yet Blue and Spirit, but Bloomberg News reporter Mary Schlangenstein is going to tell us exactly what's going on. Mary joined Bloomberg News in right and and she and Mary, since you're in Dallas, I'm gonna guess your name isn't

pronounced Schlangenstein. But since I just came back from Berlin for me, that's what it is right right, Yeah, that's that's not how we pronounced it here in the US, but you're right on the German pronouncing. How So how what do we say? What do you say when you're introducing yourself? I wasn't that far off. Um. In any case, that's not what we brought you on to talk about. Mary. What's the deal with this Jet Blue offer? I mean, is this kind of um, you know, we better get

this asset before somebody else does kind of deal. Well, I think that's part of it, because you know, for many, many years, Jet Blue has tried to grow and they've always said they want to grow organically, but they lost out several years back when they tried to buy Virgin

America that ended up being acquired by Alaska. So now when Frontier came out and made an offer for Spirit, jet Blue looks at that and says, you know, this may be one of our last chances to really have a turbo charge to our growth, so we're gonna go for it. Um. They were spurned by the Spirit Airlines board and so now they're making this hostile bid, uh to get Spirit to take a closer look at all

the details of their offer. So do we have any sense, Mary, is there any regulatory challenges to either of these acquires, jet Blue or Frontier. Does anybody have an upper hand supper regulatory perspective? Well, right now, the Jet Blue, I mean the Spirit Frontier merger proposals getting some review from regulators because they've already asked for more information. Um, so they are. That's already happening. But Jet Blue would have

to go under the same scrutiny. If it reaches an agreement to merge with Spirit or to take over Spirit, then that would go have to go through a regulatory review, and there has come some concern that's one of the big issues that Spirit raised and rejecting rejecting jet Blue would say, look, we don't think that this deal has a good chance of being consummated, and because we don't think that, we're not even going to look at your offer, you know, we're not going to evaluate the financial side

of it or anything like that because we don't think it can be done. And of course Jet Blue is arguing against that. Mary, I have indeed just moved back from six years living in Germany, and one of the coolest things about living in Europe is you can travel everywhere,

and you do because it's just so cheap. I mean, you go from one end to the continent to the other and you can do it for less than a hundred bucks round trip um pretty much guaranteed all the time, not just like once in a while when there's a sale. Is there any chance of that kind of super low cost model coming to the US? What? What's what's the differentiator of you? If you did see Frontier and Spirit combined,

they are the two largest ultra discounters already. Those are the people that charge you a very low fair price, but then they charge you for everything else, Like if you want to print your boarding path, if you want to get a bottle of water on board, they charge you for every We call that nickel and diming. Yeah, that's a lot of people do call it Nicolin diming um. And so this would make them a very large airline, um,

you know. And and there's the expectation that there would be lots of growth beyond that, simply because the resurgence and travel post pandemic has primarily been domestic leisure and and people really don't see that slowing down anytime soon. So you know, they would have the ability to grow likely quite a bit in the future, and they would be the largest carrier in that space. But do we I mean, there's no Jet, there's no easy Jet over here,

there's no Ryanair, there's no whizz Air. Is that just um, you know, lobbying by Delta and United, UM and the US Congress keeping that kind of competition out of this market. Well, you've got you've got Spirit, You've got Frontier, you've got Allegiance, you have the New Breeze, you have the New Develope. Those are all in that category of the discounters where they're they're trying to win your business by really cutting

their fairs. The issue is none of those guys have international operations, so they have very small near international like to the Caribbean or down into Mexico. So they aren't ever going to have the scale of a United or an American Airlines or Delta Airlines or even the Southwest Airlines which has some international operations as well. UM. So I don't think you're gonna see, you know, any of those big carriers face a big threat in terms of

network dominance. But there are we are seeing more and more people you know, into the industry with this lower cost model, uh marriage about thirty seconds. How do you think Frontier response to this jet Blue in hostile Um, Well, we will see a response from Frontier. I don't think we'll see a response from Spirit. Um. I think what you are likely to see a spirit will come out and say we're standing by our agreement with Jet Blue.

I mean, I'm sorry, we're standing by with Frontier. But they may say will reconsider jet Blue, or they may either offer or their decision and not do anything. All right, good, good stuff, Thanks for taking time, Mary, really appreciate that. Mary Schlangenstein Airlines reporter for Bloomberg News and assistant Scout master for the Boy Scouts of America, which is huge for me because I was the Scout master for some of New really many years back in the day. Cool. Yeah,

that's good stuff. Now. I always I always admire people. I think I put them on a pedestal if they made to the Eagle Scouts. Oh yeah, I feel like that's a huge achievement. We have a certain someone here at Bloomberg that was Eagle Scout. Yeah, Michael R. Bloomberg. Really that shouldn't come as any He's an achiever, of course, of course, Michael Bloomberg, the owner of this Bloomberg radio and TV situation here and chairman founder Bloomberg LP. Thanks

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