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You're a confident guy, John.
The consumer confidence numbers just coming out from a conference board, man spot right on the forecast came in at one fourteen point eight. That was right in line with expectations, and notably it was a lot higher than last month, which was revised down to one zero eight.
So nice pick up there.
Let's break it down with somebody who kind of knows what's happening here, Dana Peterson, chief economist at the conference Board. It joins us via Zoom Data. It looks like a solid number. Put it in context for.
Us, absolutely, we have the highest reading on consumer confidence in two years. A lot of it was led by the present situation where consumers are feeling good about their jobs, they're feeling good about the business situation, but also consumers are thinking that maybe we won't have a recession, and that also contributed to expectations which were above that threshold that usually signals or session.
Yeah, before you came on, Dana, we did the Joelt's Job Opening survey, more evidence the labor market is just cooking along. How much does that play into this?
We think it plays a huge role. Consumers continue to say that the labor market is good. Even most of last year they said the present situation was fine with regards to the labor market. Many of them are working. Companies are not letting people go because they're concerned about labor shortages, and so that's been benefiting the consumer and definitely supporting their finances and their incomes.
And Dan, it's interesting here we're getting you know, as interest rates come down, Like just take the mortgage rate. Mortgage rates are coming down off their peak. They are still a lot higher than probably people would like though, but everybody's.
Got a job.
But once one, where are you looking at this economy to get a sense of really where it is and where it might be going here?
Sure, So, I mean you have to look at the economy and look under the hood. So they're definitely areas of weakness. The housing market is still pretty weak as mortgage rates have come off, but there's still much higher, almost double what we saw a pre pandemic or even during the worst of the pandemic. Businesses are not investing that much, and we don't think government is going to be as big of a stimulator. But when you look
at consumers, many of them are working. As we said, their real incomes are rising as inflation is falling, and so that's definitely propping up spending. But the key issue is can they continue to do so, and we're not sure about that given the amount of debt that's being piled up right now.
Okay, and these numbers also to some extent, because they are good numbers, might actually be inflationary. You did mention consumer spending.
Right, Well, the interesting thing is that in the right ends, consumers continue to complain about inflation and prices, so the price level is high even though inflation prices aren't rising as quickly as they were. But the good news is that inflation expectations continue to fall in our measure, and that's a signal that consumers are thinking that inflation is going to continue to decline, and so it might not
be inflationary. Despite the fact that we have seen some pretty strong consumption, especially in the second half of last year and in the last few months of last year.
Can you explain why those inflation expectations are important? I mean, do they tend to be sort of self fulfilling prophecies?
Well, it can be. If inflation expectations are too high, then people say, well, you know, I'm just not going to spat and because I can't afford it, and I probably won't be able to afford things in the future.
So with the.
Expectations falling, that means consumers are thinking, oh, I'm going to get some relief later on. So that means I don't have to put my life on hold while I watch prices rise even faster.
So, Dana at the conference board, are you guys thinking there's going to be a recession in twenty twenty four or or not?
How do you think about that?
Well, we do think the likelihood of a soft landing has definitely increased, but we're still there's still risks out there that you could have a recession. It's probably going to be short, it's probably going to be shallow. Why do we think that? Again, consumers do no longer have the massive supports from the stimulus checks. Also, many consumers are financing their purchases with debt. At some point that's going to come due and they have to pay it back.
We also think that some businesses may come under pressure and start letting people go, and that will definitely put a debt in confidence and also spending. But the key thing is the labor market. If the labor market doesn't weaken much further, then you're probably going to see people continue to spend and we'll have that soft landing that the fet is hoping for.
Are all consumers created equal or do you break this down into certain groups geographically or income wise?
Yes, we do, and in fact every income group, with the exception of the wealthiest group, we're more optimistic in January, so that's definitely good news. Not sure what's going on with the wealthier folks spically, but the thing is that for the most part, consumers expect interest rates to be lower and they expect the stock market to be higher going forward. So you know, the folks who tend to
have stocks are the wealthier folks. But the point is that every age group was feeling better in the month, so for the most part, consumers are much more optimistic now than they were a few months ago.
Can I just real quick the political implications, What does it mean for a Joe Biden presidency.
Well, I will say the election is months away, and that's kind of like an eternity right in terms of political terms. But you know, the key thing is, you know, it's probably gonna be domestic issues and things like the border and spending that may cause consumers to come out there and vote one way or the other. But certainly, if you know, the economy does take a bit of a swoon, we think it's going to be in the middle of this year and by the time we get
to the election season, the economy should be recovering. And that's that's good for either candidate.
Really.
All right, Dan, I thank you so much. We appreciate that. Dan Peterson at the conference board.
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In addition to all the economic data we have this week, in addition to all the earnings we have this week from some big tech companies, we also have a FEDER Reserve meeting tomorrow. I think I saw Michael Barr, I mean Michael McKee with his bag heading down to the cellar station.
There's a Michael Barr on the FED too.
I know exactly we're all at the one you were thinking.
Of now, exactly, Bloomberg and tell Legence, Chief US Interest Rates strategis Ira Jersey joins us from Princeton, New Jersey via zoom So, Ira, I guess tomorrow. You know, obviously the rate, any movement in the rates is not expected tomorrow. What are you looking for in tomorrow's release and in the commentary from FED Chairman J Powell.
Yeah, tomorrow is going to be a very busy day for those of us in rates land. We not only have that FED meeting, but also the quarterly refunding announcement from the Treasury Department in the morning before that. So at the Fed, you know, we're going to be looking at listening for nuance. I think the statement probably doesn't change very much. But Jay Powell, I think will probably you know, need to guide the market as to whether or not they think there's going to be a cut
in March or not. He was going to probably say every meeting is live, but at the same time, you know, some meetings are more alive than others. I would say so, so I think that if the FED is thinking about cutting in March, he really has to make that not abundantly clear, but I think he has to make it a little bit more clear that they're going to be going to be cutting in March.
The other thing that.
I think that Jay to listen for for j Powell is what's the path thereafter? So the market is not pricing for what Governor Waller mentioned a week and a half ago or so, which is we're not going to necessarily go at every meeting.
We're going to go slow.
We might only cut three times this year. The market doesn't believe that they're going to do that. The market things that the FED going slow is cutting twenty five basis points every meeting once they start, and so you know it's going to be hard maybe to jaw bone that, but I think Jay Powell will try to tomorrow.
What's the big worry at the FED some sort of I don't know, Arthur Burns bumbled. You cut now and then inflation comes roaring back and you look like a moron.
I think that's part of it.
I think that the other issue that the Fed has is they're trying as they try to calibrate the Fed Fund rate is there's a feeling among a lot of economists and I think a lot of people the Federal Reserve that as inflation comes down, you have the real Fed fund rates of the Fed funds rate after adjusting for inflation, continues to rise, and that that will be
too restrictive and tighten financial conditions. But I think the bigger issue that the Fed has right now is that financial conditions, instead of being tighter, even though that real Fed fund rate has been going up, they've actually been easing. So you have credit spreads that are very tight. You have consumer lending rates that, while they're much higher than
they were, they've come down significantly from their peak. And in large part that's because the market is expecting the Federal Reserve to cut interest rates very aggressively starting in May and then continuing to cut into twenty twenty five. And that's adjusted a lot of the different borrowing rates and a lot of the other things that go into
different financial conditions measures. And because of that, that's one reason why I think that the Fed wants to say, Okay, we're going to go slow because they don't want to ease financial conditions even more and have another inflationary impulse.
So, like you said, John, like.
That's really the fear that the FED has is that they might be the cause of yet more inflation in the future and that the job's not done. And you're going to hear that again, the job's not quite done, but we're happy with the progress made so far. That's that's going to be probably the opening line from Jay Powell when he talks about monetary policy and inflation.
Hey, Iriti, earlier this morning, we had a cloudi assam on some consulting and formerly the Fed. She says, the Fed's already too late. They should have already started cutting rates. Is that widely held out there? How do you think about that?
Yeah, there were some people who, certainly and some investors that think that they should be just because the economy has slowed significantly, and you have seen that, you know, that gap widened between inflation and the FED fundt rate. But then there's a whole slew of others who look at the real economy and look at what happened with retail sales. You had the Jolts data that was just out a couple of minutes ago that showed that job openings actually increased in December.
The quick rate, though, kept on falling.
So I think that there was kind of a mixed picture there in terms of the job market from that reading. But the but nonetheless, the the economy seems to be holding up decently right now. So so again, like if if the Federal Reserve is behind the curve, as Missam suggested, h then you know, certainly we don't see that in the hard data. We do see it in other things
like some of the some of the survey data. But again, like you just had on data from the UH from the Conference Board, the Conference Board survey of consumer confidence was decent today. So again there's all these mixed signals right now. Mixed signals usually do lead to a turn in the economy, but it's much slower this time than you might have expected it during prior cycles. And I think a large part of that is we still have a big fiscal impulse rate.
We still have deficits that are.
Going to be approaching two trillion dollars this fiscal year and over the next couple of fiscal years, so that will keep the economy a little bit more robust than it would be normally. And then secondly, you still have consumers that don't have any lack of appetite to spend. So I think that there's a lot of good things still going on in the economy that are going to delay I think a recession and a major downturn until much later this year and maybe even into twenty twenty five.
All Right, you brought up fiscal iris, so let's talk about the Treasury cut. What do they do yesterday? They cut their quarterly borrowing estimate, which I mean to me, on the surface, that sounds pretty good.
Yeah, so it's a good thing.
They cut it by a by about fifty five billion dollars. The Treasury Department, what they do is they have a forecast for a quarter ahead, and they almost always get it at least a little bit wrong. Right, we all don't forecast perfectly what's going to happen. So they cut the borrowing estimate for this quarter primarily because it looks like revenue has been coming in a little bit stronger. Speaning tax revenue has been coming and a little bit
stronger than they anticipated. And spending has been you know about about flat and the fact that so we can spend more, Well that's maybe that's part of it, but it does mean that deficits are running going to be running a little bit lower than we initiatively anticipated.
It was pretty close to our estimates. We were actually a little bit lower than that. We were one of the lower people within the consensus.
A lot of people thought that they were going to be around eight hundred billion dollars in net borrowing. We thought it would be under closer to seven hundred. It
kind of came in the middle of that. So, yeah, so that means that the Treasury Department probably won't issue as many tea bills as we thought, but they still, we think, will increase the amount of two year notes, three year notes, all the way out to thirty year debt issue a little bit more of that because right now they're issuing a ton of tea bills compared to
how much they were issuing of other debt. And you know, there's only so much appetite that's going to be out there for short end paper, especially once the Federal Reserve gets going and starts to start to lower interest rates, and.
I rich just you know, on these auctions remind us again like who's buying this stuff?
So it's mostly domestic investment funds. When you look at at at treasury auctions, like last week we had the five year and the seven year, so you have investors who are just saying, Okay, look we're not going to buy the seven year. The seven year went terribly. Excuse me, the five year went terribly, The seven year did okay. Because I think people are getting preparing themselves for the Federal Reserve cutting interest rates, and usually longer term debt
does better when the Fed's cutting interest rates. So you have you know, people going out and buying that. Look, savings is still high. There's still relatively high savings rates compared to what we had, you know, a decade or so ago, So there's still people that have money to put to work. And with interest rates closer to four percent instead of zero, treasuries are an attractive option instead of buying maybe riskier assets that have the chance of
the fault. Maybe if revenues slip or profitability slips because you think that there's going to be a recession, then you rotate out of other fixed income instruments, into treasuries and also just you know, put your incremental savings into treasury securities.
All right, put on your politics hat, you guys in the treasury markets, you must game all sorts of things, like if there's something unexpectedly happens in the election that you know your candidate doesn't win but the other guy does, have you gained that what are all the different possibilities?
Yeah, it's interesting because, yeah, you know, the conventional wisdom might be that if there's a Republican in the White House in Congress, that maybe there'll be somewhat more fiscally responsible. That actually, historically has not been the case. That typically when you have one party that controls the White House
and both houses of Congress, deficits go up. Right, Democrats spend more money, Republicans cut taxes, But both of those have the same net effect of increasing budget deficits and increasing the amount of treasury supply that needs to come out. And quite frankly, you know, there's probably very little at this point, over the next year or two that can be done to quell the two trillion ish dollars of deficit that's coming.
Regardless of who's in the White House. You know our expectation.
I think the most important thing that's going to come out of this election is not even the fiscal stuff. It's really who's going to be the next FED chair? Right, if Joe Biden wins the presidency again, maybe J Powell will be reappointed. I think that's pretty unlikely if Donald Trump or another Republican were to win the White House, that J Powell would wind up staying in a seat.
I mean, we have to remind everybody J Powell was Donald Trump's pick, right.
And quite frankly, when that came out, I was pretty surprised that Donald Trump picked him because J. Powell is kind of a mainstream Federal Reserve governor was at the time, I had expected Donald Trump to pick someone who would be more definitively doubvish than that a mainstream economy or mainstream person.
I can't call J. Powell an economists, but nonetheless, you know, the next the.
Next FED chair might be the most important thing from a treasury market and from a rates market point of view that's going to come out of the election cycle. So who do people say might be their pick for for FED chair might be one of the more interesting things that comes out of the election. If people are askedt out of debate or in a town hall or something like that, I would certainly be interested to know is J. Powell likely to be reappointed or if not him, then who else?
But I always thought, I mean, my conventional wisdom was that, yeah, the president makes the pick on the advice of well pretty much everybody on Wall Street, because if he gets that wrong, you know, you can just kiss your you know what, goodbye.
Yeah, but there are a number of people who I think Wall Street would be okay with. But there's people along the spectrum, right, Like, you know, if you chose someone like Lyle Brainerd over Powell, then you know, you get a slightly different outlook on there, you know, Governor Waller.
Versus versus J.
Powell again, like you'd have just some nuanced differences in the policy outcomes that you might actually get just because those those people have different opinions. So you know, if you wind up with you go through a whole slew of former governors or former Fed president, you know, Federal Federal Reserve, regional FED Bank chairs like you know, James Bullard for examples out there, and he might have even a different take and uh, you know, might be more hawkish or dubvish and some.
Of the other potential picks.
So but but and I think all of those, if they're known quantities could probably Wall Street would probably be okay with them. Uh, it's just a matter of you know, what what price level you get. If you pick a more hawkish person, then maybe, you know, stocks go down.
But it's not that the market's not going to function, and it's not that you know, the treasury market is suddenly going to implode because you picked you know, one person who was more more or less a duvish mainstream person or a hawkish mainstream person.
All right, Ira, great stuff has always really appreciate you checking in with us. Ira Jersey, chief US interest rate strategist for Bloomberg Intelligence.
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Are ups.
Had some I know, just some disappointments, as Nora was just reporting, laying off some people. Ben Elgin, Bloomberg News has got a great story today, FedEx UPS struggle on ev transition as delivery demand grows, costs, the electric trucks and charging complications are hampering progress. I didn't even think about that, Like, they got to go electra too, And if they can't get the trucks and all that kind of stuff, how they're going to get that package to me in fifteen minutes.
They're going electric because there it's good for the environment, or they're trying to save money.
I don't know.
Let's check in with somebody who actually we pay this guy to think about this stuff. Lee Clascal, Senior Transport Logistics and Shipping Animals, is one of the best on the street. We got them at Bloomberg Intelligencies down from our Princeton bureau. Hey, Lee, first, let's just start with the news at UPS. I love UPS. I love the brown trucks. They deliver this stuff great.
What's going on? The stock hasn't done much in a while.
And I know they've got some union issues which they resolved earlier, and now they're laying off some people and forcing everybody to come back to work. What's happening in our good friends at UPS?
Yeah, I mean they're really just reeling from the impact from the labor negotiations they had last year. So running up ahead of those negotiations, a lot of shippers were like, you know something, I'm not going to use you, use UPS because I might want to use one of their competitors like FedEx or even the postal service, because I don't know if my stuff is going to be able
to get where it needs to go on time. So a lot of that diverted freight, you know, is kind of deleveraging effect on the network, which really weighs on margins. And then you know, they had the negotiations, they have a contract in place, which is fantastic for UPS and also for the teams stairs, you know, but a lot of the cost the initial costs of that new contract are in year one and so that's like a real
big hit to margins. That coupled with the fact it's taking some time for them to win back some of that share. You know, on today's earnings call, management noted that they've won back about sixty percent of that share. It's going to take time for them to get that share back to where.
It needs to be.
And again, these are networks and when you're talking about freight transportation. It's all about building density because the more stuff you can deliver at the same time, you know, the better the margins are. And that's what they're really
working through right now. And you know, and what I thought was kind of one of the more interesting little tidbits in the call this morning is that they think that this year that the small package volume from an industry standpoint, is only going to increase like one percent, which to me I thought was a little pessimistic. But you know, all in all, they're really dealing with tepid demand, the dealing with rising costs, and you know, they're obviously
taking those costs pretty seriously. As you know you mentioned earlier, they're they're laying off or planning the layoff or reduce heads however nicely you want to say it, twelve thousand people. And then also they're looking to get there. They're putting their brokerage business, which is called Coyote, under a strategic review. Coyote is the third largest freight broker out there. So one of the largest publicly traded ones are c H.
Robinson.
People might not know that, might may know that name. Also, RXO is another pure play brokerage as land Star. There's a couple of private ones. A lot of large companies like JBI Hunt have their own brokerage business in house.
You get sorry for a series of stupid questions, but this is who you're talking to. What is a freight what's their role on what do they do a freight brokerage?
So's they're pretty much get together buyers and sellers of freight. So if you think about it, so if you're a shipper and you have a load that you need to get from point A to point B, you might use a broker to find a truck to carry that load, and the broker kind of makes a spread in between what they're charging the shipper and what they're paying the trucking company. What's happened is, you know, it's a very
cyclical business. There's there's, there's great highs and kind of depressing loads, and margins can be very volatile during this.
So this this just a backup of this brokerage that they own that they're now getting rid of. That you could have gone to them and they could have picked a shipper other than you know, the company that owns them UPS.
Yeah, So you know, so UPS could potentially use its own in house brokerage to move a trailer load of freight between two of their sorting facilities. Or if you're Walmart and you know you have an extra load that you need to get from your DC to you know,
your Spring Lake Walmart. I don't think there's a Spring Walmart, and you know you might you might use them because either the carriers that you're contracted with don't have the capacity, or you're trying to take advantage of cheap rates in the spot market, and right now, truckload rates are extremely cheap. They've been bouncing along the bottom for quite some time, and so shippers might like to leverage that. You know, intermodal is an example, So you know the intermodal space,
which is railroads. You know that's when you see like two containers on top of a railroad. You know they're facing increased competition because of the loose conditions that are on the spot market, and a lot of those shippers might use brokerage to try to find a load, I'm sorry, try to find a carrier to carry their loads.
I think in there you it sounded like you just said there was a freight recession or at least that for.
A long time.
Well there has been for about two years.
I mean, how severe is it right now?
You know, the way we look at it, we're probably a little optimistic about twenty twenty four. Kind of a glass half full and it's filled with a really good cabernet. So's I'd say we're probably more optimistic than most.
You know, we've been saying that.
You know, we didn't feel that the economy necessarily had to go into a regular recession. And just because you go into a freight recession doesn't mean it's going to lead into a regular recession. The freight recession is really driven by a number of things. First and foremost is they had really difficult comps during the pandemic. You know,
you were talking about trying to get a refrigerator. You know, everything was just commed up during the pandemic, and so capacity was in high demand, and the problem with getting capacity was that there weren't enough workers to either be in the trucks or be on the railroads or be in the air freight area. So there was there was a real issue there, and so we just saw like, you know, a backup in demand and then all of a sudden that demand got fulfilled because apply chain started
loosening up. Here we are today. You know, you have moderating economic demand. You have you know, an ism and negative territories, so you know that the manufacturing economy is not great. You have some difficult comparison. So when we look at railroads, for example, not to be all over the place, but when you look at railroads, last year was a fantastic year for Canadian grain. This year is going to be a normalized crop. So that's that's a decline in volumes that the railroads are going to have
to deal with. You know, railroads, a Canadian Pacific and Canadian National automotive is expected to be strong this year, continued for the railroads, but coal is probably gonna be weak because the export markets are probably going to start to cool and they have some really serious difficult comparisons. And intermodal is really a crapshoot. You know, we're pretty optimistic about the domestic demand, which is more truckload competitive, just because the rails have gotten a lot better and
improving their their overall service. So we started talking about ups somehow, now we.
Got all across logistics.
See that's because Lee covers the railroads, he covers the trucking companies, he covers the logistics companies, he covers the you know, the shipping companies and big ships on the season.
He covers a lot. So we just call them basically logistics analysts.
I mean, if you've got to get a boxer point A to point B and you want to know how to do, you talk to Lee Clasgow.
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I don't know what to do with this market because we had it just ripped there in the last couple of months of twenty twenty three on that fed pivot. We've had some pretty solid economic data so far this year. The earnings okay, we'll see with some of the big tech companies this week.
But the question is where do we.
Go in twenty twenty four? So let's check in with somebody who does this for a living. Nimbrit Kang Joints as she is the chief investment officer at north Star Asset Managerment joinings via zoom from the town of.
Brotherly Love, Philadelphia, PA. I'm a huge fan of Philly, Nimber, thanks so much for joining us here.
Again, I don't think a lot of people kind of saw that move higher in stocks in bond prices at the end of last year. You know, maybe some people thought that pulled some of the performance from twenty twenty four a little bit forward here.
So as we finished out a pretty solid.
January here, Nimber, what are you telling your clients for twenty twenty four.
Yeah, we tell our clients to focus on what they know with a lot of certainty. You know, what we've seen in the last two years, Paul, is a round trip right. Last year was a pretty strong year for the markets, but it's was on the heels of a pretty dismal twenty twenty two. So we really did a
round trip here in the last two years. And you know, when we think about broadly for our clients, we expect to be in this era of heightened uncertainty and volatility in the financial markets, we are coming to a reversal of several big trends that have been in play for a number of decades almost you know, the big one
is the monetary cycle reversing. So in this environment, we just want our clients to remain focused on what they know with a lot of certainty, which is understanding and clearly communicating what their financial needs are going to be over the next five ten years and then setting appropriate strategic asset allocation based on that.
Okay, with a monetary cycle reversing. First of all, what's your expectation for the FED? The meeting, the two day meeting ends tomorrow.
You know, John, as much as I would like to kind of speculate what is thing to be doing and how exactly they're going to say, we take a little bit of a longer term view, and we do think there's an upward pressure on the rates, right.
I mean, we do have record deficits going on, record debt and at the same time our governments have to grapple with some of these big societal ecological challenges. So there's this continued upward pressure on spending, aging demographics. If we take all of that into account, we do think that you know, the ten year between the four or five percent range is a more normalized kind of an
environment going forward. Now within that range, it fluctuates all the time based on every single word out of the bed about, you know, the speculation on what their next move is going to be. Just in twenty twenty three, I was looking at the data. The low point for the ten year was a three to three and a high point was five percent.
That's a big move.
For what's usually you know, a very stable asset class.
Right, yeah, it is. It's interesting And one of the things I was thinking about, you know, putting a portfolio together for twenty twenty four is on the fixed income side. I was so surprised that the best performing fixed income category in twenty twenty three was highyield bonds. How do you think about high yield bonds in this environment where it looks like we're going to rates coming down.
We take a little bit of a differentiated approach. So on the credit side, we want to be in very high quality bonds, you know, where basically there's a contractual obligation to get the money back and we take more off the credit or company risks really on the equity side. So that's how really we think about it.
On the bond side.
We prefer to construct a very laddered portfolio, diversified across maturities, but really in very high quality government guarantee debt.
Ooh number, are you sixty forty or have you changed those allocations?
Yep, John, the allocation, it really depends on every client and their individual needs and their investing horizon. So we do think that equities have a very strong role in the portfolio as long term capital appreciation. We do think fixed income here is providing a pretty nice yield income here for a lot of people who are looking for.
That part as well.
But the actual allocation depends on where the clients are in their journey.
So my friend here, John Tucker, he started twenty twenty three long and overweight, the Magnificent seven. He's just doing this radio thing because.
He loves it. The rest of us have to work on our portfolio. In twenty twenty four, Do.
I chase those big tech names, and again we're going to see a lot of them start reporting earnings tonight.
Do I chase them or do I just say miss that boat.
Let me go look at maybe a sector that's not participated, Paul.
Our approach is to really identify these long term companies that are solving some of the secular problems invested in them take opportunities like the market volatility to really size.
The position appropriately.
So, you know, you talked about the Magnificent seven, not all seven of them, but you know, for a very long time we have held onto some of the holdings in there from the technology because we saw them very playing a very vital role in solving some of the problems, mainly related to empowering small businesses, communities, you know, entrepreneurs
all over the world. Now, when we think about, you know, the sectors that have run up, Yes, technology has far outperformed on a two year basis, though, believe it or not, Magnificent seven just on a two year basis is up only fourteen percent, So not as ridiculous as it seems, just based on twenty twenty three data. But that said, we do think there are plenty of opportunities elsewhere in other areas as well to continue to tilt the portfolio towards those types of compounders as well.
I want to get to some can you do individual names?
Yeah, absolutely, so one of the you know, area that we think there's a long term secular problem is related to water. You know, there's a huge issue around scarcity of water resources.
But even just in the US, our water infrastructure was built in.
The nineteen fifties and sixties, so there's a huge need to upgrade this water infrastructure to make sure that we're getting the safe quality drinking water that is so essential. You know, just EP estimates there're seven hundred billion of investments needed over the next twenty years. So when we have thought about that, we have tried to get exposure to a number of companies that play a very important role across the water infrastructure value chain. So specific names
like Xylum. Xyleum is very prominent in valves meters, things like that, y why out YEP, and it's you know, Xylum especially has a big mare market position, leading market position in wastewater treatment, again a big area of long term growth and where we think there's major societal problems that need to be solved. Another name, a small cap only seven hundred million in revenues is Badger Meters. They
make your utility meters. You know, there's a big upgrade cycle going on from upgrading that manual meter that needed to be read to more of those smart meters which can be read remotely. So that's another small cap company long term tail wins. You know, the company just reported excellent twenty twenty three numbers, double digit revenue earnings going forward, you know, we don't expect them to have that kind of a growth, but high single digit through the cycle is a.
Pretty reasonable expectation.
And the last one I'll leave you with is Viraltov lto is the ticker simple, it's it's a spin off from Danaher, very high quality company. You know, sixty percent comes from water quality type of businesses. They analyze the water quality coming out of our streams, rivers, but also have treatment solutions such as UV filtration some of the
other treatment solutions as well. So again, these other companies that haven't kind of had the rip roaring returns we have seen from some of the household names, but long term, very important demand for their products and solutions.
Not the sexiest names in the world, Paul, now.
But those work.
I mean if you so, when you identify a theme like water, for example, nimro, do you do you and your team do you screen across the sector for evaluation, sales growth? How do you then identify individual names once you've identified a theme exactly.
So one of our themes in our portfolio is just related to ecological limits, right. You know, we've had years and decades of extra tractive growth and we think that's you know, our natural resources are scarcer and scarcer and we're going to have to learn to cope with these problems waterfalls under that. We identified that a long time back, and knowing that, then we're looking for high quality compounders within that that are solving for that, you know, solving
that particular problem. And when we talk about high quality compounders, you know, it's your traditional companies that have strong balance sheets, revenue growth, free cash flow margins, good deployment of capital, good management track record, all of.
That same kind of criteria. There.
On valuation, we take a longer five to ten year view and we use cash flow based valuation to understand what is the true valuation based on the earnings potential of a company like that.
Hey, what's the number one thing on the minds of your clients?
You know, when we talk to clients again, it's different, but it's really around understanding that, yes, we just live in this era of a lot of uncertainty heightened volatility. You know, last year this whole thing around AI really magnified and gave a really new leash to life for these magnifist and seven names. But longer term, people just
want people. You know, our investors, our clients are concerned about making sure that they have their financial assets can help them meet their financial needs and goals, right yep, and taking a balanced approach and a very risk aware approach towards constructing those portfolios for them.
All right, That's how the pros do it. Nimmer Kang, thank you so much. We appreciate it as always. Nimmer Kang, Chief Investment Officer, north Star Asset Management.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar Play and Android Auto with the Bloomberg Business. You can also listen live on Amazon Alexa from our flagship New York station just say Alexa playing Bloomberg eleven.
Let's talk UK stocks, Let's talk European stocks. We don't do that as much here, but we can do it today because Tim Craighead is here, and Tim Craighead is a European equity strategist for Bloomberg Intelligence. He joins his live here in a Bloomberg Interactor broker studio. That's important because he's based in London at the awesome Bloomberg European headquarters.
We got to get your lead to go. It is just it is super cool. Yeah, it is just awesome.
I mean, and what I like about it a it's just a phenomenal building in the city of London, right by the Bank of England. But when you know, Brexit happened, Mike was over there with the Mayor of London saying no, we're doubling down on London, which I thought was very cool because up until Brexit, a credible argument could be made that London was the world's financial capital visa via New York, A credible argument after a couple of pints
at the local pub. And you could make that argument now you can.
Before remind me, before he leaves, I got to ask him about congestion pricing.
Okay, all right, Tim Craighead joins it.
Ay, Tim, just give us a sense here. Let's start with the UK here, how did the UK trade last year? How did that market perform and what's the expectations for this year?
So the UK did the same thing last year that it did in twenty twenty two, interesting enough, which is a big fat nothing. And if you think back in twenty twenty two, that was a good stellar performance, it was a hero. Twenty three not so much, especially with the rally at the end of the year. So far this year pretty much again, it's sort of status quot and our view is that's kind of where we're stuck.
It's a funny thing. The UK market has this very odd composition where you've got this big basic material commodity base, and you've got medals and you've got oil. You've got a big defensive brand base of companies like Unilever and Diagio I think Whiskeys, and healthcare pharma with Glaxo Smith Klein AstraZeneca, and then you've got a big dose of
financials with the big banks like HSBC. Those three. You always end up with a driver that's good for one but bad for the others, or vice versa, and quite often they just sort of nix each.
Other because you don't have that technology thing, which is actually the leader of the US.
Market, the entire TMT group. So you take internet and tech and the good media e commerce, the whole kaboodle about one percent of the UK market.
What was the best performing stock individuals talk.
Rolls Royce if memory serves correct, which.
Is this is the engine maker, not the Yes car.
Yes, the engine maker that feeds into the rebound in commercial, aerospace and defense.
The cool thing about Rolls Rice is like each of their engines has had a name like the Yeah, well going back to like World War two, Okay, the Maryland. The Maryland probably the most famous engine there ever was They stuck that in Well, the Spitfire, I digress and then fifty one D Mustang and made it the greatest plane in the world.
Absolutely, still my favorite fighter plane, the P fifty one. The Spitfire is right there at fourteen's nomber three.
All right, Tim, I actually think about this stuff. We digress and digress more.
How about Europe here a little bit broader kind of markets in terms of the waitings here. How are your clients looking at the European market?
So the European market is reasonably well positioned from the standpoint of a diverse sector base, it still doesn't have the technology opportunity set.
That sap AM.
You've got basically four big tech companies there. If you think about it, one five one is SAP. We all know that, and it's doing fine. Look at its earnings, look at stock price. Here is of late, it's been a really good call. That's one ASML, which is chip manufacturing equipment, absolutely a must when it comes to making things for say Nvidia with their chip set, you have
to have ASML's equipment. And then you've got semiconductor companies like Infinian and st Micro and they feed into more energy transition, autose, industrial applications, things along those lines.
But wait, a tech in Europe, I want to lose weight all isn't that where those weight loss drugs come from? Or initially?
So that's Novo Nordis and you know obviously is coming up as a big second here. But the pharma industry. Pharma's business is a big business from a European perspective, no doubt. You've got really big consumer franchise, you've got luxury goods and the big one of the bigger businesses over there that is different from here is the big high end luxury auto companies, which are a big play on China. Another difference with Europe versus the US is China is really important over there.
I mean if you big buyers of the big German industrial equipment.
Well, and it's pervasive. The UK has a ton of It's actually the most exposed because you've got companies like Rio Tinto and Glencore and big medals and money that feeds in. But you've also got the autos, You've also got the industrials, You've got the luxury goods, and.
All of that adds to.
Roughly a four hundred and fifty billion euro revenue business from Europe selling to China. What happens in China matters a lot for Europe, which is a different story than what you have here from a US perspective. If you add all that together, Europe is okay. It's a lot cheaper from a multiple perspective than the US, but the earnings growth expectations for this year next year are not as robust as they are here in the US, and it holds it back.
Do I have to worry about things? If I'm a U and US investor looking to invest in Europe? Do I have to worry about things like the currency translations?
You do?
And it's kind of typical with currency as a double edged sword. I think the conventional wisdom this year is if the FED cuts early and first, then you've got a week dollar scenario to be told. Now, if you're a US person and you're buying European markets, let's say all else being equal, that's going to be good for you, because you're going to be carrying, you know, Europe over
to here, which is a stronger currency. It actually ends up being negative for the European companies themselves from an innings translation basis.
But it's different argument.
All right, tim you've lived in London a long time. You live just outside of London. So we'll get to the congestion pressing. The economy here in the US is good. You had a great GDP print, inflation's coming down. How's the economy in the UK?
Yeah, Actually it feels a lot better than necessarily what the headlines might suggest. I think there are signs that housing prices are possibly stabilizing, certainly like everywhere else. If you end up seeing interest rates coming down and the expectations are for the Bank of England as well as the European Central Night to be cutting, then that could be a good thing as well. But big election cycle this year. From a UK perspective, that's going to cause a lot of noise, just like it is here in
the US. And yeah, on the ground you're traveling, you're looking around, you're going places which you do feels it feels he doesn't.
Go to your congestion pricing because okay, and everybody should care about this. London did it first, where cars coming into the central part of the city to reduce congestion are charged a fortune. New York City is trying to do that. But all sorts of you a fan or like.
Whether you like when I'm gonna say or not, I guess we'll see. I am a fan. I think it is a good thing for you.
Yeah, but and not like a mile that writes like a long way all kinds of weather.
But but but it is a case where between congestion pricing and they are expanding that congestion zone as well as increasing things like cycle lanes and other elements of public transport, it is an easier place to get around unless you want to drive.
I don't have a choice, though, we're gonna get I'm gonna take my bicycle. At two o'clock in the morning.
It comes through the Lincoln tunnel.
That's what you don't have to worry about.
Now we're gonna we're.
Going to work with somebody we know and get so John can expense his congestion pricing.
I think I know somebody can help out with that. Tim Craigh, thanks so much for joining us.
Tim Craig at European Equity Strategists know, by the way, he is also the director of research over there in Europe, so doing lots of stuff.
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