We want to be a consolidator in the industry: William Weld

Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. In the past week, as people fretted over trade wars and the decline in tech shares, ten year treasury yields quietly but very steadily moved back toward that two point nine threshold, getting back toward that three line in the sand at which many investors said they would pile back into the debt. Joining us now to figure out what's behind this move, what does it mean about the global economy, and where

should investors take their money? As Dave Lafferty, chief market Strategist, and it takes this investment manager, as he joins us here in our eleven three oh studios, Dave, thank you so much for being here. I'm trying to make sense of this. We're talking about a flattening yield curve and we're also talking about a steadily climbing ten year treasure yield.

Are we looking at stagflation? I don't think we're there yet, certainly, I do think inflation is part of the story that we've seen in the yield curve UM, I should say, in terms of ten years backing up UH. We've seen that the correlation between things like the price of oil UH and inflation break evens have been fairly consistent. So as oils backed up, it seems like inflation expectations are backing up. We've seen a little bit of the risk

off trade that we've seen around geopolitics FADE. I think that's allowing yields at the long end to back up a little bit, and there's still the the underlying strength and the global economy. I still think that the equilibrium rate for interest rates out the yield curve is still higher UH if we look at nominal rates versus nominal growth, which should be related at something like the five year

tenor in the long run. I don't think we're gonna get anywhere near this in the short run, but in the long run, the five year treasury is probably seventy basis points below where it probably ought to be in the long run. UH. Nominal growth versus nominal yield, meaning the yield is much lower than nominal growth is. Right now, David Macro in your note, you're right about the macro peak reached in January with quote synchronized global growth and

tax cut euphoria. Right, If that's correct, Why would you want to be buying into a market that has those kinds of headlines. Why wouldn't you want to just sit and wait for everything to go as they say, you know, pair shape and then buy assets. What do you want to buy assets when you're at the top or near the top of a cycle. Yeah, it's a great point. So this is why I think I've been a little bit more cautious, because at the end of the day, we tend to be more value investors in the long run.

Um And, as I mentioned, sort of you had that macro euphoria. If you went back and read everybody's two thousand eighteen outlooks that we all wrote in two thousand seventeen, it was all about that quote synchronized global growth. The global economy was priced to perfection in the fourth quarter and into January. Uh. And I think that makes it. That makes it for both the equity markets and for the global economy a very high bar to get over.

So again, the underlying fundamentals, we like the long term trend. It's not uh, it's not that we were telling people to get out of the market, but I think you have to be a little bit more cautious given how much euphoria had been priced into the market. When was the last time that you changed to your recommended allocation? Uh? Interestingly enough, it hasn't changed much. I've been sort of in this low beta camp for a few years. Uh. Going back to uh, you know, we we had been

fairly fairly bullish. I'm sorry to interrupt you, but I mean with respect to the bonds, the stocks, the cash, that's what I'm talking about. The ratios. Uh. Well, again, it depends on the client. But for an over let's say a plane, Jane, it really hasn't changed that much in a couple of years. What would make you change it? What would make me change it is if I thought the global economy was beginning to falter more than what we've already seen. We don't see the underlying trends changing

that much. Uh. So I do think there may come a time to get bearish. We're not there yet. I will, however, say that the gap, this idea that equities were the only game in town. If you went back a year and a half ago, you had stocks that weren't that expensive, you had all this global QUEI, the gap, the the the equity risk premium had gotten extremely wide. Well, now yields have started to back up, so bonds look a little bit more attractive. Peas have gone up, so earnings

yields on the equity market have come down. There's still a big gap between fixed income and equity, but it's not nearly as big as it was before. But we were never that massively optimistic in the first place. I think that market timing is pretty hard. So it's better to be slightly de risk going into a risk off environment than hoping that your clients are gonna be able to time the markets correctly, which never seems to be

the case. Right, So if that's never the case, why not take some money off the table when everybody is trying to figure out reasons to be bullish. You've got earnings. You take a look at the global economy. As you just said, oil prices, even though you get tweets from the President, oil prices barely move. You got oil at around sixty seven dollars a barrel. If all things are benign and sanguine, why not take a little money off that's able and then wait when everybody else is panicking

and hitting the sell button. Yeah. I still think the global economy is strong enough where uh, if the implications take some money off or be mildly defensive, that makes sense to us. But it's not a scenario where you want to be bailing out. The global economy is still probably growing at almost a three and a half to four percent run rate, I think three point eight three.

But I mean you can at least take some of the profits and then you let the money that you made move and you take out your original investment, so at least you have some dry powder if in case you end up with a scenario where people say I'm getting out and then you get to get back in. Yeah, And this is the sort of the notion I was mentioning before. It isn't really our view of jumping out of the market. It's staying in the market, but being

more defensive in terms of doing it. So those could be things like option hedging or low vall or minimum beta low, low variant strategies are our advices? Are there ways to be in the market without sticking your neck out too far? Thanks very much for being with us. Dave Laherty is the chief market strategist for Natixis Investment Managers. What is it like to be a value investor? Well, that's why we ask Scott and Black. He is the

president of Delphi Management to be our guest. He joins us from Boston, home to Bloomberg one or six one Boston New Report and in Metro West in the South Shore. Scott Black always a pleasure. How do you define value investor?

Really a value investor? There's somebody either sticks to a discipline throughout all cycles and buys absolutely low peas or buy consistently at a price to break up that's close below theoretical value of where the breakup value is, and so it's you know the all Benjamin Graham, the idea has get that margin of safety by not paying up.

How difficult has it been to maintain that disposition of being a value investor in the last let's say twelve to twenty four months, how about in the last ten years? Has been very difficult? To be frank with you. I mean, even though our companies come through with earnings that don't seem to get much respect, the bottom line is systematically, especially with the emergence of the e t f S, value has systematically trailed growth over the last five and

ten year period. Scott, I know that you recommend to your clients to target companies that pay high dividends. I wonder at what point those companies will look less attractive to you when you can actually start earning something on cash. No, the bottom line is that we own a panoply of companies that are low p There's some that have divd in yields, which I was going to suggest a few to your readership so they don't have to buy junk bonds.

It's not necessary that we have companies with divid in yields, but we like companies that generate lots are free cash. So I mean, I can give you a couple of it. Go ahead, give us some example. Okay, here's one high crush. It's an lp UM. It's basically one of the largest producers of frack sand in the United States. It's a eleven dollar ninety cents stock and they're gonna earn about two forty. It's a five p selling at one point three times booked, and they just bumped the diving in

again to ninety cents annualized. You get the seven point six percent yield, and the earnings are exploding this year UM last year they get about a dollar one. They'll do two forty two forty five. And as you know you've been watching, UM fracking has done one just for Americans oil production. We're up to ten and a half million barrels a day. Last year at nine point three million, and you need to use a lot of this fine sand to frackt and they have roughly a thirteen share

of the whole United States market. So you have the wind tear back, plus you're getting paid while you wait, and the stock is ridiculously cheap. How did you find high crush? Did you go to Houston? You know what we do oftentimes we do a lot of mathematical screening, initially PIM and then if it looks attracted, we call and visit the company. So we've talked to the management on this company, you know several times. We never buy anything, as they say, off the shots or on a whim.

We always talk to management to see you know, if they're really they're under control, and whether they have certain targets for returns on capital and growth and revenue and earnings per share. All right, let's talk about another one. Give us another name, because high car symbol hc LP, as you said, based in Houston, paint about a six

or seven point six percent dive. And then right now, okay, Now another one that I like is part of the Aries group is the b d C. The business development corp is Aries Capital ai c C. The stock is rough the fifteen nineties six. It sells below tangible books cents on the book, the dividends of dollar fifty two or the nine and a half percent yield, and about six point eight billion market cap, and they'll learn this year about a dollar sixty, So it's a MP selling

below book um. They make very few mistakes, and their portfolio less than one percent historically, and the company will grow its organic portfolio about five or six percent. But this is one company that benefits from rising rates. They asked that sensitive not liability sense of for example, of the portfolio loans float, so rates go up, but eighty two percent of their funding is fixed. And so for each hundred basis points in library at sixteen cents to share,

so as interest rates rise they benefit very nicely. And uh, well, what if it turn has been like on these cash rich companies well over time, um probably areas with the dividend has probably done about double digits between your growth and the stock price over time, and in the dividend high Crush is a relatively new company, so it doesn't have a long history, but I mean relative of to say the broad index. As I say, you can't look at it on that basis because I'm buying it now

on a statistical basis that they are achieved. You know, there are certain times, you know, let's say after the market crash in a way I'll give you an example. I was able to bi Oracle and Microsoft. They saw that our types of p s there are opportunities. It's not that we're going to put them away forever. You know, our longest term holdings have been things like Berkshire half the Way, which we've going forever. But these are just

opportunistic as the valuations are so cheap at this current time. Scott, what's the biggest mistake? Give you thirty seconds. What's the biggest mistake investors make when they think that they are a value investor, but they're not. Well, they think if a company used to sell it and it's now an eighteen multiple, that somehow it's value. That's a relative value,

because that's roughly the market multiple. The idea of your value investor is really to stick to absolute valuation, and the other thing is to stay away from the downs. Forget about technical analysis. You have to have your own conviction about the company, and if if something's out of stab or oftentimes, that's the time to buy it, because when the consensus is good, to be buying stocks off the high, not off the low. Scott Black, thank you

so much for joining us. Scott Black, president of Delphi Management, overseeing about a billion dollars from Boston, and uh disregard technical analysis. I'm sure some people him. We're really lucky to have our next guests hitting a very hot topic right now, and that is medical marijuana, in particular the shifting tides of major politicians who have previously opposed marijuana use, even on the medical front, but are changing their tune.

I want to offer a warm welcome to the former Massachusetts Governor William Weld, as well as Kevin Murphy, chief executive officer of Acreage Holdings, which is the medical marijuana business that has garnered support from a former governor at Weld, as well as from John Byner, the former Republican Speaker of the House who once said he was quote unilaterally

opposed to decriminalizing marijuana laws. I want to start with you, Kevin Um, yourself, as a former alternative money manager for Stanfield Capital Partners, what drew you to this business and what do you attribute the shifting tide right now in sentiment? Well, first and foremost, thanks so much for having me on the program. Uh, my shift really had come in two thousand, two thousand eleven when I was introduced to the space by a friend and I was very skeptical about marijuana

in general. Didn't have a strong working relationship with the plant UM, so it really wasn't for me. But when I had done further due diligence on the business itself and having run a multi billion dollar money management firm, understanding business and the operating leverage in that business, UM, it was that coupled with UM, the medicinal value of this plant could potentially be the silver bullet um for the medical community over the next twenty to thirty years.

It is simply remarkable what this plant can do for children with epilepsy, um people with cancer, and the list goes on and on. I want to focus for just a second, not on the medicinal potential for cannabis, but on the financial potential for cannabis. UH. William Weld, former governor of the state of Massachusetts from you have a bit of experience when it comes to state UH finances. What do you leave to be the main obstacles for lawmakers to approve the legal sale of cannabis. Forget the

medical part of it for just a moment. When you have, for many years already had the legal sale and taxation of tobacco products, the legal sale and taxation of alcohol products, Uh, we don't necessarily have a prohibition on substances that we know can create health issues, if indeed they exist. What about the financial implications of taxing cannabis and using that money to fill all of these budget holes? Well, nothing is holding back legislators in any state from doing that,

absolutely nothing, not fiscal policy, not criminal law. Nothing. That's why that's why nine states have already legalized so called adult reck adult recreational use. I I supported the Question four in Massachusetts, my state, back into two thousand and sixteen elections in that past, despite being opposed by almost all the politicians in the state except this former politician. But so why do they oppose it? Well, I think it's a cultural thing. You know, it takes a little

getting used to some people. Probably they're they're buried. Antipathy towards cannabis goes all the way back to the nineteen thirties when the you know, the movie Reefer Madness and the federal government really came down hard on it. It's almost like the panic that beset everybody in the nineteen eighties about crack cocaine. They thought it was gonna, you know,

take over our streets, and it's simply not true. One thing both Speaker Bayner and I think is right on the table now is a legal issue, is to deschedule cannabis as a Class one narcotic in Washington d C. I mean, that is supposed to be for drugs with absolutely no redeeming medicinal value whatsoever. We already know that's not true. I mean I endorsed medical marijuana back in nineteen ninety two, my second year in office, for relief from nausea from chemotherapy and glaucoma, And even then it

was known that the drug was helpful in treating those. UH. We know more now than we used to. People have focused on the fact that there are other cannabinoids besides th HC in the cannabis plant. There's uh CBD, which has none of the potentially negative effects of th HC and is enormously helpful in UH treating pain anxiety. UM. So you know, I I got into this. In fact, I jumped at the chance because I spent a couple of hours with Murph, Kevin Murphy, and I could see

his passion about doing something on the medical side. Most of his acquisitions were on the medical side. We're not opposed to adult wreck, but we think that's that's up to the States. And you know, I note with approval that candidate Trump during the election said adult wreck, that's the States rights issue. And he has now said we want to hear comments to the f d A by April on de scheduling cannabis as a Class one narcotic. Those are two very hopeful sign is from the President. Yeah, Kevin,

I want to get your sense. Um Acreage Holdings operates currently in eleven states. It's headquartered in New York. I just want to know, given the backing of Governor Murphy, governor here, who is joining us now as well as John Bayner, do you expect to expand much more or do you think that it's gonna be tepid? And what about financing? We do anticipate expanding, having UM again been in the financial services business. UM this is much like cable,

this is much like cellular. This is a business that has started out as a fragmented business. Uh. You can look back five years the cable industry, the cellular industry had thousands of players. Today there's five to ten players in both sector. UM Acreage being the largest footprint in the country today, we anticipate maintaining that pole position. So what we're here to do is bring the finest operators

we can with the best people we can. And no better place to start then with the Speaker and the governor. Governor world, I just want to get your sons in twenty seconds, do you foresee a lot more support coming, particularly from the Republican delegation in Congress? I do of the country wants adult wreck. UH wants medical marijuana, wants adult reck. It's it's coming and Uh, Acreage Holdings, you know, I'll let the cout out of the bag. We want

to be a consolidator in the industry. The management is blue chip Wall Street background. That's a good combination with the passion that Kevin Murphy also brings to the table. I want to thank you both for joining us. So William Wells, he is the former governor of Massachusetts, joining us here in studio with Kevin Murphy. He's the chief executive of Acreage Holdings, the largest multi state cannabis operator

in the country. And just a note that just today opening in New York City, that the Los Angeles based cannabis retailer MEDMN is launching its first dispensary in New York City and it will be open for on site consultations with pharmacists to determine best fit remedies for chronic

pain and other ailments diagnosed by doctors. Competition heating up, could be President tweeting today on oil and opeque looks like OPEC is at it again, he wrote, with record amounts of oil all over the place, including the fully loaded ships at sea. Oil prices are artificially very high, no good and will not be accepted. Joining US now,

Joe Carroll, US energy reporter and Houston Bureau chief. Joe, we've gotten so much news on oil in the past twenty four hours, with OPEC deciding to continue cutting production despite declines in the stockpiles, President Trump tweeting shale production facing challenges. What should traders focus on as to the

direction of crude? You know, the real fundamental issue out there and and and it's it's what's it's what really drove the the rise and prices as OPEC has been uh un characteristically you know, disciplined in imposing these these cuts since late and they've if what we found this week is they they've pretty much wiped out the glut that that led to the to the collapse and fifteen in the first place. So supplies are definitely tightening overseas and here in the US, and we're just seeing that

reflected in prices. Joe, if you were to take us on a trip to the Permian basin in West Texas and New Mexico, what would we find, Well, we'd find the roads are clogged, um and a little bit and crumbling a bit, just because there's so much heavy truck traffic. We might find it hard to get served at a restaurant, and you'd find hotel prices that would compete with what you'd pay there in in Midtown Manhattan. There is just

so much activity in the Permian. Uh. You know, the unemployment rate in Midland, which is sort of the the unofficial capital of the Permian base, and the unemployment there right there is around around two um were the rest of the state of Texas is around four. Uh. It's just it's a classic boom story and they just can't

get enough get enough people there to fill the jobs. Okay, while I was going, was the idea that if you have this increased output, and I believe output is projected to climb to four million barrels a day within two years, that's three million barrels, is that going to be enough to offset whatever production cuts get from OPEC? You know, it's it's it's an interesting question because the Permian just continues to grow. It grew right through the bus as well.

The Permian didn't require sixty or seventy dollar oil for folks to ramp up drilling activity. They were making money when oil was was forty uh So the question is the question really isn't about these opex sort of self imposed limits. It's what's going to happen to places like Venezuela, which has this one of the richest oil endowments in the world, but the country is spiraling down almost faster

than we can chronicle it. And so if and when Venezuela sort of drops out of the oil market for all intents and purposes, then you're really going to see really see a squeeze. And the other end, the other side of that would be uh, you know, if next month the Trump administration decides to reimpose sanctions on iran Um, you know, and cuts off some of those oil supplies that men, you probably see another big jump in prices. So this sort of is the swing factor the shale producers.

And you know, there are all of these massive players. They could come on or offline shell producers though, could ramp up production more than they currently have. Correct. Yeah, what's really holding back the shale folks, especially in West Texas and New Mexico. It's not an inability to find the oil or or to or to you know, get it out of the ground, so that they just don't have enough pipeline capacity or truck capacity or railroad capacity

to move at ports. You know, the nearest port or refinery is five hundred miles away from from most of the Permian, So so they need to lay more pipes. Where I wanted to go with this is that Schlumberg said today that shell drillers are facing quote production challenges that will stunt their ability to fill the impending gap between supply and demand. Uh what do you make of that? Is it something we should pay attention to. Yeah, and

that's exactly what he was talking about. That that Uh, you know, because the main driver is West Texas and New Mexico. It's about pipe capacity and truck drivers and railroads. Um, the challenges they're facing is it's one of they're all above ground, that that you just can't move the oil out fast enough. Joe, you mentioned Venezuela. Give you thirty seconds. I want your thoughts on pemm X and what's going on in Mexico. You know, the Mexican opening has been

has been amazing. Uh. They managed to attract the pickiest of the of the giant international oil explorers Uh, it only took them about two tries to get their contract structure right. You know, they succeeded in a way say Iraq has not in enticing the you know, these the excellents on the shelves of the world to really come in aggressively. I want to thank you very much for joining us. Joe Carroll, our u S Energy reporter, Houston Bureau Chief. You can follow Joe on Twitter at Jay

Carol and get this. Uh I C H G O. Gotta add that all together? All right, So this is fascinating and frankly, the implications of this are massive with respect to where oil prices go from here. They go higher, hired gas price is more inflation. Is that a good thing? Not clear? There? You go at j Carrol h g O. Bam, he's here in the studio with us. Joe Maisock, editor for the Bloomberg Brief for municipal markets, and Joe, I

don't know. Let's start with the idea that there are six million, six million investors who now claimed tax exempt interest. This is a pretty high number, isn't it. This is a big deal. The uh, the municipal market has been experiencing declines in the number of investors who claimed tax exempt interest for almost a decade, and this was the first major increase over six million. You know, that's not a bad number. The peak was six and a half million.

And Uh, if I had to guess, I would say, uh, we're heading more back in that direction as people appreciate the benefits of tax exempt income. That's I want to say, why, especially after the tax cuts. Well, uh, the in the investors who live in the states where the state and local tax has been killed or negated, if you will, Uh, they're going to look for someplace to hide their income, and the tax examp market is one of the few

shelters left. So it also because of the convenience, because you know, you can always do the math and say, well, you know, if you invest in this, it's going to give you a higher after tax income. You do this also with immunees. You know, you figure out what the taxable equivalent yield is and so on. But is there also just a convenience factor of having tax exempt income m interest thing? You know, I'm I'm I'm not sure

about that. Because the municipal market has long battled the negative ease of access, meaning municipal bonds are available in five thousand dollar minimum denominations, and generally speaking, your broker doesn't want to talk to you unless you're are going to order twenty five dollars. Yeah, that's why. That's why I brought that up. Okay, can we turn to the actual supply of municipal bonds? Smiling you like this top,

we can. It's great. You know, this week we broke thirteen billion for the first time all year, for the first time since back in December. And you know, at that point, we were coming off of a record volume month. Um. You know, it was like sixty two plus billion dollars. Uh, so, thirteen billion, and you know, things are looking up so far this year. The municipal market is off about and that, of course is bad news for all the underwriters and

financial advisors and bond lawyers out there. A little on a salesman, so uh talking about the positive edges of the bond market, I just want to bring the conversation down a little too, a little more depressing place. I want to go to Puerto Rico. I want to talk about how the power has gone out again in most of the island and the fact that, uh that a lot of bond investors are actually suddenly profiting in big in a big way from their holdings right now is

rubbing people the wrong way? Can you explain how the Puerto Rican government is upgrading its financial expectations giving bonfires? Uh, positive feeling? How does that cohere with another blockout and the situation on the island deep and dark? Yeah, we're just talking. We're gonna we're gonna name our show that

man Happy Friday, go ahead. Uh. You know, Puerto Rico is looking down the line and sees some good days ahead because there's going to be so much money invested by insurance companies, uh, and reconstruction of the island, So

they're looking forward to that. Uh. You know, when you talk about bond holders profiting, you're talking about a relatively small group of speculators who bought in a twenty cents in the dollar and the dollar and who are now looking at forty cents in the dollar if they wanted

to sell. I think that the issue here is and and you know, you talk to people who buy bonds and they say, look, the only reason why this financing is available is because of the contracts that govern it, right, And if people just feel like those contracts get broken, then the borrower is unable to tap markets. Again, that is the penalty, right, And so here we have a situation where Puerto Rico could decide to just not pay, right, I mean and and so then the bonds would not

be worth even where they're trading right now. Those words not pay that you should see the expression on Joe my sex face. Well, I'm not and I'm not arguing. I'm not arguing for them to do this. I'm just raising sort of the political backdrop that this is coming at repudiation Confederate States of America, not the uh IN and the governor said the debt is not payable, and that was the sort of crack of doom. Um, So

now it's really going to be more of a legal settlement. Uh. You know, I'm not sure you could say while we're going to write it off to zero. Yes, there have

been some people who suggest that. But as you pointed out, if Puerto Rico is going to have access to the markets to raise more capital, at some point they have to make some sort of token gesture on the outstanding debt, especially the general obligation on the Cofina debt and Just to put this in some kind of perspective, the federal board that oversees the Commonwealth's finances says, spending cuts improving tax collections, you could end up with a surplus over

the next six years of six point seven billion dollars. Thanks very much, Joe Mask, editor for the Bloomberg Brief Municipal Markets. Check it out on Briefs, go on the Bloomberg. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo.

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