Amazon/Whole Foods Deal Is a 'Net-Net Win,' Kantor Says

portfolio manager in New Burger Berman and Charles Kinder. Great, great, have you with us here in our studios in New York. Let me start by just having you take a look at the lay of the land here again, we have this close above twenty thou yesterday. There's a symbolism there in and all of that. But what's your sense of

how the equity markets are doing at this point? I think the equity markets um a story around the the earn easy trumps the rhetoric, and and as you think about the environment today, it looks very similar to that of about two years ago and three years ago. The narrative around UM nice nice earnings growth, low inflation, low, low corporate brand yields, um tight credit spreads or recently typed credit spreads. It's just it's been a really really

good environment. UM. And and it should should should remain so, UM, no doubt. UM. There's been a shift in tone around what we thought Washington could deliver um to to the market. UM. I think as you think about the rhetoric after the general election, there was tremendous hope that fiscal policy could deliver lots of tail winds to the financial markets. UM. That pieceis, of course, has not yet played out and

and certainly been pushed back a good amount. And I'd say the financial markets today believe, unlike they did three or four or five six months ago, that Washington will deliver them almost nothing in terms of of of tail

winds to to to profits, earnings and financial securities. So if your view, controversially maybe is one where you will actually get something productive out of Washington eventually, whether that be lower taxes, a tax holiday, to to bring back all our capital that's tied overseas, whether that be um UM, even more discussions around regulations and more friendly business conditions. If you believe that, UM, and you you would be

in the minority today. And therein possibly lies lies the opportunity. I'm not suggesting you'll get that. I don't have a strong view on that, but it would be important, um as we enter twenty eighteen that we get a little bit of of of of push from from from from our leadership. I'm just gonna ask you, if you're if you're a believer, if you're you're holding that controversial view, do you do you retain some optimism here that that's

going to happen. Look, I think it's not that popular for for the politicians, but but our financial markets in aggregate UM are stronger than than than leadership over long periods of time. It's not to suggest that clarity around regulation and rules of the game UM and certainty around that isn't a vital ingredient for making investment decisions, whether you're a corporate CEO or an asset manager UM, and

so clarity there is is always helpful. We haven't had a lot of clarity UM for a good amount of time, and and and if we're to get some clarity that would be that would be terrific. The market is just fine because underpending the market earnings depending on where you want to start, has been the story this year. It wasn't the story last year. The story last year was

a about multiple expansion. The story this series about earnings um and and the pick up in the global economies that started UM well before a new president was sworn into office. Um and As goes those things, so go the markets. And and I wouldn't bet against that for now, even though it's popular to do so. Charles Cancer with us with Newer Berman, really special for Global Wall Street

to open, UH this hour with him. It's a little bit of stagflation out of the BOE announcement, really really interesting tape on at six or two vote uh, David Gura. The idea here truly of a modeled higher inflation and with a real stag element to growth into wage growth as well. Sterling really gives up the one thirty two ghosts weaker Sterling. Over the last ten minutes, I've been dying to ask you this question. We're on the edge of Jack Welch. All of a sudden, everybody's talking about

a lack of pricing power. You basically arbitrage. You look for value, you look for stocks and aren't work And at the revenue line is price and quantity, price and volume. How does a lack of pricing power diminished P at the revenue line? How does it fold into your work? Is that a good thing or a bad thing? In aggregate,

it's a bad thing um. UM. And one of the things we've we've noticed UM saying the industrial sector, because we had any number of companies in the industrial segments reporting over the last ten days or so, is UM despite the the the uptick in certain commodities which would generally which our input costs foremost industrial companies, generally those things get passed along in higher prices and over time reflect themselves in in more a more stable margin profile

for the underlying company UM and and for the inaggregate. Again a broad generalization, but in aggregate, the industrial companies showed very good volume UM, but didn't raise price UM to offset the rising raw material casts. UM. We're not. We find that curious. UM. It would seem for now UM either the CEOs in aggregate are unwilling to to unsettle the apple card. Maybe they haven't seen an environment where they've had commodity input prices go up and a

nervous to raise prices worried about UM losing market share. UM. But But but these are CEOs need to start tilting to to two more of being the investor unless of being the productivity manager financial engineering maybe said it's vogue, David. What can we can we learn about consumer staples with what's happened with that with Whole Foods here over these last couple of months. I know that you were agitating for Whole Foods to do more to to to improve

its business. We're doing immigration earlier, David on television, we're mentioning the immigration in stocking produce like your blessed organic like organic. I don't two to one vote. Uh what what? What can we learn about the sector as a whole from what we've seen the Whole Foods go through and do here? Look, I mean as there's a lot to learn. Um specifically over to your question, I think it speaks to the power of the brand and brands in general and what folks will pay for brands. Um and and

brands means something more than just price. Brands means an emotional connection to the thing or the company that you're

engaging with. And I think you'll find UM and you have seen in the consumer staples sector more broadly that those companies that have created unique brands are selling at astronomically high prices UM as measured by say um you know, ibadad to enterprise value, and so I think there will always be room for the innovators, for the brand builders, for people that that build an emotional connection UM with their customers, and and those that maybe potentially the larger,

larger consumer staple companies, or those that are looking to both scale with with their with their you know, with their wholesale base. They will always be looking to to to buy the attractive consumer staple bands brands in the hope of winning more shell space, in the hope of

engaging the customer. More so so despite all the technology UM and and and the idea that there isn't pricing power UM, I think investing in a brand and and getting it right, it's it's easy to say invest in the brand, It's a lot harder to get it right over time. But I think you'll find you'll continue to see very attractive prices for for those that have both brands and have reached a certain scale we spoke to in the last are really important interview. Look for that

on bloomber Digital is well. Charles character with us here found at Citior Portfolio Manager in New Berger Berman. Uh, let me ask you maybe a broad question here about what you're enthusiastic about in the markets right now when it comes to sectors, when it comes to types of companies, What's what's attractive to you here? Halfway through a two thousand seventeen look, I think companies that can produce um believable growth UM evaluations that on nosebleed remained very attractive

to us. I think we're in an environment where where where gross difficult to come by um and if you can, and I'm not talking about double digits organic growth, I'm kind of talking about three or four or five basis points above, you know, where treasury yields are so so called mid single digit types of things. We love those businesses. We love those businesses they come with with less capital

intensity versus more. We actually love businesses candidly that look like Bloomberg, where where you're creating data sets, create them once and use them many times. We own companies like Various and and an I H. S Market that that would fit that type of building. Lots of you know, the Google to look like look like that. We love those types of businesses. And then because of where where aggregate tenure treasuries are, we've always liked capital intensive businesses

that produce stable and growing streams of income. Um. The key there, though, is is to make sure that their returns on equity are reasonably stable over time. What what tends to allow that on average to happen more than often more often than not? Is there in regulated businesses UM.

So these are very capital intensive businesses that make a small spread versus their cost of equity, positive spread versus their class of equity because the regulators asked them to take on the risk of bringing large infrastructure projects to market on time and under budget, so the company takes on that risk. So those those are kind of be the cornerstone of how we're thinking about investing. It's been the cornerstone of how we thought of investing for a

long time. Then occasionally we'll we'll find something that that that just feels like there's a shift in in in in how the boil and management will allocate capital on a go forward basis. And generally what we're looking for is is more capital rationalizations doing more with less not popular, but but so those are the three broad elements of what we find attractive. Let's use the industrial test. If

you mentioned industrials, are Mr Flaherty at General Electric? Can you get on board Generous Electric now knowing that Flatty is going to cut costs and do a better capital allocation than the trias that Jeff Amal had to do. I think we increasingly finding companies UM that are fit and focus very attractive. We actually want businesses to to to to separate their best assets and to allow guys like us, and and and and our female competitors the opportunity,

you know, to value those assets. I mean, in example, last night were the resorts announced earnings and they're splitting up their time share business from their branded business. We think that strategy, if it can be done tax effectively to shareholders, is very favorable. UM. And I think one of the listen, EMMO, did a really good job of of of setting as many financial assets as you could. He was he was dealta a very difficult hand, I think, UM.

But the challenge will be if there's certain assets there that are meaningfully menifically under value because they carry the conglomerate discount UM, those businesses should probably be put in the public markets. Independently and let let the great talent and the Nietzsche run those businesses. Thank you so much for starting to Do you get do you whenever I go to whole Foods or out of broccoli? Do you like broccoli? Do you have a special cond to it

for broccoli? We we in the Caunter household, driven by my daughter Abigail, are huge consumers of broccoli. She can Bailey, I know it's without it. It's probably my wife freezer. It's a cantor daughter. She's doing a daughters buying apple. The broccoli the crown by the crowd. Very good tru advice on broccoli. It's way and it's like makeup. It's way in the back corner. They make you walk through and to get to the broccoli, so farthest thing from

the front door. Evil. Yes, thank you so much. We continue. This is Bloomberg Pleasure. How to be joined by Peter west Away. He's our chief chief European economist at Vanguard. Peter, let me just start with your your broadest takeaway from what we learned today, from the inflation forecast, from the policy decision itself. This was a six to two decision. I'm struck by the degree to which Brexit is is

weighing on all of this. Again, I shouldn't be surprised saying that, but clear from the questions and answers at least that this is front and center for the Bank of England. Yeah, it's it's from incenter for the Bank of England. It's from a center for those of us that they're thinking about what's going to happen next in

the UK economy. And while some members of the Policy Committee had been and actually still are thinking about the the worries about inflation headline inflation picking up, it seems a very odd time to be thinking about raising rates with with the data coming out week, and with all of these uncertainties around Brexit. So really the slightly dovish message that the Bank of England have sense seems to

me to be completely appropriate. Slightly devish. Help me understand what changed at that ECB forum in Portugal a few weeks back, of course, the Governor of the Bank of England speaking, they're talking about the potential here to to remove some monetary stimulus. Uh, if the trade off facing the NBC continues to less than the policy decision Accordingly, becomes more conventional. What changed at that forum with regard to the conversation about central banking, both in the UK

and Europe. I think what was happening was that, maybe in a slightly ham fisted way, central bankers were trying to signal that these this period of exceptional monetary accommodation wasn't forever, and so they were trying to soften the market up to a removal of policy stimulats in the case of the UK, tapering of the asset purchases in Europe, which remember is still adding to stimulus, is just doing it at the slower rate, and I think that's a lesson that the market does need to take on board.

But I think maybe, especially in the case of the e c B, it was overinterpreted and I think that we've then seen a lot of rowing backwards from the ECB um a little bit different with the Bank of England because I think the data has changed. I think we've seen more information about than the economy that that's happening here. It is a good thing to have Mr Peter west Away on because he has a twisted sense of economics. We now got a line your quadratic Gaussian economics,

as we can only do with Peter Westwood. Peter, Peter, I look at the mathiness of your work out of York and out of Cambridge with great respect, and it goes to the glib comments made by all suits and ties of reaction functions. Do we have a clue the linear straight line or quadratic curved reaction functions to come? Is there anything orthodox? Now? Are we on new linear

quadratic Gaussian territory? I do like it when people take me back to my my early days and then you just dimly remember those those things that I used to do. Got that right on over the square root of two pie. That's all I read. Don't test me on it again. But but I mean you're making a serious point to which is a relative to a simple world. Just before the financial crisis, when frankly, Central mantas myself included, thought that understood the way the world worked. We knew that

we had to control inflation. We cut interest rates up and down, and that was really it. I think we're now in this much more complicated world where balance sheets of banks are also coming into play. Constitutive easing, which we thought had been confined to the textbooks, the textbooks of history, and now right back front and center. So all of these things are now making life very complicated.

And why that makes it really complicated looking forward for those of us that are trying to work out what happens next, is that the reaction function of central banks is quite hard to predict because they don't really know how things are going to playut because this is new territory for them, this is completely uncharted territory, and so there's going to be a lot, a lot of trial and error in the way they withdraw the stimulus. You know.

So as the Fed starts to wind down their balance sheets, everybody expects that will start pushing yield kids up, curves up. But we don't know whether it's going to happen all in one day or whether it's going to So that's what makes this complicated for polity magors and the rest of us trying to predict it. You keep us employed, Peter West you, thank you, thank you, thank you, thank you.

This morning with Vangor greatly appreciate um the David Dura and Tom Keen in our Bloomberg eleven three oh studios in New York. John Kelly spending his first week as Chief of Staff at the White House. Of course, he was formerly the Secretary of the Department of Homeland Security. Someone else who had that role as Michael Chertoff. He's the former U S Secretary of Homeland Security, co founder and executive chairman of the Church Tough Group. He joins

us now on our phone line. Great to speak with you once again, Mr Secretary, And yesterday we had the privilege of talking with Adael James Steuvrita's about what makes a good chief of staff in the White House. Let me turn things around a little bit to ask you about what makes someone well equipped for the job that John Kelly is now vacating. You were the second in that position. I imagine still learning your way around what was still a very new job at that point. What

equips someone well to be U S Secretary of Homeland Security. Well, I think it's useful to have a perspective on where global threats are, and not just threats that are man made, but also a natural threats, because one of the remarkable things about Secretary of Homeland Security is that you have responsibility for a wider range of risks, whether it's hurricanes or earthquakes, you can be terrorist attacks, it would be even playing a role with respect to a massive epidemic

or pandemics. Um steadiness and a kind of a wide perspective, I think are the qualifications for that job. It struck me when I interviewed John Kelly when he was a secretary of that department, how heavily the responsibilities of the job way on somebody in it. And I wonder if you could talk a little bit about that. I think, what so far as to say, it's difficult to sleep, but knowing that something could happen, how do you deal

with that, the weight of uncertainty. Well, of course I came into this having had the experience of being into the farm prossstive sense of tender eleventh, two thousand one, and so I ardly remember the way in which we were anticipating what the next attack might be, and it was really an oil, hands on deck effort to stave off what might be round two or around three of al Qaeda attacks. So I came into the job with

that experience. I think one of the things that is comforting though, in the job of Secretary of Home and Security is you're working with a superb team of people. It really is not an individual effort, but it is a team effort. So you have the people who are on the board, and you have the people who are monitoring and screening what goes on in aviation, and you have your partners in other departments as well. Uh, that's your secretary. One of want to speak to again, Uh, Michael,

turnoff with us, folks. You have the incredible privilege of working with John hard Eli years ago, one of the giants of American law, and he would be It's tragic he died so young, and he would be a perfect voice of wisdom now across all politics. With the certitude that's going on right now. John hard Eli fought every day against the certitude of this is m or that is um. Are we drowning in certitude right now? Both

on the right and both on the left. Well, I think maybe where you're asking me is are we having more opinion now than fact? And I do think to touch a change who I mean John Hue who I'm when I was back quite a while, was a believer in a healthy skepticism and that our institutions were built to learn the idea that nobody has a monopoly on wisdom, and we want to have checks and balances in order to be a will to modify our opinions in the light of experience, and I think we need to recover

some of that now. It's just fascinating. I mean, I mean the prescriptionary first of all, is there an opening it Homeland Security? Do you want to serve again as Secretary of Homeland Security with that work? For Michael? Turn off my four years enough and look to be honest, meat, fresh blood. I think one of the things has musical about our system is we do get turned over, and no matter how good you wanted a job, after several years, it's good to have a fresh pair of life. And

I think that's useful. And how much security as well? Secretary turt Off. A few weeks ago, I was having a conversation with Sir Martin Soil of w p P. Of course, that company among others that were hit by a cyber attack of a very large scale, maybe just over a month ago now, and we talked about the way his company's dealt with that, and I moved toward more coordination or conversation among companies. What do big come

pennies yet understand about the threat of cybersecurity. Well, I think everybody realizes now that it is one of the big risks any big company faces. And just as you are concerned about your financial position or your core business assets, you have to be concerned about your I T system and your cyber particularly because there's not just a lot of information that can be hacked if somebody gets into your network, but it can actually interfere with your operations.

And that's what we saw with the exploits that was part of the attack on w PP but also went around the world and did everything from shut down the National Health Service in Britain to affecting MURSK shipping. When you when you look at that attack, what does it portend to you? And are we going to see more attacks like this? What can companies like w PP, like Morisk due to prepare for attacks like this one? Imagine of course, this is seven job fending off attacks like these.

What more can companies do? Well? I do you think we're going to see more attacks and we're going to see the scale of the attacks grow. And this is really a problem of risk management. You can't eliminate the risk, but you can manage it. And some of it is a question of having a governance and a policy structure that regulates who can get on your network, what they're allowed to do on the network, what kind of monitor

monitoring the res of the network. Some of it has to do with educating people so they don't download things by mistake or leave themselves vulnerable, because one of the challenges with cybersecurity is you're only as strong as the weakest link, so you have to have a deliberate approach to driving down the risk over a period of time. You mentioned in your notes the thing that always comes back, it depends. It doesn't matter if it's Wall Street or cybersecurity,

which is corporate culture. My experience, sir, is that the corporate culture is to have the fear of God and you to go out and higher tech experts that can do the technology of cy security. Are we at that stage yet where boardroom, you know, people in suits and ties are so scared that they're actually going out and finding people with expertise in these thugs. Well, we certainly see boards focused on this issue, and um part of that is getting a technical solution. But as we like

to tell companies, it's about people, not technology. In the end that people who are attacking you are not operating autonomously. They've got an agenda, and that means you've got to think about it as a human problem. So first and foremost, you have to really understand what are your key assets

and what are you most concerned about protecting. And then you have to build a system of policies and practices that are designed to allow your business to function, but to do it in a way that drives down the risk to the key assets. And only when you've got a strategy like that does the technology play a role in enabling and implementing match strategy. In these last few minutes we have with you, I'd love to talk some

about immigration. And there was a remarkable exchange yesterday during the Daily Press briefing at the White House about immigration policy, the President coming out in support of a piece of legislation on Capitol Hill that doesn't enjoy a whole lot of support from from all Republicans. Uh, conversation about merit based immigration. Of course, immigration is something that you had to deal with when you were at the Department of Homeland Security, and I know you've been on the Immigration

Task Force at the Bipartisan Policy Center as well. Do you see a path forward at this point for immigration reform amidst all that's going on in Washington, d C. Where do you think this this falls and the hierarchy of conversation about policy. Well, I do think immigration reform is important and it's long overdue. We talked about doing this ten years ago when I was at the Department of Homeland Security, and I think that the surprising fact is that if you really look at the serious proposals

they're often isn't that much different. It tends to be more a matter of rhetoric and arguments, and it is substance. I've we all believe that we should have a regulated system of immigration where we know who's admitted, what they're doing here, and we can check when they come and go, and I don't see an argument against that. I think we also believe we ought to have a way of regulating and controlling the borders and not just have them open to human smuggling or drug smuggling or other kinds

of of unauthorized activity. The question is how do you get there in a way that is humane and practical and efficient. Which company is your best practices company when with your earned prestigian public service and your work for years now in security and cybersecurity, is there a company it's the best practice company. Well, I don't want to redose a particular company. I'd like to say that the companies on whose boards I served, I think do take

cybersecurity seriously. The boards do monitor what goes on, not at a microscopic level, but um they do get a report from the chief security officers. Are metrics Uh, when there is an issue, they drove down into what the cause of the issue isn't how do we correct it? And again, it's not trying to convert a board into a technical operating committee, but it is having the board exercise oversight and making it clear to management that it treats the issue of cyber risk as a top flight risk.

One general question, sir, I have to do this with your clerkshire for William Brennan years ago over to the Supreme Court, and we'll let you go on with your day. How many justice decisions are we away from a conservative Supreme Court? Are we one justice away, two justices away? Or could it be even further? You know? I would say that generally, if you look at the way the corporates down. It's uh tips to what most people would

call conservative um by by five to four. But certainly Justice Kennedy on some issues takes positions that conservatives probably would disagree with. Obviously, if you get one or two more conservative appointments, that's going to tip it more in one direction. But one thing I'd emphasize is this, a lot of times people think that the composition of the court or the orientation of the court is political in the sense of an election out commits, and it's really not.

If you look at Justice School, who was a wonderful justice and I was privileged to be friendly with. Sometimes he took positions that he believed the law required that many people would not regard as conservative, for example where he ruled in favor of a criminal defendant. When I was a judge, I sometimes made decisions because the law required it, even if on a personal or political level

I might have disagreed. And the beauty of our system of the rule of law is the judges of whatever persuasion, apply the law faithfully, not based on their personal preferences, but based on a philosophy of law. Very valuable. Michael chertof. Thank you so much, David Gura in time. If you love that conversation, look for that out on iTunes. Our podcasts subscribe today, This is Bloomberg. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on

Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene. David Gura is at David Gura. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio