Bloomberg Surveillance TV: June 3, 2024

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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg

Patience?

I think patients in the very near term, just because you've had that deterioration and breadth deterioration momentum. It's not fatal. It's not to say that markets can't continue to rise. We know that liquidity and trend are still very positive things.

You say, patients, there has been impatience for a rotation that's never come about. Now you've been quite in green day, over the weekend, or at least the team has What was it when I come around? Yeah?

Is it coming around? No? Will it be a boulevard of broken dreams?

Oh?

I think probably? It seems like more of a very nice I feel like an American idiot.

So the challenge with small caps is that they are so unloved and so under owned. Is that you could see a very sharp rally over the short period of time that can be ephemeral. Look at the November and December rallies. They were very short but very powerful. But if you look over the medium to longer term, you still have really weak fundamental conditions within small caps. So you have forty percent of debt in small caps is floating rate. They hate higher for longer. They have fifty

So wake me up when September ends.

I mean, this is basically what we're looking at at a time when we can't really game out when the Fed's going to start cutting rates and what the implication is going to be for risk acts. Are you saying that if there is weakness and.

The FED does cut rates.

That is a viable dip, particularly in small caps.

It depends what you are doing with growth forecasts. We wonder if gone are the days of the world where we are having a FED that's cutting rates simply because inflation is moderating. If the FED moves to cut rates or we start pricing them in, is it because of a bad reason, Is it because growth is coming and weaker. Appreciate that economic surprises have plunged over the last month. Look at real personal spending last week coming in much

Over the last year.

That means that nobody's pricing in a recession, which means we have to ask the question what.

Could surprise us?

So just to plug ism manufacturer coming out today at ten am, I am watching.

That closely, as are you, as is John. Let's put some numbers on this.

If Andrew Hollenhors over at City Group is correct and we get one hundred and forty thousand for the headline numbers on payrolls on Friday, will there be a sell off in the equity market in tandem with a rally in bonds.

I think potentially we still think that bad news is bad news, simply because you have to have the context of the starting point of estimates. If estimates were expecting a recession, you could get bad news, and it still wouldn't be that bad because you're already pricing in weaker growth. You're not pricing in any weak growth in this economy or in the market. Gdpesmates again are at two point four percent, but consider EPs estimates for twenty twenty four.

If you start asking.

The question if that's too high, that's when bad news would become bad news.

How relevant is the election this year to your call?

I think that the election is relevant in the context of yields, mostly because of treasuries and the fact that neither party is talking about austerity. Neither party is talking about balanced budgets, which means that all this concern about treasury auctions likely continues given the fact that you aren't going to see any movement to pull back on deficit spending.

So fiscal policy is a basket case regardless if he wins in November.

We're still doing the Green Day.

Thank just that what we're doing.

Yeah, yeah, sure, I think yes, because you're not seeing any sign that you're going to move to more fiscal balance, which just means that we should get used to more deficits, more high high treasury auctions in the fact that yields could be pressured higher on the long end.

Of the curve.

At what point is it a computative for stocks, Because we've been able to live with it for a.

While, it becomes punitive if you start questioning the growth story.

You can forgive a lot of things.

If growth is remaining resilient, you can shake off a tighter FED, you can shake off higher interest rates. But if you start cutting growth estimates, which really relies on the consumer at seventy percent of GDP, that's.

When you have the punitive action. You said you advise patients.

How receptive are people to that recommendation considering the fact that that doesn't really work for the DNA of most people on Wall Street.

Yeah, I think that there's still is FOMO. I mean, look at GameStop this morning, and you've certainly seen a big appetite to Russian to risk. Think, when we think about patients, you have to consider positioning and sentiment. Sentiment is in the ninetieth percentile, meaning that bullishness is broad based, as well as the fact that when you look at positioning, you can see that aaii positioning is only about one hundred and fifty basis points off its twenty twenty two highs.

You mentioned game stock.

Can we just finish on that this stock is up in the pre market by seventy five percent?

Speaking of relevancy, how relevant is this?

I always hear a lot of people every time we get a move like this, they try and say this means this, This is a signal for whatever their boss was yesterday coming into this move. What does it mean to you? If anything, It probably means nothing.

But if we can try to gain anything from it, it would be a measure of sentiment and risk appetite as well as liquidity, meaning that if you batch all of the mean kind of speculative things together, that is a reflection of risk appetite in the market. The thing, of course that's missing, though, is that some of your riskiest parts of the market, small caps have been completely sitting out of this rally, so there's a lot of conflicting data points.

Cameron, this was great. Cameron Dawson at New h RAN. It's around the table in New York. Is the international president and CEO, Tony Capuano.

Tony, good morning to here morning.

We've heard from the airlines very mixed reviews and you welcome back anytime American having some problems executing United in down to say things are okay in the hotel business, summer travel. Just walk us through things and how they look regionally at the moment.

Well, it's interesting listening to the airline CEOs because where they're consistent is about the strength of demand. And we see the same thing in our business. When we looked at Q one results across geographies and across segments, we saw strong and steady growth. Now Here in the US, our biggest mort we are seeing demands start to normalize a little bit. We had global RevPAR of about four

See the same thing in the airline business that if you have this international exposure, you seem to be doing better right now. What is that about? Is that the affluent consumer traveling more?

What is that? What explains that?

Well?

I think it's a few things.

I think the strength of the dollar is driving lots of outbound US travel. In fact, we were looking at the numbers for this summer in Western Europe and this is off the back of a record twenty twenty three. Our forward booking revenue is up about seven percent going into destinations like France, Italy, Spain, Greece, and I think the same is true for Asia. There was a study that just came out that said, for outbound US travelers,

Rates study en one to sixty house exactly.

The strength of the dollar is certainly driving that travel pattern.

I want to just sit on the idea of what the characteristics of some of these consumers are. Is there a feeling that wealthier consumers are going to keep traveling and keep spending and the more you can capture them with an international offering, the better you are versus say, mid and lower income.

Well, I think for us, we're trying to capture at both ends of that spectrum. So we're lucky enough to have the industry's largest luxury portfolio. We announced a few more conversions just this morning, resorts like Turtle Bay on Oahu and Pelican Hill out in California. So we continue to see really strong demand and pricing power in the luxury tier. At the same time, at the other end

You talk about international travel, there is this feeling that companies that go international struggle with respect to some of the international relations that have been fraying and some of the battles therein Are you.

Finding that that that's become an issue.

Well, I think we're a bit insulated for that from that because of our business model. We've got about nine thousand hotels globally and almost the entirety of the portfolio is owned by third party owners and franchisees, and so in most of those markets, our owner base is a

Is that deliberate or is that just one of the outcomes.

I think it's largely deliberate. The real estate at its core is a local business, and so aligning with partners that have deep connections both in the public and private sector, that understand local business practices, that have existing relationships with lenders in those markets has served us quite well.

You remember the President in the last month, right I did? How did that go?

Great?

You know, I was lucky enough to be invited for a second time. I applaud the administration for engaging the business community, and it gave me a short window to describe what the administration can do to support the constituents.

We can you share some of that with us, of course.

So I started with our associates, our employees, and I talked about, particularly in seasonal destinations, the help we need from the administration to expand the number of temporary work visas to try and fill in some of the gaps in high demand markets. As it relates to our owners and franchisees. I really talked about some of the constriction

Let's just dissect some of that.

Let's start of the first part, the idea that you're looking for more workers to come to the US to help you out. How much does that change under what administration versus the other.

After the election? Yeah, it's a great question. I'm not sure we know.

Right.

We have seen support from the Biden administration in terms of working with Department of Homeland Security to expand some of the temporary worker visas. We'll have to see if there's an administration change what their posture will be.

Immigration has been actually one thing that a lot of economists who come on the show talk about. This has been the big surprise. Has kept wages down and sort of kept inflation from spiraling while continuing to allow growth to expand. How much have you seen that on a practical level in your own business?

So coming out of the pandemic, obviously we saw very strong wage growth here in the US, our biggest market. We're starting to see that more normalize, kind of align a little better with inflation.

But if there wasn't as much immigration, much more difficult would it be for your business?

It would be challenging at this point going forward.

How much are you seeing wage inflation continued to keep pace given the fact that it is challenging based on what you're saying to get the number of workers.

Yeah, as I said, it's sort of moderated a bit. We're never fully staffed at the hotel level in a pre pandemic world. In any given time in the US, we might have had four or five thousand open positions during the pandemic and the early days of the recovery that swelled to twelve fourteen thousand. It's back down to around four or five thousand, and as a result of feeling as fully staffed as we might be, some of that wage pressure has been moderated.

You mentioned the debt markets. Let's talk about a debt market. Sure, or it depends who you are. If you're a big company right now, it is wide open for financing issue. Debt will street will eat it up. It doesn't matter where you are pounding here right now. But if you're at the bottom of stacks. To your point, if you're local and you're trying to get financing from a medium sized regional lender and you've got a couple of hot hoels,

How do you so it's again, it's not corporate debt, it is project specific construction financing debt. We actually see plentiful debt available for existing assets, but if you're trying to put a shovel on the ground and get a construction mini perm loan, that is quite challenging. And the irony is when you talk to many of the lenders and they look across their commercial real estate portfolios, they say,

What I find fascinating is it seems like your business is thriving. You're still seeing a lot of travel. It's not like people aren't traveling, but that it could be even better if rates were lower. Are you basically saying that the economy would just be growing at a much faster clip, that you would see that much more expansion if rates for lower, But that it's not necessarily hampering your business and you're a billion pro Now.

It's a great question, I think for when you look at our owner community, the vast majority of them are long term investors in the sector, and so they understand they've chosen a real estate sector that is cyclical by its nature. They are less impeded by the current interest rate environment and more impeded by just the sheer availability of new origination for construction depth.

I want to get to these three hotels, sure and us this morning? Can I just cite Razilla Pelican Hill. There's going to be a whole team over at PIMCO waking up this morning and know that hotel very well over in Newport Beach. How exciting you about these three names this morning you've announced.

Yeah, all three.

Early in my career I ran development in the West and so I was in Newport Beach when that hotel was developed. As you point out, it is an iconic asset. Donald Brinn and the Irvine Company have built a generational asset there and we are extraordinarily proud that they've selected us and the Saint Regis brand for that hotel. It'll be a terrific addition to the portfolio.

How do things change when you do things like this incredibly successful resort, very much loved in the area. Do you put us in Regis brand on it and it changes overnight? What does that look like?

Yeah, I mean we're still working through some of those specifics. I think the Saint Regis brand will maybe be kind of underneath the Pelican Hill Resort name. It is such an iconic name and there's so much equity in that name.

There are you going to tell me which luxury hotown in New York on Friday?

On Friday?

If you have me back, I'll be happy to all right.

You give us a cool Tony. It's good to see you.

Nice to see it.

Thank you, Let's catch up soon. Tony Kawakuana, the Internet nor President and c e O.

John, thank you very much. Indeed, if you look at the ir for data, what it will tell you is that a lot of the profitability in this sector is coming from the United States, and within the United States, it's coming from the big carriers. As you say, we're joined by one of those now, the CEO of United Scott Kirby. Nice to see, sir, Thanks for eving. We saw a little hiccup a few days back. American comes out, it changes its guidance, the industry reacts, share prices go down.

But are you seeing.

Any indication that the consumer is softening at the moment?

You know, it's demand for us is steady as she goes in a way kind of boring over the last couple of years.

I think boring is good.

But it really is not getting a lot stronger, but not getting weaker.

It really is pretty steady.

And what changes that? Does anything change that? Does the fact that the labor market maybe started to show a few little cracks, the fact that maybe rates stay higher for longer. Do any of these factors impact that that strong consumer that was saying to you it could.

But we spent the last two years talking about the risk of recession and the consumer just keeps plowing ahead and keeps going, and so I think that's likely going to continue. The bigger thing, the more likely change for aviation, I think is on.

The supply side.

We're at a peak and where the number of seats is growing a whole lot faster than the demand in the United States. But as we move into the third and fourth quarter, those numbers are scheduled to come to back down. Lie So I think the supply balance will counteract even if there was some seats going through.

Because is it with you guys at the upper end, the full service carriers, I'm suiting really across.

The board, right, you know, Southwest is probably the biggest thrower of seats, but it's really it really is across the board. We're growing, others will growing kind of across the board.

Just the peak.

This is a lot of still recovery from COVID, and this was the time that people were getting all their ability to grow back in place.

So second quarters piece, I.

Can see that capacity in some ways making sense of your end of the market. Does it make sense at the bottom end of the market, do you think all of those low cost carriers survive?

No, it doesn't make sense, and we can look, we do do the route p and ls really accurately for everyone, and you know everyone that's you know, as Martin's Lord of Us has a big chunk of their route network that loses money. The low cost and ultra low cost carriage in particular lose.

An awful lot of money. It's just it's a fatally flawed business model.

So some of them are going to go.

I think that they're going to struggle to survive.

Okay, that's about as far as I think I'm going to get used to say. That just makes the American issue. They pushed the corporate market very hard. Did you benefit from them?

You know, there's a probably a small benefit in market share that we watched the data pretty closely, and while they we got a little bit of market share from them, we thought that they were making up close to one hundred percent of their revenue change in terms of distribution expenses. And so I think it's gotten a lot of press, but we certainly thought it was a marginal issue, both for them and for us.

You talk about the supply side. The industry though, is supply constrained. Right now, You've got an issue with the prime Whinney engines that are going on three twenty's. You've got issues with the Max and the White of Boeing issues right now? Is your sense that we are past the worst of that there's worse still to come. Come and just give us to say to something.

You know, I think we are past the worst. I think we've acknowledged the problems by and large. You know, you talked about two of the big manufacturers that are issues, Pratt and Boeing. I think that we're we're probably moving up from here. It's not going to be overnight. They're not going to get back to one hundred percent, you know, quickly.

But that's okay.

Like you know, particularly when I took them Boeing, you know, like I'm not worried about the next twelve to eighteen months. I want to get structural the structure and they want to also, and then get them back to delivering high quality, delivering on time, delivering on schedule.

And that's the path that's most important.

Talk.

So when you thought a would be five years a Boeing, yeah, I think that's a realistic number.

I think it'll be faster than five years, but it depends on them really making the kinds of cultural changes that they need to make. If they make the cultural changes, I think Boeing gets fixed or gets back, gets their mojo back quicker. If they don't make cultural changes, they're not going to get their mojo back.

If you was to give advice to the chair on what kind of a person needs to sit in that cease of CEO, what kind of advice.

Would you give?

So you know, what I hope they do is somebody that focuses on the culture of Boeing and letting the one hundred and forty thousand only has one hundred and forty thousand great people, engineers, mechanics. Let them go build, design great products, build great technology, and focus on that and not focus on the short term financials.

I think that's the.

Biggest Issueocus on the upfront. Build great airplanes, great products, and the financials will take care of themselves.

Don't try to manage the back end. Manage it upfront.

Start from that. Let's stay with the FAA. You've been under review by the FAA. Any indication kind of how long that process is going to last?

Where are we?

Yeah, everything in that process has gone well so far, no major findings.

I think the FA would tell you that. I know, the FA would tell you the same thing if they answer the question. You know, we feel good, we think it. Actually, we've taken this as an opportunity.

Really we had a great safety foundation, but we did have a number of events that happened. But take that as an opportunity to make not just safety number one, but top of mind awareness all the time. And you know, I for the rest of my career, for example, every time I talk to employees, you know, I'm going to

What do you want to see from the next administration? What do you want to see from the next incoming the White House?

What helps this industry?

What helps America?

Well, it's more about help America and help the world.

You know, I think the United States is I think it's it's the greatest country in the history of the planet.

But what makes us.

Great is positivity, optimism, vision for the future. And I want us to get back to being positive, being optimistic, looking to the future and how to make things better and focusing on that, and I think we need that in the United States. I think people would respond positively to that. The world needs it, and we can make the country in the world a better place.

You are by far and away the most international of the US major carriers. Do you think a Trump administration makes your job harder being an international carrier? Do you think we're going to see more fragmentation? I guess the question that I'm really asking you.

Know, I don't think it really affects demand or our ability to fly around the world in any measurable way, one way or another.

Great to see you, Thanks very to see Thank you, Scott, Thank you very much, indeed, Scott Kirby John of the United here at the IARTA AGM in Dubai.

This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, angio politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app.