The Headlines Matter on the Margin, Kantor Says

in the last thirty minutes or suck. Yes, it's pretty

amazing about it. About thirty minutes ago. South Korea's special and envoys to North Korea returned actually a couple of hours ago and gave their briefing, basically saying that they were told by North Korea's leader, Kim Jong learn that he was willing to sit down with the United States and have a hard to hard talk, including the possibility of the nuclearizing North Korea, which is a stunning shift if that's true, considering that North Korea has always maintained

that their nuclear program was not negotiable. Yeah, pac it does write the question what was the catalyst for the change? The push that led to the shift. Well, that's a good question. I mean, obviously the ditant had had significantly increased over the last month or two, mainly because North Korea decided to participate in the in the kun Channa Olympics.

I think that the Trump administration will take some credit for it, maybe a large credit for it, saying that they it was because of their hardlines and increasing the the sanctions, their maximum pressure campaign that might have pushed North Korea's Kim Jong leund to insteed and and uh and come to the table again. It's uh, anybody's guests. North Korea has all has been unpredictable, and this was

another case of this today for a long time. In fact, for the last year, for much of the past year, the President of the United States has said that he would back off China on trade issues if they stepped up the pressure on North Korea. From the experts you speak to, Peter, is that what's worked here? Has that

helped the situation? Well, you know, uh, yeah, in some part, maybe a large part, it may have, considering that China was the largest trading partner for North Korea and provided much of their you know, their lifeline really and that had been cut back significantly. China did cooperate with the US, particularly Donald Trump's request to tighten the section. Yeah, that might have put a squeeze on North Korea. Um that you know again, will we will see Bloom Maxel and

Bureau Chief Peter Page joining us from Seoul. In South Korea, the message coming from South Korea from the Special Envoy returning from pyong Yang saying that North Korea is open to d nuclearize if the regime's safety is ashore. Do you see the impact on the FX market thirty minutes ago when this news drop donal witness across the board, with the exception of the Japanese yen Dolly yen pushing higher by just a tenth of one percent after being lower earlier in the session by about a third, Dolly

Jenne getting up to one zero six spot thirty nine. So, Tom King, we've got to talk about geopolitical risk fading in North Korea and trade war risk rising here in the United States potentially. Well, those are the I guess for investment, those are the exaggerates, sharks and things that are out there that can surprise is clearly was taken as a surprise as we saw the tenure yield reverse

and move higher. Someone John Pharaoh that has to synthesize these headlines I guess from outside, and of course to our global Wall Street audience is Charles Cantor with new Burger Berman, who has to he has an apt I believe Johnny has an optimistic take. I'm where we're heading. Yeah, and you get headlines like this and you know, futures up a heaven. It's pretty good, particularly after what we witnessed in Washington yesterday. You'd have to say, Charles that

the optimism at the moment it's being rewarded. That if you faded the trade war risk through Thursday, you've been handsomely rewarded through Friday and Monday. Pessimism doesn't get rewarded these days, Charles, Does that change anytime soon? Well, it's a function of the backdrop. Pessimism gets rewarded when when you're starting points provide you with no margin of safety. UM today's starting points, I would suggest, provides you with a very reasonable margin of safety through the lens of

of valuation and discount rates. UM market today on a ford Pe basis is possibly as cheap and as expensive as last year, and we know what happened last year, So there's been a surgeon corporate profits. Yes, the stock markets up, but but business and um and consumer confidence is very high. And and with confidence comes comes investment

and and planning on on on in ovation. So context matters, um and starting points matter, and today's starting point is as reasonable as last year, which I would suggest is

is still reasonable. When Charles Cancer picks up the front pages of the newspapers here in the United States and the trade wars plastered everywhere in the president United States with some heightened rehetoric around it, the market's fading that the view on Wall Street has changed radically compared to what you see on the front page of the national papers. But for you, Charles, to Tom's point, how do you synthesize those points that come from the nation's capital and

the idea that we're drifting towards a trade war? Well it for us, it comes from from a process and how we define ourselves. And we are long term investors. We try and block out the news and make sure as we allocate capital, we get you know, we get rewarded for the risk we take in and and and the time that we've invested UM so yes on the margin. UM. The headlines matter. Anything that had the potential to disrupt

supply and demand UM matters. Of course, we we dig in on on on on those that are most likely to be affected if the rules of of of the road, uh, the rules of the game were implemented as suggested, which they haven't been. And so you dig in on the industrials, you dig in on the machinery side. You you, you, you you, You call folks and and figure out how much of the steel price increase will pass We passed a long end, and and and and and how does

it affect um demand? Full goods and services? You know we saw yesterday headline and full full disclosure, folks. I'm not up to speed on a story where a CEO of a railroad company were shown the door yesterday and the board talked about they needed more energy, they needed to energize, etcetera, etcetera. What this comes down to, Charles, which I know is religion for you, is corporate capital allocation. How do you identify large corporations that are poorly deploying capital?

Is it in the annual report? Is it something that happens with smoking incense. How do you figure that out? There are a bunch of ways to attempt to figure that out. UM. One is to to look at the CEOs record on return on invested capital. Has his investments covered his cost of capital? Has it covered the cost of capital? Has it covered the risk of implementation? Has

it covered the risk of the deal? Um? And and and nothing speaks more loudly than that metric over time and and businesses that can earn a reasonable return on capital through a business cycle or through a very large strategic deal um get placed um in a in a very pecurious place. Um and and mean meaning job at risk, board under fire. Do you assume that real rates inflation adjusted interest rates rise here or is it just a nominal interest rate exercise? I think for us it has

to be a bit of both. Um. At some point, the the the the the yield itself, let's say, on the on the tenure becomes a headwind UM And think, while we've observed so far has been which I don't think gets necessarily enough attention, is there's there's been an equally large step up in real growth expectations as they have been in inflation. UM. And that's a fantastically healthy environment. The bond market is suggesting there's going to be more real growth um which we have, which which has been

stubbornly low for a very long period of time. But yes, at some point um the aggregate yield on on tenure treasuries, you know, will become a headwind. I mean, I like to describe today's environment as in simple terms, we have lots of certainty on fundamentals and lots of uncertainty on rates. And that's dramatically different than the mosaic we've played with

over the last five years. Charles Kinter with us a new Vermint right now with this, Kim Wallace uh joins from Erasia Group and Kim we in a spirited conversation earlier this morning about the organizational chart of Washington. You've experienced that at Treasury with President Obama, but you've also experienced it a student of the game as well. Do you know where the dotted lines and the solid lines are within Republican Washington right now? No, nor do I

think they do. The dotted lines are more important. The informal relationships have built up over the last six quarters. Tom have served the leaders on the hill, and I think the staff in the White House better than the

formal lines. My book this summer, and I haven't even announced, yeah, but I'll do it right now is Threat Matrix, which is a terrific book about Part of it is about the Bush administration and the security apparatus after the horror of nine eleven, and we all understand there the organizational chart was really white house centric and everybody else had better understand it was white house centric. Is that the way this administration is? I mean you you were a

treasury within the Obama administration. Every administration is different. Is it white House centric now or is it something else? It's white house centric from the top line, but in terms of the functions and the actual production of policy, it's diffused from there. And that's actually a risk to the president. One of the keys of confidence building in the US as a president who understands the apparatus underneath him and or her individually and UH will use that

utilize those authorities. Well, the president hasn't learned those yet. He didn't come with those skills, and so you see a bunch of his agency heads feeling the void, which happens in Washington all the time. So Kim, help us understand with that perspective, what is happening with the trade issue. These policies set to become policy or they negotiations tactics

for a whole array of issues. It's pretty clear sitting here on Tuesday morning that it's a negotiation tactic, and the tying of stealing aluminum tariffs to negotiations down in Mexico City is a big reach, but nonetheless it underscores the way the president thinks about policy making. He thinks about it the same way he did in the private sector, and increasingly that's becoming more and more complicated for him. It's transactional. Does that make it difficult to execute policy

in Washington, d c? And if so, how doesn't make it difficult? It's just that you have to have all of your trading partners or your negotiating partners understand that that's how you deal, and you have to have a staff that backs you up in that style. Right now, we don't have that linear thought process nor delivery of product.

How rare is it to see what we're witnessing right now for the leadership up of Paul Ryan to question the president's objectives at the moment with the tarrists that he's put on the table and for the potential within the administrations, have a break from St. Gary Cone, one of his lead economic advisors, to say, hold on a minute. He said, to be conveying business leaders who consume metals to try and convince the president not to do this.

How rare are these kind of things. To say that the process now in Washington is unique is an understatement. And so what you will have is you'll continue to have fits and starts and policy, which I think erodes the president's authority, not only in Washington but around the world. Have you seen a good number and where our fiscal deficits going? I I've been working just under one point for trillion. Have you seen a better study yet or do we just we just simply don't know do it?

We don't know for sure? But the simple math in front of us is about one point five trillion added to the tenure baseline from the spending program in February and about the same one point for one point five trillion added from the tax program in December. Ten years, the trillion three trillion out over ten years, John, You're gonna be dazzled by this that's three billion a year.

I think we will pay some of that interest cost of that because all of that is debt financed, and so the fiscal story is much more complicated than it's being given attention, and will become dangerous with that attention in the next year or two. We should point out this is one of your great acclaims, Kim Wallace. If that is the fact, when does the mystery go away? When do we actually begin to understand what we have wrought?

Usually in policy making or politics, you only understand what you've wrought when somebody has pointed it out to you. In this case, we rely on the CBO and the l m B to do that. The Congressional Budget Office will come out with a re estimate of the baseline in April. That will get attention. It will generally we're

waiting for CBO's changed. Nothing's changed until April. And frankly, when you have the US economy pumping on many cylinders as it is now, maybe not all cylinders, but many cylinders, it distracts from the downside story. So my guess, as you'll be into next year or sometime after the election before you start thinking seriously about fiscal policy. Drag Kim Wallace. Before we let you go, We've done trade policy, fiscal policy.

Let's talk about foreign policy just briefly. Some important headlines coming out of North Korea and South Korea this morning that the North may be willing to denuclearize if the regime is protected. How does one protect a regime when history says that once the country is denuclearized, something very different happens. It's a great question. I think it points to the difficulty in reaching the kind of a deal

that the headlines are suggesting. It is not to say that the South Koreans don't have an abiding interest in a deal. Obviously they do more than anyone else in the world, maybe Japan. But it does point to the fact that getting the regime that has spent the last thirty years building its national defenses to back away from what you say the sweetest part of those national defenses

will be very difficult. And if that requires a superpower like the US to give concessions publicly and privately in order to get that deal, you have to believe that deal is long and coming. Would it be fat to say that this unique approach from this administration might be generating some results on the foreign policy side of things, Kim, obfuscation and foreign policy is a plus usually so long as you have a strategy. Kim Wells, thank you so much.

This is brilliant. Thank you, But have you look forward to speaking to you FM Washington Studios as well. He is with your AISI group with them. Stephen Short with us now he's with us recently on oil Steve. When I want to go back to short one oh one, which is a basic question, are we energy independent that's been around own for a lifetime. Are we there yet?

We are not there yet, But if you do believe the i e. A. Which is a body that studies this based on Paris, certainly within the next five years, Uh, they're projecting that not necessarily independent, but the United States will certainly be the largest krudal producer, surpassing We've already surpassed Staudi Arabia and will certainly surpass of Russia probably by the end of next year as far as rudal

production goes. So at that point, guys, what I really want to emphasize is that the demand structure has completely changed. And Tom, I know this is right up your alley. Uh, the elasticities of demand are changing quite substantially, because now we have the sector factor. The second fact that that impacts consumer behavior, and that is substitutes. And of course I'm talking about electric vehicles and driverless technology, but they're not there yet. They're not there yet, So how do

you just that to the present to the president? Right now? We've made a significant impact already just in the past five years, and hence we're don't we're not seeing a commensurate increase in demand a relative to what you would normally expect, giving the improvement in the economy, the improvement in incomes right now, so this is essentially telling me that we're already starting to see the impact. Uh and

right now that the riding is on the wall. All of the major oil companies guys have rebranded themselves over the last couple of years. They no longer considered themselves oil companies. They now consider themselves natural gas and believe it or not, power companies. So certainly we are now in a significant paradigm shift. All right, Stephen shut come in on the idea that natural gas right now is

going international. Liquefied natural gas was reading I guess it was last week that there was a shipment of natural gas that came from Russia. It was offloaded in Boston. Because of the kind of crazy dynamics of this market, can you explain what's going on to people? Sure? In Boston you have essentially the Nimby crowd, where there is considerable backlash about expanding of access to UH gas from

my home state here in Pennsylvania. So the New England market has chosen to keep itself isolated from the bonanza of supply. So their supply essentially comes from liquefied natural gas the ruction that's certainly significant, but there's also offshore production UH in um UH in the Northern Atlantic there and Boston has to compete on the l en G market globally, and they also have to compete with Canadian demand in eastern Ontario in Quebec. So Boston is kind

of an island on itself. But the bottom line here is demand for natural gas has been created. We're now building the infrastructure to get it out. We're deglutting the markets. Mexico is going to be a huge customer of US natural gas pipeline gas. They already are. They're their largest buyer of US LERG at this point. But we have significant amount of pipeline infrastructures that are being connected. So the demand structure is really changing here, and it's really bullish.

And hence why I'm telling all of my clients on the n side who have to buy natural gas feedstocks for the manufacturing processes, if they are not locking in natural gas prices at sub three dollars now, they're doing their investors a considerable disfavor right now, because the future is extremely bright for natural gas demand and hence natural gas prices well, natural gas prices right now two dollars seventy three cents per million B tou up one and

a quarter percent. Stephen Then is there a certain irony that you have President Donald Trump who supports the construction of the various pipelines, let's say, coming from Canada to the United States to bring Canadian oil into the US to be refined and then shipped out. Is there an irony that there's support there and yet there is this trade h confrontation between the United States, Canada, and now

Mexico even though they import a lot of our natural gas. Yeah. Absolutely, I cannot figure out this administration and every time I do. It really makes my head hurt at this point because I don't know how much of it is smoking, mirrors and and so forth, trying to trying to manage expectations. But the bottom line here is Canada Mexico. I mean, our two greatest trading partners friends as it wore, I'm

not putting a lot of faith into it. I think a lot of it is bluster at this point of a PIM, I want to go back to the issue of the pipeline infrastructure. Canada UH is just producing way too much oil. They're producing way too much natural gas. They simply don't have the off take to take away capacity, even with the construction of a start. Thanks very much, as Stephen Shorty is the editor of The Short Report. Now the most important interview of the day with a

gentleman who invented a business and changed everyone's lives. Brian Kelly, were you in college? Were like, because this is romantic enough, you're in a dorm room somewhere. Well, yeah, I discovered miles. I was a student body president at the University of Pittsburgh. I was traveling all around and all of a sudden, I had elite status and I was making no money, like eighteen years old, and you were getting up. It's like, this is a really cool Why isn't everyone taken advantage

of this? Brian Kelly the points guy with a website. It links the charge cards into miles and all that. Are you here to see Jamie Diamond? When you're done with us? So you go to JP Morgan, shake everybody's hand, and walk out with my suitcases. Do they speak to you? Yeah? We worked directly with Chase. You know all the credit card issues we work with because we know their products better than they do, so we know how to translate why credit cards make sense to business travels to millennials.

What's the biggest mistake we make in our credit card? Idiotcy? Besides we don't pay our bill off? And then you know, well that yeah, that, I mean, if you're paying interest and fees, even if you're earning points, you're negating the value of any of them. But I think a lot of people get stuck with one card forever and then I don't want to change my you know, the card on file, and you're kind of cranky, and then you realize, well,

why aren't I earning so many points? There's so many different bonuses, not just to get the card, but category bonuses, so you really takes a little bit of effort, but you should be putting certain spend for groceries on one card, uber on another. You make those little tweaks and all of a sudden you're earning, you know, to more points. Brian,

Why do they make it so complicated? People already have jobs and lives they need to spend time dealing with I mean, you know, if you're going to go through and say, all right, I get bonus value of a thousand dollars for the Chase Sapphire Preferred Card and fifty thousand points on offer, good luck trying to get the flight,

the seat and the timetable that you want. Well, you know, it's actually I would disagree with that because most of the credit card programs, even Chase now allows you to buy any flight at you know, if you have the Reserve card, it's one and a half cents of point, which is really rich, so you don't have to jump through those hoops. But if you do want to transfer to a frequent flyer program, you can still get insane value.

I just booked my parents Hong Kong, JFK, Cathay business class one way, fifty thousand Alaska miles and twenty bucks for an eight thousands. Come on, this is un America. Say that. Stop the show. So it's all about partners You put two people business class one way, but it was one way, so it's you can get Alaska. Everything's

about partnerships. So Alaska Airlines miles, even if you live in New York, Alaska Airlines miles are the most valuable US carrier currency because they have all these crazy partners like Japan Airlines, Cathay, Pacific Emirates. So in Alaska miles, even if you don't fly them, you can buy them at two cents a pop. So think about that Kathay ticket I got from my parents that was fifty thousand miles one way for an eight thousand dollar ticket. I paid a thousand to just buy those miles. So there's

an arbitrage game there too with buying miles. And then you know you're taking notes on this. I just want to know, you know, how do I get to Pittsburgh? You know, but that's a serious question. Your world is all this romance? Are going to Bali for a hundred and forty two dollars. What can you do for somebody listening on serious x M Chad on one nineteen in Cincinnati, who needs to get to Boston one o six one FM. Well,

you mentioned it earlier. I mean, so domestic flights. Actually, airline pricing hasn't gone up that much, so I would say, use you know, use Google flights. So Google dot com slash flights to free site that allow you to look at airline pricing by day. You can if you know, you know, if you're flexible with dates, you can save a ton. So save the points for expensive trips or as an insurance policy. Right, so if someone in your family gets uh sick, you can use the points for

those last minute, super expensive tickets. But hunt out the cheap deals because we've seen insane deals to even to Europe, and you know there's all these low cost carriers. Now there's a new one. It's like a hundred dollars each way up a little bit pim Well if I stand corrected, but I mean I gotta say, and all of my time is trying to make this happen. Uh, you know the flight you want is either not available, you can't

get the seats that you want. But um, I want to talk about the seats because let's say you do get a seat on the on the plane, isn't the f A A gonna come in and say something about the size of the seat. Yeah, I think we're getting to a point where they're jamming and it is uncomfortable. Like I mean, some airlines have ten across seating now on planes that used to have should point out that Mr Kelly and I are clocking in at six five. It's a joke. I mean, American seating is becoming like what.

But but what I will say is that airlines used to block all the best seats for elite travelers, so it kind of sucks for elite travelers because now you can buy the best seat. So what I would say is, yes, you're not going to get the cheapest price and the best seat. You know, it's economics one on one, so you can at least even if you don't have elite status. Now you can shell out thirty bucks and get the

better seat. Where this Brian Kelly, the Points guy on your website today, Emily McNutt writing about the weather is coming, Rob Carroll and will be with this tomorrow folks with updated weather UH forecasts. In the question I get particularly from parents with kids, when do we get away from waiting four hours on the runway. Yeah, you know, the airlines have gotten better with that, with the new rules

that that got into place. But what I would recommend with these big storms, when you know it's coming, so all the airlines issue weather waivers, and that's what we try to warn people. Guess what there will be seven hour weights on on the airline, you know tomorrow, So if you wait until Wednesday, peak of storms, don't cancel your plans, right like, unless you really have to be somewhere. The airlines wave all the fees, so take advantage. So you cancel tomorrow and you don't you can read book

or just going to your money back. The airlines will just give you all your money back. Save yourself the stress. You know. You know some people that will be mad. Oh the airline didn't tell me it was going to be delayed until I got to the airport. We'll guess what I can tell you tomorrow in a northeast storm, just make alternate plans in advance. Alternate plans in advance. That's when you got the weather report. Yeah, what about

traveling other than using an airplane? Yeah, I mean it's funny there's all these new bus uh bus startups coming out. You know, who knows what hyper loop if that will actually disrupt the the airline industry. I mean train travel is still you know, kind of a disaster. It's expensive, it's not really that fast, but you know, certainly the East coast it can still make sense. But that's where I was going with train travel. Why is it impossible for the railroad industry to figure out a way to

use points and some kind of uh customer relation. I think it's just the economics aren't there. Right. AMTRAKX is subsidized by the government and still kind of loses money. And that's on you know that the whole infrastructure, right, the whole system. No one company, no one startups going

to come in and be like, let me retract the US. Right, it's a massive undertaking that I think as a country we need to get behind if it's gonna I think the biggest surprise in your new annual report the Best and Worst US Airlines in two thousand and eighteen, without question, the headline is Jet Blue, which falls off a cliff and yet at the bottom are very kind of Jet Blue as I've experienced, and that it's actually comfortable. Yeah,

so we did this service. So look, I get so annoyed there's all these airline industry promoted surveys of the best airlines. I mean, I want you walk on American airlines and like best airline. I'm like, under what criteria? You know? So at the Points guy, we don't take any free flights or hotels. Everything is independent. So we we put together a servey that said what matters most of consumers and to be honest, most people want price, So of our ranking was based on the average price

um of tickets on that airline. We also looked at customer service, lost bags, on time performance was huge and unfortunately I love Jet Blue, but it's not about what any one person's experiences. We looked at data and unfortunately Jet Blue was last in terms of on time performance. Jet Blue, you know, they lost out on the Virgin America bid. Their route network just isn't as big as the other so you know, they're They're not a terrible

airline by any means. I love them, but you know, and they're not really excelling in anyone category where I wanted to go. As Alaska Airlines taken the cool out of Virgin America, you know, they certainly are by dissolving a cool brand. I wouldn't have necessarily agreed with that. I do think they need to um, you know, I think, you know, it's two good companies coming together, and Alaska

certainly has a really solid brand as well. So I don't think it's it was, you know, the worst idea, but and now is there's a tradition of Bloomberg surveillance. We speak with Brian Kelly about his next Pacific ocean travel someplace forty nine dollars. Where are you going next? A wise one? Well, you know, it's funny. I actually just not funny. It makes us sick. But continued Fiji, Uh past the Fiji water John, Fiji. I'm still working

on my flight. It's actually a lot of the flights are sold out, so I'm actually it's it's booking last minute can be amazing on certain flights, but the destinations like Fiji, where there's like one or two flights a day, I haven't quite booked it yet. But once again, Alaska Airlines miles are amazing uh Fiji air or American Airlines with Air Tahiti Nui. So I gotta uh and and you know, getting flexible with routing and stopping in different islands.

So I'm still in the middle of that. I look at booking award trips as crossword puzzles, you know, using all the different tools that I have to what's the biggest mistake people make in the crossroad posts. The biggest mistake is listening to airline website. So airline websites won't show you all partners, you know, so if you want to use your A A miles, you know, flycat the Pacific is one of the best ways, but a dot com will never show you. And how do you book Pacific?

You got a call or you could use British Airways website to sniff out the Cathey flights because catt they will show on British Airways. And once you see the cat they flight on British you call up there right more stories about this. We didn't get the hotels. Brian Kelly, Congratulations sevested where US Airlines in two thousand eighteen, Alaska air takes the trophy. 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 Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio