Two Years On

Published May 20, 2022, 12:59 PM

Two years after George Floyd's murder and the movement towards rectifying race imbalances we audit the performance of the finance industry with John Rogers Jr., founder of Ariel Investments. The 40-year veteran of value investing also gives us his thoughts on the market selloff. Jonathan Bernstein revisits the wacky week in primaries. And David Fickling explains why hundreds of millions of people worldwide are at risk of a shortage of even the cheapest, emptiest source of nutrition. Hosted by Vonnie Quinn.

Welcome to Bloomberg Opinion listeners. I'm Bonnie Quinn. This week, it's deeply dysfunctional, has turned antidemocratic, and it's a huge problem for the nation. Jonathan Bernstein on echoes of past eras for the Republican Party in today's GOP and these are the cheapest calories that are at there. David Fickling on the food insecurity and worse potentially coming for huge populations. First though, it's been two years since George Floyd was murdered on twenty and of course the movement towards accountability on race in the wake of that moment. This week, John Rogers, junior founder of Arial Investments, was a guest of the Economic Club of New York and I got to speak with him. Rogers will celebrate forty years of Ariels founding next year, yet Ariel is still one of a tiny fraction of minority run investment firms. I spoke with Rogers about change in the industry and I got his thoughts on the macro environment. Let's get straight into it. It's been a tough time, John, with almost eighteen billion dollars in assets on an management how are you looking at this market? Itself when we're looking at it as a time for opportunity. You know, Warren Buffett always talks about the ball at somebody should be your friend. And when you have this kind of dramatic shifts in the market, and so many companies have changed so dramatically, we think there's an opportunity to take advantage of some real, real, unique bargains in this environment. So we've been adding to our positions each and every week, finding more and more areas where again we're excited about putting money to work. Is this a major pivot point or is this just a resetting of repricing? Well, I think it's In some ways, it's a I guess it's a repricing high pe multiples have had a multiple compression because you know, with interest rates going higher, you don't want to pay a lot for future earnings they are gonna be delivered ten twenty years down the road. And this ToxS had gone too far. I think they were too expensive and people just hadn't factored in the higher interest rates and how much it can impact how you value these businesses. So we've had an array of events contribute to the as well as as you say, massive inflation and huge on certainty. Do we see more of a sell off? I think we're getting You know, you never know. We all know this is impossible to predict the markets, and you know we're long term investors with a turtle, you know, as a logo to remind us the patient's winds. But I do feel like the amount of pessimism in gloom in the market is so high. Everywhere we go people are talking about how afraid that they are, so when there's so much pessimism, so much barishness. I do believe you mentioned John Templeton earlier. He always said you want to buy when there's maximum pessimism. I think we're getting into that type of environment that gives me optimism that we're starting to bottom here. Let's talk a little bit about the economy and what the federalers are is trying to do in order to engineer a softish lending. Do we get to neutral by the end of the year and roughly where is that. One thing I've learned over the thirty nine years that i've been an arial is what gets you as always the surprises, the things you didn't think about, the things you couldn't have worried about. So I think when you have all the Federal Reserve and all the top economists in the world, and everybody fixated on whether we can avoid this recession, whether that can do the right thing, I don't think they're gonna be too far off. I don't think there'll be some big negative surprise they will come from this. It's so well identified, it so well talked about, So I don't think we'll get hurt by it. So that's a lot of optimism we have heard in the last couple of days alone from various investors suggesting that it's a very narrow path to avoid a recession. What is the likelihood that we can avoid that recession. Well, someday we'll have another recession. You know, everyone is always predicting many more recessions than ever occur. That's sort of one of those cliches that we all talk about and here about. So I don't see a recession coming anytime soon. As we talk to our management teams, you know, we've just gone through the learning season. We've been on the phone with CEOs and CFOs of dozens of companies in the last several weeks. Everyone is telling us they're seeing no signs of a recession. The consumer has a lot of money. The consumer has been saving. We know the low unemployment rate, so we don't think it can be a consumer lead recession. I think it will be a ways off. But if it comes a little bit early, I means it'll just end a little bit earlier. You know, people always think it's like this great bookie man out there, we have this great recession. But eventually, you know, we all know, once you have the recession, we have a recovery. And you know, when you go to the annual meeting for Berkshire, Hathaway and my you know, my favorite thing is he always talked about what the dial did last century, how it started at sixty six and ended it over eleven thousand. I keep reminding myself that last century we had great depression, we had many recessions. We had World War one, World War two, we had a pandemic. We get through these. You know, he always says, our capitalist democracy is the best system ever invented, And so I try not to get too troubled by this short term worry of something that can commit it. So we do get through them. But it's the question of the damage that's done. I guess in the getting through them. When you talk to all of these CEO, CFO, supply chain managers and so on, and I know you do, you speak to them on a quarterly basis, at least, what are their main worries right now? I think the supply chain issue is a worry for a lot of the companies we talked to. You know, it's called it's it's it's a headwind. It's just you know, it's a problem. But they're working through it and for the most part getting through it, and with some challenges, some higher expenses they would have hoped, but it's not a catastrophe by any means. At the same time, I think people are worried about inflation these managements. As we know, most CEOs have never lived through an inflationary period before. They don't know what to expect, They don't know how this can impact them. But so far, so good. People are feeling they're able to raise prices, and you know, so we're spending a lot of time trying to check on that, double check on that, ask all these management teams how they're dealing with it, But so far they're managing it. So inflation still at an eight percent handle. We're not sure exactly how fast it's going to come down or what kind of outside factors are going to help it come down, because right now things are not alleviating all that much when it comes to energy prices and frictions in the system. Where do you see the FED being able to bring inflation down to by the end of the year. I'm not sure by the end of the year it will be down very much, you know. I still think that they got started too late, and they kept saying this was transitory, kept saying it was transitory, and they didn't quite get it right. So ultimately it's gonna take longer for it to get under control. So whether we get there by the end of the year, maybe it's the middle of next year, but eventually they obtain this beast and things will be back on track. So if you could put a figure on it, or if you could cite what some of your CEOs are telling you, are they seeing six percent still at the end of the year four to five, I think it will be higher, since nically higher than that, that's our view. I would take the over on how high inflation will be at the end of the year. It's been two years since George Floyd's murder on and the movement towards accountability on race. In the wake of that moment, I spoke with John Rogers on the financial industry and it's race record. We began with his own experience and the people that led him into finance, starting with his father. I was very fortunate. My dad was a Tuskegee airman and you flew over a hundred missions in World War Two. And he was thirty nine when I was born, so he had a lot of time to decide exactly what I was going to do. At different ages and certain agents had of a checking account, certain age, I had a saving his account. I mentioned my being a vendor. I had to have a summer job by the time I was sixteen, and then by the time I was twelve, I had to have a stock market portfolio, and right, yeah, it was a great idea. And you know the thing was he my parents were divorced when I was three, So I'd go visit my dad on the weekends and he'd have his newsletters piled up for me to read, and the annual reports and the quarterly reports the companies that he had invested in for me. He wasn't wealthy. It was two hundred fifty dollars here and five dollars there. But as the years went on, and you know, and then he took me to meet his stockbroker, guy named Stacy Adams, who was the first American stockbroker in the South Street. You know, he became my role model, he became my mentor. I just go and sit with Stacy and watched the ticker tape go by, and he was this unique guy. He'd been there forever. But to have him there for me all the difference, and my father introduced me to him, and it just became a labor of love. It came fun well and a phenomenal that you had that you know, so many people don't know, most people don't you know, you're probably the exception that you had a dad that was that interested in that, you know, aware of how young he should start teaching you, and that you had other mentors like that. If you went out there today, would there be any more mentors or is the ratio still that tiny? It feels to me like, you know, I've been in this business years that not that much has changed in that time. So what about forty years. Has much changed in forty years. Um, it's it's changed. It's it's it's you know, and it's accelerating and changed. Since the George Floyd murder, there's a much much more rigorous and serious efforts to diversify the financial services industry. Melody Hops and you know and my co CEO, and we're both getting more opportunities to speak to groups like this, speak to boards of directors, speaking to different types of organizations and political leaders. There really is a push and I'm starting to see some real traction and something's happening. I think I have to stay here in New York City. I have to say, you guys have been way way ahead of any other city in the country by far with the kind of leadership. You know, we've had from you know, the kinchin Alds to the world and others and leadership roles, but also the Ray mcguires and Bill Lewis's that have been an investment banking, We've had a lot of progress in private equity. So New York City is one that I think is just really truly making a difference. But unfortunately it hasn't been extrapolated throughout the United states and the way that it should. Well, there's one statistics that I just found absolutely terrifying from one of your surveys, and that it's that one point two percent of all assets under management are a minority you owned firms. Is that still the case? And that's that's for all minority firms. I think the data correct, so it's not just African American or Latin X. Now the numbers are really really bad when it comes to money management mutual funds. And what makes that a particularly heartbreaking as you all know here again here in New York, you know, so much of the wealth and jobs and philanthropy comes through Wall Street. That's a part of the economy where again it's been so successful. You have the high profit margins, and in the past, so many progressive institutions, even when they wanted to do the right thing, they did it through the term supplier diversity, which implies that, okay, if you're gonna work with minority owned business, it's going to come through supply chain, construction, catering, janitorial services, office supplies the lowest margin part of the spin. And we're the least amount of wealth of been creating, and we have hard data that shows that you know from Mackenzie and BCG showing in the Chicago land spend business and professional services is seventy five billion dollars profit margins five. Construction is tenth on the list at roughly twenty five billion dollars profit margins less than one. So if you really want to make difference, you have to get rid of this term supplier diversity. The University of Chicago coin to term business diversity, and now our Civic Committee is used in that terminology. In Chicago are eighty four largest businesses the Barack Obama Foundations using the terminology business diversity. So I think to make a difference, we have to signal to two people you want to be able to do business minorities and everything that we do that it's kind of a kind of unconscious or implicit bias if you only work with minority firms in the commodity parts of spend and not in the most lucrative parts of our economy. So this that's the reality. And the other part I would say, lastly outside it's disappointing, is I bet if you look at one point two percent, most of that spend is coming from government and Unfortunately, the universities, the hospitals and museums, many of the anchorings, tuitions, and the foundations have been the least progressive. You would have expected the exact opposite, but they have been the least for progressive. What changes that? Is it just complacency? Is it? Well, this is the way we've been doing it for the last twenty thirty four years. Therefore, let's just sign up the dotted line again. What gets the fire a lit? I think you're right. I think it's partly the fact that people done it the same way for fifty years, you know, just supply or diversity construction being the focus, and everyone just thinks that's the way to do it without actually thinking about it. People have this definition of small business that hasn't been really thought through in an economy where these giant companies that are trillion dollar market caps, so the prison with which people look at these things they just look at them the same way and having to evolved as our economy has evolved into this again professional services, capital, light industries, less manufacturing. So that you see, right, people have an adjusted People haven't changed in the way that the world is. The second thing is because there's so few of us in the finance to services industry. I was lucky to, you know, learn about the marketscy or earlier, he said earlier, but then be on boards like a on corporation in Chicago for eighteen years and watch Pat Ryan build that into extraordinary enterprise and see how a successful financial and professional services business can grow and thrive and create all kinds of jobs and philanthropy and political empowerment and all aspects. You have, Pats a genius. But because there's so few of us in those spots. When we sit on a board of a hospital or a museum and university, when they put someone who's diverse on those boards, it's often people who are not coming with a lot of financial services experience, and so they're there to think about maybe social justice issues, but not as comfortable raising their hand and pushing for economic justice. And um, I mean Dr King used to talk about that all the time, that many progressive white Americans deplore prejudice but except or ignore economic injustice. And so you have to have progressive leaders and people of coloring the board. We're willing to fight that sort of standard way of looking at the world. John Rogers Jr. Of Aurial Investments, don't forget to get in touch. All thoughts and opinions welcome. I'm at Vonnie Quinn on Twitter or email v Quinn at Bloomberg dot net. Bloomberg Opinion is also available, by the way, as a podcast on Apple, Spotify or wherever you get your podcasts. A review of this week's primaries Now with Jonathan Bernstein. Jonathan, we had the extraordinarily interesting primary that we knew it was going to be. Obviously, not just Pennsylvania happened this week. We had Kentucky, Oregon, Idaho, and North Carolina. But what do we learn overall that might be applicable to national campaigns. Well, certainly, one of the things that we're confirming out of these last set of primaries is that, you know, if you look at it, in one sense, Republican voters are not zombies who do whatever Donald Trump says. We've had a series now of candidates, whether it's the Idaho lieutenant governor who Trump endorsed, or Dr Oz in Pennsylvania or j d Vance who won his Senate nomination, of these candidates are getting about a third of the vote. Now, we've had a couple who did a little better, and incumbents the Trump endorses are doing perfectly well as you would expect because they're incumbents. But you know that means that a contested races, two thirds of Republican voters are very comfortable ignoring or opposing what Donald Trump tells them to do. So that's something when people say it's Trump's party, he controls them. It's certainly not the case that all Republican voters are sort of in a cult of Trump and will do whatever he says. At the same time, you point out in one of your recent columns that Trump is um is not exactly everything Trump says at the moment. It's this incarnation of writing radicalism that changes over time. So if you were a Republican operative, how much would you be paying attention to what Trump is doing and saying? And how much would you be paying attention to the two thirds of Republican primary voters that are either ignoring some of what he says or all of what he says? Well, exactly, it's not that the Republican part he has suddenly become a functional normal party in some of these cases. The reason that Trump's candidates are only getting a third of the vote is because even more radical candidates are getting a big chunkle of vote. This goes back, as you said, historically, to Joe McCarthy to Nixon, to Gingrich to the Tea Party, and it's not the same in every incarnation, but there are deep connections between that strain of the Republican Party all the way going back to the ninety fifties or before that, and the strain that is now the dominant coalition within the Republican Party, and it's deeply dysfunctional, has turned antidemocratic, and it's a huge problem for the nation. What happens in the cycle where you see that part of the party dominance ebbs. That's a good question and I don't have a good answer for that. Um I don't really have a good answer for why it comes and goes, but where it is now is extremely dangerous. You know, the nominee for governor of Pennsylvania, radical candidate who Trump endorsed only at the last minute, so he really rose to front runner status on his own. His campaign is based on that he would if he's governor of Pennsylvania certified the Republican candidate as the winner of the presidential election regardless of what the voters saying. Yeah, and you sort of have to do a double take and wait, is that really where they are? And the answer is yes, that is really where a number of these politicians have found themselves. And you know, the democracy can't work if one of the political parties is essentially anti democratic. Jonathan, what role did Kathy Barnett fulfill in the end um? This is the extremely radical candidate who had been in Washington and January six, etcetera, etcetera, and ran for Senate and wound up getting quite a bit of support in Republican talk radio, but then fell short in the actual election, in part because Republican aligned media turned against her in the last week. Trump also came out against her, but when she gave her post election statements, she singled out I believe Sean Hannity for coming after her and for interfering in the election. Of course, that's not interfering selection. That's how parties work, is there. You know, party actors weigh in on on elections. It's unusual to have party aligned media at such a central portion of the party so important to who picks which candidate. But that's essentially where the Republican Party is now, and that's one of the reasons that they've become so radical, and that they are willing to nominate people like the candidate for governor who are probably lousy candidates who may well lose an election that Republicans could win, but that as long as it's a good product you in the Republican marketplace, in the conservative marketplace, that's fine with them. They're making money off of it. It's starry telling that the Senate primary between Dr Oz David Warmick, obviously Kathy Ornett was in there as well, ended up being so close. Does it say anything about the amount of money that's being spent. It does. Two of the candidates spent a lot of money and a lot of very close and the third spent a lot less money that probably made her more vulnerable to the last minute attacks. One of the reasons she had a chance is because the two leading candidates spent a ton of money attacking each other, both their own campaigns and outside organized groups that played in the race, and spent a lot of money attacking the other candidate. So money matters, But it's never been as simple as money determines the nomination Jonathan Bernstein there and next week brings primaries in Georgia, Arkansas, and Alabama. We will be back with Jonathan Bernstein for a review. It's known as red gold. It's been feeding billions of people in places such as India. Indonesia embargoed as export last months, and we're seeing that pattern replicate across markets, with India banning most exports of feet this week, sending prices of feet skyrocketing. I asked David Fickling, what is this mysterious red gold. Palm oil which people probably have heard a fair bit about from some of the environmental campaigns. Most of the world's palm oil is made in Indonesia and Malaysia, and palm oil is the core of the global vegetable oil market, which is it does not get a lot of attention, but vegetable oils are absolutely crucial for multiple ways. Now, to be clear, palm oil is about of all vegetable oil. So when you hear, for instance, in relation to the war in Ukraine, there was a lot of talk about Ukraine is the biggest producer of sun flour oil and those exports would end and that would be a problem. This is true, but sun Floril is two to five percent of global vegetable oil supply. Palm oil is being oil is about everything else is about ten percent. So palm oil is absolutely crucial. And also I think it's important to understand it's a product with multiple different uses. You can use it for food. It's an ingredient in all sorts of foods. That's a lovely mouth feel, frankly from ducts with palm oil in them. Um. It's also a very cheap cooking oil, and you'll see in countries like India it's the largest importer of palm oil. It's a good value cooking all. It's not particularly healthy, but it's a very cheap sort of calories we look at we've been reading that Indian street vendors have to actually steam at the moment because of a lack of palm oils that are not able to fry their food exactly. And this is an interesting thing in the aspect of global nutrition and hunger. Like I said, if you look at the calories that you get from a kilogram, for instance, of cereal staples of wheat or rice, the calories from vegetables are about thirty cheaper than that, and the calories from sugar are about cheaper than the starchy staples. So the reason things like fat and sugar are so crucial to nutrition in lower income countries is that is the cheapest sort of calories out there. And this is one of the reasons. I mean, actually going back to Pakistan, Pakistan has um some of the highest and fastest rising rates of things like type two diabetes of anywhere in the world. And you're seeing this transition in a lot of lower middle income countries from under nourishment problems of proportion of people being overweight, being substantially hard in the proportion of people underweight. And that's not unconnected to the fact that these are the cheapest calories that are out there. That's a phenomenal thing. I did not know that at all, and it's actually that's it's a pretty tragic in fact. But at the same time, without this palm oil, these populations are also in trouble and they're not getting the palm oil or it's it's the prices inflated. Explained to us, what's going on. Yeah, this is where we come back to Indonesia and we come back again to this issue of import dependence in the mid two thousands, Indonesia was looking at the rising price of crude oil and it's growing dependence on imports of crude oil, and did very similar to what you see in the US, saying well, the solution to this is we blend in some biofuel. And this is also there may be environmental benefits to this, although there's question marks around that which we can we can come to later. So there have been blending mandates very similar to the blending mandates that you see in the US. Here in Australia where I live, there's a lot of blended fuel as well, for blending in a rising proportion of palm oul derived biodiesel into into road fuel, and at present thirty percent of road fuel has to be derived from palm bio diesel. Now that's a problem because the capacity of the palm oil plantations to supply this is fairly limited. And although transport fuel is a fairly small source of palm oil demand at this point maybe like fifteen percent of the total, whereas goes to food, it's the bit that's growing faster, and in Indonesia it's growing fastest due to a government mandate. There's no way around the blending mandate. So if you look for the past few years back to about more than half of the growth of palm ol demand globally has been Indonesian domestic demands, and that's putting pressure on the whole sector. The Indonesia has essentially put an embargo on exports of palm oil and palm al derivatives altogether. Prices have risen very fast over the last three years. That's pushing up the prices of cooking oil from palm oil in Indonesia. It's a political problem for Indonesia. In an attempt to push down those prices, you have this export embargo, but of course that pushes the price pressure onto other countries, particularly as as I said, India, the biggest importer of palm oil, which is ultimately sort of cutting nutritional calories, not the highest quality nutritional calories, but raising the cost of those calories to Indians. All of this is feeding inflation. I guess we see this with a of fuels, but one country can feed inflation around the entire world, to the point of austin governments absolutely. And you can think of Indonesia in relation to palma or Indonesia, Malaysia certainly they are the opeque of palm oil. You know, they control, in fact a much more substantial share of the palm oil market and the vegetable market as a whole OPEC plus. Even if you put all the other economies that you know, Russia in that did account for barely fifty percent of global crude oil supply, Indonesia and Malaysia put them together, it's six plus of vegetable oil supply. Is there a substitute, David? I mean, obviously sunflower oil at least coming from Ukraine. It's going to be a problem, you know, in the near future. And as you say, it's only a tiny present of oil globally. But is there a substitute for palm oil. I'm going to sound like a bit of a broken record here, but it's a little bit similar to Pakistan. I think the solution is renewables and electrification. Electric vehicles in Indonesia, actually they're running costs are substantially cheaper than internal combustion engine vehicles. That's despite the fact that Indonesia very heavily subsidizes fuel and bio fuel. The problem is the infrastructure is not there. The government had a target by one that they would have a hundred and seventy thousand charging stations. In fact, they're only a hundred forty eight um, so no zeros afterward, It okay against a hundred and seventy You know, if you have a look at a country like India. India has made great strides around two and three wheelers, scooters and rickshaws to electrify that fleet and is moving quite fast, not moving fast enough. But the point is if you look at India, it's energy production is not the cleanest. It's one of the world's biggest uses of coal in the grid, but you're seeing a fast increase in renewable production and crucially, electrification of the road sector is moving at a fair pace. And you see this in China as well, another country of course, very dependent on imports of petroleum. If you power your road sector with a large and rising share of electric vehicles, and you power your grid with a rising share of domestically produced energy, ideally for climate reasons, that should be renewable energy. But in the case of India China, a lot of that is still coal, but it will still actually have a less of a climate impact of footprint and petroleum because of the efficiencies of electric vehicles. You do that and you reduce the dependence on imported petroleum, and you reduce the dependence on bio fuel which really should not be going into road vehicles where there is a good alternatives. Now, well, that sounds like it's quite a long term plan. So just to answer for is then why is it called red gold palm oil. It's fantastically profitable for some of the sort of lowest income constituency groups in Indney here in Malaysia, and this is the reason. You know, I talk about a bit of a biofield industrial complex in Indonesia similar to what you have with corn ethanol in the US. There are a lot of rural votes in palmer production. Small holders account for more of production. All of those people vote, and these are people who really need the income from it. That's one of the things that makes this hard thing to break. There was an interesting study last year that looked at mayoral elections in Indonesia and it found that in the run up to a mayor election, when palmer prices are high, you see an eighteen percent rise in deforestation. And that's essentially because they argue mayors are sort of loosening some of the regulations against deforestation to win votes in the election. It's it's popular. Bear in mind with Indonesia, there are some big elections coming up. We are seeing palma prices at a record. The world, i think, clearly is hoping that we've seen the end of the expansion of palmer plantations and deforestation. One these plantations are established there by a fuel is pretty good in climate terms, that sort of six or seventy less than petroleum. But if you cut down rainforest to build a new plantation, the emissions work out is roughly twice what they are from petroleum. So what the world needs to do at this point is to maximize the yield from his palmer plantations that have already been established. But what we can't afford to do is increase the area that's planted. But looking at the politics of it, looking at the economics of it, at these high prices, I wouldn't want to bet that deforestation has ended. David Fickling there, we're now choosing to exit all conversations. Not with you, though, Do get in touch. I'm at Bonney Quinn on Twitter or email v Quinn at Bloomberg dot net. We're produced by Eric mollow Till next time on Neoomberg Opinion. I was in the middle of the Atlantic Ocean when it happened. There was a sudden jolt in our submarine crashed on the sea floor. We were in total darkness. That's Dr de Jona Figaroa, a marine biologist and STEM teacher, talking about a deep sea dive. She'll never forget. It's funny. When I was a kid, I was afraid of the ocean, and there I was, two miles below the surface. But as a scientist, you prepare for that using our training. In a little creativity, we fixed the sub and finished our experiments. The dive was just too important. Every dive gives us glimpses at thinks. Few people ever get to see blowing creatures, fiery undersea volcanoes. When we got back to the surface, I kissed the ground and called my mom. Of course, but you know what, I wouldn't trade that dive for anything. Dr Figaroa uses her passion for STEM to discover new things and make the world a better place. She can Stem, so can you check out she can Stem for more stories and inspiration. A message from the AD Council

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