Bloomberg SurveillanceChris Verrone, Strategas Partner & Head of Technical & Macro Strategy, says it's hard to embrace the short dollar call. Jay Bryson, Wells Fargo Chief Economist, says the bar for a September rate hike is high. John Lovallo, UBS US Homebuilders & Building Products Equity Research Analyst, says the supply chains for most US homebuilders have gotten better but the biggest headwind is labor. Andrew Slimmon, Morgan Stanley Investment Management Managing Director & Senior Portfolio Manager, expects a strong fourth quarter. Sheila Kahyaoglu, Jefferies Senior Equity Research Analyst, discusses the state of airline travel post-summer.
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This is the Bloomberg Surveillance Podcast.
I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best an economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal and the Bloomberg Business app.
Christopherroun with us around a tay Bupana had a technical of Matros Strategy strtig us a bad company. Chris good moins, it's great to be here. Is it time to buy that story?
In China, I would say this, I wouldn't be sure. Think about how terrible the newsflow has been the last three or four which probably the most barrett news out of China I've seen since eight And what hasn't broken down iron Ore come to your point, has knockne down? Copper has not broken down. The Chinese two year yield has stopped going down. So I think the price action doesn't reflect the bearishness from the news. As someone who tries to marry, how does price action first news interact every day? It will be difficult for me to be here short and comfortable with that when I've gotten every piece of information in the direction of the bears, and price won't break lower. So I think, at a minimum, cover your shorts and open your imagination to the idea that something might be changing there.
Chris, you and I are trend based analysis. There's a stochastic catching a knife in the dark and getting on a trend, staying on a trend. The trend you're most interested in is oil. I link oil demand directly to a Pacific rim recovery.
Am I right to do that?
I think we can link it to a number of inputs that certainly being one of them limited supply. I think the supply side of this is equally as important. But at the end of the day, we've had this just bearish onslaught of Russia news and of China news. And what hasn't gone down is crude. Crud's bottomed. It's positive in our trend work, I think brent on its way to ninety. Here. Look how the energy stocks, after a pretty meaningful consolidation or pause this year, have just regained the flag of leadership. When I look sector bisector, there's not another group that has say ninety percent of issues of the two hundred day, that has relative leadership. Inflecting again that the energy you have.
A sex sound just as one example, what is xomb I mean basically it hasn't gone down as oil went from one twenty to seventy whatever back up to eighty as well. Is oil catching up to the equity stocks or do the oil stocks surge ahead of a recovering oil?
Yeah, Tom, I think one of the things we try to do in our work is understand the regime we're in, and therefore we know what rules to play by. I think for so many years, every single rally in crude was one you could sell. Every time the energy stocks bounced, you should sell them. This is a different regime. We've had six months of a benign consolidation and energy and now it's reasserting itself to the point on exon. What I'm encouraged by is a lot of the return to leadership from energy has come without the major integrators doing a whole heck of a lot here. This has been the service names, this has been the EP names. Look at some of the big global names here as well, which have all really reignited in terms of a leadership story.
Okay, what about elsewhere in cyclicals? Financial stocks in particular. I know you're looking at some of the banks. We were just talking about how we're continuing to see the ramifications of the failures we've seen this year. What's happening in those guys.
I think if you told me that the Bank index would be down fifteen percent year to day, I wouldn't guess the SMP would be up fifteen percent year to day. We went back yesterday and looked at every major SMP low over the last hundred years. This would be the first time in one hundred years where you're nearly a year off the low last October, where SMP's up some number and banks are actually down. It would be more normal if banks were up seventy percent. Here they're down fifteen from where they were last October. You name by name. It's just odd to me that city group was back on the loads. Big of America's right there. Goldman and Morgan Stanley look weak, and we know the regionals have rolled. I think it's difficult to entirely dismiss that. I think the benign explanation is listen, fifty percent of the S and p's above, the two hundred and fifty percent is below. It's a very very split tape. What I don't like is on the wrong side of the split tape, you have some pretty important groups like banks.
So if you're saying we're too pessimistic on China, are we too constructive on the United States?
Yeah?
I think we're probably first, probably too constructive on Europe, which I think is deteriorating right now. Like look at three month low German d acts, three month low French CAC and you know what drove a lot of those markets where European luxury names, those have all rolled here, European discretionary has rolled. So you know, in a way, go back fourteen to fifteen months ago, Europe was kind of first to bottom and turn up and lead. That seems to be flagging here. So I think before you talk about US at major risk, I think there's a change going on in Europe. You see in euro usdcross as well, which has come in sharply as US German rate differentials have changed.
So what am I positioning for Donna strengths? What are you looking for? Why do your positions take advantage of that.
You know what's funny is I think it's interesting how consensus short dollar is yet dollars really not going down almost against anything I pair it against in a way time it actually makes energies resilience here even more noted that it's happened even as dollar has firm, but dollars firm against end, it's firm against Euro, it's firm against Stirling, it's firm against C and H. So hard for me to really embrace the short dollar call when it's just not on the charts.
And I'm looking at BBDXY, which is a blended bank index which includes a lot of emerging market in China as well, and to be kind, it's well behaved and centered trend on the trading level of two standard deviations as well. You suggest that break stronger.
I think if you look pair by pair, it's hard to come up with a really compelling short dollar call here. I mean, even like also USD, right, that's been soft. I think the pair you ought to focus on here is actually EUROCNH. Euro has been so strong versus C and H for the better part of the last year that actually seems to be changing here. And I think it's in step with this idea that something's changing with China. Perhaps a stronger CNH relative to euro is one more sign in that direction.
You've got a call for lagat next month, September fourteenth.
You know, when I look at say German rates is kind of our barometer here. They've effectively been in this range for the last six or seven months. My experience in this business has always surprises break in the direction of the trend, and I think the trending global rate is still up. So I think if there's a surprise, its rates have one more or last push in them. That would be our.
Guest, Chris. This was awesome. Thank you, by thank you, Thank you, Chris around mister to take us there. If you want to call on the FX market, Goldman Sachs out with the call on the FX market six month call dolly n. They were looking for one thirty five, they're now looking for one fifty five on dolly En. They've gone back to the nineteen nineties on the Japanese end.
Governor, you had to have the chance to clear the air at Jackson Hall. From what I can tell, he did not. There's a huge uncertainty there and here what you said, John, one thirty five in the Golden Sex, cause what.
They're looking for one fifty five? The co what's one.
Forty seven right now?
And I would say kid Jukes and others are really heightened here at one forty seven. I don't know where you break through one fifty, but I'm sorry. The Bank of Japan, the Ministry of Finance will defend the yen on the path to one fifty five.
You got a level of mind there, Chris. But when that happens for the bijah high higher? How much higher?
Weaker?
Ye?
I'm drawn to the fifty five number. It's an important Fibinac number actually if you look at kind of the long term dollary en charp. But you kind of can't have both ways. You're either going to defend the bond market or you're going to defend the end, and I don't think you can do both. The big winner, though, I think is domestic Japanese assets, if they're doing everything they can to keep money at home. I think Japanese bank stocks reflect that did the strongest bank stocks anywhere in the world. I don't think that's an accident.
Chris Farrean go to Thank you twice.
What a joy to get.
A brief summary from Jay Brice and chief economist at Wills Fargo.
I love, love, love Jay.
The two sentences in your report on a real yield and inflation adjusted ten year yield that will quote drift through two percent. What's the ramification to our viewers and listeners of a two point one or a two point two percent real rate?
Well, so, I think the ramification is that exerts significant headwinds on the US economy. I mean, what you look at with the real rate, and Mike was kind of talking about this before, is that's what matters for the real US economy. And if the potential growth rate of the US economy, no one really knows exactly where that.
Is, but let's call it roughly two percent.
I mean, you kind of want, you know, a real FED funds rate, you know, at that or maybe even a little bit below that would be neutral. You get north of two percent, then you're putting some real restraint on the economy. Whether it's enough to actually cause you know, a technical downturn, technical recession, that kind of remains to be seen. But even if it's not enough, it certainly puts headwinds on the economy.
It slows growth in the US economy.
I mean, jee, I've got a Bloomberg Financial Conditions Index a positive.
Point three one. Folks.
All you need to know in the mathiness of it is it screams accommodation to me, how many rate rises do we need to get truly restrictive?
Well, so, Tom, the index that you're referring to, and just for your viewers, it comes up with like there's ten different variables beneath it, okay, And one would be credit spreads on corporate bonds, one would be volatility and markets things of that nature. Those are the big, the big sort of things. And so how do you how do you get it more restrictive? I guess it would be if the Fed were to become really more hawkish here and so you start to price in some more rate.
Hikes in there.
That leads to volatility in the stock market, that pushes bond spreads wider.
All those things.
Really matter for you know, for the real economy as well. And right now markets you know, are looking at markets have been I would say, very accommodative. Recently, bond spreads have narrowed, you know, the stock markets holding in there. But you know, if we get let's say we got a bad PCEE print, you know tomorrow, or or you know, a really strong labor market number, and people start to believe, okay, there's even more tightening coming in there. You'll start to see that tightening in terms of the financial markets.
But but the question is, you know when that tightening will come. Even if we do get those things this week, If we get a blowout jobs report, if there's more inflation pressure, then perhaps the Fed would like to see would that actually result in a hike in September. We were discussing earlier how the bar for next seems quite high. Would they still not pause, wait to see the lagged defects, perhaps kicking in more than make a call on November?
Yeah, Kelly, we agree. I agree with your sentiment there.
I mean, I think that, as you said, the bar for a rate hike in September, I think is pretty high at this point. I think, you know, my sense is where the consensus on the FOMC is right now is we want to see a.
Little bit more data.
And so if you do get a blowout jobs report, if you do get a bad PCEE print. I think what happens in terms of markets is that pushes the probability of rate hike in November up.
But that would also, I think lead to some volatility in markets.
Jay question, with immense respect for what Wills Fargo's done on labor economics for decades, is our job market accountable or are we going to be surprised every job's day forever? Where we really guys like you sort of don't in your great team, don't really have a handle on the accountability of the two surveys.
Well, so you know, when we look at our model, we look at the you know, the error bands around that are estimate. You know, the arab bands around our estimates are you know, similar, like plus or minus seventy thousand. So you know, in some sense you're you are throwing a little bit of a dart with that, and and so, and then that gets magnified in terms of the of the pandemic because that just puts so much volatility into the underlying numbers that you're using to try to come up with a prediction. So as the pandemic stuff starts to fade away over time, I think those aerror bands will start to narrow, but it's always at the end of the day, you know, a little bit of a guessing game as it relates to the labor market.
Yeah, and as it relates to you know, the headline figures on non farm payrolls. But when we think about some of the other components of the labor market data, specifically the pressure, the upward pressure perhaps on wages. We were speaking with City earlier on in the show about what we're seeing in terms of strike activity and union activity and the power of labor and in pushing for higher compensation. How should we be thinking about that and how it relates to the FEDS fight against inflation.
So you get a lot of headlines in terms of you know, unions and things of that nature. I want to say that I don't remember the number off the exact top of my head, but I want to say, the percent of the labor force that's unionized today, it's only like six percent. I mean, we're not talking the nineteen fifties or nineteen sixties here. It's a much smaller sort of a piece of that. And so it's you know, there's gets a lot of headlines, but at the end of the day, it's a marginal sort of effects in terms of wages.
And sorry to interrupt, but the thesis, the thinking from City says that this is more just an indication of the supply problems we are still seeing in labor, which is why workers feel empowered to ask for more and in theory that goes beyond beyond unions.
Yeah, that's a good point.
I mean, obviously, the labor market is very very tight right now. You know, to push for higher, higher wage gains. That's easier when you are unionized, when you have collective bargaining than if you're just out there independently doing it. But know, the point is that the labor market is tight. But you know, anything that we've seen right now, whether you're looking at the ECI, whether you're looking at the employment cost Index, whether you're looking at average hourly earnings, all of those things showed there has been some deceleration in terms of wages. Now we're probably still above where we need to be to be consistent with a two percent inflation rates. But that said, it's it's we're not getting the same sort of upward pressure on wages that we were, say last year at this time.
Jay personal income, personal spending, are they acting in a normal way?
Personal yes, I mean, given it's given as tight as the labor market is right now, personal income is acting in the normal way if you look at the last the last I don't know, ten eleven out eleven months, we've had positive real disposable income growth because wages are growing faster than what prices are going up.
Right now, J Brison, thank you so much. Doctor Bryson is with Wells Fargo to.
Joining us now.
Smartest guy in a block, John Ovallo, US homebuilders analyst at UBS. Did you see this coming?
Like?
Were you like pounding the table Ubs strong by back when everybody said they're all going to die and they didn't.
I'll tell you we came out of the gates pretty bullish when we when we launched about a year and a half ago, and we did not expect this to play out the way it did.
However, we your thumb up.
You were a thumb up at the time.
One hundred percent. And I mean we were looking at stocks that were trading at a fraction of book value right when we saw very little risk to book value.
Now, what I mean a DH hort and venerable company, are they all the executives all unload and shares and and that on a log basis, it's a log convex to say the least are going to call it a moonshot.
Now, what for the homebuilders, we're still bullish.
I think that it's an incredibly interesting dynamic that's playing out right now where there is just very very little existing home inventory three point two months to be exact, that's about half of what it should And so you couple that with the fact that demand out there is still resilient, regardless of the fact that rates are at seven and a half percent, and the demand is all being funnel towards these public homebuilders.
I just wonder how long that could last. John. If we're north of seven already on the approach to eight percent, that's got to hit demand at some point, even for people who are trying to.
Buy new one hundred percent. But the beauty of being a public home builder is that you have arrows in your quiver. What they can do that the existing incentives incentives, so they can buy down mortgage rates, and not only that, they can build smaller footprints, they can build a little further away from the city center, so there's optionality that the existing home market doesn't have. You can't pick up the home and move it, and so there's a lot of things that are favoring being a builder at this point.
So John, in the UK, this can slowly correct because they fixed rate mortgage over there is maybe an agreement for two, three, four, five years, some even on floating. Right the US mortgage market thirty you're fixed. I'm trying to work out, johnni we're facing something generational here. Is this something that goes over the next decade, twenty years? How are you thinking about that? Just what kind of time arison have you got for this to play out.
I think that there's a long, long runway here in the US housing market. You have, first of all, a massive generational wealth transfer sixty eight trillion dollars being funneled from baby boomers to millennials in Gen X, And you have an underbuilt housing market in the US and a lot of millennials that are coming to the market right now that have been kind of shut out of the market for fifteen years, and all of a sudden they're saying, well, you know what, I think we do want to own a home. They're a little bit wealthier than prior, prior generations, they have the ability to borrow from parents and so forth, and so that capacity and ability to buy is actually there. And he adds to the fact that.
So our housing market is based on rich parents giving money to kids.
That's part of it for sure. But I would say that the generation that's coming through right now as the first time home buyer is a little bit better healed than prior generations because they're a little bit older, they're doing things a little bit later in life. So there is wealth that has been been accumulated. And this is a need based player, right.
Okay, the fancy people you follow have I mean, Granted's out now writing kitchens.
You don't do.
Granted courts now courts Thanks Katie Lin's on top of that. Everybody you talk to who's got courts kitchens. Why can't we build a starter home that's respectful.
Why can't we do that?
It's a great question, Tom. I mean, the one thing that this industry has not done over the years is really sort of adopted technology like other like other industries have. Think about the automotive industry, right, they're building a home today exactly the same way was built one hundred years ago, So there needs to be technology infusion into this industry. There are a lot of players that are working on this.
I mean, John, we had an ice drink in the backyard and the ice skates to the refrigerator, cuts through the linoleum floor and nobody cared. And now you know it's a courtz counter right.
Yeah.
Well, but on the subject of and of the tools that are actually being used to build this home or these homes, part of the issue with rates being so high is because there's a fight to get inflation down and a lot of that inflation was actually just driven by supply chain challenges. Are builders still contending with that? Are there any supply issues that still are being worked out?
The supply chain has gotten much much better. I mean, there are still some hang ups on electrifying communities, so transformers, things of that nature, but in general, the supply chain is getting a lot better than it was. And I would say, you know, the biggest sort of headwind, if you will, would be labor and we're just you know, in a labor constrained market. But the public builders, given their size and scale, have the ability to attract and retain better than the smaller builders.
Okay, So as we're talking about the different public builders and of the different to Tom's point, you know, a starter home versus elsewhere in the new build landscape, between like a luxury player, more luxury oriented player, or one that is more for that base consumer. Who fares better in environment? Is it the luxury end.
It's a really good question. We still actually favor the entry level first time buyer. And that's so that would be a d R.
Horton.
And that's because this is a very need based, life driven buyer. So marriage, children, things of that nature that require more space, and so to the extent that that person can make the math work, they're going to make it work. And you know what, the public home builders are going to help them make that math work. Now to your question, though, we like the other side too, so sort of a Barbell approach. We're a Toll Brothers of the World, for instance, who just reported a massive quarter that buyer is a little bit more shielded from interest rates. We have twenty five to thirty percent that are buying with cash, for instance.
How disciplined are these home builders bank? That's what we're really trying to get at here. When you are able to construct really bullish thesis for things like home builders, where we can sit here and say this might be a ten to twenty year runway for these guys. If I'm listening to that, I'm just like, let's build, let's go, let's go, let's go. How disciplined are they being right now?
It's a great question, and it's really what has changed between two day and maybe pre financial crisis, that there's been a lot of discipline instilled in the market because of the pain from the past. But maybe just as importantly, there are some capacity constraints, particularly on the labor front, that will not allow them to overbuild. So even to the extent that the industry wanted to overbuild, they wouldn't be able to. So there's natural governors to the growth, which I think are very healthy.
I can't wait for these high prices for the rest of our lives. Tom Seclarly, that's the story right now. That can change. When you say things like that in the house in market, you just wonder how quickly things can change. John, Thank you, John Levelo that the GBS.
This is a joy because he is the one who has been right, and also he's the one who's been responsible. Andersliman joins us right now with Morgan Stanley, Managing director of Fear, senior portfolio manager at Wrigley Field in Chicago, Andrew flying over Wrigleyfield. I'm sorry going into oh here there and look him down at Wrigley Field. It's God's country. You are in the market. How do you find the courage to be in the market now?
Well, I think really the story of this year is, you know, it's a tragic story in many ways, which is stocks looked forward. But as Warren Buffett said, people use the rear view mirror to frame their viewpoint, and we had a terrible market last year, and that's when you're supposed to get more bullish after a down year. People looked in the rearview mirror and saw down here and got more pessimistic. So it was a you know, in hindsight, it was pretty in my opinion, you had to put the chips in because we had a bad year last year. And what I see now is all that money that washed out of the market hasn't capitulated back in. Sentiment has gone up, but flows have in turned positive. And I've never seen a bull market where ultimately people reverse and flow back into the market. It happened in twenty twenty one. I think money market yields being where they are are keeping people on the sidelines. But I just refuse to believe that ultimately this cycle won't end the same way, which is, we got to get everyone in before the boat sinks.
How do you identify a second leg of the bull market? You and I know the pop off seventy four, first leg up of that mess was amazing, and then shock of shocks.
I believe it was January of seventy five. We had a moonshot out eighteen months. How do you figure out your beginning a second leg?
Well, I think there's you know, in terms of from now to year in and then looking further out. I think we're in a pause period now, but I suspect we'll have a strong fourth order for a three simple reasons. Number one is what I said is you know, and Jonathan's actually quoted me on this, which is the pain of being out of the market is going to become more cute as we get in the four reporter knowing that you got to go see clients and report, you know, how they've done relatives to the market. That's first. Number two is earnings are actually earnings growth rate is going to inflect from negative year over year to positive later this year. And thirdly, and this is I don't think this gets enough focus. The amount of money that the government is going to unleash in the Chips Act, Infrastructure Act, IRA Act, all coming starting the fourth quarter is huge, and that is going to invert the M two positive. That's another reason. So all those I think will drive the market higher. What I struggle with, and you guys have already touched on this, is how are we going to get back to two percent target? Which is what Jerome Powell told this last week. He's still targeting with wage pressures, all this public works spending coming, I just don't see that, and that worries me about next year. But I think this year it's a good set.
Okay, well, but to expand on that point, and we actually were just getting headlines out from President Biden related to the Medicare drug negotiation part of the Inflation Reduction Act to what you were just referring trying to lower healthcare costs. But to your point on all of this fiscal stimulus an impulse that kick in later on this year and going forward, Does that good thing then become a bad thing when you're talking about more money being pumped into the economy and potentially what the FED is going to have to do to counteract that force.
Sure, but absolutely it's a long term negative. But look what happened COVID. You know, we pumped a ton of money into the market, into the economy, and the market responded positively. So I think there's a positive response to that spending money, and we hear it from the companies and one of the reason why I like the industors. We're hearing these companies say the money is coming, We've got projects set up to do.
So.
I think this will dry part of the economy and earnings, but it's going to extend this inflation fight longer than I think many expect.
Inside Baseball question, Jeff Curry at Goldbin Sachs, retiring there out of the oil racket, talked about how the new yield structure getting us back to pre two thousand and seven makes inventory management and the hydrocarbons completely different. I would suggest across America we underestimate what inventory management, given a real yield, how it changes corporate behavior. I would suggest corporations will begin to adjust viscerally to these new yields.
Do you agree, Well, there's no question a rising ye'll curve creates a higher cost of capital, and eventually that's why, you know, rates going up causes a recession. And I don't question that. Inverted you'll curve is also suggesting that the question is when, and it's not very good at predicting, And I think what is really going on here is that actually, for most of the companies in the S and P five hundred, higher yields is a net positive because they've locked in fixed rates, but they're making more on their cash. So right now, right now, it's not a negative. But certainly as that as that debt comes due, the cost of capital will increase. The other thing that it will slow is ultimately capex spending because projects are harder to justify at higher yields. I think that's all to come. I just don't think it is this year or early next year.
Andrew isn't a negative for the banks.
Yeah, you know, again, it's the cost of capital. So I think that that that they're the spread, the margins remain higher. What I've want worry about will we have another SVB crisis out there. It doesn't look that way. We've watched the bar at the window. It doesn't look that way to us. But ultimately, is there are there other banks that have a duration issue. That's a tough, tough question to answer.
They've just not tried it well over the last month. Tak the financial it's been a tough one.
The other areas in value I would search.
For, Andrew, do you want to finish that? You've got about fifteen seconds if you want it, well, there is sure.
I think the industrials look very attractive because i think with this public work spending coming, I'm very comfortable that these companies are going to make or beat the numbers, whether it's materials, industrial companies or with this spending that's that's already been approved. So this has already been approved. I think that's a cleaner area than financials.
Right now, Drew, thank you, sir, Andrew Slim and there of more good standing.
This is a joy on your biggest headache besides what we've said on housing and all today.
And that is never an always airline.
Sheila kahou joins US right now, Senior Equity Research channalysts at Jeffries and once she dabbled in leveraged finance, so she's got a really twisted financial understanding of this crazy business. Sheila, My arch question is do you change your bag? What is the behavior of senior managers? Are the senior managers now at United Delta Southwest all of them? Are they not like one or two generations ago where they're actually going to deliver a more persistent free cash flow.
Thanks Tommy giving me a lot of it. At Jefferies, I focus on equity coverage covering aerospace, defense, and airlines, so I get the benefit of covering, you know, three segments of the market. And we're quite negative on the airlines just having our other coverage with the OEMs, mainly because of pricing and what we're seeing the low cost carriers doing. But we do think the network carriers are better positioned, like the Deltas and the Uniteds of the world that are getting that premium customer base versus the network carriers versus the low cost carriers that might see a little bit more pricing softness potentially as people's pockets move.
Okay, so to that point, we're starting to see a little bit of a deterioration in the pricing power of some of these airlines. Is that to suggest that travel demand post summer, now that it's winding down, isn't going to look as great.
I think that's the question.
I don't think you know.
First of all, I think.
Corporate is stagnating at eighty five percent ninety percent, and some of the meetings are getting replaced by Zoom permanently, so we haven't seen corporate improve and across the airlines, nobody's really calling for a massive improvement here. International has been recovering and is doing really well, and that's where we're seeing the pricing momentum, and that's why United and Delta are really benefiting, prices up twenty five percent plus. On the US domestic side, US domestic flights are still up year over year like down ten percent below twenty nineteen levels, and we're seeing pricing stagnate there. So it's is the wallet moving to international or are we seeing some customer softness there. That's the question that remains to be seen for twenty twenty four. But the fight that we a few weeks ago we downgraded Southwest Airlines to an underperform rating first and to perform on the stock basically because we think that they have to change their network. They announced a five hundred million network optimization plan that's going to go through the first half the next year.
Okay, So if we're talking about some of that pricing power going away, the pricing not being as strong on the input kind of side, then it's also the question of output and costs, especially in light of the deal for example, American agreed to with its pilot some of the cost pressures on the labor side. Also what we're seeing in terms of energy and fuel costs. What's going to happen to the profitability of these airlines if they have those two dynamics happening simultaneously.
I think that's the concern here. How much does the profitability shrink if pricing is going down, fuels going up, salaries are going up. American two weeks ago announce that, you know, their their pilot agreement. They didn't change the fulllier guidance. Because they change they took down some other expenses, and they were pretty ambiguous on what those other expenses were. So how does that now affect twenty twenty four costs? And how does that strength them Morgin profile at the corporate of these airlines, and that's really why we're to live on the center as we think, you know, pricing although fifteen percent above twenty nineteen levels probably stagnates here. We'll see what international pricing does next year, but we don't think domestic improves.
Sure, their planes are packed, that's my amateur observation. They're absolutely ridiculously packed. Every seat's taken. It scenes. I remember when they were seventy four seventy six percent capacity, and yet I keep getting emails telling me that they're putting on flights internationally and particularly across the Pacific. Are those planes going to be full? Are those proven add ons?
So I think that's.
Where you're seeing the issue. You know, load factors is what we call them. They like you said, Tom, they used to be normalized in the high seventies, and now the high eighties are the new normal. But Southwest saw eighty three percent, I believe in the second quarter, which was relatively low for the highest trapical season. So it depends it's on certain markets. One of the examples they cited is certain cities in the US there are more work from home, so you don't need that connecting flight to a major hub. So that's where you're seeing the softness. But I think international demands and capacity is still well below twenty nineteen level. Sorry's national community and that's driving the demand in the person, Marrea.
I don't know if you've seen this story, Sheila, but Alex Milson here for Bloomberg were the only story that matters today. There's going to be an adult and child section on airplanes. You gotta be kidnaping, Sheila, LaGuardia to DFW. There's going to be a children's section on the airline.
I messed and missed it.
Okay, Sheila, here's here's your context. This is one European airline, Corndon Airlines, is going to pilot a no kid area on a ten hour flight just between Amsterdam and Currosol. You can pay forty nine dollars to sit in the expori adult only zone.
What do you think, Sheila.
I didn't know that was a coveted route that needed a specialized section. But good for them if they think that's a niche market, Sheila.
Thank you, Sheila. Call with this with Jeffreys here.
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