WEBVTT - Global Payments Gets Needed Scale With TSS: CEO Sloan (Podcast) 0:00:02.600 --> 0:00:05.320 Welcome to the Bloomberg Penl podcast. I'm Paul swing you, 0:00:05.360 --> 0:00:07.680 along with my co host Lisa Brahma wits. Each day 0:00:07.720 --> 0:00:10.240 we bring you the most noteworthy and useful interviews for 0:00:10.280 --> 0:00:12.520 you and your money, whether at the grocery store or 0:00:12.560 --> 0:00:15.480 the trading floor. Find a Bloomberg Penl podcast on Apple 0:00:15.520 --> 0:00:17.960 Podcast or wherever you listen to podcasts, as well as 0:00:17.960 --> 0:00:22.120 at Bloomberg dot com. There is another deal in the 0:00:22.120 --> 0:00:25.320 payments industry. Global Payments today agreed to buy Total System 0:00:25.360 --> 0:00:28.240 Services in a deal valued at twenty one point five 0:00:28.280 --> 0:00:31.800 billion dollar, the payment industries third mega merger. Of the deal, 0:00:32.360 --> 0:00:35.080 we can get the details from the person himself, Jeff Sloan, 0:00:35.240 --> 0:00:37.879 CEO of Global Payments. He joints is here in our 0:00:37.880 --> 0:00:40.839 Bloomberg Interactive Broker studio. Jeff, thanks so much for joining us. 0:00:40.880 --> 0:00:43.400 I know it's a busy, exciting day for you guys 0:00:43.479 --> 0:00:46.440 at your company. I know you and t ss I've 0:00:46.479 --> 0:00:48.879 been looking at each other for a while. Why do 0:00:48.960 --> 0:00:52.800 the deal now? Well, I think the rate of innovation 0:00:52.840 --> 0:00:55.720 and payments is only accelerated if you look. For example, 0:00:55.800 --> 0:00:57.840 here in New York as well as the United States. 0:00:58.200 --> 0:01:00.560 Contact lists. The announcement you've seen from He's in JP. 0:01:00.640 --> 0:01:03.640 Morgan coming to the subways in Manhattan, UH in the 0:01:03.640 --> 0:01:06.320 next month or two is just one example of the 0:01:06.440 --> 0:01:10.520 rate of continued innovation and acceleration of change and payments. Therefore, 0:01:10.520 --> 0:01:12.759 it's important that you have scale. It's hard to make 0:01:12.800 --> 0:01:15.680 those investments and all the new products and services that 0:01:15.720 --> 0:01:17.760 are the most attractive to our merchant base without having 0:01:17.840 --> 0:01:19.480 enough scale to fund those in the first place. So 0:01:19.760 --> 0:01:22.039 it's pretty clear over the last few months that the 0:01:22.120 --> 0:01:25.360 bar for scale is ever higher. So is scale with 0:01:25.440 --> 0:01:29.120 respect to which business Because it's interesting that there is 0:01:29.280 --> 0:01:32.480 overlap with you in Total System Services TSS when it 0:01:32.520 --> 0:01:36.440 comes to catering to smaller businesses. They do, though, have 0:01:36.800 --> 0:01:42.399 a business processing payments for larger financial firms. How do 0:01:42.440 --> 0:01:46.000 you get scale with that versus just diversification At that point, 0:01:46.319 --> 0:01:48.160 the servers don't know the difference. It's kind of the 0:01:48.160 --> 0:01:49.800 answer at the end of the day. So we're gonna 0:01:49.800 --> 0:01:52.680 be making the same kind of investments capital wise as 0:01:52.680 --> 0:01:55.480 a technology matter, into the same kind of environments, whether 0:01:55.480 --> 0:01:57.520 it's on the cardish who are side or the merchant side. 0:01:57.560 --> 0:01:59.960 Global Payments does this already today, so there's a lot 0:02:00.000 --> 0:02:03.280 of similarities between our two business. For example, we have 0:02:03.320 --> 0:02:06.960 about five fies financial institutions that are customers of Global 0:02:06.960 --> 0:02:10.920 Payments to stay globally, TEASES has about nine hundred, So 0:02:10.960 --> 0:02:12.920 there's a lot of overlap in terms of the products 0:02:12.919 --> 0:02:16.360 and services that we provide those large complicated financial institutions 0:02:16.400 --> 0:02:19.320 that TEASES does as well. Number one. Number two, there's 0:02:19.360 --> 0:02:22.440 obvious overlap between the issuer business that you're asking about 0:02:22.480 --> 0:02:24.920 at t S two and what we do a global payments. So, 0:02:24.960 --> 0:02:27.840 for example, the same folks, the same financial institutions who 0:02:27.880 --> 0:02:31.079 are buying the issuing business are also providing referrals to 0:02:31.160 --> 0:02:33.760 the merchant business. The same types of technologies that we 0:02:33.840 --> 0:02:36.000 deploy the merchant business are also being deployed in the 0:02:36.040 --> 0:02:39.560 issuing business. That's particularly true overseas, but increasingly if you 0:02:39.560 --> 0:02:42.120 look at these other deals, also true in the United States. 0:02:42.120 --> 0:02:45.600 Why five Serve and why Fidelity, but Debbi Gateways is 0:02:45.639 --> 0:02:48.079 part of what they do is to emulate what we'll 0:02:48.080 --> 0:02:50.800 be able to do on the issuing side, combining issuer 0:02:51.320 --> 0:02:54.320 processing with acquire processing, so that means if you use 0:02:54.320 --> 0:02:56.799 your credit card or merchant I know it's you from 0:02:56.800 --> 0:02:58.560 the issue are side, and then I know where you're 0:02:58.560 --> 0:03:00.919 spending it from the acquire ring side. That's what those 0:03:00.960 --> 0:03:03.880 debic gateways do and that's what a combined global payments 0:03:03.880 --> 0:03:06.680 and tiesis will do. So if I'm a fintech M 0:03:06.680 --> 0:03:08.200 and a banker, this is a great year for me. 0:03:08.400 --> 0:03:11.280 Three three deals so far give our Just give us 0:03:11.280 --> 0:03:14.440 a sense of how the structure of your industry, how 0:03:14.440 --> 0:03:17.600 fragment is it still? Do you envision more consolidation? Is 0:03:17.639 --> 0:03:20.239 this a global consolidation play? Just give us a sense 0:03:20.240 --> 0:03:22.600 of how the industry structured. So the nice thing about 0:03:22.600 --> 0:03:25.160 the industry is it consistently reinvents itself. So it's a 0:03:25.200 --> 0:03:27.560 scale business. So there's always going to be more consolidation. 0:03:27.680 --> 0:03:29.720 But part of what striving change. To go back to 0:03:29.720 --> 0:03:33.040 your first question is the rate of techno technological innovation. 0:03:33.080 --> 0:03:35.080 So think about it. Apple was not out there with 0:03:35.120 --> 0:03:37.960 Apple Pay five years ago. Square didn't exist, ten years ago. 0:03:38.360 --> 0:03:41.960 Google didn't have Android Pay, Samsung didn't have Samsung Pay. 0:03:42.000 --> 0:03:43.880 So think about the folks who have come into the business. 0:03:43.880 --> 0:03:46.920 So today, for example, you have Stripe for startups and 0:03:46.960 --> 0:03:49.920 small merchants. You have Square, which is a public company 0:03:50.280 --> 0:03:52.680 as well. You've got plenty of examples adding in which 0:03:52.680 --> 0:03:54.920 is a public company in a coom in Ireland, but 0:03:54.960 --> 0:03:57.560 it's worldwide in scope. You have plenty of examples of 0:03:57.600 --> 0:04:00.240 companies say that either didn't exist five or ten years 0:04:00.240 --> 0:04:03.120 ago or didn't remotely look like what they look today. 0:04:03.160 --> 0:04:05.360 So the future is very bright for the industry. There's 0:04:05.400 --> 0:04:08.160 going to be continued consolidation because of scale functions that 0:04:08.160 --> 0:04:11.160 we've been describing, but there's always gonna be continued new entrants. 0:04:11.200 --> 0:04:12.920 I think at the end of the day, the ability 0:04:12.920 --> 0:04:16.280 to provide banking like services through open API s, the 0:04:16.400 --> 0:04:19.120 scale you get in cloud based and SAS computing, which 0:04:19.120 --> 0:04:22.080 we're very focused on at Global Payments and Teasis, that's 0:04:22.080 --> 0:04:24.400 what's driving the rate of innovation you're seeing today. So 0:04:24.440 --> 0:04:28.080 do you expect to eventually expand out into banking like 0:04:28.240 --> 0:04:30.720 services for some of your clients, lending to some of 0:04:30.760 --> 0:04:33.320 your smaller merchants. Now, where we draw a line, and 0:04:33.320 --> 0:04:35.320 some people like Square actually don't draw this line. But 0:04:35.520 --> 0:04:37.839 where we draw the line is we're independent. We're not 0:04:37.880 --> 0:04:40.280 a bank by ourselves um at Global Payments, and neither 0:04:40.360 --> 0:04:42.000 is TASiS. In fact, we don't want to compete with 0:04:42.040 --> 0:04:44.240 our customer base, so it's very important for us to 0:04:44.279 --> 0:04:47.279 stay out of functions in banking. That's not true for 0:04:47.320 --> 0:04:49.599 some of our competitors, like a Square, which provides direct 0:04:49.680 --> 0:04:53.839 lending in conjunction with their parties. We actually provide referrals 0:04:53.880 --> 0:04:56.120 of merchants who are looking for loans out to f 0:04:56.120 --> 0:04:59.280 eyes our partners. That's our job, rather than provide that 0:04:59.279 --> 0:05:01.240 are directly ourselves. So then how do you respond to 0:05:01.279 --> 0:05:04.880 people who say, right now, smaller midsized merchants, they just 0:05:04.920 --> 0:05:07.599 want to simplify what they do. They don't want to 0:05:07.640 --> 0:05:11.040 have to figure out uh sort of bespoke of financial 0:05:11.080 --> 0:05:14.240 payments processing system and then figuring out their relationship with 0:05:14.240 --> 0:05:16.520 a banker. And so we'll just go to square. What 0:05:16.560 --> 0:05:18.119 do you say to people who are who are wondering 0:05:18.120 --> 0:05:20.480 about that. So we have the same complete ecosystem that 0:05:20.560 --> 0:05:22.240 Square has. The difference with us is we have it 0:05:22.320 --> 0:05:23.800 from the small guy to the big guy, and we 0:05:23.839 --> 0:05:26.760 have it in a hundred countries where squares predominantly as 0:05:26.800 --> 0:05:29.080 a pure revenue matter, proviently in the United States. So 0:05:29.120 --> 0:05:31.080 we have all that. So today a Heartland, which is 0:05:31.080 --> 0:05:33.919 one of our businesses sales representative can walk into a 0:05:33.920 --> 0:05:37.120 small merchant here in Manhattan and on your phone, on 0:05:37.160 --> 0:05:39.599 that person's phone, can underwrite that merchant, get that merchant 0:05:39.680 --> 0:05:43.080 up and running, provide a loan, provide payroll, you name it, 0:05:43.480 --> 0:05:46.440 we have it. So we have the ecosystem that they have. 0:05:46.839 --> 0:05:49.359 The difference with us is we're more multinational in scope. 0:05:49.400 --> 0:05:51.240 We can go from the really small guy we call 0:05:51.279 --> 0:05:53.920 it the taco truck up to Taco Bell, which is 0:05:53.960 --> 0:05:55.800 one of our customers. So we can do at the 0:05:55.839 --> 0:05:58.240 small level as well as the enterprise level, really in 0:05:58.279 --> 0:06:01.240 a hundred countries. Jeff Slan, CEO of Global Payments, joining 0:06:01.279 --> 0:06:03.440 us in a Bloomberg in Actor broker studio talking about 0:06:03.480 --> 0:06:06.040 his a big deal today. So, Jeff, you know, twenty 0:06:06.080 --> 0:06:08.840 one and a half billion dollar all stock deal. Your 0:06:08.839 --> 0:06:10.320 stock is kind of hanging in there, only down to 0:06:10.440 --> 0:06:12.800 two percent today, So that's a pretty good sign that 0:06:12.880 --> 0:06:16.120 the market likes what they're hearing. What kind of synergies 0:06:16.160 --> 0:06:19.000 did you promise the market revenue and cost synergies, because 0:06:19.000 --> 0:06:22.240 I'm assuming you've got to deliver some creative EPs. Yeah, 0:06:22.240 --> 0:06:24.000 so it is a creative at the boxer, right, we 0:06:24.040 --> 0:06:26.919 said it's mid single digits a creative to the combined 0:06:26.920 --> 0:06:30.320 company in and double digits a creative thereafter. So we 0:06:30.320 --> 0:06:33.520 think it's a very attractive financial profile, very similar to 0:06:33.520 --> 0:06:35.359 what we announced in Heartland. Actually when we did that 0:06:35.360 --> 0:06:37.400 deal in two thousand and fifteen, what we said on 0:06:37.400 --> 0:06:39.640 our call this morning was at least three hundred million 0:06:40.000 --> 0:06:42.279 of expense synergies and at least a hundred million of 0:06:42.320 --> 0:06:45.400 revenue synergies within three years, and we really do plan 0:06:45.480 --> 0:06:48.039 to get most of the expense integration done in the 0:06:48.120 --> 0:06:50.760 first eighteen months, so we do expect a pretty good 0:06:50.839 --> 0:06:54.400 ramp on the synergy expectation. And to give you a sense, 0:06:54.400 --> 0:06:57.040 when we did the Hartland transaction, UM, we talked about 0:06:57.040 --> 0:06:58.960 a hundred twenty five million in synergies and we ended 0:06:59.000 --> 0:07:00.720 up producing foreign x US of that. So a very 0:07:00.720 --> 0:07:04.440 good track record, UH in delivering those energies. Thank you 0:07:04.480 --> 0:07:06.960 so much for being here in congratulations on the deal. 0:07:07.440 --> 0:07:10.600 Jeff Sloan is chief executive Officer of Global Payments, joining 0:07:10.680 --> 0:07:14.960 us here in our Blue Reactor Interactive broker's studios. His 0:07:15.000 --> 0:07:18.200 company agreed to buy Total System Services in a deal 0:07:18.240 --> 0:07:23.600 valued at twenty one and a half billion dollars looking 0:07:23.600 --> 0:07:26.600 at the ten year up ten thirty seconds today, pushing 0:07:26.600 --> 0:07:29.440 that yield down to two point to eight percent. How 0:07:29.520 --> 0:07:31.920 much lower can yields go? We go to our next guest, 0:07:32.040 --> 0:07:35.040 Eric Stein. Eric is a portfolio manager and co director 0:07:35.080 --> 0:07:37.720 of Global fixed income at Eaton Vance et Van says 0:07:37.720 --> 0:07:40.800 about four D sixty billion dollars under management. They're located 0:07:40.800 --> 0:07:44.520 in Boston. Eric, thanks so much for joining us. How 0:07:44.600 --> 0:07:46.600 much you know what's also you know been in the 0:07:47.280 --> 0:07:49.240 front pages over the last several weeks have been the 0:07:49.560 --> 0:07:52.480 escalating trade tensions with China. How much of the action 0:07:52.520 --> 0:07:55.120 we're seeing in the treasury market is kind of reflecting 0:07:55.160 --> 0:07:58.320 that uncertainty. Well, first off, thanks for having me on. 0:07:58.360 --> 0:07:59.640 I mean, I think if you look at all of 0:07:59.680 --> 0:08:02.600 two I was in nineteen, which also includes you know, 0:08:02.640 --> 0:08:04.720 the first quarter where risk markets were doing well and 0:08:04.720 --> 0:08:06.800 people thought were going to have at least a decent 0:08:06.840 --> 0:08:09.000 settlement with the China trade war in the short term, 0:08:09.360 --> 0:08:12.680 treasure yields continued that this grind lower. So certainly, you 0:08:12.680 --> 0:08:15.160 know some of the action we've seen with yields continuing 0:08:15.200 --> 0:08:16.960 to decline over the past couple of weeks, I would 0:08:17.000 --> 0:08:19.200 say there are fears of global growth as well as 0:08:19.240 --> 0:08:22.440 the re escalation of the US China trade warm But 0:08:22.560 --> 0:08:25.040 for all of two thousand nineteen. You know, we have 0:08:25.160 --> 0:08:28.480 seen this very significant rally in the U S Treasury market. 0:08:28.840 --> 0:08:31.680 So we were just talking earlier about the inversion of 0:08:31.760 --> 0:08:34.720 the yield curve. The fact that the gap between tenure 0:08:34.800 --> 0:08:37.520 and three month treasury yields is now inverted by the 0:08:37.559 --> 0:08:40.600 most since two thousand and seven, exceeding the lows reached 0:08:40.640 --> 0:08:44.080 back in March. Does this send a barish signal to you? 0:08:45.040 --> 0:08:46.880 So you know, look, it's something that you know, we 0:08:47.200 --> 0:08:48.719 and Vans have a big debate on, you know, does 0:08:48.760 --> 0:08:51.800 the yield curve matter or not. I certainly put myself 0:08:51.880 --> 0:08:54.760 in the camp that the yield curve does matter. I 0:08:54.760 --> 0:08:57.440 think it's a market signal. I think people that dismiss 0:08:57.480 --> 0:09:00.160 it kind of do so at their own peril, uh know. 0:09:00.280 --> 0:09:02.839 That being said, I think sometimes there's an obsession about, 0:09:03.000 --> 0:09:04.880 you know, particular parts of the front end of the 0:09:04.920 --> 0:09:06.680 yield curve. So I'd look more at kind of you know, 0:09:06.760 --> 0:09:10.120 twos tens, twos thirties, things like that. At least the 0:09:10.160 --> 0:09:13.800 two thirties hasn't continued to invert, which to me is 0:09:13.600 --> 0:09:16.319 a is a good sign. Uh It's still relatively flat, 0:09:16.360 --> 0:09:18.760 but it hasn't kind of continued on the flattening that 0:09:18.800 --> 0:09:20.679 we saw last year. But certainly, as you mentioned at 0:09:20.679 --> 0:09:23.319 the front end, you do see some inversion. So I think, 0:09:23.360 --> 0:09:25.800 you know, it's like any market signal, I would not 0:09:25.920 --> 0:09:27.839 ignore it. If I were the Fed, if I were 0:09:27.880 --> 0:09:29.960 someone looking at the economy, I would certainly, you know, 0:09:30.000 --> 0:09:33.079 take it seriously. So Eric, given where we are with 0:09:33.200 --> 0:09:36.120 these historically low rates, what are you doing with your 0:09:36.240 --> 0:09:39.840 portfolio right here? Yes? So, Look, I think first off, 0:09:39.880 --> 0:09:42.920 from a you know, a treasury perspective, look to me 0:09:43.000 --> 0:09:44.920 that you know, the value in the treasury market is 0:09:44.920 --> 0:09:46.480 if you think that things are going to get worse 0:09:46.600 --> 0:09:48.480 from here, And I said, the treasure markets pricing in 0:09:48.520 --> 0:09:51.000 a pretty bad outcome. Maybe things do get worse, so 0:09:51.040 --> 0:09:53.400 maybe there's some safety value. But to me, the the 0:09:53.440 --> 0:09:55.880 only really sector of the treasure market I really like 0:09:56.280 --> 0:10:00.560 would be tips on a kind of nominal treasury edge basis. 0:10:00.600 --> 0:10:03.000 I think there's a lot of policies by the Fed 0:10:03.200 --> 0:10:05.160 as well as the trade war, a lot of policies 0:10:05.160 --> 0:10:07.600 that should lead to somewhat higher inflation, so I think 0:10:07.679 --> 0:10:10.559 duration hedge tips could be attractive. Look, I also think 0:10:10.559 --> 0:10:13.520 parts of the emerging market bond complex look attractive as 0:10:13.640 --> 0:10:16.800 yields are so low, not only in the US, but 0:10:16.800 --> 0:10:19.240 but in you know, Germany, UK, Japan, really all the 0:10:19.280 --> 0:10:23.000 whole developed market world. Uh. It makes places like emerging 0:10:23.040 --> 0:10:25.960 markets that, yes, there's volatility, but if you look at, 0:10:26.000 --> 0:10:28.600 you know, what yields you're getting on emerging market assets 0:10:28.720 --> 0:10:32.280 versus treasuries or their developed market bond markets, I think 0:10:32.280 --> 0:10:34.560 those are attractive. And I think if we're back, you know, 0:10:34.720 --> 0:10:37.000 if we're still in this goldilocks not too hot, not 0:10:37.080 --> 0:10:40.120 too cold world, it's actually a pretty good environment for 0:10:40.280 --> 0:10:42.760 carrying and some of the riskier parts of the fixed 0:10:42.800 --> 0:10:46.480 income markets. So Eric, how much is this thesis predicated 0:10:46.520 --> 0:10:49.160 on the idea that the Federals will cut rates again 0:10:49.640 --> 0:10:52.600 in the near term. So I don't think you need 0:10:52.640 --> 0:10:55.960 to cut for emerging markets assets to do well. I 0:10:56.000 --> 0:10:57.640 certainly think if the Fed ward had turned, you know, 0:10:57.720 --> 0:10:59.960 very hawkish and and people are talking about rate high, 0:11:00.240 --> 0:11:03.240 that would be that that would be negative for sure. 0:11:03.880 --> 0:11:05.800 But I think if if rates just kind of stay 0:11:05.800 --> 0:11:08.800 where they are, uh in in the U S that's 0:11:08.920 --> 0:11:11.240 you know, whether it's front end um you know, or 0:11:11.280 --> 0:11:13.280 back into the curve, kind of stay where they are, 0:11:13.840 --> 0:11:16.520 I think a lot of these assets and emerging markets. 0:11:16.559 --> 0:11:19.559 You know, investors will once again be searching for yield, 0:11:20.080 --> 0:11:22.360 and they'll need to invest in, you know, somewhere else 0:11:22.400 --> 0:11:24.280 other than U S. Treasuries. I guess another way to 0:11:24.320 --> 0:11:26.600 ask this is, you know, if the Federal, if the 0:11:26.640 --> 0:11:29.040 vessors are does cut rates as the market expects it 0:11:29.080 --> 0:11:31.760 to do within the next nine months, do you think 0:11:31.800 --> 0:11:35.120 that will be an additional support to risk assets or 0:11:35.160 --> 0:11:36.920 that it will harm them because it will send a 0:11:37.040 --> 0:11:41.360 message that is somewhat barish on the U S economy. 0:11:41.520 --> 0:11:43.719 Very good question. Look, I've you know, I've never been 0:11:43.760 --> 0:11:45.320 in the school thought, and I used to work at 0:11:45.360 --> 0:11:47.319 the New York FED that the Fed knows something that 0:11:47.480 --> 0:11:50.280 let's say, the markets don't, and so, you know, sometimes 0:11:50.280 --> 0:11:52.720 I think there could be confusion in policy statements, which 0:11:52.760 --> 0:11:55.200 which can lead to markets, you know, not behaving as 0:11:55.440 --> 0:11:57.960 you would expect them to. I you know, US rates 0:11:58.000 --> 0:12:00.360 going down, a risk assets not doing well. Maybe market 0:12:00.400 --> 0:12:03.000 was expecting more. Maybe the statement, um, you know, it 0:12:03.120 --> 0:12:06.040 wasn't as as devilish as people were expecting. So you know, 0:12:06.080 --> 0:12:08.160 I can see that I'm not you know, as I said, 0:12:08.160 --> 0:12:10.400 of the view that the FED really knows more than 0:12:10.600 --> 0:12:13.800 than other than you know, other market participants. UM, you know, 0:12:13.880 --> 0:12:16.040 I do think that. UM, you know, if there are 0:12:16.080 --> 0:12:18.240 lower rates, you know, certainly that helps. I also think 0:12:18.240 --> 0:12:19.920 something else is going to start to get talked about, 0:12:19.960 --> 0:12:23.079 as the US dollar. I've actually been surprised with with 0:12:23.160 --> 0:12:24.839 the strength of the US dollar that we started to 0:12:24.880 --> 0:12:27.600 see some weakness last week. Uh you know, we've seen 0:12:27.640 --> 0:12:29.960 lots of tweets from President Trump about the Fed. I've 0:12:29.960 --> 0:12:32.280 actually been surprised we haven't seen more tweets about the 0:12:32.360 --> 0:12:35.040 US dollar. And so if the Fed gets more debblished, 0:12:35.080 --> 0:12:37.560 that would be another uh you know, reason for the 0:12:37.640 --> 0:12:40.360 US dollar to start the weekend, which should help emerging 0:12:40.440 --> 0:12:43.120 market assets. Eric Stein, thank you so much for being 0:12:43.160 --> 0:12:45.679 with us. Eric Stein's portfolio manager and co director of 0:12:45.720 --> 0:12:52.080 Global Fixed Income and EAT Advanced. For a few days now, 0:12:52.160 --> 0:12:54.480 a growing number of Wall Street analysts are coming out 0:12:54.480 --> 0:12:58.160 with predictions for how much profits could drop at some 0:12:58.200 --> 0:13:00.679 of the big U S. Tech companies in the case 0:13:00.760 --> 0:13:03.360 of an escalation in the U. S. China trade war. 0:13:03.960 --> 0:13:06.640 Joining US now to talk about how realistic this is, 0:13:06.679 --> 0:13:09.720 how significant the losses could be. David Garretty, chief market 0:13:09.720 --> 0:13:13.640 strategist for leid Long Co, also a partner at bt block. 0:13:14.040 --> 0:13:16.800 So first, let's just start with are we entering a 0:13:16.880 --> 0:13:19.440 tech war, and if so, what does that mean. No, 0:13:19.640 --> 0:13:24.000 certainly we're rendering into widening an era of widening tariffs, 0:13:24.160 --> 0:13:27.360 and certainly they're not just widening, but they're also growing greater. 0:13:27.880 --> 0:13:32.000 And while tariffs are paid by the US consumers here 0:13:32.120 --> 0:13:35.240 relative to Chinese goods, the fact of the matter is 0:13:35.280 --> 0:13:38.160 that you are most likely are going to see US 0:13:38.240 --> 0:13:42.080 products that are available in China think Apple iPhones as 0:13:42.120 --> 0:13:45.600 being potentially priced out of the market. But also at 0:13:45.640 --> 0:13:49.360 the same time, we're already operating in an environment between 0:13:49.440 --> 0:13:52.719 the US and China where China announced back in two 0:13:52.800 --> 0:13:56.920 thousand and fifteen a ten year plan. Communist countries like 0:13:57.040 --> 0:13:59.760 to do these things ten year plans, but there's was 0:14:00.200 --> 0:14:04.640 made in China, and in that they laid out goals 0:14:04.679 --> 0:14:08.000 to be leaders in ten tech categories all the way 0:14:08.040 --> 0:14:12.000 from artificial intelligence through aviation. How they were going to 0:14:12.000 --> 0:14:16.000 get there obviously has been unfolding over time. These tariffs 0:14:16.040 --> 0:14:18.440 that we're seeing right now in some respects as a 0:14:18.480 --> 0:14:22.040 reaction to that. But tariffs or no, I would still 0:14:22.080 --> 0:14:25.440 say that we're in a tech cold war between the 0:14:25.520 --> 0:14:29.320 United States and China, or more broadly, between China and 0:14:29.560 --> 0:14:32.440 the US and its allies. So in terms of a 0:14:32.520 --> 0:14:35.080 tech cold war, I think it really ratcheted up for 0:14:35.120 --> 0:14:38.800 a lot of investors when the US government puts, you know, 0:14:38.880 --> 0:14:41.360 announce some sanctions on the Huahwei and you think about 0:14:41.360 --> 0:14:43.440 the global supply chain and what that means for Huahwei 0:14:43.480 --> 0:14:45.840 and what that means for US tech industries. The implications 0:14:45.840 --> 0:14:48.720 are just extremely broad. What is the risk you think 0:14:48.760 --> 0:14:51.320 if if these sanctions do go through on Huahwei, that 0:14:51.800 --> 0:14:55.200 China will retaliate, say on an Apple, and do something 0:14:55.240 --> 0:14:58.600 similar there. Well, I mean, China, certainly, just to save face, 0:14:59.080 --> 0:15:01.800 is going to have to taliate. And and certainly you 0:15:01.800 --> 0:15:04.840 know that they've been beating the drums in this regard 0:15:05.200 --> 0:15:08.680 directly and indirectly. Um. But if China were to go 0:15:08.840 --> 0:15:12.240 through and actually you know, take extreme action against you know, 0:15:12.400 --> 0:15:14.880 a household brand name like Apple, um, you know, the 0:15:14.920 --> 0:15:17.200 fact remains is that China is still very, very heavily 0:15:17.200 --> 0:15:21.840 dependent upon US suppliers of semiconductors, and for the time being, 0:15:21.920 --> 0:15:26.240 semiconductors are a fundamental or foundation technology as far as 0:15:26.240 --> 0:15:30.120 technology is concerned across a wide range of applications. So 0:15:30.320 --> 0:15:34.479 China would do this obviously to their own detriment. But nevertheless, 0:15:34.520 --> 0:15:38.160 I fully expect that because of the kabuki theater that 0:15:38.200 --> 0:15:41.120 gets involved in terms of tariffs UH and the need 0:15:41.200 --> 0:15:44.480 to save face. UM. Not to say that Trump doesn't 0:15:44.600 --> 0:15:47.400 engage in face saving moves himself, but I think very 0:15:47.480 --> 0:15:49.120 much so that we're likely to see some sort of 0:15:49.160 --> 0:15:52.680 major response and reaction. Clearly, we've seen in terms of 0:15:52.720 --> 0:15:55.320 technology stocks after they came out with first quarter results 0:15:55.320 --> 0:15:57.280 back in April, you know, they pretty much kind of 0:15:57.360 --> 0:15:59.880 rolled over, and we've already seen a pullback UH in 0:16:00.160 --> 0:16:03.000 terms of the Chinese tech names as well. So the 0:16:03.080 --> 0:16:07.320 prospect of a non global market or a bifurcated market 0:16:07.400 --> 0:16:10.800 certainly is working to the detriment of the valuation of 0:16:10.960 --> 0:16:14.440 both US as well as Chinese technology stocks. Who is 0:16:14.480 --> 0:16:19.240 going to suffer more, the US or Chinese tech companies? UM. 0:16:19.280 --> 0:16:21.640 I would make the argument that, you know, at the 0:16:21.720 --> 0:16:23.480 end of the day, it's likely to be China to 0:16:23.520 --> 0:16:26.160 the extent that they're not going to have a larger 0:16:26.320 --> 0:16:29.000 end market available to them. Granted, you know, one point 0:16:29.040 --> 0:16:31.680 three billion people in China are a fair number of 0:16:31.680 --> 0:16:34.440 people to sell to. In the first place. But clearly, 0:16:34.480 --> 0:16:37.440 if you're trying to make the investments necessary to scale up, 0:16:37.760 --> 0:16:40.960 far better if you had an integrated global market of 0:16:41.400 --> 0:16:44.680 you know, seven trillion of seven you know, seven trillion consumers, 0:16:44.680 --> 0:16:48.120 seven billion consumers to sell into UH than than a 0:16:48.200 --> 0:16:51.640 smaller Chinese market. So, David, one of the big big 0:16:51.680 --> 0:16:55.600 global growth areas and technology is five G UM. And 0:16:55.640 --> 0:16:58.120 I think when this Huahwei news came out and trade 0:16:58.120 --> 0:17:02.600 tech wars started getting discuss us, the concern is any 0:17:02.640 --> 0:17:05.879 trade tech war could really impact the global development of 0:17:05.880 --> 0:17:08.120 five G. Do you think that's a valid concern? Now, 0:17:08.119 --> 0:17:09.960 it's very much of a valid concern. And when we 0:17:10.000 --> 0:17:12.720 look at five G, you know, we're we're looking at 0:17:12.720 --> 0:17:17.120 a platform technology. I mean, certainly the US and US 0:17:17.200 --> 0:17:20.320 technology companies were very successful in the four G environment. 0:17:20.359 --> 0:17:22.840 Witnessed the rise of Apple UH in terms of the 0:17:22.880 --> 0:17:26.000 services they offer. Now five G prominence is a twenty 0:17:26.040 --> 0:17:29.439 times speed increase over four G. And now what this 0:17:29.520 --> 0:17:32.680 is going to enable is a wide range of possibilities. 0:17:32.920 --> 0:17:36.719 Huawei has been already deemed by the Defense Innovation Board 0:17:37.000 --> 0:17:40.160 and an advisory council to the US Department of Defense 0:17:40.480 --> 0:17:44.159 to potentially have a first mover advantage in five G. 0:17:44.720 --> 0:17:47.919 Five G sets the rules by which the game is 0:17:47.960 --> 0:17:50.800 going to be played going forward. So what's happening with 0:17:50.840 --> 0:17:54.560 five G is critical to the prospects not just of 0:17:54.600 --> 0:17:57.200 the U S economy, of the U S technology companies, 0:17:57.520 --> 0:18:00.320 but the global economy. And from that stay and point, 0:18:00.359 --> 0:18:03.840 you're already seeing, you know, concessions being made by American 0:18:03.880 --> 0:18:07.520 intelligence officials and telecoms executives saying that they think in 0:18:07.560 --> 0:18:13.159 the future, forty of networks over which businesses, diplomat, spies, 0:18:13.160 --> 0:18:17.040 and citizens do business are going to be Chinese five G. 0:18:18.160 --> 0:18:21.040 They're deeming these to be dirty networks, to the extent 0:18:21.119 --> 0:18:25.360 that in China it's a state controlled economy and businesses 0:18:25.440 --> 0:18:29.040 do what the state wants. Just real quick here twenty seconds. 0:18:29.040 --> 0:18:31.639 Are there any U S tech companies immune to the 0:18:31.680 --> 0:18:35.320 ongoing or more immune to the ongoing trade tensions? I think, 0:18:35.320 --> 0:18:39.040 you know, in terms of companies who are developing cybersecurity initiatives, 0:18:39.240 --> 0:18:42.640 I mean, certainly that's an evergreen business, always has been. 0:18:42.880 --> 0:18:46.200 But I think the case for owning cybersecurity names only 0:18:46.240 --> 0:18:50.080 gets stronger in this type of an environment. UH names 0:18:50.119 --> 0:18:54.360 that have been competing directly albeit they're not US technology names, 0:18:54.400 --> 0:18:56.680 but if you look at Ericson and Nokia, they traditionally 0:18:56.680 --> 0:19:01.600 had been very strong telecommunications infrastructure equip suppliers. They two 0:19:01.640 --> 0:19:03.679 are gonna be playing in five GEO would expect them 0:19:03.680 --> 0:19:06.560 to see a benefit from this interesting trade. Tech wars 0:19:06.560 --> 0:19:08.159 will certainly keep our eyes on that that is not 0:19:08.200 --> 0:19:11.639 anybody's best interest. David Garretty, chief market strategist from Laidlaw 0:19:11.680 --> 0:19:16.520 and Company, also a partner at bt Block. There were 0:19:16.520 --> 0:19:19.480 elections in the European Union and if you read three 0:19:19.480 --> 0:19:22.280 different publications about what the outcome was, you will get 0:19:22.320 --> 0:19:26.320 three different stories. Either the Centrists held steady, there was 0:19:26.680 --> 0:19:30.639 there were gains made by the populists, or it is 0:19:30.680 --> 0:19:33.919 just a muddle. That is par for the course. Right now, 0:19:34.000 --> 0:19:36.280 let's bring in Clive Crook to sort of pass through 0:19:36.359 --> 0:19:37.800