Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene
Speaker 1: Jay Ley. We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. The
Speaker 1: big theme though, it is what is happening in emerging markets,
Speaker 1: with Turkey's financial markets very much sinking, the Lyra hitting
Speaker 1: a record low, bond yeal hitting a fresh record high,
Speaker 1: the tenure yeard preaching for the first time ever, and
Speaker 1: yet investors are confronted with the sound of silence, the
Speaker 1: central Bank and government so fast seemingly nowhere to be seen.
Speaker 1: Joining us here in New York is Gabrielle Santos, JP
Speaker 1: Morgan Asset Management, Global market Strategist. Good morning to Gabby,
Speaker 1: getting morning. So where are they west? The government, west,
Speaker 1: the central Bank. That's that's a big question, right, I mean,
Speaker 1: if we remember how this all started for Turkey really
Speaker 1: was mid April when the dollar started to strengthen, and
Speaker 1: it really brought out the emerging markets that we're seen
Speaker 1: as particularly vulnerable, Turkey being one of them, Argentina being another.
Speaker 1: That's spoken of in the same breath with a similar
Speaker 1: current account deficit in US dollar debt. Now, Argentina has
Speaker 1: taken steps right and big steps. It's raised interest rates,
Speaker 1: it's set up a large physical austerity program, it's sought
Speaker 1: help from the I m F. Whereas Turkey we haven't
Speaker 1: heard anything. And so that's where I think sentiment is very,
Speaker 1: very tricky and Turkey now and we need to see
Speaker 1: some sort of steps from them in order to improve
Speaker 1: investor sentiment. Have we entered the classic E M doom
Speaker 1: loop where the currency weekends markedly, worries starts to rise
Speaker 1: about the debt being financial? Do you know the doom loop? Tom?
Speaker 1: Welcome back, by the way. That's an entrance too into
Speaker 1: the show. Do you start with good morning or just
Speaker 1: jump in doom loop? Do you know what a doom loop?
Speaker 1: What does the doom loop? The feedback loop and negative
Speaker 1: self fulfilling feedback loop. You don't know what wants to
Speaker 1: talking about traffic the South. I think Mrs Kean was
Speaker 1: mentioned in that to me. I think you were in
Speaker 1: the doom loop in the cane house that we can
Speaker 1: talk about that in a continuous and this becomes self
Speaker 1: fulfilling gabby in the sense of the currency weakens, people
Speaker 1: start to worry about the debt being refinanced, and it
Speaker 1: feeds back into a wikied currency, so the wikied currency
Speaker 1: begets a wicked coouncy. And we have been seeing that, right,
Speaker 1: I would say, for for a few emerging markets over
Speaker 1: the past few months. And that's where you do need
Speaker 1: some sort of action to break that loop, right for
Speaker 1: investors to feel like we are in a vulnerable position
Speaker 1: right now, but there are actual steps being taken to
Speaker 1: improve so that the future looks a little bit brighter
Speaker 1: than it does right now. With the tapestry over that
Speaker 1: is this width between a booming United States and a
Speaker 1: few selected economies and everybody else. I mean, I get
Speaker 1: the idea that select em countries are idiosyncratic, but I
Speaker 1: know all of our audience is saying, yeah, but wait
Speaker 1: a minute, we're booming and they're not. At some point
Speaker 1: that catches up with you, right, And I do think
Speaker 1: that's one of the major drivers behind this very very
Speaker 1: strong dollar rally we've seen since mid April, the idea
Speaker 1: that the US is booming compared to the rest of
Speaker 1: the world. But there's one thing that we can do,
Speaker 1: which is look in the rear view mirror and notice
Speaker 1: that dynamic. And there's another in terms of looking over
Speaker 1: the next six eighteen months and think, well, is this
Speaker 1: dynamic going to hold? Is the US going to continue
Speaker 1: to boom so much compared to the rest of the world.
Speaker 1: And we would argue that four percent g d P
Speaker 1: was a one time occurrence, that is not going to
Speaker 1: be the dynamic and that be done smoothly, or do
Speaker 1: we get brutal moves assuming that I mean someday we're
Speaker 1: gonna come out. Let's say you're right, and Bruce Casman's right,
Speaker 1: and someday we're gonna come out and go, oh, we're
Speaker 1: not going to do three point eight or four percent GDP.
Speaker 1: The run rate is going to be two point x
Speaker 1: or whatever it is. The assumption is that happens with controlled,
Speaker 1: measured moves, and these other asset classes, including the stock
Speaker 1: market says who, So, I do think there there is
Speaker 1: to be fair right and understanding in the investment community
Speaker 1: that four percent is not sustainable. But there is still
Speaker 1: a bit of a focus on three percent growth over
Speaker 1: the next twelve months. But our view is that that
Speaker 1: is not a permanent shift in terms of potential growth
Speaker 1: that we do decelerate down to two percent in the
Speaker 1: second half of and the sooner we start focusing on that, um,
Speaker 1: the smoother the process can be in terms of dollar
Speaker 1: adjustment and market adjustment. The thing when you're advising clients
Speaker 1: on portfolio mix or what to do with new cash, etcetera.
Speaker 1: The basic idea is the United States. To borrow phrase
Speaker 1: from Mr Farrell, which I love to do, we're doom
Speaker 1: loop free, right um. Doom is a is a strong word,
Speaker 1: but other than that, we're doom loop free, right Um.
Speaker 1: I do think that, to use another d word, right,
Speaker 1: that there is a deceleration that we see in the
Speaker 1: US over the next twelve and eighteen months, and so
Speaker 1: US assets, the shining star over the past six months
Speaker 1: won't shine so bright in that kind of scenario compared
Speaker 1: to the rest of the world, especially if you compare
Speaker 1: it to emerging markets, which was coming from a very
Speaker 1: tricky spot there for many many years and has the
Speaker 1: potential to keep accelerating over the next couple of years.
Speaker 1: What were seeing in Turkey? Do you see contagent risk?
Speaker 1: So at the moment, we do not, right, And I
Speaker 1: do think that there is an understanding that Turkey is
Speaker 1: a very particular case. Here we mentioned its vulnerabilities in
Speaker 1: terms of current account dollar DAD as well as it's
Speaker 1: uh we could call it an orthodox approach towards economic policy.
Speaker 1: I think that there is an understanding that other emerging
Speaker 1: markets are different. Um, there is an understanding that, you know,
Speaker 1: we shouldn't punish all emerging markets to that same extent.
Speaker 1: I thought it was really interesting what we got from
Speaker 1: China f X reserves overnight. Many people thought they'd see
Speaker 1: a decline. We didn't. We got a slight rise in
Speaker 1: China effects reserves. What's the signal you take from that
Speaker 1: gaping So if we think about why we were so
Speaker 1: concerned about China's effects reserves, why this release took on
Speaker 1: a whole new importance in our calendars. It was really
Speaker 1: during when we started to see yu want depreciation, and
Speaker 1: there was a concern that the Chinese government was using
Speaker 1: up a lot of its effects reserves to shore up
Speaker 1: the currency to have a controlled depreciation of the currency, right,
Speaker 1: And so it's it's very very positive to have seen
Speaker 1: over the past couple of years much more stable effects reserves.
Speaker 1: It sends the signal that there isn't an out of
Speaker 1: controlled depreciation in the yuan, so we do feel generally,
Speaker 1: I would say okay with the outlook for China, especially
Speaker 1: in the second half of the year. We have seen
Speaker 1: a lot of fiscal and monetary easing over the past
Speaker 1: few weeks and that should feed through to it to
Speaker 1: an acceleration in Chinese expect Do you expect to see
Speaker 1: more more easing? I think right which China is always
Speaker 1: a bit of a balance between trying to ensure uh
Speaker 1: some good economic growth at the same time not give
Speaker 1: up completely on reforms of when we think about all
Speaker 1: of the credit that China has build up, so I
Speaker 1: think it's it's a tough balancing act and as long
Speaker 1: as the economy starts to pick up, then the Chinese
Speaker 1: government won't want to do too much and just just
Speaker 1: very quickly here. I mean, the vics spiked down to
Speaker 1: ten point five two today. But once again in the
Speaker 1: US markets, all the doom and gloom guys have been wrong.
Speaker 1: Have you ever seen anything like this or like John
Speaker 1: to me, it's Friday. Everybody publishes on Friday their doom
Speaker 1: and gloom article of the week, and I'm sure sometimes
Speaker 1: they'll be right, But the fact is the VIX is
Speaker 1: eleven point zero one under with a ten handle earlier.
Speaker 1: I mean, how do you deal with that professionally, because
Speaker 1: I know you're getting it from clients, right. We do,
Speaker 1: we do, and and to be fair, we want to
Speaker 1: focus on the risk. We want to think through them.
Speaker 1: But at the same time, we also want to take
Speaker 1: a look at what current situations are. Right. And if
Speaker 1: you look at the backdrop for the US market, it's
Speaker 1: a solid economic backdrop. We spoke about deceleration, but it's
Speaker 1: still expansion. It's still growth. It's not recession, um and
Speaker 1: and as a result, profit growth can continue at a
Speaker 1: very very healthy pace. UM. So we do try to
Speaker 1: think through the risk. The one we are still focusing
Speaker 1: on our trade tensions, um. But we don't want to
Speaker 1: react to rashly, right as as long as the current
Speaker 1: fundamentals look positive. Okay, this has been great. Get Real Scientists.
Speaker 1: Thank you so much, greatly, thank you so much this morning. John.
Speaker 1: I don't know what your favorite team is. I don't
Speaker 1: know what Steve Major's favorite team is, but I think
Speaker 1: you both don't like Arsenal Right, you'll bring in Mr
Speaker 1: Major and I Steve supports it's West Ham isn't it, Steve.
Speaker 1: That's right, John, you're a happy man looking forward to
Speaker 1: the season. Yes, I'm looking forward to it, looking forward
Speaker 1: to the scene, Steve Major, East London's finest. There you go.
Speaker 1: I'm trying to teach it. HSBC's global head of Fixed
Speaker 1: Income Research, Johning us Now, Steve, what are we getting
Speaker 1: wrong in the fixed income market? Still that you have
Speaker 1: to spend a lot of time explaining the clients. Well,
Speaker 1: the five percent number was quite funny this morning. I'm
Speaker 1: not sure whether the JP Morgan Research department have written
Speaker 1: anything that's got a five percent. Believe they have not.
Speaker 1: And I'm just wondering what would happen here, Whether if
Speaker 1: Stuart Gulliver had done that, our ex head so now
Speaker 1: it's John Flint. If John Flint had done that, I
Speaker 1: wonder what would have happened here? What would you have said, Steve?
Speaker 1: What would you have said if well done that a
Speaker 1: couple of years ago. There's a fair bit of a
Speaker 1: fair bit of work get into these research reports and
Speaker 1: they're done with some consideration. It doesn't make them right.
Speaker 1: We could always be wrong. But you know, I'm beholden
Speaker 1: to my colleagues to justify everything I say and think,
Speaker 1: and if I go across the line, they'll pull me back.
Speaker 1: So we've got a published number that's two point three,
Speaker 1: and that number hasn't changed for the last twelve months,
Speaker 1: and every day of the week I'm out there defending it.
Speaker 1: The thing is with botons, the forecasts aren't wrong until
Speaker 1: we get to the forecast date. And our forecast is
Speaker 1: for the end of this year and the end of
Speaker 1: next year, and I'm thinking, look, I'm not wrong yet,
Speaker 1: and to be right, you just need the yield to
Speaker 1: be lower than the forward is implying. So this year
Speaker 1: we've had a hundred and fifty trading days and only
Speaker 1: on nine days did the US tenure treasury close at
Speaker 1: three or above. So if you've been sure the tenure
Speaker 1: treasury is, it's been quite painful for most of the
Speaker 1: time you've given up the coupon. So look, five PC.
Speaker 1: It's a number the FED says they're going to go
Speaker 1: to about They're not saying they're going to go to four.
Speaker 1: To have a five ten year yield. The Fed's got
Speaker 1: to be at for and change, and you've gotta have
Speaker 1: inflation going above the FED target. That might be a
Speaker 1: possible scenario for the future, but I wouldn't give it
Speaker 1: a probability of waiting of more than five or ten percent.
Speaker 1: I would attach at probability to the idea that the
Speaker 1: FED stops at one of the next two or three meetings.
Speaker 1: And you when you when you wait all those scenarios up,
Speaker 1: you end up with a forecast that has a two handle,
Speaker 1: not a five handle to stay a lot to one
Speaker 1: pank Here, let's just pick up on the point about
Speaker 1: the Federal Reserve. What's going to problem? What's the catalyst
Speaker 1: for them to stop in the next two or three meetings. Well, look,
Speaker 1: the way I describe it, Johns has been plenty already
Speaker 1: this year. It's like a bucket filling up and at
Speaker 1: some stage to bucket just overflows. So if you imagine
Speaker 1: that bucket you've got, you call it a bucket in America,
Speaker 1: I think whatever it is a bucket. You have this
Speaker 1: radio London. Yeah, so you have you have a you
Speaker 1: have a leaking roof, and you have drip drip, you know,
Speaker 1: the drops of rain water fill the bucket up. At
Speaker 1: some stage it overflows. For me this year, it started
Speaker 1: with FRA O I S. Then there was the cryptocurrency collapse,
Speaker 1: then there was reverse fix, and just about every emerging
Speaker 1: market sequentially has been in play. Is there a common denominator,
Speaker 1: I ask you, And what the answer to me is, Yes,
Speaker 1: there's there's a huge d leverage. The FED is exporting
Speaker 1: a tightening of financial conditions around the rest of the world,
Speaker 1: and all of the tourist money that has flown from
Speaker 1: one game to another has been sucked out. So so yes,
Speaker 1: the the tightening of policy in the US has consequences,
Speaker 1: and we can see it everywhere. And you go to Turkey,
Speaker 1: go to go to China. You have a look at
Speaker 1: what's happening in these markets that they've all been there,
Speaker 1: you know, in the last few months. It started with Argentina,
Speaker 1: it went through various points along the way, Mexico, Indonesia, India,
Speaker 1: most recently it's Turkey that that's the one if one's
Speaker 1: talking about, but also China. All of these markets are
Speaker 1: in focus. And I think it's because of the tightening
Speaker 1: of financial conditions that the US is exporting to the
Speaker 1: rest of the world. And so you asked me what
Speaker 1: stops the FED. I just think a few more drips
Speaker 1: in the buckets and it will overflow, and you know
Speaker 1: that the traditional reaction function would be a strong dollar.
Speaker 1: That's starting to happen in some in some ways, or
Speaker 1: it's the incoming data. And as there are a bunch
Speaker 1: of economists in the FED who are looking at incoming data,
Speaker 1: it might take weaker data to bang them on the
Speaker 1: back of the head to wake them up. But to me,
Speaker 1: it's incredulous to just think that nothing happens. So let's
Speaker 1: talk about thirty a US. How should you position elsewhere?
Speaker 1: Long duration in the US you have to be long
Speaker 1: long to us with with with a continued flattening bias,
Speaker 1: because look, I'm not denying the Fed's going to hike
Speaker 1: in September. They might even hike in December. Although we'll
Speaker 1: have to look at the post midterm election emprovement. We
Speaker 1: have to we have to look at what Italy does
Speaker 1: to this bucket of water that's filling up. Well, I
Speaker 1: go to the Book of Water. But Steve, this is
Speaker 1: important and this is for Global Wall Street folks. Duration
Speaker 1: is the length of the bun. How brave are you
Speaker 1: to buy price higher yield lower is measured out the
Speaker 1: yield curve. How far out are you willing to go, well,
Speaker 1: I'd keep going into the ten year plus. You would
Speaker 1: go into ten year plus. Yeah, ten year plus. The
Speaker 1: worry at the moment for people in the very long
Speaker 1: end is that you've got some stuff coming up in
Speaker 1: September October around the tax reform and how the pension's
Speaker 1: market is that some people are worried about some steepening
Speaker 1: and you're you're not concerned, Steve Major about the fiscal polity.
Speaker 1: It's the buying opportunity. Any cheapness is of buying opportunity. Look, look,
Speaker 1: ten year plast this year, you've been pretty safe sitting there.
Speaker 1: You haven't had that many bad days and you grab
Speaker 1: and I get yeah, so you know, as long as
Speaker 1: you don't too much. I think the first few weeks
Speaker 1: of this year were bad for the bond guys. But
Speaker 1: but the last six months, so that takes me back
Speaker 1: into sort of late Joan early fab. They've been fine,
Speaker 1: but not moved. It's been in a range. How long
Speaker 1: do you feel I mean, I mean, do you feel
Speaker 1: like a lonely car here of Laurie yields you and Gary.
Speaker 1: I do feel I do feel. I do feel quite lonely,
Speaker 1: and I've just I've continued to add to my long
Speaker 1: position on weakness. So you know, I don't change the view.
Speaker 1: And actually it's not because I've got my head stuck
Speaker 1: in the standards, because I believe it. And actually, in
Speaker 1: my experience, the best forecasts that we've ever had have
Speaker 1: normally involved as being quite lonely, and it's normally a
Speaker 1: good sign. When when people start to say you're wrong
Speaker 1: and and you start to look like a bit of
Speaker 1: a loony when people think you're mad, then then it's
Speaker 1: normally a good sign. So we're getting to the point
Speaker 1: now where we are the Mavericks on our own, and
Speaker 1: I'm quite happy with that. Giving Tom Kine some ideas
Speaker 1: there they please don't makes you thank you so much. Really,
Speaker 1: we're gonna lead our podcast, I hope today with this
Speaker 1: really wonderful. We have a lot of funny here. It's
Speaker 1: sort of like after the Market. I know, I'm supposed
Speaker 1: to talk Zello or this or Turkishly or forget about it.
Speaker 1: City Group has done a brilliant analysis of what is
Speaker 1: permeating your house. Now for those of you have a
Speaker 1: certain vintage uh you know, there's a seventy eight record
Speaker 1: in the needle that you have to put in and
Speaker 1: you know it prick your finger. And then there was LPs,
Speaker 1: and then there was cassettes and c d s and
Speaker 1: CDs were lousy, then CDs were good, and now they're streaming.
Speaker 1: Is a City group has really looked at the state
Speaker 1: of the music business. Tim Signers joins us right now
Speaker 1: ahead of their European You've forgot eight tracks by the way,
Speaker 1: oh you excuse me, I forgot eight tracks that was
Speaker 1: underneath the um the glove compartment as well. Tom. When
Speaker 1: you put this report together with five six seven City Group, guys,
Speaker 1: what was the number one surprise with the new economics
Speaker 1: of the music business? Really cool? Thanks for having me, Tom. Yeah, well,
Speaker 1: I'm going to say there's two surprises. I think, you know.
Speaker 1: The first one actually was I think we've got accustomed
Speaker 1: to the idea that the music industry was challenged. You know,
Speaker 1: we've heard a lot about how rewarded music was under pressure,
Speaker 1: but actually the music music industries in relatively good health.
Speaker 1: It's growing in pasted its historic peak kutchures two thousand
Speaker 1: and six. In the US, consumers are spending three billion
Speaker 1: dollars a year on music in some way, shape or form.
Speaker 1: The issue is only a tiny fraction of that goes
Speaker 1: to the artist. I think that's the real killer point
Speaker 1: from this. We it's going up, but it's around of
Speaker 1: industry revenues end up with the artist, which is much
Speaker 1: much lower than you'd expect the talent to be getting
Speaker 1: based on what we see another industry. Well, this has
Speaker 1: been true and it used to be seven percent and
Speaker 1: now it's up to a week double digit statistic. But
Speaker 1: the bottom line is, am I right that in the
Speaker 1: modern music business, the talent only gets it from gate
Speaker 1: from concerts, and that means it's only a certain percentage
Speaker 1: of the talent. If you're an artist that doesn't have gait,
Speaker 1: you don't survive, do you exactly right? I mean, the
Speaker 1: main main driver of it moving up over time is
Speaker 1: is exactly that. It's it's it's the rise and um
Speaker 1: in live events and as you say, that disproportionately benefits
Speaker 1: the big artist. But what it also speaks to is
Speaker 1: that is just how complex this industry is. You've got
Speaker 1: we call it the blob, but you know, the music industry,
Speaker 1: there are so many different intermediaries, all breaking their own cut,
Speaker 1: and that's really where we're likely to see disruption in
Speaker 1: are you? Where? Where is the disruption for record companies
Speaker 1: that used to be twenty or thirty record companies and
Speaker 1: there's always a maverick one like Reprise Records, or you
Speaker 1: know a couple of the British record companies as well
Speaker 1: Stigwood and their crew a million years ago. But where
Speaker 1: are the record companies right now? Does anybody still care
Speaker 1: about Columbia and the big red dot. Yeah, no, I
Speaker 1: think that's there's still very big companies and still very
Speaker 1: important players. And certainly when we think about their control
Speaker 1: of catalog, it's it's obviously very very strong, but it
Speaker 1: really is a question about what's going to look like
Speaker 1: in five, ten, fifteen years time. Remember those record labels.
Speaker 1: The big thing they had was they owned recording facilities,
Speaker 1: which were really difficult to to to to organize your
Speaker 1: of as an artist. But most artists can now record
Speaker 1: musics on a laptop. You know. They owned manufacturing facilities
Speaker 1: to make the eight tracks from the vinyl that we
Speaker 1: were talking about, but you don't need that books you
Speaker 1: can distribute online, and of course they owned marketing and distribution,
Speaker 1: and obviously artists can do a lot of that work themselves,
Speaker 1: so it's it's really not about the the legacy business,
Speaker 1: which is still quite robust and the value of catalog
Speaker 1: quite high. It's about where's the business going forward? And
Speaker 1: do you as an artist really need to use a
Speaker 1: legacy record label in order to to make money in
Speaker 1: recorded music? And increasingly it looks, you know, the answer
Speaker 1: to that is well not really. Could the Beatles happen today? Absolutely,
Speaker 1: I think you know the Beatles, you know, we've seeing
Speaker 1: lots of exciting new artists are very dynamic and exciting time.
Speaker 1: I think the big thing is, you know, would the
Speaker 1: Beatles need to sign up with a with a with
Speaker 1: a with a record labor because they do it themselves
Speaker 1: and and and you're seeing a number of interesting artists
Speaker 1: that are doing in exactly that Macilmore Chance the Rapper.
Speaker 1: These are all artists who have built their own director
Speaker 1: consumer business models and and there much better off financially
Speaker 1: for it. I mean, I'm watching right now with our studios,
Speaker 1: folks of the stack of TV is always keeping us
Speaker 1: and the rest of the news and ad for Kenny
Speaker 1: Chesney of Nashville out with three or four opening acts
Speaker 1: doing the Arena tour. I mean, those those rare acts
Speaker 1: are still bringing in tons of money, whether it was
Speaker 1: Arianna Grande at the Manchester Concert or Mr Chesney doing
Speaker 1: it in New York City. I mean, the big arenas
Speaker 1: still matter, don't they Absolutely? I mean the big the
Speaker 1: big driver of the industry growth and the way that
Speaker 1: we define it, and certainly the big driver of artists
Speaker 1: share of industry is live events. Absolutely. And I think
Speaker 1: one of the things that is striking about the music
Speaker 1: industry that stands is just how stratified it is. By
Speaker 1: and large, record labels are still record labels. Constant promoters
Speaker 1: are still constant promoters. Distribute platforms are still distribution platforms.
Speaker 1: And I think one of the big things that we
Speaker 1: think will happen as disruption impact is you'll see more
Speaker 1: vertical integration and actually live events is probably going to
Speaker 1: be the big area of focus, and companies like Live
Speaker 1: Nation um set to benefit from that because that's the
Speaker 1: area ultimately the artists are focusing on, and ultimately the
Speaker 1: area that the other players in the music industry are
Speaker 1: going to watch to bring into the folds. In the time,
Speaker 1: we've got left, We've got Spotify, we've got Apple Music,
Speaker 1: we've got Amazon trying to get into streaming. Does City
Speaker 1: Group have a prediction of who wins the streaming battle?
Speaker 1: Um Look, the big point we make on streaming is
Speaker 1: simply that it's not clear any of them will ever
Speaker 1: make a really sustainable return. The big question is, of course,
Speaker 1: whether this matters for companies like Apple, Google, Amazon, ten cents. Um.
Speaker 1: It may well be that music is just the tool
Speaker 1: to drive engagement and loyalty for other parts of the
Speaker 1: of the of their platform. The fundamentally that makes life
Speaker 1: very very difficult for the stand alone players who have
Speaker 1: to try and make a return on on on the
Speaker 1: basis that it's a stand alone business and that who
Speaker 1: we think is a factor that will drive um vertical
Speaker 1: integration or at least have pushed towards it. But the question,
Speaker 1: of course is whether this is organic and happens slowly
Speaker 1: over time, or is inorganic and involved. Umman, what what
Speaker 1: just one final question if we could and if your
Speaker 1: brieferst on YouTube, it's it's been there's YouTube TV now,
Speaker 1: which a lot of people have told me is too
Speaker 1: expensive in that But can Google in YouTube play in
Speaker 1: the streaming world or is it just sort of the
Speaker 1: haphazard feel of finding a song on YouTube that it
Speaker 1: seems to be right now. Yeah, well I M alphabet
Speaker 1: or Google is is covered by my colleague Mark May.
Speaker 1: But the point he makes is that the size of
Speaker 1: music within this sort of alphabet complex is relatively small.
Speaker 1: You know, YouTube generates about seventeen billion dollars of AD
Speaker 1: revenue and we we estimate about three billion of that
Speaker 1: is music related, so it's substantially five per cent of
Speaker 1: the total, but you know it is it is an
Speaker 1: important area of focus. Um uh. They need to improve
Speaker 1: user engagement and time spent on the platform, and there
Speaker 1: are a lot of other players sort of pushing hard
Speaker 1: in that to try and use music as a as
Speaker 1: I say, something to engage users on their platforms. So
Speaker 1: even though it's small there economically, we do think it's
Speaker 1: going to be a key focus for the group. I
Speaker 1: congratulate you guys and going outside the box. It's great
Speaker 1: to see. I mean, there's a lot of these things
Speaker 1: that are contrived. This report from City Group is not contrived.
Speaker 1: It's a very serious look at again a forty three
Speaker 1: billion large business. Thank you Tim single Hearst for joining us,
Speaker 1: and you mentioned Mark me. Their internet analyst Jim Suva
Speaker 1: Wing in here as well Alicia yeah as and and
Speaker 1: many others as well on the music business from City Group.
Speaker 1: We protect the copyrate of all of our guests. Please
Speaker 1: get that. Please get that report from your City Group representative.
Speaker 1: Tom Singlehurst was City Group. Thank you so much. We
Speaker 1: thought we'd dragged Steve Weisman nine on a summer's day
Speaker 1: really to talk about one stock, of course, Mr Iceland
Speaker 1: with Newberger Berman and someone who looks at things long
Speaker 1: and short as well. Steve, how did you discover zello?
Speaker 1: How did you you know within the matrix of a
Speaker 1: thousand stocks or five thousand stocks? How did you wander
Speaker 1: into zillo um? You know, there are lots of different
Speaker 1: ways to find stock. Sometimes you find them on yourselves,
Speaker 1: sometimes people given to them give them to you. This
Speaker 1: was a stock that's been covered by a cell side
Speaker 1: analyst named Brad Safilo at a small boutique called p
Speaker 1: A A Research. I've known him for years. He's an
Speaker 1: excellent analyst. You know, sometimes he's right, sometimes he's wrong,
Speaker 1: but he's always incredibly interesting and does incredible research. And
Speaker 1: he put me onto this. What you heard there from
Speaker 1: Mr Eisman, Folks is the way pros used the cell side.
Speaker 1: Whether the right or wrong isn't the litmus test. They
Speaker 1: always want to be intrigued right or wrong. Do you
Speaker 1: treat a stock that you're cautious on that you could
Speaker 1: short differently when it's a smaller stock like Zillo versus
Speaker 1: some genormous company, Um, not necessarily. I mean, if the
Speaker 1: stock has a very very heavy short interest, I tend
Speaker 1: not to want to let people know that. I'm sure
Speaker 1: this has a fairly large short interest, but I think
Speaker 1: it's there's some things happening that make it incredibly ripe
Speaker 1: for being short. I mean to sound significantly today, but
Speaker 1: I think it has much more downside. Well, okay, short
Speaker 1: interest is about thirty and a half percent. What about
Speaker 1: Zillo causes you to be bearish? Well, there are two
Speaker 1: things that came out that that that I want to
Speaker 1: focus on. Two things. One thing that was discussed on
Speaker 1: the call, and one thing that was not so Zillo
Speaker 1: is largest businesses you go on the website to look
Speaker 1: for look to buy a home. That's not what I
Speaker 1: want to focus on. They got into a business several
Speaker 1: months ago. They announced that they were going to go
Speaker 1: and invest their own capital and buy houses. And then,
Speaker 1: by the way, I described it on your on your
Speaker 1: show two weeks ago, I said, and I said and
Speaker 1: flipped them, and they had projected that they were going
Speaker 1: to generate about twenty to forty million dollars in revenue
Speaker 1: this year. I'm sorry to two D fifty five million
Speaker 1: revenue this year, and they reduced it to um. Just
Speaker 1: people just do that again because people aren't writing it down,
Speaker 1: but but we are. Just they were going, they said
Speaker 1: they were going to generate a D twenty five to
Speaker 1: two hundred and fifty five million in revenue from this
Speaker 1: business this year, which they just started, and now they've
Speaker 1: lowered that guidance to twenty million. When asked on the
Speaker 1: call why, they said that they were giving people offers,
Speaker 1: but it was taking much longer for those offers to
Speaker 1: be accepted. Now, I what I said on your show
Speaker 1: was I thought this is a horrible business because I
Speaker 1: thought this it was cyclical, capital intensive, um and low margin.
Speaker 1: And after listening to that call, I take it back.
Speaker 1: It's not a horrible business. Business that is potentially disastrous
Speaker 1: because what they basically described is that they are offering
Speaker 1: consumers a free put. In other words, they give it,
Speaker 1: let's say it consumer puts his house on for three
Speaker 1: hundred thousand dollars. Zilla will offer a ten percent, let's say,
Speaker 1: a ten percent discount two D seventy thousand dollars. And
Speaker 1: what's happening is these are not distressed sellers, and these
Speaker 1: sellers are taking that offer, and basically they're shopping it.
Speaker 1: They're looking for a better price, and essentially what Zilla
Speaker 1: is doing is offering consumer the seller a free put.
Speaker 1: The reason why this is so bad is that they're
Speaker 1: going to be horribly adversely selected. Think about it this way.
Speaker 1: The house, for most Americans is the major store of
Speaker 1: their wealth. So Zillo shows up with that two hundred
Speaker 1: seventy thousand dollar offer. Now, why would a non distressed
Speaker 1: seller sell their home for two hundred seventy thousand dollars
Speaker 1: if they're not distressed. If the house is worth three
Speaker 1: hundred thousand dollars, there's only two possibilities for that. Either one,
Speaker 1: Zillo has missed priced the house and it's not worth
Speaker 1: two d seventy thousand dollars. Is it's worth less, or
Speaker 1: there's something wrong with the house and maybe on the
Speaker 1: surface it's worth three dollars, but it requires considerable repairs
Speaker 1: and maybe it's only worth two dollars, and so the
Speaker 1: seller now accepts the the prices Zilo, which is too high.
Speaker 1: So I cannot think of a single business ever that
Speaker 1: can function by offering sellers a free put. It it
Speaker 1: be like going to Goldman Sacks and say, hey, I
Speaker 1: own X amount of IBM stock. I want to buy
Speaker 1: some puts to protect my position. What will you charge
Speaker 1: before him? And Goldman says nothing. Well, of course I'm
Speaker 1: gonna take that. That that is essentially Zilo is creative.
Speaker 1: I mean, you describe nothing pretty straightforward. What I don't
Speaker 1: understand it. They think somehow they're going to crack some
Speaker 1: crazy code. But I don't think they understand that by
Speaker 1: offering a free put their being adversely selective. Let me
Speaker 1: just continue for a second, because there's something that was
Speaker 1: not discussed on the call, which in some ways I
Speaker 1: think is equally as important. Um. On June, Zillo did
Speaker 1: an equity offering and they raised hundreds of millions of
Speaker 1: dollars between June and and August six last night, there
Speaker 1: was considerable and there has been insider selling, and now
Speaker 1: less only a little bit more than a month after
Speaker 1: doing that offering, the company has has reduced guide insignificantly,
Speaker 1: and as of today the stock is down right now
Speaker 1: seventeen and a half percent. Now, this is a little
Speaker 1: bit of what did they know and when did they
Speaker 1: know it? Um, maybe they did not know that they
Speaker 1: were going to reduce guide in significantly on Dune twenty eight,
Speaker 1: but it seems to me that that's a question that
Speaker 1: needs to be addressed by management and was not raised
Speaker 1: on the call, and it needs to be raised. I
Speaker 1: think they raised about three d and seventy million in
Speaker 1: that offering, correct, They they raised it at seven and
Speaker 1: the rock is now correct seem Thank you so much,
Speaker 1: greatly appreciated his thoughts on Zilla. We really focused there
Speaker 1: on one security uh this time around. Thanks for listening
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