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Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene

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Speaker 1: Jay Lee. We bring you insight from the best in economics, finance, investment,

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Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com, and of course, on the Bloomberg The

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Speaker 1: Big Story then worldwide, the President's men heading to Beijing,

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Speaker 1: top officials from the administration arriving for trade talks as

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Speaker 1: China says it's not willing to back down on key issues,

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Speaker 1: and investors are left asking what is the minimum condition

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Speaker 1: for success of this visit. We're joined now by Steven Stanley,

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Speaker 1: Amherst Pierpont Securities chief Economists. So Stephen, let's put that

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Speaker 1: question to you. What is the minimum condition for success

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Speaker 1: at this visit? Good morning. I think if they if

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Speaker 1: they get back home and they haven't started like a

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Speaker 1: an elean an escalation of the trade war, I'd probably

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Speaker 1: be pretty happy. I don't really expect much out of this.

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Speaker 1: That's how low the bar is. Stephen, Well, I just

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Speaker 1: I mean, as you said, the team is, uh, it's

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Speaker 1: kind of an unique team of individuals who aren't really

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Speaker 1: unnecessarily on the same page. Um and so I think,

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Speaker 1: you know, I'm not sure that the idea here was

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Speaker 1: to go over there and negotiate some huge agreement. I

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Speaker 1: think they're just trying to, uh, kind of set the

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Speaker 1: stage for the next, the next steps of this process.

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Speaker 1: Respected positions on trade seemed to have hardened, but on

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Speaker 1: other issues there things to be agreements. In fact, progress

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Speaker 1: on the issue with say, let's talk about North Korea.

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Speaker 1: That could be a positive, and it could be a

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Speaker 1: positive when when trade starts getting discussed as well. Do

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Speaker 1: you see those two issues folded into one another? Oh? Absolutely,

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Speaker 1: And and President Trump has been pretty explicit about that,

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Speaker 1: and uh, not only with China but with others, where

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Speaker 1: he said, We're willing to give you a break on

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Speaker 1: trade if you help us out in other areas. What's

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Speaker 1: your time horizon for how long it's going to take

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Speaker 1: to negotiate this This is a big visit it by

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Speaker 1: any mates, it's an a pull and visit. But how

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Speaker 1: long would its tight two really sold? Well, it's gonna

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Speaker 1: be months, I think before they figure out kind of

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Speaker 1: what the deal is with these tariffs. And I think

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Speaker 1: these are discussions that are gonna be going on for years.

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Speaker 1: Within this is the Steven Stanley view of the strength

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Speaker 1: of our economy. So let's start over on the right hand.

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Speaker 1: Started the equation net exports, which has to do with China.

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Speaker 1: We need more export growth. Isn't that the amorous Pierponts

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Speaker 1: solution to all this? Well? Certainly? Yeah. I mean we're

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Speaker 1: at a stage in the business cycle where the economy

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Speaker 1: is pretty strong. Domestic demand is strong and probably stronger

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Speaker 1: than the overall global economy. So that we import German

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Speaker 1: BMW's you know, picked the vehicle from Germany volks Vegazin.

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Speaker 1: Isn't that a sign of a strong America? Sure? Sure?

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Speaker 1: And I think you know, certainly the the administration or

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Speaker 1: the President in particular, wants to get the trade deficit

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Speaker 1: down and very understandable, um thought. But in this stage

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Speaker 1: of the business cycle, typically the trade depsit is widening. Okay,

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Speaker 1: so we want to celebrate the imports coming in. I

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Speaker 1: guess we all get that. Then the solution is exports.

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Speaker 1: How do you boost the gradient of exports? Right? Well,

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Speaker 1: I think you know, one thing is you have to

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Speaker 1: make the US a a favorable place to do business,

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Speaker 1: and certainly I think the tax reform help that in

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Speaker 1: some in some aspects um, and you have to have

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Speaker 1: companies that can compete around the world. And then I

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Speaker 1: think what the administration would say is, then you have

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Speaker 1: to make sure that the rules of trade are fair.

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Speaker 1: And I think that's that's why they're going after China

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Speaker 1: and the way that they are is to try to

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Speaker 1: even the playing field in their minds. How important is

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Speaker 1: the FX market as a backstrop tool of this, Well,

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Speaker 1: you know, it's interesting the dollar has been weakening for

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Speaker 1: the most part over the last year or two, at

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Speaker 1: a time when you would expect it to be strengthening.

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Speaker 1: If you're looking at the traditional things that I, as

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Speaker 1: an economist would look at, you're looking at rates, um,

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Speaker 1: you're looking at relative growth. Uh. Those with those things

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Speaker 1: would suggest that dollars should have been strengthening. It has

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Speaker 1: turned recently, and it'll be interesting to see if that

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Speaker 1: proved to be a sustained move. And John, I want

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Speaker 1: to interrupt here. We have two tweets from the President

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Speaker 1: which implied a third tweet. We now have the third

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Speaker 1: tweet four minutes ago, which seems to have an ending

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Speaker 1: to it. These tweets are so lengthy, John, I'm not

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Speaker 1: going to read them all. It just takes too long

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Speaker 1: and too much valuable time from Stephen Stanley the President

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Speaker 1: and three lengthy John. Here's the key phrase, carefully written tweets.

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Speaker 1: Uh goes over this news to Mr Giuliani last night,

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Speaker 1: about Mr Cohen and about Ms Daniels Uh as well.

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Speaker 1: So we have three tweets out. I'll read the final sentence, John,

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Speaker 1: Money from the campaign or campaign contributions played no role

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Speaker 1: in this transaction. But it doesn't read. I will state

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Speaker 1: this not as an editorial comment, but just observing the

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Speaker 1: Bloomberg terminal, it doesn't read as a Trump tweet. There's

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Speaker 1: a typical Trump layout tweet. It looks very formable. I

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Speaker 1: think that's to take away from a lot of people

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Speaker 1: reading these tweets this morning. But I would also say

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Speaker 1: this just really isn't on wall streets radar, and it's

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Speaker 1: absolutely But I think my point is we finally have

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Speaker 1: the third tweet I think of three tweets. I could

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Speaker 1: be wrong. Let's get to something that is on wall streets, right, John,

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Speaker 1: the effects market today some significant dollar weakness stunt. It's

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Speaker 1: come back through after a couple of weeks a dollar

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Speaker 1: strength Stephen. A lot of people thought a Federal Reserved

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Speaker 1: decision would be a total non event because there was

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Speaker 1: no news conference but the Federal Reserve. But being quite

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Speaker 1: clear about a symmetrical inflation target for less, can you

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Speaker 1: talk us through what a symmetrical inflation target is as

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Speaker 1: opposed to just targeting two sure? Well, I think traditionally

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Speaker 1: people have viewed a two percent inflation target as being

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Speaker 1: kind of lopsided. Anything above to the tolerance was very low.

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Speaker 1: So if it's one and a half, that's okay, But

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Speaker 1: if it's two and a half, that's a real problem

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Speaker 1: for the FED. And what the FED has based sickly

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Speaker 1: telling us is that they view themselves as having some

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Speaker 1: room on either side of two percent. So we've been

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Speaker 1: running below two percent now for the most part throughout

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Speaker 1: this expansion, um, and the FED is wanted to get

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Speaker 1: up to two percent. And what they're telling us is that, hey, look,

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Speaker 1: if we get to two point one, we're not hitting

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Speaker 1: the panic button right away. Um. And I think the

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Speaker 1: key there is partly is where you think the trend

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Speaker 1: is headed. So if we get to to one or

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Speaker 1: to two two, or even to two three, and the

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Speaker 1: FED thinks that we're going to level off, there that's

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Speaker 1: probably fine. If there were at two and at quarter

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Speaker 1: and they think we're headed to two and a half

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Speaker 1: or maybe even to three, that becomes a problem. So

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Speaker 1: here's the important question I think for for many people

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Speaker 1: in the market, and the reason we saw that we

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Speaker 1: could done it off the back of a lot of this,

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Speaker 1: that the Federal Reserve just endorse in inflation over shoot.

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Speaker 1: I think they did. I think they said and in

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Speaker 1: a number of individuals have have made that very clear

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Speaker 1: that hey, look we've run below two percent for years,

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Speaker 1: it's fine if we run above two percent for a while.

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Speaker 1: Which takes us to Europe where we have the inflation

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Speaker 1: print this morning, Tom Case, I mean East is important.

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Speaker 1: We have to think about that East. The last year,

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Speaker 1: of course, was in a pro easter. This tion more

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Speaker 1: inflation in the United Kingdom as well. Right, Yes, so

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Speaker 1: it's a thief and we knew where easter was and

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Speaker 1: the economists still got it dead wrong. So the inflation

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Speaker 1: story in Europe is just not picking up. Stephen. I

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Speaker 1: just want to how much of a problem this is

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Speaker 1: for President Racky. Well, in many ways Europe has been

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Speaker 1: it felt has felt like Europe has been behind the

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Speaker 1: US in the cycle by a couple of years. Maybe

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Speaker 1: you see it in kind of where they are in

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Speaker 1: terms of monetary policy, and you also see that, I

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Speaker 1: think in terms of where the economy is in certain

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Speaker 1: ways you've seen stronger growth in Europe over the last year,

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Speaker 1: but where they're still having trouble getting inflation to move

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Speaker 1: up toward US target. And hey, that's exactly where the

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Speaker 1: FED was a few years ago. Stevens Stanley Amherst pypon

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Speaker 1: Securities Chief Economists. Great to have us with have you

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Speaker 1: with us on the program. It is without question the

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Speaker 1: publishing event of the season on China. Beyond timely here

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Speaker 1: with Secretary re minutions, trip to the daily back and

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Speaker 1: forth of what some would say as a mercantile Washington,

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Speaker 1: a mercantile Trump dealing with President G, this new, more definitive,

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Speaker 1: more entrenched leader of China. There is no one who

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Speaker 1: can brief us on this on what she calls the

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Speaker 1: Third Revolution. That Elizabeth Economy of the Council on Foreign Relations,

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Speaker 1: Elizabeth congratulations on two d and fifty pages of update

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Speaker 1: on President G. What was the biggest surprise of President

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Speaker 1: G and putting together the Third Revolution? I think that

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Speaker 1: the biggest surprise really was just how transformative he's managed

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Speaker 1: to be in just five short years. You know, when

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Speaker 1: he came in, people this is going to be a

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Speaker 1: reform are along the lines of Dungho Ping. We're going

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Speaker 1: to see more reform and opening up the low profile

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Speaker 1: foreign policy and in fact, piece you know, move the

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Speaker 1: country a hundred and eighty degrees in the opposite direction,

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Speaker 1: you know, reasserting the Communist Party into the economy, into society,

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Speaker 1: much more ambitious foreign policy, much more more repressive and

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Speaker 1: authoritarian at home. So he's really the Third Revolution really

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Speaker 1: is all about the game changing nature. She didn't tan Uh.

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Speaker 1: Secretary Minution no doubt has a copy of your book

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Speaker 1: well foot noted and marked on the plane going out

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Speaker 1: when he's stopping the fist fights between Lawrence Cudlow and

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Speaker 1: Peter Navarro. If that's the case, how would you brief

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Speaker 1: the secretary on the relationship of Beijing to the major

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Speaker 1: Pacific RIM cities like Shanghai and Hong Kong. What's that

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Speaker 1: new dynamic? I think, you know, for Beijing has always

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Speaker 1: been the center of political power, and you know Shanghai,

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Speaker 1: Hong Kong or the economics centers I think underseaging Ping,

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Speaker 1: Beijing has only become stronger U. And we see Beijing,

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Speaker 1: you know, making a number of moves, for example, in

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Speaker 1: this relationship with Hong Kong to limit the autonomy of

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Speaker 1: Hong Kong and an essence saying, you know, we know

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Speaker 1: that you're a gateway to China, but we're not going

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Speaker 1: to need you, uh in that respect for very much longer.

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Speaker 1: And you've got to get yourselves in line politically. I

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Speaker 1: think the Shijunking, you know, is not a huge fan

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Speaker 1: of the go go economic growth. Uh that done Shoking represented,

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Speaker 1: that's embodied in Shanghai. He's got a different view. Well

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Speaker 1: what does that different view and what does it mean

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Speaker 1: for these Western business locations in the third the Third Revolution? Well,

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Speaker 1: I think, you know, again reinserting the party into the state,

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Speaker 1: don't enterprises, you know, telling joint ventures. You know, we

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Speaker 1: want to have our party representatives on your board reviewing

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Speaker 1: your investment decisions. Uh, you know, the entire push for

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Speaker 1: the status control of Chinese technology made in China. All

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Speaker 1: of these things are still wins for multinationals who had

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Speaker 1: hoped for a more open uh you know, market opening.

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Speaker 1: You know, less I t theft. They hope to see

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Speaker 1: progress on some of these major institutional types of changes

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Speaker 1: that are needed, and they're not seeing them if you're

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Speaker 1: just joining us, Elizabeth, Economy, the Third Revolution, Jping in

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Speaker 1: the New Chinese State mustery fifty pages terrific briefing. Ian

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Speaker 1: Bremer raves about it, and far more importantly, I think

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Speaker 1: Dr Bremer would agree with me. Orville Shell says simple,

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Speaker 1: simply a well researched book, which is shell isk for

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Speaker 1: she nailed it, Elizabeth. When you did this, you've got

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Speaker 1: to fold in the new military might of China. You've

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Speaker 1: got to fold in the fears that Peter Navarro has

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Speaker 1: about the economics of China as well. How transparent, how

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Speaker 1: knowledgeable is our true intelligence of the Chinese government system?

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Speaker 1: Do we actually know what they're doing? I think in

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Speaker 1: summers spects we're pretty knowledgeable. We have a pretty good

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Speaker 1: sense for you know, how China's developing its military. It's

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Speaker 1: new technologies, it's new modes of operation. The really significant

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Speaker 1: advances that they've made under Shi Jinping. He's a big

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Speaker 1: supporter of the Chinese military, and you know said when

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Speaker 1: he first came to power, you know, I'm going to

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Speaker 1: develop a people's liberation army that's capable of fighting and

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Speaker 1: winning wars. Uh. So, you know they've they've been a

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Speaker 1: real beneficiary under sheet. You know, I think where we're

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Speaker 1: less good certainly is understanding the internal dynamics at the

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Speaker 1: very top level. How do you know the seven members

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Speaker 1: and the committity berro get along. You know, what are

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Speaker 1: the real differences of opinion around Chi jin Ping? He's

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Speaker 1: just amassed so much power that it's really tough to tell,

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Speaker 1: you know, where there might be some dissenting views. Does

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Speaker 1: that make this economic soire that we're in right now

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Speaker 1: nothing more than a show? He won't be there right well,

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Speaker 1: I think it doesn't, you know, mean that it's just

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Speaker 1: going to be a show. The Chinese has said, you know,

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Speaker 1: we're not going to negotiate, you know, under these threats.

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Speaker 1: They pitched their position when their top economic guy, Leo

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Speaker 1: Hook came to the United States back at the end

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Speaker 1: of February UM and they've said, you know, we're gonna

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Speaker 1: stand tough. You know, this trade war isn't going to

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Speaker 1: impact us that much. We're strong and resilient. So that

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Speaker 1: their negotiating stance they've learned from Trump, right there playing

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Speaker 1: the brinksmanship at this point. But I think, look, they've

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Speaker 1: got their own domestic economic problems. You know, she didn't

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Speaker 1: things trying to de leverage. They want to know, address poverty,

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Speaker 1: they want to address the environment. They've got a lot

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Speaker 1: of things on their dockets. They're not they don't have

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Speaker 1: a big appetite for a big trade war. But I

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Speaker 1: definitely think there's room. But really quietly, folks, only thirty

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Speaker 1: seventy pages into the Third Revolution, Elizabeth, you have that

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Speaker 1: single sentence that's timeless. Their number one driving force is

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Speaker 1: to keep people employed and to keep rising incomes, and

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Speaker 1: that regard it's no different than the first the Second Revolution,

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Speaker 1: is it, Well, there's no different than the Second Revolution.

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Speaker 1: The first Revolution wasn't all that exact concerned about right.

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Speaker 1: He was more concerned about political correctness. But definitely, uh,

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Speaker 1: dun Shoping, that was his major objective. I think Hijenping

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Speaker 1: just has a different vision of how to get there

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Speaker 1: than Dune Shopping. Did you know? Dun Shopping wanted to

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Speaker 1: unleash the capitalist and entrepreneurial spirit of the Chinese people.

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Speaker 1: I have corruption flourished. It was bad, but it's not

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Speaker 1: the end of the world inequality grew. Okay, hi Jinping

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Speaker 1: has a different idea. No corruption, you know, address inequality

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Speaker 1: and if it cost the Chinese economy a little bit, okay,

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Speaker 1: address right now. Are listeners who say, look, the human

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Speaker 1: rights is appalling. We don't really know the protests. Uh,

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Speaker 1: this is a country that really we don't have anything

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Speaker 1: in common with in terms of culture and values, and

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Speaker 1: we should take a rigid stance. What do you say

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Speaker 1: to those people? I think, um, You know, pushing back

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Speaker 1: against China when it comes to human rights is essential

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Speaker 1: because it's not just about what China is doing on

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Speaker 1: the home front and places like Shinjong into bed and

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Speaker 1: even more broadly with their new surveillance systems and the

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Speaker 1: penetration of the Communist Party into every detail of the

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Speaker 1: people's lives. But it's that they're trying to export an

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Speaker 1: element of this autocracy abroad, their training officials in Africa

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Speaker 1: and Latin America and Southeast Asia on how to manage populations,

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Speaker 1: on how to do propaganda, and they're trying to rewrite

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Speaker 1: the rules of the game globally. You know, it's one

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Speaker 1: of the things that to look at the book is

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Speaker 1: you know, changing the way that the human rights regime

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Speaker 1: operated in the United Nations. Okay, but critically this is

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Speaker 1: really really important. Then how do we respond to this

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Speaker 1: If we have an administration that says essentially we're bilateral

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Speaker 1: or maybe even unilateral, that we've got a State Department,

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Speaker 1: at least with Mr Tillerson that was removed, how do

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Speaker 1: we affect our policy? How do we pivot or show

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Speaker 1: our flag if the Chinese are more asserted of with

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Speaker 1: their culture. Absolutely, and I think it's a big challenge

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Speaker 1: for us right now. We have to rely on people

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Speaker 1: like Frankly, you know, Nikki Halley in the United Nations.

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Speaker 1: She really does wave the flag, you know, very vigorously

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Speaker 1: on issues of human rights when it comes to China. Uh,

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Speaker 1: you know, we have to hold uh, you know, work

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Speaker 1: with our allies who also care a lot about these issues.

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Speaker 1: And the Europeans have stepped up significantly on issues of

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Speaker 1: human rights as well. So I think there are others

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Speaker 1: out there in the international community who seemed to be

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Speaker 1: stepping into the breach. Of course, nobody can speak with

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Speaker 1: as loud and as important to voices the United States.

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Speaker 1: So um, you know, it would be great if President

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Speaker 1: Trump would begin to understand the value of human rights, uh,

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Speaker 1: and what that means in terms of promoting America's vision

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Speaker 1: and strengths. Congratulations Elizabeth Economy, the Third Revolutions, she's in

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Speaker 1: Ping and the New Chinese State without question, the New musty. Uh.

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Speaker 1: Very it's very terse, folks. It's a very direct book

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Speaker 1: of great benefit about really focused on Mr g and

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Speaker 1: and with a lot of perspective that I haven't seen before.

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Speaker 1: Elizabeth Economy, After the River Runs Black, after wonderful books

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Speaker 1: on energy, the Third Revolution, j Ping and the New

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Speaker 1: Chinese State. I'll feature that out on Twitter, uh today. Well,

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Speaker 1: the Federal Reserve kept its benchmark interest rate unchanged yesterday,

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Speaker 1: but acknowledged that inflation is beginning to creep higher. Well

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Speaker 1: with that, in that increase mean increases in interest rates

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Speaker 1: and when would they come? Well here to help us

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Speaker 1: answer this question is that Kate Warren, the Edward Jones

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Speaker 1: Investments Chief market strategist. She joins us here in our

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Speaker 1: eleven three oh studios. Kate, thanks very much for being here.

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Speaker 1: What did you take away from yesterday's Federal Reserve sort

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Speaker 1: of report? I think the main takeaway is that they're

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Speaker 1: not very concerned with the uptick in inflation that we've

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Speaker 1: seen that they sort of emphasized that they wanted to

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Speaker 1: see a balance around their two percent targets, so they

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Speaker 1: didn't highlight that increasing inflation might be more interest rate increases.

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Speaker 1: They didn't give any kind of signal about how many

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Speaker 1: they'll do in the future. And uh, I think it

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Speaker 1: was actually a relatively reassuring and if anything, uh, slightly

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Speaker 1: less hawkish uh set of a you know, announcement than

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Speaker 1: I would have expected. But we're still going to twenty

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Speaker 1: five basis points in June. Yes, I think that was

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Speaker 1: quite clear. I think they telegraphed that quite clearly before

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Speaker 1: this as well as in the statement. You are hardwired

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Speaker 1: to a retail audience that has a monthly statement that

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Speaker 1: comes in and they see bond prices down and yields up.

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Speaker 1: How many months in a row of that grind do

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Speaker 1: we need until all of a sudden it's a bond

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Speaker 1: bear market for bond America. Well, I think that, uh,

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Speaker 1: it doesn't take very many months because most most investors

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Speaker 1: are pretty sensitive to down prices on their statement. And

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Speaker 1: what's so good with your work at Ellase where you

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Speaker 1: know the history is three months in a row of

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Speaker 1: bond prices down on statements is different. It's seven percent

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Speaker 1: nominal than it is three nominal. Yes, I think the

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Speaker 1: other thing is there's a flip side to it, which

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Speaker 1: is many investors have been waiting for higher interest rates,

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Speaker 1: and they're actually a little bit pleased to see the

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Speaker 1: fact that on a two year treasury you're now getting

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Speaker 1: two and a half percent, and that actually looks pretty

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Speaker 1: good compared to other things out there in the marketplace.

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Speaker 1: There's another side to this, Okay, So then when they

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Speaker 1: see all the advertisements for certificate is a deposit offering

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Speaker 1: two percent for whatever many years? Uh, do they give

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Speaker 1: you a call and say, tell us what products you

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Speaker 1: have that can get us this kind of interest rate? Well,

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Speaker 1: we do offer CD. So we are I mean you're

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Speaker 1: getting those calls. Yeah, we're getting those calls. People are saying, hey,

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Speaker 1: this looks attractive, especially compared to the fact that many

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Speaker 1: rates at the bank are still near zero. What's a

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Speaker 1: five year CD not roughly. I don't have any, but

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Speaker 1: the answers hired than it was. You could see that

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Speaker 1: my hands on radio tenC. Weans that's what we're doing.

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Speaker 1: What you are you can pull out the paper and

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Speaker 1: look at the yield. I'm going to show you the ads.

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Speaker 1: They are full page ads in newspaper, in the in

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Speaker 1: the journal, and a lot of talking about how much

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Speaker 1: that you can get and it says, you know, two

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Speaker 1: point x percent and that's a lot of money. Well,

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Speaker 1: when you think about it, with inflation still at two percent,

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Speaker 1: at least you're getting a positive yield. And let's meld

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Speaker 1: your economics in now with this, this real world yield

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Speaker 1: dynamic for the public, and that is, okay, rates higher,

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Speaker 1: but every single person listening is going to go, I

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Speaker 1: get it. But inflation is going up to So where's

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Speaker 1: the real yield go? What is the Edward D. Jones

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Speaker 1: bat on a larger inflation adjusted yield? Is it going

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Speaker 1: to happen? We think inflation actually stays pretty contained because

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Speaker 1: of all the extraordinarily high competition in marketplaces. Companies keep

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Speaker 1: saying they're not able to raise prices, uh and in

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Speaker 1: many cases their input costs are going up. We're seeing

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Speaker 1: disruptive competition in markets. Think Amazon. But high real full

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Speaker 1: faith and credit yield, high real corporate yield, quality corporate bond,

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Speaker 1: You're gonna see a real yield. Yes, we think that

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Speaker 1: it's not high is not exactly the term idea better

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Speaker 1: And and so I'm saying, I think there's lots of dynamics,

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Speaker 1: including global growth and the fact we're seeing more products

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Speaker 1: services from more places that keep prices moving up very slowly.

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Speaker 1: And therefore you do get we don't see a dramatic

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Speaker 1: increase in long term rates or short term rates even

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Speaker 1: as the FED raisers rates. And that's why, yes, you

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Speaker 1: get a better real yild. You're saying, say shorter on

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Speaker 1: the on the yield curve on the duration in order

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Speaker 1: to not get hit by the rising rates. Do your

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Speaker 1: customers have a lot of cash to do all the

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Speaker 1: things you're describing? They have some cash. They stayed pretty

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Speaker 1: fully invested, so they're not where does all the new

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Speaker 1: money come from? What do they have to sell in

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Speaker 1: order to execute? Um? I think it's that they still

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Speaker 1: have cash, uh, you know, sitting in savings accounts or

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Speaker 1: in in cash accounts in other places that they didn't

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Speaker 1: really think of investment money and now looks more tractic

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Speaker 1: to invest their money. Really, And even with the idea

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Speaker 1: that interest rates will continue to increase, you just said

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Speaker 1: they're going to increase in June Basis points, why not

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Speaker 1: wait and get a higher interest rate? Why do anything,

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Speaker 1: let's say between now and the end of the summer. Well,

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Speaker 1: I'd say it depends on what you're doing. We'd still

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Speaker 1: be saying putting money, put money inequities, stay money in inequities,

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Speaker 1: and keep some in the short term fixed income accounts,

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Speaker 1: because what you're trying to get is a better return

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Speaker 1: than what you've gotten recently. Thank you so much, but

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Speaker 1: it's greatly, greatly appreciated. It has been far too long

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Speaker 1: since I harass Shannon Cross of Cross Research, who writes brilliant,

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Speaker 1: detailed reports on all these technological wonders we talk about

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Speaker 1: every day. Her acuity is off the chart. We're thrilled

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Speaker 1: the Shannon Cross will join us today on a company

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Speaker 1: shifting from growth to valuenus is Dennis Gartman said yesterday,

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Speaker 1: maybe it will be a widows and orphan stock someday,

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Speaker 1: and that would be Fortress Cook. Shannon, good morning, is Apple?

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Speaker 1: Is it a widows and orphan stock now or is

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Speaker 1: it going to be one someday? Well, I think what

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Speaker 1: what Apple has done? And it's nice to speak with

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Speaker 1: you again, By the way, Um, what what Apple has

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Speaker 1: done is is basically moved into and trying to move

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Speaker 1: into this concept of recurring revenue stability. You know, we've

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Speaker 1: talked about it for years about the ecosystem and the

428
00:24:18,800 --> 00:24:22,040
Speaker 1: value that's there. But you know, they really have put

429
00:24:22,080 --> 00:24:25,399
Speaker 1: together a very very solid platform and so you know

430
00:24:25,640 --> 00:24:29,440
Speaker 1: over time, you know, especially with an increasing dividend yield

431
00:24:29,480 --> 00:24:32,239
Speaker 1: which weeks or wealth increasing divid in payment we should say,

432
00:24:32,240 --> 00:24:34,560
Speaker 1: because it depends on what stock price is at. You know,

433
00:24:34,800 --> 00:24:37,200
Speaker 1: it's one of those that I think can be I

434
00:24:37,200 --> 00:24:39,480
Speaker 1: don't know if widows and children sort of makes it

435
00:24:39,560 --> 00:24:42,040
Speaker 1: sound really boring, but you know, I think I would

436
00:24:42,080 --> 00:24:45,159
Speaker 1: go as stable and predictable. Have you've done as some

437
00:24:45,280 --> 00:24:48,480
Speaker 1: of the parts evaluations some of your partners in crime,

438
00:24:48,800 --> 00:24:51,480
Speaker 1: I think as Gene Monster years ago, Piper Jeffrey have

439
00:24:51,640 --> 00:24:54,679
Speaker 1: done as some of the parts analysis of the Apple

440
00:24:54,840 --> 00:24:58,600
Speaker 1: his cross research wandered through that exercise. We haven't because

441
00:24:58,600 --> 00:25:00,840
Speaker 1: we don't when you look at of the parts and

442
00:25:00,840 --> 00:25:03,560
Speaker 1: and honestly, I mean going back twenty years ago when

443
00:25:03,560 --> 00:25:05,520
Speaker 1: I was on you know, Wall Street at a big bank,

444
00:25:05,600 --> 00:25:07,880
Speaker 1: and and we did some of the parts and came

445
00:25:07,960 --> 00:25:10,800
Speaker 1: up with huge valuations that never came to fruition because

446
00:25:11,080 --> 00:25:13,439
Speaker 1: you have to be willing to separate the company. And

447
00:25:13,480 --> 00:25:16,480
Speaker 1: I don't think Apple, you know, once step they're much

448
00:25:16,480 --> 00:25:20,560
Speaker 1: stronger as you know, a whole Uh, Shannon, I want

449
00:25:20,560 --> 00:25:23,520
Speaker 1: to understand a little bit about Apple and it's pricing,

450
00:25:23,600 --> 00:25:26,560
Speaker 1: because there were a lot of comments about the iPhone

451
00:25:26,600 --> 00:25:28,800
Speaker 1: ten and how it was miss priced. Do you believe

452
00:25:28,800 --> 00:25:32,280
Speaker 1: it was miss priced? You know, I think that it

453
00:25:32,400 --> 00:25:36,320
Speaker 1: was priced appropriately for the units that they are selling.

454
00:25:36,440 --> 00:25:38,760
Speaker 1: I think the street, though, kind of got it wrong

455
00:25:38,840 --> 00:25:41,520
Speaker 1: in terms of thinking about you know, there was this

456
00:25:41,720 --> 00:25:44,560
Speaker 1: huge addressable market at over a thousand dollars. I think

457
00:25:44,600 --> 00:25:47,879
Speaker 1: for Apple, they want to have product at all, you know,

458
00:25:47,960 --> 00:25:51,040
Speaker 1: at many different levels along the price line, and so

459
00:25:51,119 --> 00:25:53,560
Speaker 1: you know, they go down below four hundred and they

460
00:25:53,560 --> 00:25:56,399
Speaker 1: obviously go above a thousand now and so you know,

461
00:25:56,480 --> 00:25:59,080
Speaker 1: I think that they were testing a new price point.

462
00:25:59,119 --> 00:26:01,480
Speaker 1: We now know sort of the elasticity of demand is.

463
00:26:01,920 --> 00:26:04,520
Speaker 1: And frankly, the company was very happy because they noted

464
00:26:04,560 --> 00:26:08,000
Speaker 1: that the iPhone ten was the best seller during every

465
00:26:08,040 --> 00:26:10,920
Speaker 1: week during the quarter all the way through March, so

466
00:26:11,280 --> 00:26:13,040
Speaker 1: you know, there's a lot of demand for it. I

467
00:26:13,080 --> 00:26:15,159
Speaker 1: think what it indicated to us is that there was

468
00:26:15,240 --> 00:26:18,000
Speaker 1: a fair amount of demand for the iPhone seven and

469
00:26:18,080 --> 00:26:20,800
Speaker 1: perhaps not as much for the iPhone eight. Shannon, does

470
00:26:20,840 --> 00:26:24,119
Speaker 1: it also indicate that Wall Street analysis of Apple is

471
00:26:24,200 --> 00:26:28,200
Speaker 1: basically flawed. I'm not sure it's float. I think people

472
00:26:28,240 --> 00:26:31,560
Speaker 1: get pretty you know, there there's a hype factor around it. Um.

473
00:26:31,600 --> 00:26:34,520
Speaker 1: You know, our numbers were always, frankly a little bit

474
00:26:34,560 --> 00:26:36,280
Speaker 1: below where where people were at, and they kind of

475
00:26:36,280 --> 00:26:38,840
Speaker 1: came in closer to us UM. But you know, again,

476
00:26:38,960 --> 00:26:41,560
Speaker 1: it's such a stable company, was such cash flow that,

477
00:26:42,040 --> 00:26:44,119
Speaker 1: you know, investors I think see through some of the

478
00:26:44,200 --> 00:26:46,080
Speaker 1: hype that comes out of the cell side on the name.

479
00:26:47,560 --> 00:26:51,320
Speaker 1: I mean, I look Shannon at the company, and part

480
00:26:51,359 --> 00:26:54,240
Speaker 1: of it comes down, as you say, recurring revenue. I

481
00:26:54,359 --> 00:26:59,120
Speaker 1: take real offense when the media particularly goes breathlessly, oh

482
00:27:00,000 --> 00:27:02,280
Speaker 1: dollars or four hundred dollars or whatever a cell phone.

483
00:27:02,840 --> 00:27:05,840
Speaker 1: Nobody I know is doing that. Everybody signs up for

484
00:27:05,880 --> 00:27:10,000
Speaker 1: this monthly plan racket. That's a source of recurring revenue,

485
00:27:10,080 --> 00:27:12,919
Speaker 1: isn't it? It is, um, you know, from from a

486
00:27:12,960 --> 00:27:15,560
Speaker 1: carrier perspective, clearly that's been going on for a long time.

487
00:27:15,600 --> 00:27:19,040
Speaker 1: Apple now has the upgrade program. You know, this concept

488
00:27:19,040 --> 00:27:22,040
Speaker 1: of device is a service is not um you neque

489
00:27:22,040 --> 00:27:24,920
Speaker 1: to Apple alone. I mean it obviously started with smartphones

490
00:27:24,960 --> 00:27:27,360
Speaker 1: and that with the carriers, but all of the companies

491
00:27:27,400 --> 00:27:29,320
Speaker 1: we cover are starting to talk more and more. Where

492
00:27:29,359 --> 00:27:33,040
Speaker 1: there's PCs, if it's data centerspend everything is going to

493
00:27:33,119 --> 00:27:36,399
Speaker 1: irradible Well, they would like it to go to irradible

494
00:27:36,920 --> 00:27:40,680
Speaker 1: kind of pricing because again, it provides predictable, stable revenue.

495
00:27:40,880 --> 00:27:42,479
Speaker 1: Is that true? That was where I knew you were

496
00:27:42,480 --> 00:27:44,920
Speaker 1: going to go there, Shannon. But is there evidence that

497
00:27:45,040 --> 00:27:49,280
Speaker 1: Apple has more persistent cash flows and dividend growth and

498
00:27:49,320 --> 00:27:53,200
Speaker 1: share buy back because we're spending forty five ten cents

499
00:27:53,240 --> 00:27:56,000
Speaker 1: for one of the eight iPhones we're paying for. I

500
00:27:56,000 --> 00:27:58,159
Speaker 1: think absolutely. And I think that the other thing that

501
00:27:58,240 --> 00:28:01,240
Speaker 1: happens is when you go to un monthly see again,

502
00:28:01,240 --> 00:28:03,800
Speaker 1: whether it's Apple or others, people are seeing it much

503
00:28:03,840 --> 00:28:06,800
Speaker 1: easier to upsell the customer because you know, really you're

504
00:28:06,800 --> 00:28:14,399
Speaker 1: paying forty dollars, it's easy, you miss spoke Shannon. You

505
00:28:14,400 --> 00:28:19,720
Speaker 1: mean to upsell the teenager, Yeah, upsell the teenager. Frankly,

506
00:28:19,840 --> 00:28:23,159
Speaker 1: you know it's yes, it's easier for me. They can

507
00:28:23,160 --> 00:28:26,720
Speaker 1: get a better phone. I mean upsell basically, upsell everybody

508
00:28:26,760 --> 00:28:29,719
Speaker 1: that really isn't paying for the whole the whole planet?

509
00:28:30,280 --> 00:28:33,800
Speaker 1: Uh is Shannon? When is Tom King going to wake

510
00:28:33,880 --> 00:28:38,560
Speaker 1: up with Apple earpod earbuds in his ears? Good questions?

511
00:28:38,960 --> 00:28:41,800
Speaker 1: You know, I have to say, net of the I

512
00:28:42,400 --> 00:28:44,360
Speaker 1: for what it's worth, nett of the iPhone. I think

513
00:28:44,400 --> 00:28:46,960
Speaker 1: the air pods are the best product that apples. You're

514
00:28:48,720 --> 00:28:52,520
Speaker 1: sc rip up the scripts here. Tell people. Tell people

515
00:28:52,600 --> 00:28:55,120
Speaker 1: why and why Tom is going to be wearing one

516
00:28:55,720 --> 00:28:58,760
Speaker 1: care in a couple of months. I ski with them,

517
00:28:58,840 --> 00:29:01,880
Speaker 1: I ride my bike was them. I can do conference

518
00:29:01,880 --> 00:29:05,440
Speaker 1: calls with them on a tram and an airport. They're

519
00:29:05,520 --> 00:29:08,200
Speaker 1: they're a really really good product. They're not cheap, and

520
00:29:08,240 --> 00:29:09,920
Speaker 1: you have to make sure you don't lose them. Wait

521
00:29:10,440 --> 00:29:14,640
Speaker 1: if I get your what do you call them? Your poet?

522
00:29:14,680 --> 00:29:16,280
Speaker 1: Your pos? Does that mean I have to work out?

523
00:29:18,280 --> 00:29:20,360
Speaker 1: It means you have to return phone calls? I guess.

524
00:29:20,360 --> 00:29:24,840
Speaker 1: But you music, they're they're great. Um, I mean they

525
00:29:25,040 --> 00:29:27,480
Speaker 1: just work really really well and they work well with

526
00:29:27,560 --> 00:29:29,480
Speaker 1: my phone too. And am I watch and now I

527
00:29:29,520 --> 00:29:32,000
Speaker 1: sound like I'm I'm, you know, selling Apple products, but

528
00:29:32,720 --> 00:29:35,560
Speaker 1: they are really good. But channel But here's the point,

529
00:29:35,600 --> 00:29:38,840
Speaker 1: and you make it very anecdotally, is that they have

530
00:29:39,040 --> 00:29:42,280
Speaker 1: created this system where they've got your ears, your wrist,

531
00:29:42,480 --> 00:29:46,239
Speaker 1: and your eyes and I don't even want to think

532
00:29:46,280 --> 00:29:48,400
Speaker 1: about other parts of your anatomy that they might end up,

533
00:29:48,440 --> 00:29:51,920
Speaker 1: you know, taking over. But Apple has managed to do

534
00:29:52,000 --> 00:29:55,040
Speaker 1: something that I can't imagine any other company at least

535
00:29:55,120 --> 00:29:58,440
Speaker 1: currently being able to do. Yeah, it's it's interesting. You know,

536
00:29:58,480 --> 00:30:03,240
Speaker 1: they really are again very sort of comprehensive in terms

537
00:30:03,240 --> 00:30:05,200
Speaker 1: of how we work with it, you know, and think

538
00:30:05,240 --> 00:30:07,280
Speaker 1: about it like wearables are now the size of a

539
00:30:07,280 --> 00:30:10,080
Speaker 1: Fortune three company, which you know they weren't a few

540
00:30:10,200 --> 00:30:12,400
Speaker 1: years ago. So it's not just me. I mean there's

541
00:30:12,400 --> 00:30:14,600
Speaker 1: a lot of people who are who are buying the

542
00:30:14,640 --> 00:30:19,440
Speaker 1: incremental products that Apple provides. What's your target? Please? Our

543
00:30:19,440 --> 00:30:22,440
Speaker 1: target is two hundred UM And you know, I think

544
00:30:22,480 --> 00:30:25,360
Speaker 1: it's going to be a nice, uh nice year for

545
00:30:25,400 --> 00:30:28,480
Speaker 1: Apple sort of slow and steady upward, especially with the

546
00:30:28,760 --> 00:30:34,480
Speaker 1: Sherry purchase support of Apple. Are one so headed to two?

547
00:30:35,120 --> 00:30:37,400
Speaker 1: Can I want to ask one of one quick question here?

548
00:30:37,440 --> 00:30:41,040
Speaker 1: Apple Watch? Was this a footnote that the Apple Watches

549
00:30:41,080 --> 00:30:44,400
Speaker 1: the best selling watch in the world, Shannon, I don't

550
00:30:44,400 --> 00:30:46,160
Speaker 1: know if it's a footnote, but I think it's it's

551
00:30:46,160 --> 00:30:48,680
Speaker 1: indicative of you know, I think Apple over time wants

552
00:30:49,120 --> 00:30:51,240
Speaker 1: at whether if their's or somebody else, is everybody to

553
00:30:51,280 --> 00:30:53,680
Speaker 1: have a device on their watch on their wrist that

554
00:30:53,840 --> 00:30:56,920
Speaker 1: tracks your health and that helps you communicate. And I

555
00:30:56,920 --> 00:30:58,720
Speaker 1: think the Apple Watch gets you part of the way

556
00:30:58,760 --> 00:31:00,960
Speaker 1: they're obviously they're f d A and other issues that

557
00:31:00,960 --> 00:31:03,800
Speaker 1: they have to get through from more of the hard perspective. Shannon,

558
00:31:03,840 --> 00:31:06,560
Speaker 1: Thank you so much. Shannon Cross Cross, researcher on Apple

559
00:31:06,640 --> 00:31:11,640
Speaker 1: over Jefferies, Mr. Litveck. Previous conviction also reversed on appeal,

560
00:31:12,520 --> 00:31:22,600
Speaker 1: serving a two year prison sentence. Thanks for listening to

561
00:31:22,680 --> 00:31:27,200
Speaker 1: the Bloomberg Surveillance podcast. Subscribe and listen to interviews on

562
00:31:27,240 --> 00:31:33,080
Speaker 1: Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm

563
00:31:33,120 --> 00:31:36,440
Speaker 1: on Twitter at Tom Keene before the podcast. You can

564
00:31:36,480 --> 00:31:39,680
Speaker 1: always catch us worldwide. I'm Bloomberg Radio