Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene
Speaker 1: Jay Lee. 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 Story then worldwide, the President's men heading to Beijing,
Speaker 1: top officials from the administration arriving for trade talks as
Speaker 1: China says it's not willing to back down on key issues,
Speaker 1: and investors are left asking what is the minimum condition
Speaker 1: for success of this visit. We're joined now by Steven Stanley,
Speaker 1: Amherst Pierpont Securities chief Economists. So Stephen, let's put that
Speaker 1: question to you. What is the minimum condition for success
Speaker 1: at this visit? Good morning. I think if they if
Speaker 1: they get back home and they haven't started like a
Speaker 1: an elean an escalation of the trade war, I'd probably
Speaker 1: be pretty happy. I don't really expect much out of this.
Speaker 1: That's how low the bar is. Stephen, Well, I just
Speaker 1: I mean, as you said, the team is, uh, it's
Speaker 1: kind of an unique team of individuals who aren't really
Speaker 1: unnecessarily on the same page. Um and so I think,
Speaker 1: you know, I'm not sure that the idea here was
Speaker 1: to go over there and negotiate some huge agreement. I
Speaker 1: think they're just trying to, uh, kind of set the
Speaker 1: stage for the next, the next steps of this process.
Speaker 1: Respected positions on trade seemed to have hardened, but on
Speaker 1: other issues there things to be agreements. In fact, progress
Speaker 1: on the issue with say, let's talk about North Korea.
Speaker 1: That could be a positive, and it could be a
Speaker 1: positive when when trade starts getting discussed as well. Do
Speaker 1: you see those two issues folded into one another? Oh? Absolutely,
Speaker 1: And and President Trump has been pretty explicit about that,
Speaker 1: and uh, not only with China but with others, where
Speaker 1: he said, We're willing to give you a break on
Speaker 1: trade if you help us out in other areas. What's
Speaker 1: your time horizon for how long it's going to take
Speaker 1: to negotiate this This is a big visit it by
Speaker 1: any mates, it's an a pull and visit. But how
Speaker 1: long would its tight two really sold? Well, it's gonna
Speaker 1: be months, I think before they figure out kind of
Speaker 1: what the deal is with these tariffs. And I think
Speaker 1: these are discussions that are gonna be going on for years.
Speaker 1: Within this is the Steven Stanley view of the strength
Speaker 1: of our economy. So let's start over on the right hand.
Speaker 1: Started the equation net exports, which has to do with China.
Speaker 1: We need more export growth. Isn't that the amorous Pierponts
Speaker 1: solution to all this? Well? Certainly? Yeah. I mean we're
Speaker 1: at a stage in the business cycle where the economy
Speaker 1: is pretty strong. Domestic demand is strong and probably stronger
Speaker 1: than the overall global economy. So that we import German
Speaker 1: BMW's you know, picked the vehicle from Germany volks Vegazin.
Speaker 1: Isn't that a sign of a strong America? Sure? Sure?
Speaker 1: And I think you know, certainly the the administration or
Speaker 1: the President in particular, wants to get the trade deficit
Speaker 1: down and very understandable, um thought. But in this stage
Speaker 1: of the business cycle, typically the trade depsit is widening. Okay,
Speaker 1: so we want to celebrate the imports coming in. I
Speaker 1: guess we all get that. Then the solution is exports.
Speaker 1: How do you boost the gradient of exports? Right? Well,
Speaker 1: I think you know, one thing is you have to
Speaker 1: make the US a a favorable place to do business,
Speaker 1: and certainly I think the tax reform help that in
Speaker 1: some in some aspects um, and you have to have
Speaker 1: companies that can compete around the world. And then I
Speaker 1: think what the administration would say is, then you have
Speaker 1: to make sure that the rules of trade are fair.
Speaker 1: And I think that's that's why they're going after China
Speaker 1: and the way that they are is to try to
Speaker 1: even the playing field in their minds. How important is
Speaker 1: the FX market as a backstrop tool of this, Well,
Speaker 1: you know, it's interesting the dollar has been weakening for
Speaker 1: the most part over the last year or two, at
Speaker 1: a time when you would expect it to be strengthening.
Speaker 1: If you're looking at the traditional things that I, as
Speaker 1: an economist would look at, you're looking at rates, um,
Speaker 1: you're looking at relative growth. Uh. Those with those things
Speaker 1: would suggest that dollars should have been strengthening. It has
Speaker 1: turned recently, and it'll be interesting to see if that
Speaker 1: proved to be a sustained move. And John, I want
Speaker 1: to interrupt here. We have two tweets from the President
Speaker 1: which implied a third tweet. We now have the third
Speaker 1: tweet four minutes ago, which seems to have an ending
Speaker 1: to it. These tweets are so lengthy, John, I'm not
Speaker 1: going to read them all. It just takes too long
Speaker 1: and too much valuable time from Stephen Stanley the President
Speaker 1: and three lengthy John. Here's the key phrase, carefully written tweets.
Speaker 1: Uh goes over this news to Mr Giuliani last night,
Speaker 1: about Mr Cohen and about Ms Daniels Uh as well.
Speaker 1: So we have three tweets out. I'll read the final sentence, John,
Speaker 1: Money from the campaign or campaign contributions played no role
Speaker 1: in this transaction. But it doesn't read. I will state
Speaker 1: this not as an editorial comment, but just observing the
Speaker 1: Bloomberg terminal, it doesn't read as a Trump tweet. There's
Speaker 1: a typical Trump layout tweet. It looks very formable. I
Speaker 1: think that's to take away from a lot of people
Speaker 1: reading these tweets this morning. But I would also say
Speaker 1: this just really isn't on wall streets radar, and it's
Speaker 1: absolutely But I think my point is we finally have
Speaker 1: the third tweet I think of three tweets. I could
Speaker 1: be wrong. Let's get to something that is on wall streets, right, John,
Speaker 1: the effects market today some significant dollar weakness stunt. It's
Speaker 1: come back through after a couple of weeks a dollar
Speaker 1: strength Stephen. A lot of people thought a Federal Reserved
Speaker 1: decision would be a total non event because there was
Speaker 1: no news conference but the Federal Reserve. But being quite
Speaker 1: clear about a symmetrical inflation target for less, can you
Speaker 1: talk us through what a symmetrical inflation target is as
Speaker 1: opposed to just targeting two sure? Well, I think traditionally
Speaker 1: people have viewed a two percent inflation target as being
Speaker 1: kind of lopsided. Anything above to the tolerance was very low.
Speaker 1: So if it's one and a half, that's okay, But
Speaker 1: if it's two and a half, that's a real problem
Speaker 1: for the FED. And what the FED has based sickly
Speaker 1: telling us is that they view themselves as having some
Speaker 1: room on either side of two percent. So we've been
Speaker 1: running below two percent now for the most part throughout
Speaker 1: this expansion, um, and the FED is wanted to get
Speaker 1: up to two percent. And what they're telling us is that, hey, look,
Speaker 1: if we get to two point one, we're not hitting
Speaker 1: the panic button right away. Um. And I think the
Speaker 1: key there is partly is where you think the trend
Speaker 1: is headed. So if we get to to one or
Speaker 1: to two two, or even to two three, and the
Speaker 1: FED thinks that we're going to level off, there that's
Speaker 1: probably fine. If there were at two and at quarter
Speaker 1: and they think we're headed to two and a half
Speaker 1: or maybe even to three, that becomes a problem. So
Speaker 1: here's the important question I think for for many people
Speaker 1: in the market, and the reason we saw that we
Speaker 1: could done it off the back of a lot of this,
Speaker 1: that the Federal Reserve just endorse in inflation over shoot.
Speaker 1: I think they did. I think they said and in
Speaker 1: a number of individuals have have made that very clear
Speaker 1: that hey, look we've run below two percent for years,
Speaker 1: it's fine if we run above two percent for a while.
Speaker 1: Which takes us to Europe where we have the inflation
Speaker 1: print this morning, Tom Case, I mean East is important.
Speaker 1: We have to think about that East. The last year,
Speaker 1: of course, was in a pro easter. This tion more
Speaker 1: inflation in the United Kingdom as well. Right, Yes, so
Speaker 1: it's a thief and we knew where easter was and
Speaker 1: the economists still got it dead wrong. So the inflation
Speaker 1: story in Europe is just not picking up. Stephen. I
Speaker 1: just want to how much of a problem this is
Speaker 1: for President Racky. Well, in many ways Europe has been
Speaker 1: it felt has felt like Europe has been behind the
Speaker 1: US in the cycle by a couple of years. Maybe
Speaker 1: you see it in kind of where they are in
Speaker 1: terms of monetary policy, and you also see that, I
Speaker 1: think in terms of where the economy is in certain
Speaker 1: ways you've seen stronger growth in Europe over the last year,
Speaker 1: but where they're still having trouble getting inflation to move
Speaker 1: up toward US target. And hey, that's exactly where the
Speaker 1: FED was a few years ago. Stevens Stanley Amherst pypon
Speaker 1: Securities Chief Economists. Great to have us with have you
Speaker 1: with us on the program. It is without question the
Speaker 1: publishing event of the season on China. Beyond timely here
Speaker 1: with Secretary re minutions, trip to the daily back and
Speaker 1: forth of what some would say as a mercantile Washington,
Speaker 1: a mercantile Trump dealing with President G, this new, more definitive,
Speaker 1: more entrenched leader of China. There is no one who
Speaker 1: can brief us on this on what she calls the
Speaker 1: Third Revolution. That Elizabeth Economy of the Council on Foreign Relations,
Speaker 1: Elizabeth congratulations on two d and fifty pages of update
Speaker 1: on President G. What was the biggest surprise of President
Speaker 1: G and putting together the Third Revolution? I think that
Speaker 1: the biggest surprise really was just how transformative he's managed
Speaker 1: to be in just five short years. You know, when
Speaker 1: he came in, people this is going to be a
Speaker 1: reform are along the lines of Dungho Ping. We're going
Speaker 1: to see more reform and opening up the low profile
Speaker 1: foreign policy and in fact, piece you know, move the
Speaker 1: country a hundred and eighty degrees in the opposite direction,
Speaker 1: you know, reasserting the Communist Party into the economy, into society,
Speaker 1: much more ambitious foreign policy, much more more repressive and
Speaker 1: authoritarian at home. So he's really the Third Revolution really
Speaker 1: is all about the game changing nature. She didn't tan Uh.
Speaker 1: Secretary Minution no doubt has a copy of your book
Speaker 1: well foot noted and marked on the plane going out
Speaker 1: when he's stopping the fist fights between Lawrence Cudlow and
Speaker 1: Peter Navarro. If that's the case, how would you brief
Speaker 1: the secretary on the relationship of Beijing to the major
Speaker 1: Pacific RIM cities like Shanghai and Hong Kong. What's that
Speaker 1: new dynamic? I think, you know, for Beijing has always
Speaker 1: been the center of political power, and you know Shanghai,
Speaker 1: Hong Kong or the economics centers I think underseaging Ping,
Speaker 1: Beijing has only become stronger U. And we see Beijing,
Speaker 1: you know, making a number of moves, for example, in
Speaker 1: this relationship with Hong Kong to limit the autonomy of
Speaker 1: Hong Kong and an essence saying, you know, we know
Speaker 1: that you're a gateway to China, but we're not going
Speaker 1: to need you, uh in that respect for very much longer.
Speaker 1: And you've got to get yourselves in line politically. I
Speaker 1: think the Shijunking, you know, is not a huge fan
Speaker 1: of the go go economic growth. Uh that done Shoking represented,
Speaker 1: that's embodied in Shanghai. He's got a different view. Well
Speaker 1: what does that different view and what does it mean
Speaker 1: for these Western business locations in the third the Third Revolution? Well,
Speaker 1: I think, you know, again reinserting the party into the state,
Speaker 1: don't enterprises, you know, telling joint ventures. You know, we
Speaker 1: want to have our party representatives on your board reviewing
Speaker 1: your investment decisions. Uh, you know, the entire push for
Speaker 1: the status control of Chinese technology made in China. All
Speaker 1: of these things are still wins for multinationals who had
Speaker 1: hoped for a more open uh you know, market opening.
Speaker 1: You know, less I t theft. They hope to see
Speaker 1: progress on some of these major institutional types of changes
Speaker 1: that are needed, and they're not seeing them if you're
Speaker 1: just joining us, Elizabeth, Economy, the Third Revolution, Jping in
Speaker 1: the New Chinese State mustery fifty pages terrific briefing. Ian
Speaker 1: Bremer raves about it, and far more importantly, I think
Speaker 1: Dr Bremer would agree with me. Orville Shell says simple,
Speaker 1: simply a well researched book, which is shell isk for
Speaker 1: she nailed it, Elizabeth. When you did this, you've got
Speaker 1: to fold in the new military might of China. You've
Speaker 1: got to fold in the fears that Peter Navarro has
Speaker 1: about the economics of China as well. How transparent, how
Speaker 1: knowledgeable is our true intelligence of the Chinese government system?
Speaker 1: Do we actually know what they're doing? I think in
Speaker 1: summers spects we're pretty knowledgeable. We have a pretty good
Speaker 1: sense for you know, how China's developing its military. It's
Speaker 1: new technologies, it's new modes of operation. The really significant
Speaker 1: advances that they've made under Shi Jinping. He's a big
Speaker 1: supporter of the Chinese military, and you know said when
Speaker 1: he first came to power, you know, I'm going to
Speaker 1: develop a people's liberation army that's capable of fighting and
Speaker 1: winning wars. Uh. So, you know they've they've been a
Speaker 1: real beneficiary under sheet. You know, I think where we're
Speaker 1: less good certainly is understanding the internal dynamics at the
Speaker 1: very top level. How do you know the seven members
Speaker 1: and the committity berro get along. You know, what are
Speaker 1: the real differences of opinion around Chi jin Ping? He's
Speaker 1: just amassed so much power that it's really tough to tell,
Speaker 1: you know, where there might be some dissenting views. Does
Speaker 1: that make this economic soire that we're in right now
Speaker 1: nothing more than a show? He won't be there right well,
Speaker 1: I think it doesn't, you know, mean that it's just
Speaker 1: going to be a show. The Chinese has said, you know,
Speaker 1: we're not going to negotiate, you know, under these threats.
Speaker 1: They pitched their position when their top economic guy, Leo
Speaker 1: Hook came to the United States back at the end
Speaker 1: of February UM and they've said, you know, we're gonna
Speaker 1: stand tough. You know, this trade war isn't going to
Speaker 1: impact us that much. We're strong and resilient. So that
Speaker 1: their negotiating stance they've learned from Trump, right there playing
Speaker 1: the brinksmanship at this point. But I think, look, they've
Speaker 1: got their own domestic economic problems. You know, she didn't
Speaker 1: things trying to de leverage. They want to know, address poverty,
Speaker 1: they want to address the environment. They've got a lot
Speaker 1: of things on their dockets. They're not they don't have
Speaker 1: a big appetite for a big trade war. But I
Speaker 1: definitely think there's room. But really quietly, folks, only thirty
Speaker 1: seventy pages into the Third Revolution, Elizabeth, you have that
Speaker 1: single sentence that's timeless. Their number one driving force is
Speaker 1: to keep people employed and to keep rising incomes, and
Speaker 1: that regard it's no different than the first the Second Revolution,
Speaker 1: is it, Well, there's no different than the Second Revolution.
Speaker 1: The first Revolution wasn't all that exact concerned about right.
Speaker 1: He was more concerned about political correctness. But definitely, uh,
Speaker 1: dun Shoping, that was his major objective. I think Hijenping
Speaker 1: just has a different vision of how to get there
Speaker 1: than Dune Shopping. Did you know? Dun Shopping wanted to
Speaker 1: unleash the capitalist and entrepreneurial spirit of the Chinese people.
Speaker 1: I have corruption flourished. It was bad, but it's not
Speaker 1: the end of the world inequality grew. Okay, hi Jinping
Speaker 1: has a different idea. No corruption, you know, address inequality
Speaker 1: and if it cost the Chinese economy a little bit, okay,
Speaker 1: address right now. Are listeners who say, look, the human
Speaker 1: rights is appalling. We don't really know the protests. Uh,
Speaker 1: this is a country that really we don't have anything
Speaker 1: in common with in terms of culture and values, and
Speaker 1: we should take a rigid stance. What do you say
Speaker 1: to those people? I think, um, You know, pushing back
Speaker 1: against China when it comes to human rights is essential
Speaker 1: because it's not just about what China is doing on
Speaker 1: the home front and places like Shinjong into bed and
Speaker 1: even more broadly with their new surveillance systems and the
Speaker 1: penetration of the Communist Party into every detail of the
Speaker 1: people's lives. But it's that they're trying to export an
Speaker 1: element of this autocracy abroad, their training officials in Africa
Speaker 1: and Latin America and Southeast Asia on how to manage populations,
Speaker 1: on how to do propaganda, and they're trying to rewrite
Speaker 1: the rules of the game globally. You know, it's one
Speaker 1: of the things that to look at the book is
Speaker 1: you know, changing the way that the human rights regime
Speaker 1: operated in the United Nations. Okay, but critically this is
Speaker 1: really really important. Then how do we respond to this
Speaker 1: If we have an administration that says essentially we're bilateral
Speaker 1: or maybe even unilateral, that we've got a State Department,
Speaker 1: at least with Mr Tillerson that was removed, how do
Speaker 1: we affect our policy? How do we pivot or show
Speaker 1: our flag if the Chinese are more asserted of with
Speaker 1: their culture. Absolutely, and I think it's a big challenge
Speaker 1: for us right now. We have to rely on people
Speaker 1: like Frankly, you know, Nikki Halley in the United Nations.
Speaker 1: She really does wave the flag, you know, very vigorously
Speaker 1: on issues of human rights when it comes to China. Uh,
Speaker 1: you know, we have to hold uh, you know, work
Speaker 1: with our allies who also care a lot about these issues.
Speaker 1: And the Europeans have stepped up significantly on issues of
Speaker 1: human rights as well. So I think there are others
Speaker 1: out there in the international community who seemed to be
Speaker 1: stepping into the breach. Of course, nobody can speak with
Speaker 1: as loud and as important to voices the United States.
Speaker 1: So um, you know, it would be great if President
Speaker 1: Trump would begin to understand the value of human rights, uh,
Speaker 1: and what that means in terms of promoting America's vision
Speaker 1: and strengths. Congratulations Elizabeth Economy, the Third Revolutions, she's in
Speaker 1: Ping and the New Chinese State without question, the New musty. Uh.
Speaker 1: Very it's very terse, folks. It's a very direct book
Speaker 1: of great benefit about really focused on Mr g and
Speaker 1: and with a lot of perspective that I haven't seen before.
Speaker 1: Elizabeth Economy, After the River Runs Black, after wonderful books
Speaker 1: on energy, the Third Revolution, j Ping and the New
Speaker 1: Chinese State. I'll feature that out on Twitter, uh today. Well,
Speaker 1: the Federal Reserve kept its benchmark interest rate unchanged yesterday,
Speaker 1: but acknowledged that inflation is beginning to creep higher. Well
Speaker 1: with that, in that increase mean increases in interest rates
Speaker 1: and when would they come? Well here to help us
Speaker 1: answer this question is that Kate Warren, the Edward Jones
Speaker 1: Investments Chief market strategist. She joins us here in our
Speaker 1: eleven three oh studios. Kate, thanks very much for being here.
Speaker 1: What did you take away from yesterday's Federal Reserve sort
Speaker 1: of report? I think the main takeaway is that they're
Speaker 1: not very concerned with the uptick in inflation that we've
Speaker 1: seen that they sort of emphasized that they wanted to
Speaker 1: see a balance around their two percent targets, so they
Speaker 1: didn't highlight that increasing inflation might be more interest rate increases.
Speaker 1: They didn't give any kind of signal about how many
Speaker 1: they'll do in the future. And uh, I think it
Speaker 1: was actually a relatively reassuring and if anything, uh, slightly
Speaker 1: less hawkish uh set of a you know, announcement than
Speaker 1: I would have expected. But we're still going to twenty
Speaker 1: five basis points in June. Yes, I think that was
Speaker 1: quite clear. I think they telegraphed that quite clearly before
Speaker 1: this as well as in the statement. You are hardwired
Speaker 1: to a retail audience that has a monthly statement that
Speaker 1: comes in and they see bond prices down and yields up.
Speaker 1: How many months in a row of that grind do
Speaker 1: we need until all of a sudden it's a bond
Speaker 1: bear market for bond America. Well, I think that, uh,
Speaker 1: it doesn't take very many months because most most investors
Speaker 1: are pretty sensitive to down prices on their statement. And
Speaker 1: what's so good with your work at Ellase where you
Speaker 1: know the history is three months in a row of
Speaker 1: bond prices down on statements is different. It's seven percent
Speaker 1: nominal than it is three nominal. Yes, I think the
Speaker 1: other thing is there's a flip side to it, which
Speaker 1: is many investors have been waiting for higher interest rates,
Speaker 1: and they're actually a little bit pleased to see the
Speaker 1: fact that on a two year treasury you're now getting
Speaker 1: two and a half percent, and that actually looks pretty
Speaker 1: good compared to other things out there in the marketplace.
Speaker 1: There's another side to this, Okay, So then when they
Speaker 1: see all the advertisements for certificate is a deposit offering
Speaker 1: two percent for whatever many years? Uh, do they give
Speaker 1: you a call and say, tell us what products you
Speaker 1: have that can get us this kind of interest rate? Well,
Speaker 1: we do offer CD. So we are I mean you're
Speaker 1: getting those calls. Yeah, we're getting those calls. People are saying, hey,
Speaker 1: this looks attractive, especially compared to the fact that many
Speaker 1: rates at the bank are still near zero. What's a
Speaker 1: five year CD not roughly. I don't have any, but
Speaker 1: the answers hired than it was. You could see that
Speaker 1: my hands on radio tenC. Weans that's what we're doing.
Speaker 1: What you are you can pull out the paper and
Speaker 1: look at the yield. I'm going to show you the ads.
Speaker 1: They are full page ads in newspaper, in the in
Speaker 1: the journal, and a lot of talking about how much
Speaker 1: that you can get and it says, you know, two
Speaker 1: point x percent and that's a lot of money. Well,
Speaker 1: when you think about it, with inflation still at two percent,
Speaker 1: at least you're getting a positive yield. And let's meld
Speaker 1: your economics in now with this, this real world yield
Speaker 1: dynamic for the public, and that is, okay, rates higher,
Speaker 1: but every single person listening is going to go, I
Speaker 1: get it. But inflation is going up to So where's
Speaker 1: the real yield go? What is the Edward D. Jones
Speaker 1: bat on a larger inflation adjusted yield? Is it going
Speaker 1: to happen? We think inflation actually stays pretty contained because
Speaker 1: of all the extraordinarily high competition in marketplaces. Companies keep
Speaker 1: saying they're not able to raise prices, uh and in
Speaker 1: many cases their input costs are going up. We're seeing
Speaker 1: disruptive competition in markets. Think Amazon. But high real full
Speaker 1: faith and credit yield, high real corporate yield, quality corporate bond,
Speaker 1: You're gonna see a real yield. Yes, we think that
Speaker 1: it's not high is not exactly the term idea better
Speaker 1: And and so I'm saying, I think there's lots of dynamics,
Speaker 1: including global growth and the fact we're seeing more products
Speaker 1: services from more places that keep prices moving up very slowly.
Speaker 1: And therefore you do get we don't see a dramatic
Speaker 1: increase in long term rates or short term rates even
Speaker 1: as the FED raisers rates. And that's why, yes, you
Speaker 1: get a better real yild. You're saying, say shorter on
Speaker 1: the on the yield curve on the duration in order
Speaker 1: to not get hit by the rising rates. Do your
Speaker 1: customers have a lot of cash to do all the
Speaker 1: things you're describing? They have some cash. They stayed pretty
Speaker 1: fully invested, so they're not where does all the new
Speaker 1: money come from? What do they have to sell in
Speaker 1: order to execute? Um? I think it's that they still
Speaker 1: have cash, uh, you know, sitting in savings accounts or
Speaker 1: in in cash accounts in other places that they didn't
Speaker 1: really think of investment money and now looks more tractic
Speaker 1: to invest their money. Really, And even with the idea
Speaker 1: that interest rates will continue to increase, you just said
Speaker 1: they're going to increase in June Basis points, why not
Speaker 1: wait and get a higher interest rate? Why do anything,
Speaker 1: let's say between now and the end of the summer. Well,
Speaker 1: I'd say it depends on what you're doing. We'd still
Speaker 1: be saying putting money, put money inequities, stay money in inequities,
Speaker 1: and keep some in the short term fixed income accounts,
Speaker 1: because what you're trying to get is a better return
Speaker 1: than what you've gotten recently. Thank you so much, but
Speaker 1: it's greatly, greatly appreciated. It has been far too long
Speaker 1: since I harass Shannon Cross of Cross Research, who writes brilliant,
Speaker 1: detailed reports on all these technological wonders we talk about
Speaker 1: every day. Her acuity is off the chart. We're thrilled
Speaker 1: the Shannon Cross will join us today on a company
Speaker 1: shifting from growth to valuenus is Dennis Gartman said yesterday,
Speaker 1: maybe it will be a widows and orphan stock someday,
Speaker 1: and that would be Fortress Cook. Shannon, good morning, is Apple?
Speaker 1: Is it a widows and orphan stock now or is
Speaker 1: it going to be one someday? Well, I think what
Speaker 1: what Apple has done? And it's nice to speak with
Speaker 1: you again, By the way, Um, what what Apple has
Speaker 1: done is is basically moved into and trying to move
Speaker 1: into this concept of recurring revenue stability. You know, we've
Speaker 1: talked about it for years about the ecosystem and the
Speaker 1: value that's there. But you know, they really have put
Speaker 1: together a very very solid platform and so you know
Speaker 1: over time, you know, especially with an increasing dividend yield
Speaker 1: which weeks or wealth increasing divid in payment we should say,
Speaker 1: because it depends on what stock price is at. You know,
Speaker 1: it's one of those that I think can be I
Speaker 1: don't know if widows and children sort of makes it
Speaker 1: sound really boring, but you know, I think I would
Speaker 1: go as stable and predictable. Have you've done as some
Speaker 1: of the parts evaluations some of your partners in crime,
Speaker 1: I think as Gene Monster years ago, Piper Jeffrey have
Speaker 1: done as some of the parts analysis of the Apple
Speaker 1: his cross research wandered through that exercise. We haven't because
Speaker 1: we don't when you look at of the parts and
Speaker 1: and honestly, I mean going back twenty years ago when
Speaker 1: I was on you know, Wall Street at a big bank,
Speaker 1: and and we did some of the parts and came
Speaker 1: up with huge valuations that never came to fruition because
Speaker 1: you have to be willing to separate the company. And
Speaker 1: I don't think Apple, you know, once step they're much
Speaker 1: stronger as you know, a whole Uh, Shannon, I want
Speaker 1: to understand a little bit about Apple and it's pricing,
Speaker 1: because there were a lot of comments about the iPhone
Speaker 1: ten and how it was miss priced. Do you believe
Speaker 1: it was miss priced? You know, I think that it
Speaker 1: was priced appropriately for the units that they are selling.
Speaker 1: I think the street, though, kind of got it wrong
Speaker 1: in terms of thinking about you know, there was this
Speaker 1: huge addressable market at over a thousand dollars. I think
Speaker 1: for Apple, they want to have product at all, you know,
Speaker 1: at many different levels along the price line, and so
Speaker 1: you know, they go down below four hundred and they
Speaker 1: obviously go above a thousand now and so you know,
Speaker 1: I think that they were testing a new price point.
Speaker 1: We now know sort of the elasticity of demand is.
Speaker 1: And frankly, the company was very happy because they noted
Speaker 1: that the iPhone ten was the best seller during every
Speaker 1: week during the quarter all the way through March, so
Speaker 1: you know, there's a lot of demand for it. I
Speaker 1: think what it indicated to us is that there was
Speaker 1: a fair amount of demand for the iPhone seven and
Speaker 1: perhaps not as much for the iPhone eight. Shannon, does
Speaker 1: it also indicate that Wall Street analysis of Apple is
Speaker 1: basically flawed. I'm not sure it's float. I think people
Speaker 1: get pretty you know, there there's a hype factor around it. Um.
Speaker 1: You know, our numbers were always, frankly a little bit
Speaker 1: below where where people were at, and they kind of
Speaker 1: came in closer to us UM. But you know, again,
Speaker 1: it's such a stable company, was such cash flow that,
Speaker 1: you know, investors I think see through some of the
Speaker 1: hype that comes out of the cell side on the name.
Speaker 1: I mean, I look Shannon at the company, and part
Speaker 1: of it comes down, as you say, recurring revenue. I
Speaker 1: take real offense when the media particularly goes breathlessly, oh
Speaker 1: dollars or four hundred dollars or whatever a cell phone.
Speaker 1: Nobody I know is doing that. Everybody signs up for
Speaker 1: this monthly plan racket. That's a source of recurring revenue,
Speaker 1: isn't it? It is, um, you know, from from a
Speaker 1: carrier perspective, clearly that's been going on for a long time.
Speaker 1: Apple now has the upgrade program. You know, this concept
Speaker 1: of device is a service is not um you neque
Speaker 1: to Apple alone. I mean it obviously started with smartphones
Speaker 1: and that with the carriers, but all of the companies
Speaker 1: we cover are starting to talk more and more. Where
Speaker 1: there's PCs, if it's data centerspend everything is going to
Speaker 1: irradible Well, they would like it to go to irradible
Speaker 1: kind of pricing because again, it provides predictable, stable revenue.
Speaker 1: Is that true? That was where I knew you were
Speaker 1: going to go there, Shannon. But is there evidence that
Speaker 1: Apple has more persistent cash flows and dividend growth and
Speaker 1: share buy back because we're spending forty five ten cents
Speaker 1: for one of the eight iPhones we're paying for. I
Speaker 1: think absolutely. And I think that the other thing that
Speaker 1: happens is when you go to un monthly see again,
Speaker 1: whether it's Apple or others, people are seeing it much
Speaker 1: easier to upsell the customer because you know, really you're
Speaker 1: paying forty dollars, it's easy, you miss spoke Shannon. You
Speaker 1: mean to upsell the teenager, Yeah, upsell the teenager. Frankly,
Speaker 1: you know it's yes, it's easier for me. They can
Speaker 1: get a better phone. I mean upsell basically, upsell everybody
Speaker 1: that really isn't paying for the whole the whole planet?
Speaker 1: Uh is Shannon? When is Tom King going to wake
Speaker 1: up with Apple earpod earbuds in his ears? Good questions?
Speaker 1: You know, I have to say, net of the I
Speaker 1: for what it's worth, nett of the iPhone. I think
Speaker 1: the air pods are the best product that apples. You're
Speaker 1: sc rip up the scripts here. Tell people. Tell people
Speaker 1: why and why Tom is going to be wearing one
Speaker 1: care in a couple of months. I ski with them,
Speaker 1: I ride my bike was them. I can do conference
Speaker 1: calls with them on a tram and an airport. They're
Speaker 1: they're a really really good product. They're not cheap, and
Speaker 1: you have to make sure you don't lose them. Wait
Speaker 1: if I get your what do you call them? Your poet?
Speaker 1: Your pos? Does that mean I have to work out?
Speaker 1: It means you have to return phone calls? I guess.
Speaker 1: But you music, they're they're great. Um, I mean they
Speaker 1: just work really really well and they work well with
Speaker 1: my phone too. And am I watch and now I
Speaker 1: sound like I'm I'm, you know, selling Apple products, but
Speaker 1: they are really good. But channel But here's the point,
Speaker 1: and you make it very anecdotally, is that they have
Speaker 1: created this system where they've got your ears, your wrist,
Speaker 1: and your eyes and I don't even want to think
Speaker 1: about other parts of your anatomy that they might end up,
Speaker 1: you know, taking over. But Apple has managed to do
Speaker 1: something that I can't imagine any other company at least
Speaker 1: currently being able to do. Yeah, it's it's interesting. You know,
Speaker 1: they really are again very sort of comprehensive in terms
Speaker 1: of how we work with it, you know, and think
Speaker 1: about it like wearables are now the size of a
Speaker 1: Fortune three company, which you know they weren't a few
Speaker 1: years ago. So it's not just me. I mean there's
Speaker 1: a lot of people who are who are buying the
Speaker 1: incremental products that Apple provides. What's your target? Please? Our
Speaker 1: target is two hundred UM And you know, I think
Speaker 1: it's going to be a nice, uh nice year for
Speaker 1: Apple sort of slow and steady upward, especially with the
Speaker 1: Sherry purchase support of Apple. Are one so headed to two?
Speaker 1: Can I want to ask one of one quick question here?
Speaker 1: Apple Watch? Was this a footnote that the Apple Watches
Speaker 1: the best selling watch in the world, Shannon, I don't
Speaker 1: know if it's a footnote, but I think it's it's
Speaker 1: indicative of you know, I think Apple over time wants
Speaker 1: at whether if their's or somebody else, is everybody to
Speaker 1: have a device on their watch on their wrist that
Speaker 1: tracks your health and that helps you communicate. And I
Speaker 1: think the Apple Watch gets you part of the way
Speaker 1: they're obviously they're f d A and other issues that
Speaker 1: they have to get through from more of the hard perspective. Shannon,
Speaker 1: Thank you so much. Shannon Cross Cross, researcher on Apple
Speaker 1: over Jefferies, Mr. Litveck. Previous conviction also reversed on appeal,
Speaker 1: serving a two year prison sentence. Thanks for listening to
Speaker 1: the Bloomberg Surveillance podcast. Subscribe and listen to interviews on
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