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Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along

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Speaker 1: with Jonathan Farrell and Lisa Abramowitz joined us each day

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Speaker 1: for insight from the best and economics, geopolitics, finance and investment.

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Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and

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Speaker 1: anywhere you get your podcasts, and always on Bloomberg dot Com,

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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business app. Joining us.

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Speaker 1: So let's get right to it right now with William Dudley.

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Speaker 1: He is a former New York Fed President, preceding John Williams.

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Speaker 1: He writes for Bloomberg Opinion. We are honored by that,

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Speaker 1: and most importantly, he has led an incredibly consistent and

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Speaker 1: cogent debate of how we need to get used to

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Speaker 1: higher interest rates, We need to get use to a

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Speaker 1: more sustained inflation and do something about it. Bill, what

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Speaker 1: do you make of the cacophony of the last and days?

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Speaker 1: Just as in an open question to a former art official,

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Speaker 1: your your followers speaking, you're in the next hour, what

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Speaker 1: do you make of the last ten days? Well, I

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Speaker 1: would say it's really much ado about nothing, because at

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Speaker 1: the end of the day, how the economy performs is

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Speaker 1: going to determine how much the FEED does, and any

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Speaker 1: disagreement between the market and the Feds we resolved by

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Speaker 1: the economic data. Uh. You know, what we saw on

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Speaker 1: Friday is a good example that we had a very

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Speaker 1: strong employment report, and the market is now repriced to

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Speaker 1: basically mimic what the FET is written down in their

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Speaker 1: December Summary of Economic projections. Market is now pricing in

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Speaker 1: a twenty five basic point rate hike in March, in

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Speaker 1: the twenty five basic point great hike and make that's

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Speaker 1: what FEED officials have been promising. So we're pretty much

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Speaker 1: in alignment. Now, what is the character of our disinflation?

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Speaker 1: The textbooks you studied at Berkeley would be something like,

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Speaker 1: there's a sixties seventies Prevoker inflation, there is a Korean

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Speaker 1: War sharp disinflation, which the Laurea Krugman wrote about just

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Speaker 1: in the recent days, and then there's all discussion about

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Speaker 1: the Biden stimulus, and almost back to Freedman and a

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Speaker 1: monitorist dynamic. What does Dudley disinflation look like? Well, I

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Speaker 1: think part of the problem is that debased and muddeled

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Speaker 1: is because people have either put themselves in the transitory

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Speaker 1: camp or the non transitory camp. And the reality is

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Speaker 1: we have some of both. In the transitory side, we

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Speaker 1: had a lot of goods pressure inflation in the goods

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Speaker 1: marketing sector of the of the economy because of the

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Speaker 1: shifting composition of demand towards goods during the pandemic. That's

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Speaker 1: all I'm winding now. But we still have quite a

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Speaker 1: bit of pressure in services inflation. And that's one thing

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Speaker 1: that policy highlighted. We need to get services inflation x

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Speaker 1: housing down. We're not gonna do that until we have

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Speaker 1: more slack in the labor market, the layer markets basically

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Speaker 1: the tightest layer market in memory, uh, and that that

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Speaker 1: is not consistent with a tu percent inflation outturn. So

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Speaker 1: the Fendries aerve needs to push the unemployer rate of

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Speaker 1: generate more slack of the layer market get wage inflation down.

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Speaker 1: Only once they have done that can they be confident

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Speaker 1: and they're gonna get inflation back down to two percent

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Speaker 1: on a sustainable basis. What's the role of financial conditions

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Speaker 1: on that process of disinflation. Well, the financial conditions are

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Speaker 1: sort of the way that monetary paulic the impulse gets

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Speaker 1: translated to the real economy. Right, So if the FED

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Speaker 1: raises short term interest rates but nothing happens in terms

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Speaker 1: of the bond market the stock market, it's not going

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Speaker 1: to have much of a restraining impact. So it's really

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Speaker 1: important that the rise in short term rates affects bond

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Speaker 1: prices and stock prices. That's how the FED gets grabs

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Speaker 1: the real economy. We see that in the housing sector.

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Speaker 1: It's it's the rise in long term interest rates, the

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Speaker 1: rise and morang rates. That's really cool to off housing.

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Speaker 1: That's how the FED gets gets attraction on monetary policy.

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Speaker 1: You know, I think Paul basically it's not that disturbed

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Speaker 1: by the marginal easy in financial conditions to head or

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Speaker 1: the last few months, because he knows that if the

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Speaker 1: FED keeps going, financial conditions probably won't ease much further

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Speaker 1: and the Fed words are, will actually be able to

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Speaker 1: get control of things. Well, this isn't really important. Pill.

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Speaker 1: Basically you're saying it doesn't really concern FED Chair J.

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Speaker 1: Powell because he thinks that when they actually enact tighter

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Speaker 1: financial policy, the markets will adapt and adjust. Another word,

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Speaker 1: stocks will fall and you won't get the same kind

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Speaker 1: of rally that you saw in January. That's a different

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Speaker 1: message than the markets taking away, which is that he

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Speaker 1: doesn't care. Can you explain why you have conviction around

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Speaker 1: the view that he just knows that eventually they're going

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Speaker 1: to realize and they're going to see the light. I

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Speaker 1: think part of the issue here is that there's a

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Speaker 1: lot of concerning about the economic album. So you know,

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Speaker 1: Paul isn't really sure how much further he has to go,

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Speaker 1: So he's not really sure if financial conditions are off

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Speaker 1: where they're relative to where he needs them to be.

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Speaker 1: What he does know, though, that is that he controls

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Speaker 1: the policy rate, and so if he needs, if he

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Speaker 1: needs to slowly coming down more, you can just raise

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Speaker 1: policy rates higher, or you can keep them higher higher, longer,

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Speaker 1: and that will tighten financial conditions and do the job.

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Speaker 1: So the fedcing control here, I mean, financial markets can

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Speaker 1: think whatever they want. At the end of the day,

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Speaker 1: the Fed Reserve is going to write the script based

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Speaker 1: on where they take the Federal fundry build. There's a

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Speaker 1: guy out in San Francisco a number of years ago

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Speaker 1: who its stars in his eyes and develop our and

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Speaker 1: then our ard and now we're talking about our start start.

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Speaker 1: You watched the Ascent of John Williams and is great

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Speaker 1: respect within monetary economics. And now he sits in the

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Speaker 1: chair you had in New York explain our start and

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Speaker 1: its importance in this cacophony that we're living in right now.

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Speaker 1: What we're trying to do is figure out what level

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Speaker 1: of short term rates makes monterary policy restrictive. So to

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Speaker 1: do that, you have to have some notion of what's neutral.

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Speaker 1: You know that words, how high should not a federal

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Speaker 1: fundrais be to have a neutral Montrey policy? And that's

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Speaker 1: where our start star comes in. Our star is an

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Speaker 1: estimate of what the neutral interest rate is after adjusting

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Speaker 1: for inflation. And our star came down in the in

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Speaker 1: the last ten or fifteen years. It was running two

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Speaker 1: percent prior to the Great Financial Crisis. Now it's around,

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Speaker 1: you know, probably somewhere in this one percent range. But

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Speaker 1: you have to have a no show where neutral is

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Speaker 1: before we can think about what's tight. Right. Well, if

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Speaker 1: that's the case, do we have a confidence in our

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Speaker 1: meeting demeaning monetary theory? Given the effective technology, the effective demographics,

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Speaker 1: the effect of larger factors that Olivier Blanchard's writing about. Now,

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Speaker 1: do we have a confidence the formulas work well? I

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Speaker 1: think your pointing out the fact that there's a lot

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Speaker 1: of uncertainty exactly what neutral where neutral is uh, And

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Speaker 1: so the Fed Reserve is essentially trying to push Monterrey

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Speaker 1: policy to us, saying that they're confident that they're at

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Speaker 1: in restrictive territory. They probably don't know how restrictive, but

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Speaker 1: they're confidence that are there in restrictive territory. As long

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Speaker 1: as that they're in restrictive territory, that will slow the

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Speaker 1: economy and bring inflation down. Now, if it turns out

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Speaker 1: that our star was much higher and a five percent

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Speaker 1: fed nomenal Federal FUNDRAI wasn't enough to push Monterrey Paul

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Speaker 1: into restrictive territory, the Connie Win Slow and the Federal

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Speaker 1: Reserve and ultimately have to do more. So the uncertainy

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Speaker 1: about our star is translates to uncertainty about how tight

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Speaker 1: does Monterrey policy have to be, how high does the

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Speaker 1: federal fundraiate have to go, and how long does the

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Speaker 1: Federal Reserve have to keep it there. That details perfectly

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Speaker 1: into Friday's labor market report. That really shifted the narrative

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Speaker 1: for at least the bottom. But but but this really

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Speaker 1: raises a question of whether it was material enough to

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Speaker 1: shift your view of how high our star has to be,

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Speaker 1: how high the terminal rate needs to go. Well. I

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Speaker 1: think at this point the FEDS game plan is to

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Speaker 1: go to what they think is restrictive and then keep

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Speaker 1: it there as long as it takes. I think, you know,

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Speaker 1: if they are faced was stronger data, I think it's

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Speaker 1: more likely that they extend the timing of how long

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Speaker 1: monetary policy is restrictive as opposed to keep raising the

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Speaker 1: rate higher and higher. Now, obviously, if the commy stays

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Speaker 1: really strong, then they're gonna revise up their forecast of

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Speaker 1: what interest rate peak is necessary to slowly commy. I

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Speaker 1: don't think we're there yet, but do you think that

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Speaker 1: five five quarters still where they're headed, and then they're

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Speaker 1: going to hang out there for a while. If the

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Speaker 1: econmy stays strong after you get to five to five

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Speaker 1: and a quarter, then you could see them move even further.

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Speaker 1: Remember we used to talk about the improbability of a

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Speaker 1: soft landing, the improbability of getting this to land in

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Speaker 1: some sort of nice way, and now that's the base case.

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Speaker 1: Do you push back or do you think that it

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Speaker 1: looks more and more likely that we could get some

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Speaker 1: sort of immaculate disinflation or a soft landing. I think

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Speaker 1: it's still unlikely. I mean, I think that it's true

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Speaker 1: that we're not going to go into recession anytime soon.

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Speaker 1: The economy just says too much for momentum. If you

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Speaker 1: look at the Lanta Fed now a GDP now forecast,

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Speaker 1: they revised it up by over a percentage point just

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Speaker 1: in the last week, so they're looking for two point

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Speaker 1: one percent growth first quarter. Before it was less than

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Speaker 1: one percent just on the back of last week's data,

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Speaker 1: So I think the commy has quite a bit momentum.

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Speaker 1: I do think the recession is likely in the medium

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Speaker 1: term because the Fed has to push up an employer

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Speaker 1: rate by a meaningful amount to generate that slap in

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Speaker 1: the layer market. And every time the Fans pushed the

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Speaker 1: unemployer rate up by more than half a percentage point,

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Speaker 1: we've always ended up in recession. I just don't see

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Speaker 1: that this time is gonna be any different. Do you

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Speaker 1: think that we, when we look back from historical perspective,

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Speaker 1: can write the book on zero rate policies as having

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Speaker 1: ended without any sort of financial accident that was material. Well,

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Speaker 1: I think all the things that we did during to

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Speaker 1: fix the financial system fund the Great Financial Crisis have

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Speaker 1: helped a lot. I mean, the banking systems in much

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Speaker 1: better shape, much more capital, much more liquidity, stress test mismanagement.

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Speaker 1: So I think the financial system system is stronger now.

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Speaker 1: And that's why the Fender Reserves in some way in

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Speaker 1: control of the process. Once the FED that cheese is objective,

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Speaker 1: they can cut rates. And so if the e commy

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Speaker 1: turns out to be weaker than the FED wants at

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Speaker 1: some point, you know, six months, twelve months down the road,

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Speaker 1: the Federal Reserve can cure that pretty quickly because they're

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Speaker 1: gonna be a you know, they're gonna be five in

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Speaker 1: terms of rates. There canna be plenty of room for

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Speaker 1: the Fed to stimulate the economy. That's why Paul, you know,

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Speaker 1: said that, you know the risk of staying too tight

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Speaker 1: too long is less than the risk of not doing enough,

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Speaker 1: because the FAN has the ability to support the time

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Speaker 1: comes hugely valuable. Dr Dudley, thank you so much. Quem Dudley,

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Speaker 1: the former president of the New York Fed. Next guest home,

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Speaker 1: was looking at three hundred thousand, and that was like

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Speaker 1: the app he was like, and then we go five

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Speaker 1: seven set that Outliers. Andrew Hollenhorst, his chief US economists

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Speaker 1: at City Group. He's really provided intellectual leadership over the

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Speaker 1: last year. We had a wonderful conversation a number of

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Speaker 1: weeks ago here on the terminal rate on where this

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Speaker 1: fed will go. Andrew, John and Lisa want to dive

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Speaker 1: into that. But what I'd like to talk to you

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Speaker 1: about in the days you see, l A, you had

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Speaker 1: the great joy of all the heritage U c l

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Speaker 1: A of Axcel Leonovot, who is one of the bravest

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Speaker 1: economists I've ever read. He was way out front in

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Speaker 1: the sixties and seventies. Some people have said he was

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Speaker 1: the marine coming out of the trenches on inflation for

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Speaker 1: Volker Axel Lanovo would look at the M two right

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Speaker 1: now and he would just simply say, what do we

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Speaker 1: have going on? What do we have with the money

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Speaker 1: supply coming down? You were weaned on this at u

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Speaker 1: c l A. Should we pay attention to Leonovid's M two?

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Speaker 1: Thanks very much, Tom, And you're right. I mean U

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Speaker 1: c l A was a great place to go to school,

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Speaker 1: and I think the message was to always take the

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Speaker 1: theory seriously, but then confront the theory with reality. And

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Speaker 1: I think that's what Axel would ask us to do today. UM.

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Speaker 1: In terms of M two, You're right, it's coming down,

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Speaker 1: but it's coming down after being up very substantially. And

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Speaker 1: I think that's what is difficult in annual analyzing this economy,

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Speaker 1: that we had such big movements during the pandemic period,

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Speaker 1: big increases in savings built up UM, and we're trying

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Speaker 1: to figure out now as those things are moving in

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Speaker 1: the opposite direction. Savings, for instance, are coming down, how

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Speaker 1: much of a tailwind that's going to be for demand

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Speaker 1: and for spending and for price pressure. And going back

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Speaker 1: to that Job's report, it looks like we may have

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Speaker 1: more of a tail wind than we might have thought.

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Speaker 1: What is your disinflation confidence look like we've got this

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Speaker 1: February fourteens at report. Do you have confidence to five

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Speaker 1: to four to three or Kenya? Was John mentioned in

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Speaker 1: your note get somewhere in the vicinity of Chairman Paul's

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Speaker 1: two percent. I think we're still the ways away from

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Speaker 1: two percent. And we have some good news on inflation,

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Speaker 1: which is that goods inflation has cooled, But that's really

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Speaker 1: what we're seeing in these monthly inflation prints and share

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Speaker 1: Powell was trying to emphasize that, and let me just

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Speaker 1: re emphasize that that a big part of what we've

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Speaker 1: seen is used car prices that are coming down. Goods

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Speaker 1: inflation in general that is slowed. So that's good news

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Speaker 1: on the inflation front. But if you look at those

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Speaker 1: non shelter services, you look at services away from housing,

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Speaker 1: those are still inflating at a rate of about four

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Speaker 1: percent annualized. So it does look like maybe some of

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Speaker 1: the biggest, most aggressive inflation on the good side has

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Speaker 1: come off, but we still have the services inflation, and

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Speaker 1: that's what's gonna be sensitive to the labor market. That's

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Speaker 1: what's gonna be sensitive to a number like five thousand

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Speaker 1: plus jobs. So then why er do you think that

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Speaker 1: Chair Powell isn't more aggressive, isn't taken the same kind

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Speaker 1: of wyoming tone with respect to his press conference on Wednesday,

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Speaker 1: With respect to that interview yesterday, I was a little

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Speaker 1: bit surprised, to be honest. I think that David Rubinstein

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Speaker 1: kind of set him up to make some change, make

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Speaker 1: some differences from what he said last week before the

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Speaker 1: job's number versus after the job's number. I think you

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Speaker 1: could tell from the body language and from reading between

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Speaker 1: the lines of it that that there there is a change.

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Speaker 1: Probably it's uncomfortable for a FED official to make too

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Speaker 1: much out of any one monthly number, but it's not

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Speaker 1: just the one monthly number. Lease If you look at

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Speaker 1: the pace of job growth prior to the January reading,

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Speaker 1: we're running at something close to three hundred thousand jobs

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Speaker 1: per months. So I don't think we're going to continue

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Speaker 1: to print five hundred thousand jobs a month, but even

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Speaker 1: three thousand would be enough to keep that unemployment rate

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Speaker 1: moving down. It's already at a fifty year low. I'll

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Speaker 1: go back to those days at u c l A.

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Speaker 1: If you do the base macroeconomics, it's a very very

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Speaker 1: tight labor market. It's hard to think that that wouldn't

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Speaker 1: create wage pressure, but we are seeing wage pressure actually declined,

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Speaker 1: So what do you make of that? So that's been

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Speaker 1: one of the most interesting things in the data that

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Speaker 1: we have, this this really tight labor market, it's actually

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Speaker 1: tightening further. And then you're right across a range of measures,

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Speaker 1: we saw some softening in wages, but remember it kind

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Speaker 1: of goes back to what we were talking about earlier.

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Speaker 1: This is a softening from historically rapid wage increases. We

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Speaker 1: were reopening the economy all at once, every restaurant was

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Speaker 1: trying to hire workers at the same time bring these

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Speaker 1: workers back into the labor force. That of course is

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Speaker 1: going to create a surge of wage pressure. So maybe

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Speaker 1: we've come off of that surge of wage pressure against

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Speaker 1: a bit and we'd come down from you know, call

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Speaker 1: it five percent wage inflation to four percent wage inflation.

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Speaker 1: But with a really tight labor market, I wouldn't expect

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Speaker 1: that to slow further, and if anything, the risk is

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Speaker 1: that it accelerates. And after the March meeting May three

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Speaker 1: June fourteen July, the school starts against Septe number twenty.

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Speaker 1: Which of those meetings is the real crucible for this

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Speaker 1: FED where they've really got to decide if their demand

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Speaker 1: structured Phillips curve driven or not. So I think you

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Speaker 1: have a few signposts along the way. The March meeting

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Speaker 1: is going to be really important because that's where Chaire

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Speaker 1: Powell isn't going to be able to do what he

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Speaker 1: did in the interview yesterday and kind of say, well,

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Speaker 1: let's let the data take US where it does, the

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Speaker 1: f O m C will have to come out and

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Speaker 1: Fed officials broably will have to come out with their

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Speaker 1: projections for the economy, inflation, and importantly for that terminal

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Speaker 1: policy rate. Right now they have a five to five

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Speaker 1: when you looking at that jobs report, maybe if anything,

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Speaker 1: it should be revised up. So we'll see where the

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Speaker 1: core inflation data comes in. We think it will be

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Speaker 1: a little bit stronger. UM. Where does that median dot

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Speaker 1: go at the March meeting will be really important. It

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Speaker 1: looks like a basis point rate hike is quite likely

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Speaker 1: in March. The question is going to become May. In June,

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Speaker 1: they've talked about ongoing rate hikes, probably another hike in May.

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Speaker 1: We think are gonna be hiking again in June. But

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Speaker 1: this is when it might get a little bit more

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Speaker 1: difficult because they're gonna have to actually navigate between a

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Speaker 1: labor market that, if financial conditions tighten further, should be

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Speaker 1: slowing UM an inflation that is still too high. So

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Speaker 1: how are they going to navigate that tension and the

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Speaker 1: reaction function. They haven't really had to do that yet. Andrew,

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Speaker 1: I love reading your notes every time they come out.

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Speaker 1: I'm excited to read them, especially when everybody was convinced

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Speaker 1: that we're going to go back down to two percent

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Speaker 1: inflation by the end of the year and the fiend

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Speaker 1: is going to be cutting rates by fifty basis points.

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Speaker 1: There was frustration in your voice that I sensed of, Hey, guys,

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Speaker 1: the data hasn't changed. It hasn't so often they're still

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Speaker 1: going to have to hike that much more. What has

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Speaker 1: the response been, like two clients, the mood swings among

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Speaker 1: investors that pushed back as this sort of a view

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Speaker 1: in the market has shifted from rapid disinflation to well,

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Speaker 1: maybe not. It's interesting listen because we have this kind

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Speaker 1: of stability that we're talking about from share Powell trying

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Speaker 1: not to try and change too rapidly as the data

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Speaker 1: come in um in any of the market, which of

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Speaker 1: course is going to change very rapidly, to try to

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Speaker 1: figure out where that next data print is coming in.

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Speaker 1: And we had a series of three cooler core inflation prints,

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Speaker 1: we had softer wage data. So I think it makes

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Speaker 1: sense that the market got a little bit more excited

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Speaker 1: about these outcomes where inflation just comes down of its

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Speaker 1: own accord. And I think our job here as economists

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Speaker 1: is to look at all of the data and really

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Speaker 1: figure out what's most likely in terms of an outcome.

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Speaker 1: And despite the slower price inflation, despite the softer wage inflation,

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Speaker 1: looking through to the tight labor market, looking through to

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Speaker 1: services inflation, we just weren't convinced that really anything that's

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Speaker 1: slowed down in terms of an underlying pace. And well,

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Speaker 1: you know, you see how it just takes one data

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Speaker 1: print and all of a sudden the market is well

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Speaker 1: along those same lines. Makes you wonder what happened to Jackson? Hope?

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Speaker 1: Pal doesn't it? What happened to Jackson? Hope? The data

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Speaker 1: caught up with these guys are data is changed changing?

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Speaker 1: Sign Andrew, Thank you? Andrew homean host that of City Joy.

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Speaker 1: She is chief investment Officer Morgan Stanley Wealth Management, Lisa

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Speaker 1: Shellett here knowing that things have changed. There is a

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Speaker 1: yield and that means cash has Vailue. Lisa, we're talking

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Speaker 1: before the show about your outside of perspectus, where you've

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Speaker 1: got maybe ten percent cash whatever that movable feast is

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Speaker 1: to portfolio to portfolio. But the Morgan Stanley audience wants

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Speaker 1: to hold more cash than that. Why well, look I

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Speaker 1: think that there's a huge amount of uncertainty out there.

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Speaker 1: I think you know that we've been cautioning against the

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Speaker 1: fact that we think that this is yet another bear

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Speaker 1: market rally. Uh, that if we were going to really

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Speaker 1: materialize the soft landing, we would not be seeing negative

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Speaker 1: earnings and year over year compares and not negative earnings

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Speaker 1: guidance and negative earnings revisions. Uh. So you know, I'm

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Speaker 1: hardened that maybe our clients are are taking our cautionary

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Speaker 1: view to heart. Uh, they're also embracing for the first

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Speaker 1: time and you know literally uh you know, six seven

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Speaker 1: eight years a livable uh fixed income yield meaning net

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Speaker 1: of the expected inflation by the end of the year,

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Speaker 1: which may be sub four percent, gives them a positive

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Speaker 1: really yield um and they don't need to take any

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Speaker 1: duration risks. So you know, we've got folks piling into

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Speaker 1: things like certificates of deposit, like money market funds, which

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Speaker 1: you know, I know in many eras were not considered

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Speaker 1: sexy products but are satisfactory for a lot of investors

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Speaker 1: right now, Lisa, do you think that's wise to take

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Speaker 1: on a product that maybe you have to think about

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Speaker 1: where to deploy capital in a year or two where

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Speaker 1: yields just done at this level. Lisa, how do you

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Speaker 1: how do you advocate for taking maybe a little bit

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Speaker 1: more risk, maybe taking on a little bit more duration,

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Speaker 1: but looking in these interest rates for a whole lot longer. Yeah.

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Speaker 1: So look, I mean I think that there's an argument there. Uh.

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Speaker 1: The problem is right now we've got an inverted yield curve,

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Speaker 1: and so you're not really getting paid any extra yield

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Speaker 1: for taking on some of that duration risk. Uh. And

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Speaker 1: so what we've said to folks is, look, let's be

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Speaker 1: patient this year. Ultimately, if we get this this mythical

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Speaker 1: soft landing that everyone seems to be betting on, Uh,

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Speaker 1: then that yield curve is going to invert. I mean,

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Speaker 1: it's going to re steep, and I should say I'm sorry, Uh,

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Speaker 1: And that means you're longer. The longer unto the curve

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Speaker 1: is going to give you some higher yields. And so

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Speaker 1: let's stay ultrashort duration right now. Let's see how the

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Speaker 1: year plays out and see if there's opportunities to kind

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Speaker 1: of roll up and lock in for longer um some

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Speaker 1: of those higher yields. One of the biggest inconsistencies right

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Speaker 1: now in markets And I ask this because a lot

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Speaker 1: of people have been saying that bond markets are hearing

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Speaker 1: what FED shared. J. Powell is saying the actual words,

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Speaker 1: whereas stock markets are just hearing that he said disinflation

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Speaker 1: a couple of times. Yeah, I couldn't agree more. You know,

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Speaker 1: to us, the US equity market is fighting the FED

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Speaker 1: big time. Um, there are some major disconnects and how

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Speaker 1: the equity market is positioning itself. We we saw, you know,

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Speaker 1: a huge short covering rally. We we saw uh, you know,

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Speaker 1: a low quality dimension to the rally, and now most recently,

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Speaker 1: we've seen cyclicals out performing more defensive stocks. What's precarious

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Speaker 1: about that, uh, is that we have almost all the

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Speaker 1: cyclical linked indicators, meaning recession linked indicators, like the Index

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Speaker 1: of Leading Economic Indicators, which is really plummeted. Uh. And

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Speaker 1: yet uh, it's disconnected from this cyclical out performance. So

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Speaker 1: you know, I've heard the theories that people say, yes,

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Speaker 1: we understand what what should have been, but we're gonna

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Speaker 1: look through it. Um. I don't know how far their

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Speaker 1: crystal ball goes to look through it. But history is

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Speaker 1: not kind to these kind of you know, massive disconnects.

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Speaker 1: At least I just wanted to finish on something that's

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Speaker 1: getting a ton of attention at the moment. So bear

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Speaker 1: with me as I work through the issue. There are

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Speaker 1: these things called zero day to expiry options at the

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Speaker 1: index level. It's getting a ton of attention. Join a

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Speaker 1: manual of bt I G or rather of evercorn now

430
00:22:25,359 --> 00:22:26,720
Speaker 1: wrote about it. I've got to get used to that

431
00:22:26,760 --> 00:22:29,640
Speaker 1: list of ever court. He said this this morning. He said,

432
00:22:29,680 --> 00:22:32,080
Speaker 1: you had a one point five to two percent bullbear

433
00:22:32,119 --> 00:22:36,479
Speaker 1: bull sequence yesterday. Why because zero DTE options trading has

434
00:22:36,520 --> 00:22:39,600
Speaker 1: become an important marginal price setter. He said, this least

435
00:22:39,600 --> 00:22:42,680
Speaker 1: around lovely response to it. Look at options volumes yesterday

436
00:22:42,880 --> 00:22:46,359
Speaker 1: dominated by zero and one day to expiy spy options

437
00:22:46,760 --> 00:22:49,720
Speaker 1: and higher rates. Of course, this unintended consequence as people

438
00:22:49,760 --> 00:22:52,960
Speaker 1: have moved down of zero percent money market funds, deposited

439
00:22:52,960 --> 00:22:54,960
Speaker 1: a places where they can get four percent interest and

440
00:22:55,000 --> 00:22:58,360
Speaker 1: take ten percent of their capital and trade options virtually

441
00:22:58,359 --> 00:23:02,600
Speaker 1: for free every day. Ad response to that, Lisa, look,

442
00:23:02,640 --> 00:23:05,320
Speaker 1: I do think that we're in a period of time

443
00:23:05,359 --> 00:23:09,040
Speaker 1: where there are some of these speculative excesses going on.

444
00:23:09,680 --> 00:23:12,040
Speaker 1: Uh and you know, you know Tom mentioned that we

445
00:23:12,040 --> 00:23:16,160
Speaker 1: were chatting before going on air and you know right now,

446
00:23:16,320 --> 00:23:20,880
Speaker 1: this issue of excess liquidity and markets of huge piles

447
00:23:20,920 --> 00:23:25,080
Speaker 1: of cash still sitting on the sideline. Uh. It is there.

448
00:23:25,359 --> 00:23:29,000
Speaker 1: And while Chair Powell did not want to address the

449
00:23:29,160 --> 00:23:33,159
Speaker 1: realities of the fact that over the last four months

450
00:23:33,560 --> 00:23:38,240
Speaker 1: financial conditions have massively eased. UM, he has not answered

451
00:23:38,240 --> 00:23:42,520
Speaker 1: the question. The reality is we're seeing these bizarre perturbations

452
00:23:42,560 --> 00:23:46,920
Speaker 1: and markets, this speculative activity, UM, Jonathan, to your point,

453
00:23:46,920 --> 00:23:50,600
Speaker 1: this use of options, and this willingness to take you know,

454
00:23:50,760 --> 00:23:55,640
Speaker 1: the these kind of um, you know, very high turnover strategies. UM.

455
00:23:55,960 --> 00:23:59,879
Speaker 1: And to me that's an indication that um, you know,

456
00:24:00,000 --> 00:24:03,960
Speaker 1: liquidity is at play. Uh, that market stability is gonna

457
00:24:04,040 --> 00:24:07,240
Speaker 1: once again raise its head as an issue that if

458
00:24:07,440 --> 00:24:10,199
Speaker 1: Chair Powell doesn't want to talk about it, potentially some

459
00:24:10,240 --> 00:24:13,360
Speaker 1: of the other governors actually look at the data may

460
00:24:13,440 --> 00:24:16,359
Speaker 1: start bringing up Lisa, that's great. The only reason I

461
00:24:16,400 --> 00:24:21,359
Speaker 1: put up with Pharaoh's he perfectly explained that options insanity

462
00:24:21,440 --> 00:24:25,440
Speaker 1: we're seeing within one day, John, you perfectly explained that.

463
00:24:25,960 --> 00:24:29,480
Speaker 1: And it's so hearkens back to a time Lisa and

464
00:24:29,520 --> 00:24:32,639
Speaker 1: I remember where there was actually a vailue to cash.

465
00:24:33,000 --> 00:24:36,440
Speaker 1: That's really what this is about, is tob talking about

466
00:24:36,440 --> 00:24:39,240
Speaker 1: the gravity is returned, and so is the idiosy that

467
00:24:39,320 --> 00:24:41,760
Speaker 1: you explained a Lisa, thank you. It's great a catchp

468
00:24:42,080 --> 00:24:54,639
Speaker 1: wise at LEASA shout at that of Morgan Stanley. Right now,

469
00:24:54,640 --> 00:24:56,680
Speaker 1: we're gonna rip up the script. We're very good at

470
00:24:56,680 --> 00:24:58,720
Speaker 1: doing this, and we do it with a world class

471
00:24:58,800 --> 00:25:01,760
Speaker 1: expert on the show of Hollywood and the rest, Michael

472
00:25:01,840 --> 00:25:04,439
Speaker 1: Nathanson with us, who wrote a brilliant note on Disney

473
00:25:04,480 --> 00:25:07,560
Speaker 1: a number of days ago, but we've been overcome by

474
00:25:07,560 --> 00:25:11,640
Speaker 1: the news flow. He's with SVB moth At Nathanson this morning. Michael,

475
00:25:11,800 --> 00:25:17,680
Speaker 1: you absolutely nailed the streaming failure that the the the

476
00:25:17,760 --> 00:25:22,360
Speaker 1: experiment would not provide profit. The Wall Street Journal reports

477
00:25:22,359 --> 00:25:26,200
Speaker 1: this morning that Warner Brothers Discovery has just flat out blinked.

478
00:25:26,680 --> 00:25:29,320
Speaker 1: Forget about all the happy talk. You've been to those

479
00:25:29,600 --> 00:25:31,879
Speaker 1: those dogg and ponies where they talk about we're all

480
00:25:31,920 --> 00:25:34,800
Speaker 1: going to merge together, and they said, no, they're gonna

481
00:25:34,880 --> 00:25:38,840
Speaker 1: keep Discoveries separate. Why are they Why are they renigging

482
00:25:39,000 --> 00:25:43,359
Speaker 1: on everything of the last year's plans, Because Tom, there's

483
00:25:43,400 --> 00:25:47,600
Speaker 1: no overlap between HBO content and Discovery content right there is.

484
00:25:48,200 --> 00:25:50,399
Speaker 1: We've done a time to work on this. There literally

485
00:25:50,480 --> 00:25:53,520
Speaker 1: is no overlap, maybe temperance out of the market and junified,

486
00:25:53,800 --> 00:25:57,800
Speaker 1: So putting discovery content on HBO doesn't move the needle, right,

487
00:25:57,920 --> 00:26:01,720
Speaker 1: So they having a niche service and discovery, plus they

488
00:26:01,760 --> 00:26:03,720
Speaker 1: don't want to lose it by merging with HBO, and

489
00:26:03,720 --> 00:26:06,520
Speaker 1: I want to drive any new value at HBO. So

490
00:26:06,720 --> 00:26:09,439
Speaker 1: that strategy is not going to work. And we always question,

491
00:26:09,560 --> 00:26:13,680
Speaker 1: you know, it's just such a hodgepodge of content that

492
00:26:14,000 --> 00:26:16,040
Speaker 1: it's best to keep it separate. But doesn't It doesn't

493
00:26:16,040 --> 00:26:18,800
Speaker 1: solve any of the problems, which is that linear is

494
00:26:18,840 --> 00:26:21,960
Speaker 1: declining rapidly and there's not a big enough solution to

495
00:26:22,080 --> 00:26:25,800
Speaker 1: upset that decline of linear economics streaming, what is discovering?

496
00:26:25,880 --> 00:26:31,080
Speaker 1: What is the time urgency for a company? Was Debtor

497
00:26:31,160 --> 00:26:34,280
Speaker 1: for that matter, the time urgency for the many streamers

498
00:26:34,359 --> 00:26:37,960
Speaker 1: John knows them better than me that don't have critical scale.

499
00:26:38,520 --> 00:26:43,640
Speaker 1: What's the immediacy here? In two thousand twenty three, Yeah,

500
00:26:43,680 --> 00:26:47,080
Speaker 1: we've labeled this the third act of streaming UM and

501
00:26:47,080 --> 00:26:49,280
Speaker 1: we think the next one or two years. Your conversations

502
00:26:49,320 --> 00:26:52,440
Speaker 1: today about the cost of money will affect this. We

503
00:26:52,600 --> 00:26:54,520
Speaker 1: look at the balance sheets of these companies in a

504
00:26:54,640 --> 00:26:59,880
Speaker 1: cash generation. Shocking actually how little cash they produce, even

505
00:27:00,000 --> 00:27:02,320
Speaker 1: all Disney. So they have to use the next one

506
00:27:02,400 --> 00:27:06,479
Speaker 1: or two years to consolidate, slowdown content, spend, race pricing. Right,

507
00:27:06,560 --> 00:27:10,040
Speaker 1: they need to change the you know, the dimension of

508
00:27:10,080 --> 00:27:12,240
Speaker 1: their business quickly. So I think it's one or two

509
00:27:12,320 --> 00:27:15,000
Speaker 1: years and that's the third act. Right, things will happen

510
00:27:15,080 --> 00:27:17,359
Speaker 1: change and to the benefit. I've never said this before

511
00:27:17,720 --> 00:27:20,959
Speaker 1: to Netflix. Netflix will now right off into the sunset

512
00:27:21,080 --> 00:27:24,320
Speaker 1: victorious because they've come through this and now they generate

513
00:27:24,359 --> 00:27:26,600
Speaker 1: cash in the balance sheet. It's not as bad as

514
00:27:26,640 --> 00:27:29,160
Speaker 1: everyone else's balance sheet. So that's that's pretty good. Let's

515
00:27:29,160 --> 00:27:31,200
Speaker 1: talk about what you expect from Disney after the bell

516
00:27:31,240 --> 00:27:33,800
Speaker 1: today with their report earnings, you talk about consolidation, and

517
00:27:33,840 --> 00:27:36,560
Speaker 1: you see that some of their biggest non forced errors

518
00:27:36,680 --> 00:27:40,320
Speaker 1: included the acquisition of twenty century Fox, bidding on cricket

519
00:27:40,600 --> 00:27:43,640
Speaker 1: in India and other sports that were non primary for ESPN.

520
00:27:43,680 --> 00:27:45,880
Speaker 1: I'm sure that would be a controversial call on your part.

521
00:27:46,200 --> 00:27:50,639
Speaker 1: What kinds of consolidation or closures or layoffs are you

522
00:27:50,680 --> 00:27:54,960
Speaker 1: expecting from Bob Biker's Disney. Well, Lisa, I'm not thinking

523
00:27:55,040 --> 00:27:57,520
Speaker 1: any numbers today, you know, like I think they're still

524
00:27:57,520 --> 00:27:59,800
Speaker 1: gonna work through a plan to give us cost savings.

525
00:28:00,119 --> 00:28:02,919
Speaker 1: But the real question is they changed their vision of

526
00:28:03,000 --> 00:28:05,520
Speaker 1: Disney plus. If you go back to the first investor day,

527
00:28:05,560 --> 00:28:09,320
Speaker 1: they had a smaller vision llion subs, and then during

528
00:28:09,359 --> 00:28:12,600
Speaker 1: the middle of the pandemic, about a year later in

529
00:28:12,640 --> 00:28:15,800
Speaker 1: December twenty, they gave you a much grander vision of

530
00:28:15,800 --> 00:28:19,320
Speaker 1: over subs. That's got to be ramped back, right, So

531
00:28:19,359 --> 00:28:22,879
Speaker 1: I'm expecting a more sober outlook on the addressable market

532
00:28:22,920 --> 00:28:26,760
Speaker 1: here as part of that revisit of what the opportunity is.

533
00:28:26,920 --> 00:28:29,560
Speaker 1: I'm expecting a reduction of the long term spending they

534
00:28:29,560 --> 00:28:32,080
Speaker 1: need to do to get there. Right. So it's to

535
00:28:32,200 --> 00:28:35,400
Speaker 1: me an honest discussion which wasn't being had the past

536
00:28:35,440 --> 00:28:37,919
Speaker 1: twelve months, about how much you need to spend in

537
00:28:38,040 --> 00:28:40,640
Speaker 1: streaming and isn't the business big enough at this point

538
00:28:40,680 --> 00:28:44,360
Speaker 1: in time to start trying to drive better profitability? Right,

539
00:28:44,360 --> 00:28:47,320
Speaker 1: So I'm looking for a toad shift on investment spending

540
00:28:47,320 --> 00:28:49,840
Speaker 1: when it comes to streaming, not actual numbers yet least

541
00:28:50,080 --> 00:28:52,280
Speaker 1: so just to build on that. For years we were

542
00:28:52,280 --> 00:28:54,640
Speaker 1: talking about content is king. You're willing to borrow whatever

543
00:28:54,720 --> 00:28:56,560
Speaker 1: kind of money you need to invest in whatever kind

544
00:28:56,560 --> 00:28:59,000
Speaker 1: of production you need to. And now we're seeing, you know,

545
00:28:59,040 --> 00:29:03,640
Speaker 1: one production of a major franchise after another, whether it's Bond,

546
00:29:03,720 --> 00:29:06,280
Speaker 1: whether it's whatever you want to do, and that's really

547
00:29:06,320 --> 00:29:09,719
Speaker 1: the main output. What is the new mantra after content

548
00:29:09,840 --> 00:29:13,560
Speaker 1: is king? Well, it's platform is king, so you send

549
00:29:13,560 --> 00:29:15,280
Speaker 1: me up. Well for that, right, you have to have

550
00:29:15,320 --> 00:29:18,280
Speaker 1: a scale platform, inscrution platform. You need to get the

551
00:29:18,320 --> 00:29:21,280
Speaker 1: chrotical mass of enough people with a minimum out of churn,

552
00:29:21,880 --> 00:29:23,840
Speaker 1: and then I'm not sure our content is king anymore.

553
00:29:24,240 --> 00:29:27,960
Speaker 1: There's a lot of average content that's sticky just because

554
00:29:28,000 --> 00:29:31,520
Speaker 1: you have this um you know, scaled base where people

555
00:29:31,520 --> 00:29:33,360
Speaker 1: come in every day to take a look at something. Right,

556
00:29:33,400 --> 00:29:35,959
Speaker 1: So you need to scale. At this point there are

557
00:29:35,960 --> 00:29:38,760
Speaker 1: three or full scale company and white content is longer king.

558
00:29:39,120 --> 00:29:42,080
Speaker 1: There's there's too much content, so there's too many platforms

559
00:29:42,480 --> 00:29:44,520
Speaker 1: and at some point you need to ratchet that back.

560
00:29:44,720 --> 00:29:47,080
Speaker 1: Maybe content be king in the future. Right now it's

561
00:29:47,200 --> 00:29:50,400
Speaker 1: it's platform scale. I get some desperation out there, Michael,

562
00:29:50,440 --> 00:29:54,200
Speaker 1: which frankly, you've you've spearheaded research on where Disney has

563
00:29:54,240 --> 00:29:56,680
Speaker 1: taken the first episode of Mandalorian. They're gonna put it

564
00:29:56,680 --> 00:29:59,520
Speaker 1: out on cable or whatever they're gonna do. But the

565
00:29:59,520 --> 00:30:03,640
Speaker 1: bottom line, do your enthusiasm about Netflix is editorial is

566
00:30:03,680 --> 00:30:07,640
Speaker 1: Mandalorian is not Wednesday. That's the heart of the matter.

567
00:30:07,800 --> 00:30:12,160
Speaker 1: It's still about making hits that John Farrell will watch

568
00:30:12,200 --> 00:30:15,960
Speaker 1: at night, right right, But Tommy, you also need to

569
00:30:16,000 --> 00:30:18,160
Speaker 1: scale it right, and you basically need We've been saying

570
00:30:18,160 --> 00:30:23,200
Speaker 1: this for years. Netflix has this constant, you know, shooting

571
00:30:23,760 --> 00:30:26,760
Speaker 1: model where the basic putting shot tungle every day. The

572
00:30:26,800 --> 00:30:28,720
Speaker 1: media industries don't have the model like that. They pick

573
00:30:28,800 --> 00:30:31,760
Speaker 1: their franchises, they build them, they let them out slowly.

574
00:30:32,240 --> 00:30:34,680
Speaker 1: Netflix has a model it's really hard to replicate. I

575
00:30:34,680 --> 00:30:36,320
Speaker 1: don't think it's a great model, as you know. I've

576
00:30:36,360 --> 00:30:39,200
Speaker 1: said that for years. But these companies can't get there

577
00:30:39,200 --> 00:30:42,280
Speaker 1: because their balance sheets are true restrictive. They can't. They

578
00:30:42,280 --> 00:30:44,880
Speaker 1: can't produce seventeen billion dollars a year of streaming content

579
00:30:45,160 --> 00:30:48,520
Speaker 1: with a continual you know, release schedule every day of

580
00:30:48,520 --> 00:30:50,640
Speaker 1: a new binge titles. It's not a model that they

581
00:30:50,640 --> 00:30:53,080
Speaker 1: can get to. Michael, how do we get revenue for

582
00:30:53,120 --> 00:30:56,240
Speaker 1: some of these streaming industries. Is it through just pay

583
00:30:56,320 --> 00:30:58,960
Speaker 1: for a subscription or is this going to start to

584
00:30:58,960 --> 00:31:03,280
Speaker 1: be more of an adver tiesment driven model. Yeah, it's

585
00:31:03,320 --> 00:31:06,080
Speaker 1: going to be a bit of return to what they had.

586
00:31:06,160 --> 00:31:09,120
Speaker 1: You'll see people using windows, so people go back to

587
00:31:09,160 --> 00:31:13,520
Speaker 1: putting movies in theaters. Shockingly enough, Doctor raised prices, which

588
00:31:13,720 --> 00:31:17,280
Speaker 1: just happened last month with Disney and Netflix or Disney

589
00:31:17,320 --> 00:31:19,760
Speaker 1: race prices. You have an ad here, but I think

590
00:31:19,760 --> 00:31:22,600
Speaker 1: you're going to see, um, everyone started driving higher and

591
00:31:22,640 --> 00:31:26,240
Speaker 1: higher revenues through pricing and advertising and then also using

592
00:31:26,840 --> 00:31:29,720
Speaker 1: windowing to try to offload the cost of the content

593
00:31:30,120 --> 00:31:32,760
Speaker 1: and older window right. So this experiment to put everything

594
00:31:32,800 --> 00:31:35,080
Speaker 1: at once and streaming the way the Warners did it

595
00:31:35,160 --> 00:31:37,680
Speaker 1: and Disney has done it has to be reversed. And

596
00:31:37,680 --> 00:31:41,080
Speaker 1: that's what you got here. Yeah, Michael, can we get

597
00:31:41,120 --> 00:31:51,320
Speaker 1: you in the studio? Signed? Yeah with model totally great.

598
00:31:51,560 --> 00:31:54,320
Speaker 1: I would love to hear good for one in your

599
00:31:54,360 --> 00:31:58,320
Speaker 1: seeing that happened, Michael. Thank you, Michael, Thank you, Michael.

600
00:31:58,360 --> 00:32:03,880
Speaker 1: Nice gotten the Spy Run. Subscribe to the Bloomberg Surveillance

601
00:32:03,880 --> 00:32:08,280
Speaker 1: podcast on Apple, Spotify and anywhere else you get your podcasts.

602
00:32:08,680 --> 00:32:12,760
Speaker 1: Listen live every weekday starting at seven am Easter. I'm

603
00:32:12,800 --> 00:32:16,320
Speaker 1: Bloomberg dot Com, the I Heart Radio app tune in,

604
00:32:16,600 --> 00:32:20,000
Speaker 1: and the Bloomberg Business app. You can watch us live.

605
00:32:20,200 --> 00:32:24,520
Speaker 1: I'm Bloomberg Television and always on the Bloomberg Terminal. Thanks

606
00:32:24,520 --> 00:32:28,440
Speaker 1: for listening. I'm Tom Keane, and this is Bloomberg