Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Farrell and Lisa Abramowitz joined us each day
Speaker 1: for insight from the best and economics, geopolitics, finance and investment.
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Speaker 1: So let's get right to it right now with William Dudley.
Speaker 1: He is a former New York Fed President, preceding John Williams.
Speaker 1: He writes for Bloomberg Opinion. We are honored by that,
Speaker 1: and most importantly, he has led an incredibly consistent and
Speaker 1: cogent debate of how we need to get used to
Speaker 1: higher interest rates, We need to get use to a
Speaker 1: more sustained inflation and do something about it. Bill, what
Speaker 1: do you make of the cacophony of the last and days?
Speaker 1: Just as in an open question to a former art official,
Speaker 1: your your followers speaking, you're in the next hour, what
Speaker 1: do you make of the last ten days? Well, I
Speaker 1: would say it's really much ado about nothing, because at
Speaker 1: the end of the day, how the economy performs is
Speaker 1: going to determine how much the FEED does, and any
Speaker 1: disagreement between the market and the Feds we resolved by
Speaker 1: the economic data. Uh. You know, what we saw on
Speaker 1: Friday is a good example that we had a very
Speaker 1: strong employment report, and the market is now repriced to
Speaker 1: basically mimic what the FET is written down in their
Speaker 1: December Summary of Economic projections. Market is now pricing in
Speaker 1: a twenty five basic point rate hike in March, in
Speaker 1: the twenty five basic point great hike and make that's
Speaker 1: what FEED officials have been promising. So we're pretty much
Speaker 1: in alignment. Now, what is the character of our disinflation?
Speaker 1: The textbooks you studied at Berkeley would be something like,
Speaker 1: there's a sixties seventies Prevoker inflation, there is a Korean
Speaker 1: War sharp disinflation, which the Laurea Krugman wrote about just
Speaker 1: in the recent days, and then there's all discussion about
Speaker 1: the Biden stimulus, and almost back to Freedman and a
Speaker 1: monitorist dynamic. What does Dudley disinflation look like? Well, I
Speaker 1: think part of the problem is that debased and muddeled
Speaker 1: is because people have either put themselves in the transitory
Speaker 1: camp or the non transitory camp. And the reality is
Speaker 1: we have some of both. In the transitory side, we
Speaker 1: had a lot of goods pressure inflation in the goods
Speaker 1: marketing sector of the of the economy because of the
Speaker 1: shifting composition of demand towards goods during the pandemic. That's
Speaker 1: all I'm winding now. But we still have quite a
Speaker 1: bit of pressure in services inflation. And that's one thing
Speaker 1: that policy highlighted. We need to get services inflation x
Speaker 1: housing down. We're not gonna do that until we have
Speaker 1: more slack in the labor market, the layer markets basically
Speaker 1: the tightest layer market in memory, uh, and that that
Speaker 1: is not consistent with a tu percent inflation outturn. So
Speaker 1: the Fendries aerve needs to push the unemployer rate of
Speaker 1: generate more slack of the layer market get wage inflation down.
Speaker 1: Only once they have done that can they be confident
Speaker 1: and they're gonna get inflation back down to two percent
Speaker 1: on a sustainable basis. What's the role of financial conditions
Speaker 1: on that process of disinflation. Well, the financial conditions are
Speaker 1: sort of the way that monetary paulic the impulse gets
Speaker 1: translated to the real economy. Right, So if the FED
Speaker 1: raises short term interest rates but nothing happens in terms
Speaker 1: of the bond market the stock market, it's not going
Speaker 1: to have much of a restraining impact. So it's really
Speaker 1: important that the rise in short term rates affects bond
Speaker 1: prices and stock prices. That's how the FED gets grabs
Speaker 1: the real economy. We see that in the housing sector.
Speaker 1: It's it's the rise in long term interest rates, the
Speaker 1: rise and morang rates. That's really cool to off housing.
Speaker 1: That's how the FED gets gets attraction on monetary policy.
Speaker 1: You know, I think Paul basically it's not that disturbed
Speaker 1: by the marginal easy in financial conditions to head or
Speaker 1: the last few months, because he knows that if the
Speaker 1: FED keeps going, financial conditions probably won't ease much further
Speaker 1: and the Fed words are, will actually be able to
Speaker 1: get control of things. Well, this isn't really important. Pill.
Speaker 1: Basically you're saying it doesn't really concern FED Chair J.
Speaker 1: Powell because he thinks that when they actually enact tighter
Speaker 1: financial policy, the markets will adapt and adjust. Another word,
Speaker 1: stocks will fall and you won't get the same kind
Speaker 1: of rally that you saw in January. That's a different
Speaker 1: message than the markets taking away, which is that he
Speaker 1: doesn't care. Can you explain why you have conviction around
Speaker 1: the view that he just knows that eventually they're going
Speaker 1: to realize and they're going to see the light. I
Speaker 1: think part of the issue here is that there's a
Speaker 1: lot of concerning about the economic album. So you know,
Speaker 1: Paul isn't really sure how much further he has to go,
Speaker 1: So he's not really sure if financial conditions are off
Speaker 1: where they're relative to where he needs them to be.
Speaker 1: What he does know, though, that is that he controls
Speaker 1: the policy rate, and so if he needs, if he
Speaker 1: needs to slowly coming down more, you can just raise
Speaker 1: policy rates higher, or you can keep them higher higher, longer,
Speaker 1: and that will tighten financial conditions and do the job.
Speaker 1: So the fedcing control here, I mean, financial markets can
Speaker 1: think whatever they want. At the end of the day,
Speaker 1: the Fed Reserve is going to write the script based
Speaker 1: on where they take the Federal fundry build. There's a
Speaker 1: guy out in San Francisco a number of years ago
Speaker 1: who its stars in his eyes and develop our and
Speaker 1: then our ard and now we're talking about our start start.
Speaker 1: You watched the Ascent of John Williams and is great
Speaker 1: respect within monetary economics. And now he sits in the
Speaker 1: chair you had in New York explain our start and
Speaker 1: its importance in this cacophony that we're living in right now.
Speaker 1: What we're trying to do is figure out what level
Speaker 1: of short term rates makes monterary policy restrictive. So to
Speaker 1: do that, you have to have some notion of what's neutral.
Speaker 1: You know that words, how high should not a federal
Speaker 1: fundrais be to have a neutral Montrey policy? And that's
Speaker 1: where our start star comes in. Our star is an
Speaker 1: estimate of what the neutral interest rate is after adjusting
Speaker 1: for inflation. And our star came down in the in
Speaker 1: the last ten or fifteen years. It was running two
Speaker 1: percent prior to the Great Financial Crisis. Now it's around,
Speaker 1: you know, probably somewhere in this one percent range. But
Speaker 1: you have to have a no show where neutral is
Speaker 1: before we can think about what's tight. Right. Well, if
Speaker 1: that's the case, do we have a confidence in our
Speaker 1: meeting demeaning monetary theory? Given the effective technology, the effective demographics,
Speaker 1: the effect of larger factors that Olivier Blanchard's writing about. Now,
Speaker 1: do we have a confidence the formulas work well? I
Speaker 1: think your pointing out the fact that there's a lot
Speaker 1: of uncertainty exactly what neutral where neutral is uh, And
Speaker 1: so the Fed Reserve is essentially trying to push Monterrey
Speaker 1: policy to us, saying that they're confident that they're at
Speaker 1: in restrictive territory. They probably don't know how restrictive, but
Speaker 1: they're confidence that are there in restrictive territory. As long
Speaker 1: as that they're in restrictive territory, that will slow the
Speaker 1: economy and bring inflation down. Now, if it turns out
Speaker 1: that our star was much higher and a five percent
Speaker 1: fed nomenal Federal FUNDRAI wasn't enough to push Monterrey Paul
Speaker 1: into restrictive territory, the Connie Win Slow and the Federal
Speaker 1: Reserve and ultimately have to do more. So the uncertainy
Speaker 1: about our star is translates to uncertainty about how tight
Speaker 1: does Monterrey policy have to be, how high does the
Speaker 1: federal fundraiate have to go, and how long does the
Speaker 1: Federal Reserve have to keep it there. That details perfectly
Speaker 1: into Friday's labor market report. That really shifted the narrative
Speaker 1: for at least the bottom. But but but this really
Speaker 1: raises a question of whether it was material enough to
Speaker 1: shift your view of how high our star has to be,
Speaker 1: how high the terminal rate needs to go. Well. I
Speaker 1: think at this point the FEDS game plan is to
Speaker 1: go to what they think is restrictive and then keep
Speaker 1: it there as long as it takes. I think, you know,
Speaker 1: if they are faced was stronger data, I think it's
Speaker 1: more likely that they extend the timing of how long
Speaker 1: monetary policy is restrictive as opposed to keep raising the
Speaker 1: rate higher and higher. Now, obviously, if the commy stays
Speaker 1: really strong, then they're gonna revise up their forecast of
Speaker 1: what interest rate peak is necessary to slowly commy. I
Speaker 1: don't think we're there yet, but do you think that
Speaker 1: five five quarters still where they're headed, and then they're
Speaker 1: going to hang out there for a while. If the
Speaker 1: econmy stays strong after you get to five to five
Speaker 1: and a quarter, then you could see them move even further.
Speaker 1: Remember we used to talk about the improbability of a
Speaker 1: soft landing, the improbability of getting this to land in
Speaker 1: some sort of nice way, and now that's the base case.
Speaker 1: Do you push back or do you think that it
Speaker 1: looks more and more likely that we could get some
Speaker 1: sort of immaculate disinflation or a soft landing. I think
Speaker 1: it's still unlikely. I mean, I think that it's true
Speaker 1: that we're not going to go into recession anytime soon.
Speaker 1: The economy just says too much for momentum. If you
Speaker 1: look at the Lanta Fed now a GDP now forecast,
Speaker 1: they revised it up by over a percentage point just
Speaker 1: in the last week, so they're looking for two point
Speaker 1: one percent growth first quarter. Before it was less than
Speaker 1: one percent just on the back of last week's data,
Speaker 1: So I think the commy has quite a bit momentum.
Speaker 1: I do think the recession is likely in the medium
Speaker 1: term because the Fed has to push up an employer
Speaker 1: rate by a meaningful amount to generate that slap in
Speaker 1: the layer market. And every time the Fans pushed the
Speaker 1: unemployer rate up by more than half a percentage point,
Speaker 1: we've always ended up in recession. I just don't see
Speaker 1: that this time is gonna be any different. Do you
Speaker 1: think that we, when we look back from historical perspective,
Speaker 1: can write the book on zero rate policies as having
Speaker 1: ended without any sort of financial accident that was material. Well,
Speaker 1: I think all the things that we did during to
Speaker 1: fix the financial system fund the Great Financial Crisis have
Speaker 1: helped a lot. I mean, the banking systems in much
Speaker 1: better shape, much more capital, much more liquidity, stress test mismanagement.
Speaker 1: So I think the financial system system is stronger now.
Speaker 1: And that's why the Fender Reserves in some way in
Speaker 1: control of the process. Once the FED that cheese is objective,
Speaker 1: they can cut rates. And so if the e commy
Speaker 1: turns out to be weaker than the FED wants at
Speaker 1: some point, you know, six months, twelve months down the road,
Speaker 1: the Federal Reserve can cure that pretty quickly because they're
Speaker 1: gonna be a you know, they're gonna be five in
Speaker 1: terms of rates. There canna be plenty of room for
Speaker 1: the Fed to stimulate the economy. That's why Paul, you know,
Speaker 1: said that, you know the risk of staying too tight
Speaker 1: too long is less than the risk of not doing enough,
Speaker 1: because the FAN has the ability to support the time
Speaker 1: comes hugely valuable. Dr Dudley, thank you so much. Quem Dudley,
Speaker 1: the former president of the New York Fed. Next guest home,
Speaker 1: was looking at three hundred thousand, and that was like
Speaker 1: the app he was like, and then we go five
Speaker 1: seven set that Outliers. Andrew Hollenhorst, his chief US economists
Speaker 1: at City Group. He's really provided intellectual leadership over the
Speaker 1: last year. We had a wonderful conversation a number of
Speaker 1: weeks ago here on the terminal rate on where this
Speaker 1: fed will go. Andrew, John and Lisa want to dive
Speaker 1: into that. But what I'd like to talk to you
Speaker 1: about in the days you see, l A, you had
Speaker 1: the great joy of all the heritage U c l
Speaker 1: A of Axcel Leonovot, who is one of the bravest
Speaker 1: economists I've ever read. He was way out front in
Speaker 1: the sixties and seventies. Some people have said he was
Speaker 1: the marine coming out of the trenches on inflation for
Speaker 1: Volker Axel Lanovo would look at the M two right
Speaker 1: now and he would just simply say, what do we
Speaker 1: have going on? What do we have with the money
Speaker 1: supply coming down? You were weaned on this at u
Speaker 1: c l A. Should we pay attention to Leonovid's M two?
Speaker 1: Thanks very much, Tom, And you're right. I mean U
Speaker 1: c l A was a great place to go to school,
Speaker 1: and I think the message was to always take the
Speaker 1: theory seriously, but then confront the theory with reality. And
Speaker 1: I think that's what Axel would ask us to do today. UM.
Speaker 1: In terms of M two, You're right, it's coming down,
Speaker 1: but it's coming down after being up very substantially. And
Speaker 1: I think that's what is difficult in annual analyzing this economy,
Speaker 1: that we had such big movements during the pandemic period,
Speaker 1: big increases in savings built up UM, and we're trying
Speaker 1: to figure out now as those things are moving in
Speaker 1: the opposite direction. Savings, for instance, are coming down, how
Speaker 1: much of a tailwind that's going to be for demand
Speaker 1: and for spending and for price pressure. And going back
Speaker 1: to that Job's report, it looks like we may have
Speaker 1: more of a tail wind than we might have thought.
Speaker 1: What is your disinflation confidence look like we've got this
Speaker 1: February fourteens at report. Do you have confidence to five
Speaker 1: to four to three or Kenya? Was John mentioned in
Speaker 1: your note get somewhere in the vicinity of Chairman Paul's
Speaker 1: two percent. I think we're still the ways away from
Speaker 1: two percent. And we have some good news on inflation,
Speaker 1: which is that goods inflation has cooled, But that's really
Speaker 1: what we're seeing in these monthly inflation prints and share
Speaker 1: Powell was trying to emphasize that, and let me just
Speaker 1: re emphasize that that a big part of what we've
Speaker 1: seen is used car prices that are coming down. Goods
Speaker 1: inflation in general that is slowed. So that's good news
Speaker 1: on the inflation front. But if you look at those
Speaker 1: non shelter services, you look at services away from housing,
Speaker 1: those are still inflating at a rate of about four
Speaker 1: percent annualized. So it does look like maybe some of
Speaker 1: the biggest, most aggressive inflation on the good side has
Speaker 1: come off, but we still have the services inflation, and
Speaker 1: that's what's gonna be sensitive to the labor market. That's
Speaker 1: what's gonna be sensitive to a number like five thousand
Speaker 1: plus jobs. So then why er do you think that
Speaker 1: Chair Powell isn't more aggressive, isn't taken the same kind
Speaker 1: of wyoming tone with respect to his press conference on Wednesday,
Speaker 1: With respect to that interview yesterday, I was a little
Speaker 1: bit surprised, to be honest. I think that David Rubinstein
Speaker 1: kind of set him up to make some change, make
Speaker 1: some differences from what he said last week before the
Speaker 1: job's number versus after the job's number. I think you
Speaker 1: could tell from the body language and from reading between
Speaker 1: the lines of it that that there there is a change.
Speaker 1: Probably it's uncomfortable for a FED official to make too
Speaker 1: much out of any one monthly number, but it's not
Speaker 1: just the one monthly number. Lease If you look at
Speaker 1: the pace of job growth prior to the January reading,
Speaker 1: we're running at something close to three hundred thousand jobs
Speaker 1: per months. So I don't think we're going to continue
Speaker 1: to print five hundred thousand jobs a month, but even
Speaker 1: three thousand would be enough to keep that unemployment rate
Speaker 1: moving down. It's already at a fifty year low. I'll
Speaker 1: go back to those days at u c l A.
Speaker 1: If you do the base macroeconomics, it's a very very
Speaker 1: tight labor market. It's hard to think that that wouldn't
Speaker 1: create wage pressure, but we are seeing wage pressure actually declined,
Speaker 1: So what do you make of that? So that's been
Speaker 1: one of the most interesting things in the data that
Speaker 1: we have, this this really tight labor market, it's actually
Speaker 1: tightening further. And then you're right across a range of measures,
Speaker 1: we saw some softening in wages, but remember it kind
Speaker 1: of goes back to what we were talking about earlier.
Speaker 1: This is a softening from historically rapid wage increases. We
Speaker 1: were reopening the economy all at once, every restaurant was
Speaker 1: trying to hire workers at the same time bring these
Speaker 1: workers back into the labor force. That of course is
Speaker 1: going to create a surge of wage pressure. So maybe
Speaker 1: we've come off of that surge of wage pressure against
Speaker 1: a bit and we'd come down from you know, call
Speaker 1: it five percent wage inflation to four percent wage inflation.
Speaker 1: But with a really tight labor market, I wouldn't expect
Speaker 1: that to slow further, and if anything, the risk is
Speaker 1: that it accelerates. And after the March meeting May three
Speaker 1: June fourteen July, the school starts against Septe number twenty.
Speaker 1: Which of those meetings is the real crucible for this
Speaker 1: FED where they've really got to decide if their demand
Speaker 1: structured Phillips curve driven or not. So I think you
Speaker 1: have a few signposts along the way. The March meeting
Speaker 1: is going to be really important because that's where Chaire
Speaker 1: Powell isn't going to be able to do what he
Speaker 1: did in the interview yesterday and kind of say, well,
Speaker 1: let's let the data take US where it does, the
Speaker 1: f O m C will have to come out and
Speaker 1: Fed officials broably will have to come out with their
Speaker 1: projections for the economy, inflation, and importantly for that terminal
Speaker 1: policy rate. Right now they have a five to five
Speaker 1: when you looking at that jobs report, maybe if anything,
Speaker 1: it should be revised up. So we'll see where the
Speaker 1: core inflation data comes in. We think it will be
Speaker 1: a little bit stronger. UM. Where does that median dot
Speaker 1: go at the March meeting will be really important. It
Speaker 1: looks like a basis point rate hike is quite likely
Speaker 1: in March. The question is going to become May. In June,
Speaker 1: they've talked about ongoing rate hikes, probably another hike in May.
Speaker 1: We think are gonna be hiking again in June. But
Speaker 1: this is when it might get a little bit more
Speaker 1: difficult because they're gonna have to actually navigate between a
Speaker 1: labor market that, if financial conditions tighten further, should be
Speaker 1: slowing UM an inflation that is still too high. So
Speaker 1: how are they going to navigate that tension and the
Speaker 1: reaction function. They haven't really had to do that yet. Andrew,
Speaker 1: I love reading your notes every time they come out.
Speaker 1: I'm excited to read them, especially when everybody was convinced
Speaker 1: that we're going to go back down to two percent
Speaker 1: inflation by the end of the year and the fiend
Speaker 1: is going to be cutting rates by fifty basis points.
Speaker 1: There was frustration in your voice that I sensed of, Hey, guys,
Speaker 1: the data hasn't changed. It hasn't so often they're still
Speaker 1: going to have to hike that much more. What has
Speaker 1: the response been, like two clients, the mood swings among
Speaker 1: investors that pushed back as this sort of a view
Speaker 1: in the market has shifted from rapid disinflation to well,
Speaker 1: maybe not. It's interesting listen because we have this kind
Speaker 1: of stability that we're talking about from share Powell trying
Speaker 1: not to try and change too rapidly as the data
Speaker 1: come in um in any of the market, which of
Speaker 1: course is going to change very rapidly, to try to
Speaker 1: figure out where that next data print is coming in.
Speaker 1: And we had a series of three cooler core inflation prints,
Speaker 1: we had softer wage data. So I think it makes
Speaker 1: sense that the market got a little bit more excited
Speaker 1: about these outcomes where inflation just comes down of its
Speaker 1: own accord. And I think our job here as economists
Speaker 1: is to look at all of the data and really
Speaker 1: figure out what's most likely in terms of an outcome.
Speaker 1: And despite the slower price inflation, despite the softer wage inflation,
Speaker 1: looking through to the tight labor market, looking through to
Speaker 1: services inflation, we just weren't convinced that really anything that's
Speaker 1: slowed down in terms of an underlying pace. And well,
Speaker 1: you know, you see how it just takes one data
Speaker 1: print and all of a sudden the market is well
Speaker 1: along those same lines. Makes you wonder what happened to Jackson? Hope?
Speaker 1: Pal doesn't it? What happened to Jackson? Hope? The data
Speaker 1: caught up with these guys are data is changed changing?
Speaker 1: Sign Andrew, Thank you? Andrew homean host that of City Joy.
Speaker 1: She is chief investment Officer Morgan Stanley Wealth Management, Lisa
Speaker 1: Shellett here knowing that things have changed. There is a
Speaker 1: yield and that means cash has Vailue. Lisa, we're talking
Speaker 1: before the show about your outside of perspectus, where you've
Speaker 1: got maybe ten percent cash whatever that movable feast is
Speaker 1: to portfolio to portfolio. But the Morgan Stanley audience wants
Speaker 1: to hold more cash than that. Why well, look I
Speaker 1: think that there's a huge amount of uncertainty out there.
Speaker 1: I think you know that we've been cautioning against the
Speaker 1: fact that we think that this is yet another bear
Speaker 1: market rally. Uh, that if we were going to really
Speaker 1: materialize the soft landing, we would not be seeing negative
Speaker 1: earnings and year over year compares and not negative earnings
Speaker 1: guidance and negative earnings revisions. Uh. So you know, I'm
Speaker 1: hardened that maybe our clients are are taking our cautionary
Speaker 1: view to heart. Uh, they're also embracing for the first
Speaker 1: time and you know literally uh you know, six seven
Speaker 1: eight years a livable uh fixed income yield meaning net
Speaker 1: of the expected inflation by the end of the year,
Speaker 1: which may be sub four percent, gives them a positive
Speaker 1: really yield um and they don't need to take any
Speaker 1: duration risks. So you know, we've got folks piling into
Speaker 1: things like certificates of deposit, like money market funds, which
Speaker 1: you know, I know in many eras were not considered
Speaker 1: sexy products but are satisfactory for a lot of investors
Speaker 1: right now, Lisa, do you think that's wise to take
Speaker 1: on a product that maybe you have to think about
Speaker 1: where to deploy capital in a year or two where
Speaker 1: yields just done at this level. Lisa, how do you
Speaker 1: how do you advocate for taking maybe a little bit
Speaker 1: more risk, maybe taking on a little bit more duration,
Speaker 1: but looking in these interest rates for a whole lot longer. Yeah.
Speaker 1: So look, I mean I think that there's an argument there. Uh.
Speaker 1: The problem is right now we've got an inverted yield curve,
Speaker 1: and so you're not really getting paid any extra yield
Speaker 1: for taking on some of that duration risk. Uh. And
Speaker 1: so what we've said to folks is, look, let's be
Speaker 1: patient this year. Ultimately, if we get this this mythical
Speaker 1: soft landing that everyone seems to be betting on, Uh,
Speaker 1: then that yield curve is going to invert. I mean,
Speaker 1: it's going to re steep, and I should say I'm sorry, Uh,
Speaker 1: And that means you're longer. The longer unto the curve
Speaker 1: is going to give you some higher yields. And so
Speaker 1: let's stay ultrashort duration right now. Let's see how the
Speaker 1: year plays out and see if there's opportunities to kind
Speaker 1: of roll up and lock in for longer um some
Speaker 1: of those higher yields. One of the biggest inconsistencies right
Speaker 1: now in markets And I ask this because a lot
Speaker 1: of people have been saying that bond markets are hearing
Speaker 1: what FED shared. J. Powell is saying the actual words,
Speaker 1: whereas stock markets are just hearing that he said disinflation
Speaker 1: a couple of times. Yeah, I couldn't agree more. You know,
Speaker 1: to us, the US equity market is fighting the FED
Speaker 1: big time. Um, there are some major disconnects and how
Speaker 1: the equity market is positioning itself. We we saw, you know,
Speaker 1: a huge short covering rally. We we saw uh, you know,
Speaker 1: a low quality dimension to the rally, and now most recently,
Speaker 1: we've seen cyclicals out performing more defensive stocks. What's precarious
Speaker 1: about that, uh, is that we have almost all the
Speaker 1: cyclical linked indicators, meaning recession linked indicators, like the Index
Speaker 1: of Leading Economic Indicators, which is really plummeted. Uh. And
Speaker 1: yet uh, it's disconnected from this cyclical out performance. So
Speaker 1: you know, I've heard the theories that people say, yes,
Speaker 1: we understand what what should have been, but we're gonna
Speaker 1: look through it. Um. I don't know how far their
Speaker 1: crystal ball goes to look through it. But history is
Speaker 1: not kind to these kind of you know, massive disconnects.
Speaker 1: At least I just wanted to finish on something that's
Speaker 1: getting a ton of attention at the moment. So bear
Speaker 1: with me as I work through the issue. There are
Speaker 1: these things called zero day to expiry options at the
Speaker 1: index level. It's getting a ton of attention. Join a
Speaker 1: manual of bt I G or rather of evercorn now
Speaker 1: wrote about it. I've got to get used to that
Speaker 1: list of ever court. He said this this morning. He said,
Speaker 1: you had a one point five to two percent bullbear
Speaker 1: bull sequence yesterday. Why because zero DTE options trading has
Speaker 1: become an important marginal price setter. He said, this least
Speaker 1: around lovely response to it. Look at options volumes yesterday
Speaker 1: dominated by zero and one day to expiy spy options
Speaker 1: and higher rates. Of course, this unintended consequence as people
Speaker 1: have moved down of zero percent money market funds, deposited
Speaker 1: a places where they can get four percent interest and
Speaker 1: take ten percent of their capital and trade options virtually
Speaker 1: for free every day. Ad response to that, Lisa, look,
Speaker 1: I do think that we're in a period of time
Speaker 1: where there are some of these speculative excesses going on.
Speaker 1: Uh and you know, you know Tom mentioned that we
Speaker 1: were chatting before going on air and you know right now,
Speaker 1: this issue of excess liquidity and markets of huge piles
Speaker 1: of cash still sitting on the sideline. Uh. It is there.
Speaker 1: And while Chair Powell did not want to address the
Speaker 1: realities of the fact that over the last four months
Speaker 1: financial conditions have massively eased. UM, he has not answered
Speaker 1: the question. The reality is we're seeing these bizarre perturbations
Speaker 1: and markets, this speculative activity, UM, Jonathan, to your point,
Speaker 1: this use of options, and this willingness to take you know,
Speaker 1: the these kind of um, you know, very high turnover strategies. UM.
Speaker 1: And to me that's an indication that um, you know,
Speaker 1: liquidity is at play. Uh, that market stability is gonna
Speaker 1: once again raise its head as an issue that if
Speaker 1: Chair Powell doesn't want to talk about it, potentially some
Speaker 1: of the other governors actually look at the data may
Speaker 1: start bringing up Lisa, that's great. The only reason I
Speaker 1: put up with Pharaoh's he perfectly explained that options insanity
Speaker 1: we're seeing within one day, John, you perfectly explained that.
Speaker 1: And it's so hearkens back to a time Lisa and
Speaker 1: I remember where there was actually a vailue to cash.
Speaker 1: That's really what this is about, is tob talking about
Speaker 1: the gravity is returned, and so is the idiosy that
Speaker 1: you explained a Lisa, thank you. It's great a catchp
Speaker 1: wise at LEASA shout at that of Morgan Stanley. Right now,
Speaker 1: we're gonna rip up the script. We're very good at
Speaker 1: doing this, and we do it with a world class
Speaker 1: expert on the show of Hollywood and the rest, Michael
Speaker 1: Nathanson with us, who wrote a brilliant note on Disney
Speaker 1: a number of days ago, but we've been overcome by
Speaker 1: the news flow. He's with SVB moth At Nathanson this morning. Michael,
Speaker 1: you absolutely nailed the streaming failure that the the the
Speaker 1: experiment would not provide profit. The Wall Street Journal reports
Speaker 1: this morning that Warner Brothers Discovery has just flat out blinked.
Speaker 1: Forget about all the happy talk. You've been to those
Speaker 1: those dogg and ponies where they talk about we're all
Speaker 1: going to merge together, and they said, no, they're gonna
Speaker 1: keep Discoveries separate. Why are they Why are they renigging
Speaker 1: on everything of the last year's plans, Because Tom, there's
Speaker 1: no overlap between HBO content and Discovery content right there is.
Speaker 1: We've done a time to work on this. There literally
Speaker 1: is no overlap, maybe temperance out of the market and junified,
Speaker 1: So putting discovery content on HBO doesn't move the needle, right,
Speaker 1: So they having a niche service and discovery, plus they
Speaker 1: don't want to lose it by merging with HBO, and
Speaker 1: I want to drive any new value at HBO. So
Speaker 1: that strategy is not going to work. And we always question,
Speaker 1: you know, it's just such a hodgepodge of content that
Speaker 1: it's best to keep it separate. But doesn't It doesn't
Speaker 1: solve any of the problems, which is that linear is
Speaker 1: declining rapidly and there's not a big enough solution to
Speaker 1: upset that decline of linear economics streaming, what is discovering?
Speaker 1: What is the time urgency for a company? Was Debtor
Speaker 1: for that matter, the time urgency for the many streamers
Speaker 1: John knows them better than me that don't have critical scale.
Speaker 1: What's the immediacy here? In two thousand twenty three, Yeah,
Speaker 1: we've labeled this the third act of streaming UM and
Speaker 1: we think the next one or two years. Your conversations
Speaker 1: today about the cost of money will affect this. We
Speaker 1: look at the balance sheets of these companies in a
Speaker 1: cash generation. Shocking actually how little cash they produce, even
Speaker 1: all Disney. So they have to use the next one
Speaker 1: or two years to consolidate, slowdown content, spend, race pricing. Right,
Speaker 1: they need to change the you know, the dimension of
Speaker 1: their business quickly. So I think it's one or two
Speaker 1: years and that's the third act. Right, things will happen
Speaker 1: change and to the benefit. I've never said this before
Speaker 1: to Netflix. Netflix will now right off into the sunset
Speaker 1: victorious because they've come through this and now they generate
Speaker 1: cash in the balance sheet. It's not as bad as
Speaker 1: everyone else's balance sheet. So that's that's pretty good. Let's
Speaker 1: talk about what you expect from Disney after the bell
Speaker 1: today with their report earnings, you talk about consolidation, and
Speaker 1: you see that some of their biggest non forced errors
Speaker 1: included the acquisition of twenty century Fox, bidding on cricket
Speaker 1: in India and other sports that were non primary for ESPN.
Speaker 1: I'm sure that would be a controversial call on your part.
Speaker 1: What kinds of consolidation or closures or layoffs are you
Speaker 1: expecting from Bob Biker's Disney. Well, Lisa, I'm not thinking
Speaker 1: any numbers today, you know, like I think they're still
Speaker 1: gonna work through a plan to give us cost savings.
Speaker 1: But the real question is they changed their vision of
Speaker 1: Disney plus. If you go back to the first investor day,
Speaker 1: they had a smaller vision llion subs, and then during
Speaker 1: the middle of the pandemic, about a year later in
Speaker 1: December twenty, they gave you a much grander vision of
Speaker 1: over subs. That's got to be ramped back, right, So
Speaker 1: I'm expecting a more sober outlook on the addressable market
Speaker 1: here as part of that revisit of what the opportunity is.
Speaker 1: I'm expecting a reduction of the long term spending they
Speaker 1: need to do to get there. Right. So it's to
Speaker 1: me an honest discussion which wasn't being had the past
Speaker 1: twelve months, about how much you need to spend in
Speaker 1: streaming and isn't the business big enough at this point
Speaker 1: in time to start trying to drive better profitability? Right,
Speaker 1: So I'm looking for a toad shift on investment spending
Speaker 1: when it comes to streaming, not actual numbers yet least
Speaker 1: so just to build on that. For years we were
Speaker 1: talking about content is king. You're willing to borrow whatever
Speaker 1: kind of money you need to invest in whatever kind
Speaker 1: of production you need to. And now we're seeing, you know,
Speaker 1: one production of a major franchise after another, whether it's Bond,
Speaker 1: whether it's whatever you want to do, and that's really
Speaker 1: the main output. What is the new mantra after content
Speaker 1: is king? Well, it's platform is king, so you send
Speaker 1: me up. Well for that, right, you have to have
Speaker 1: a scale platform, inscrution platform. You need to get the
Speaker 1: chrotical mass of enough people with a minimum out of churn,
Speaker 1: and then I'm not sure our content is king anymore.
Speaker 1: There's a lot of average content that's sticky just because
Speaker 1: you have this um you know, scaled base where people
Speaker 1: come in every day to take a look at something. Right,
Speaker 1: So you need to scale. At this point there are
Speaker 1: three or full scale company and white content is longer king.
Speaker 1: There's there's too much content, so there's too many platforms
Speaker 1: and at some point you need to ratchet that back.
Speaker 1: Maybe content be king in the future. Right now it's
Speaker 1: it's platform scale. I get some desperation out there, Michael,
Speaker 1: which frankly, you've you've spearheaded research on where Disney has
Speaker 1: taken the first episode of Mandalorian. They're gonna put it
Speaker 1: out on cable or whatever they're gonna do. But the
Speaker 1: bottom line, do your enthusiasm about Netflix is editorial is
Speaker 1: Mandalorian is not Wednesday. That's the heart of the matter.
Speaker 1: It's still about making hits that John Farrell will watch
Speaker 1: at night, right right, But Tommy, you also need to
Speaker 1: scale it right, and you basically need We've been saying
Speaker 1: this for years. Netflix has this constant, you know, shooting
Speaker 1: model where the basic putting shot tungle every day. The
Speaker 1: media industries don't have the model like that. They pick
Speaker 1: their franchises, they build them, they let them out slowly.
Speaker 1: Netflix has a model it's really hard to replicate. I
Speaker 1: don't think it's a great model, as you know. I've
Speaker 1: said that for years. But these companies can't get there
Speaker 1: because their balance sheets are true restrictive. They can't. They
Speaker 1: can't produce seventeen billion dollars a year of streaming content
Speaker 1: with a continual you know, release schedule every day of
Speaker 1: a new binge titles. It's not a model that they
Speaker 1: can get to. Michael, how do we get revenue for
Speaker 1: some of these streaming industries. Is it through just pay
Speaker 1: for a subscription or is this going to start to
Speaker 1: be more of an adver tiesment driven model. Yeah, it's
Speaker 1: going to be a bit of return to what they had.
Speaker 1: You'll see people using windows, so people go back to
Speaker 1: putting movies in theaters. Shockingly enough, Doctor raised prices, which
Speaker 1: just happened last month with Disney and Netflix or Disney
Speaker 1: race prices. You have an ad here, but I think
Speaker 1: you're going to see, um, everyone started driving higher and
Speaker 1: higher revenues through pricing and advertising and then also using
Speaker 1: windowing to try to offload the cost of the content
Speaker 1: and older window right. So this experiment to put everything
Speaker 1: at once and streaming the way the Warners did it
Speaker 1: and Disney has done it has to be reversed. And
Speaker 1: that's what you got here. Yeah, Michael, can we get
Speaker 1: you in the studio? Signed? Yeah with model totally great.
Speaker 1: I would love to hear good for one in your
Speaker 1: seeing that happened, Michael. Thank you, Michael, Thank you, Michael.
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