WEBVTT - Morgan Stanley's Jim Caron Talks Tech Selloff

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Inflation coming up here in four minutes. Michael Ball on deck.

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<v Speaker 2>But first Jim Karen joins us from Morgan Stanley. The

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<v Speaker 2>note is brilliant. We protect the copyright of all of

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<v Speaker 2>our guests. Get Jim Karen's brilliance from Morgan Stanley. Okay,

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<v Speaker 2>so you're out of aeronautical engineering at Caltech. And the

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<v Speaker 2>final trick question on the exam sophomore year Jim Kern

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<v Speaker 2>is what does it mean if the bond markets worry, worry, handringing, worry,

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<v Speaker 2>and Google can do one hundred year bond nine times

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<v Speaker 2>over subscribed. Jim, I've never seen this.

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<v Speaker 1>Well.

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<v Speaker 3>I think it's I think it's really a statement on

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<v Speaker 3>the dispersion that's in the markets right now. So, look,

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<v Speaker 3>there's a lot of volatility that's happening. Right We understand

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<v Speaker 3>what's happening in the equity markets, but then when we

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<v Speaker 3>look at the publicly traded fixed income markets, as you're

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<v Speaker 3>pointing out, the risk isn't necessarily being evenly distributed across

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<v Speaker 3>all markets. And Tom, that's good news, okay, because whenever

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<v Speaker 3>we go into these types of market events where there's

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<v Speaker 3>a big repricing in a certain sector. In this case

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<v Speaker 3>in software, the number one question is always about contagent.

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<v Speaker 3>Is their contagent into other markets? And we're seeing fire

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<v Speaker 3>breaks between the public markets and the private markets, and

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<v Speaker 3>certainly equities are taking the brunt of this in some way,

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<v Speaker 3>but we're not seeing broad based contagent. So I think

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<v Speaker 3>if there's a silver lining around all of this, I

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<v Speaker 3>think that's it.

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<v Speaker 4>Jim, what do you make about this rotation we've seen

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<v Speaker 4>out of some higher growth areas, most notably software, into

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<v Speaker 4>more valuable parts of the market, maybe even a small

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<v Speaker 4>and midcaps. That spooked a lot of folks who thought

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<v Speaker 4>software and tech broadly was a good place to be.

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<v Speaker 3>Well, it's a great example of why you want to

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<v Speaker 3>have a diversified portfolio.

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<v Speaker 1>Right.

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<v Speaker 3>So we've come off of a market over the past

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<v Speaker 3>couple of years it's been highly concentrated MAG seven Mag seven,

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<v Speaker 3>Mag seven, and people have just forgot about the other

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<v Speaker 3>four ninety three right in the s and P. Five

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<v Speaker 3>hundred And the point here is that if we get

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<v Speaker 3>this rise in economic growth is higher productivity, there should

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<v Speaker 3>be a cyclical broadening of the markets. Look at the

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<v Speaker 3>ISM data. Isms are well above fifty, right, now even

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<v Speaker 3>new orders are around fifty seven. You've got the manufacturing

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<v Speaker 3>above fifty two. You've got GDP growth which is still

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<v Speaker 3>pretty reasonable.

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<v Speaker 1>Jobs.

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<v Speaker 3>You know, market seems pretty stable. Let's let's keep our

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<v Speaker 3>eye on the bigger picture and in the reality here

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<v Speaker 3>is that I do think that the cyclical broadening of

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<v Speaker 3>the markets is actually really a healthy line, you know,

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<v Speaker 3>for more diversified growth.

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<v Speaker 2>When you listen to your economics team, is the vector

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<v Speaker 2>in goods inflation? Usually it's a disinflation, and all of

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<v Speaker 2>a sudden, in the last six months, Jim Kier and

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<v Speaker 2>I got goods inflation and rising inflation. Is that going

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<v Speaker 2>to reverse and get back to quote unquote normal?

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<v Speaker 1>No, I don't think it will.

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<v Speaker 3>I think that we have gone through a period of

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<v Speaker 3>time and this goes back to two thousand and one

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<v Speaker 3>when China joined the wto that goods inflation was relatively

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<v Speaker 3>flat down and it was all about services inflation and

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<v Speaker 3>everything else. So therefore overall inflation was able to stay low.

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<v Speaker 3>Now we're in a different, different place.

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<v Speaker 2>Should get Jim Karen into trouble this morning? Oh do

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<v Speaker 2>you do you agree with a Posen or Zagg thesis

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<v Speaker 2>of four percent inflation, I do not.

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<v Speaker 3>I think the number is probably around two and a

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<v Speaker 3>half to three.

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<v Speaker 1>That's likely where we're going to stabilize.

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<v Speaker 3>I don't think we're going to see below two for

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<v Speaker 3>a while unless we see a recession.

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<v Speaker 2>That's brilliant. See that he's so trained by compliance. I

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<v Speaker 2>mean just about Adam posed it out on Twitter this morning,

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<v Speaker 2>recapitulating how we get to that worry of high inflation.

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<v Speaker 2>The release, you will, the reaction function is through maybe

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<v Speaker 2>a higher wage, which we really haven't seen yet. Well,

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<v Speaker 2>if that's a bet, that's an outlier, as many people

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<v Speaker 2>have said to us, Jim Karen with us, and we'll

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<v Speaker 2>stay with us. With Morgan Stanley Investment Management, as we

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<v Speaker 2>go to the nation's inflation report, usually midweek, it's on

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<v Speaker 2>a Friday because of that brief government shut down as well.

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<v Speaker 2>We'll you'll give you the headline data, folks, but then

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<v Speaker 2>we dive into it and give you the nuance as

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<v Speaker 2>we can on Bloomberg through the morning. Jim Karen with this,

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<v Speaker 2>Morgan Stanley, I go to a weeker dollar out there,

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<v Speaker 2>but some real churn in the market as well, and

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<v Speaker 2>we see it in Jim Karen's space as they say

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<v Speaker 2>in the bond market, Jim Karen with a ten year

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<v Speaker 2>yield four point zero seven percent with a substantial move

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<v Speaker 2>over the last two three days, can you at Morgan

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<v Speaker 2>Stanley model a three point ninety nine percent ten year yield.

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<v Speaker 3>I mean, it's certainly lower than what we would have

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<v Speaker 3>expected it to be. It's really a question in terms

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<v Speaker 3>of how we think the Fed starts to react to this.

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<v Speaker 3>Does the Fed now start to see a clear runway

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<v Speaker 3>to cutting rates maybe more aggressively because inflation, as we

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<v Speaker 3>just saw, is maybe coming down a bit, maybe a

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<v Speaker 3>bit faster than many people are expecting. I'm still in

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<v Speaker 3>the camp that there's maybe one more cut this year,

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<v Speaker 3>possibly too so. And I think that's pretty much well

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<v Speaker 3>in the price at this point as far as where

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<v Speaker 3>the two year treasury is currently trading. And so I

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<v Speaker 3>think it's going to be very difficult for the ten

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<v Speaker 3>year yield to stay below four percent for any material

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<v Speaker 3>period of time unless you believe there's going to be

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<v Speaker 3>a significant flattening, and we don't, and we think the

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<v Speaker 3>curve is going to stay relatively steep around you know,

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<v Speaker 3>sixty bases points or so.

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<v Speaker 2>We welcome all of you across America. Bloomberg surveying US

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<v Speaker 2>commercial free to the nine o'clock our, Micael ball Away

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<v Speaker 2>meeting us as well, and Veronica Clark will join us

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<v Speaker 2>some city group here in a moment. Paul Sweeney with

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<v Speaker 2>Morgan Stanley's Jim Karen.

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<v Speaker 4>Jim, this is a pretty eventful week for the FED

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<v Speaker 4>to reserve lots of data. It's a data rich week,

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<v Speaker 4>and I guess the takeaway is, boy, we've got a

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<v Speaker 4>pretty solid labor market. We saw that on Wednesday, and

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<v Speaker 4>now we've got an inflation environment that continues to be

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<v Speaker 4>pretty reasonable out there. A boy, the Fed could go

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<v Speaker 4>either way here. They could sit on their hands, or

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<v Speaker 4>they could cut rates. How do you think they're going

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<v Speaker 4>to interpret this week's data.

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<v Speaker 3>I think at the moment that they're probably still leaning

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<v Speaker 3>towards potentially one more cut this year if the inflation

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<v Speaker 3>numbers are coming down. But we also have to understand

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<v Speaker 3>that the unemployment rate did tick down from four point

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<v Speaker 3>four to four point three percent.

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<v Speaker 1>Now could that be seasonal? Could that be an aberration?

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<v Speaker 3>You know, maybe this is maybe we need to see

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<v Speaker 3>a couple of more numbers, which is why I don't

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<v Speaker 3>think the Fed's going to do anything, you know, in

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<v Speaker 3>the first quarter of this year or probably they're gonna

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<v Speaker 3>have to wait until the second quarter, maybe late second quarter.

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<v Speaker 3>So I think the way the FED is likely to

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<v Speaker 3>interpret this is that we have inflation.

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<v Speaker 1>That seems to be stabilizing.

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<v Speaker 3>That's good news, a labor market that also seems to

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<v Speaker 3>be stabilizing, but we need a little bit more confidence

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<v Speaker 3>in that.

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<v Speaker 1>You brought this point up earlier. What about wages, right, So.

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<v Speaker 3>You know, I think the big complaint out there, and

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<v Speaker 3>I did a podcast on this which was to make

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<v Speaker 3>a twenty dollars hamburger affordable again? And my point was that,

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<v Speaker 3>you know, the price of that hamburger is not likely

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<v Speaker 3>coming down. What's going to make it more affordable is

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<v Speaker 3>that incomes and wages need to start to go up,

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<v Speaker 3>but they have to go up in a non inflationary way.

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<v Speaker 3>And the way that happens, this is the magic trick

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<v Speaker 3>that the economy does, is through higher productivity. So higher

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<v Speaker 3>productivity is the non inflationary speed limit on growth, meaning

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<v Speaker 3>that you can have higher wages better growth, but that

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<v Speaker 3>higher wages doesn't necessarily increase goods, inflation or anything like that.

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<v Speaker 3>That's what productivity does, right, now thea any numbers are

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<v Speaker 3>accelerating higher. So it is likely if we get a recovery,

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<v Speaker 3>that these incomes in wages can go up without creating

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<v Speaker 3>the inflation. And that's what makes the twenty dollars Hamburger

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<v Speaker 3>more affordable.

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<v Speaker 2>See how clear he does that?

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<v Speaker 5>Surely learned that if you're at the Bowden Observatory in

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<v Speaker 5>physics in February and it's twenty below zero and you

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<v Speaker 5>get the telescope, it's clearer because it's cold air.

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<v Speaker 2>That's how you get to think that clearly.

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<v Speaker 1>And then he says that bad.

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<v Speaker 4>And then he says, I got to go California to

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<v Speaker 4>California's technology smart tech as well.

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<v Speaker 2>Jim Karen go write a report. He is brilliant at

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<v Speaker 2>Morgan Stanley. We appreciate mister Karen's expertise here