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Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.

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Speaker 1: Along with my co host Lisa Bramowitz. Each day we

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Speaker 1: bring you the most important, noteworthy, and useful interviews for

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Speaker 1: you and your money, whether you're at the grocery store

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Speaker 1: or the trading floor. Find the Bloomberg p m L

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Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Earlier today,

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Speaker 1: the dollar was just starting to get a bid in

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Speaker 1: strengthening against rival currencies, but now it's back down in

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Speaker 1: weakening against uh the rival currencies. Here to talk about

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Speaker 1: whether we can expect to see the ongoing weakness continue

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Speaker 1: for the dollar is Doug Borthwick, Managing director and head

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Speaker 1: of FX at Chapter Lane and Co H. Doug, thank

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Speaker 1: you so much for being with us. You know, this

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Speaker 1: is a really important question, and I just want to

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Speaker 1: frame this issue first because I was reading a story

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Speaker 1: about how the pace of dollar denominated emerging market bond

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Speaker 1: sales are hitting a record so far this year, and

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Speaker 1: this is basically a leveraged bet that the dollar will

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Speaker 1: continue to depreciate and then emerging market currencies will continue

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Speaker 1: to appreciate. Is there any risk that all these investors

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Speaker 1: are wrong? Well, there's certainly a risk of the investors

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Speaker 1: are wrong. That there always is, there's no one way bet.

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Speaker 1: But I think the one thing that they're putting their

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Speaker 1: their money on is the fact that there will be

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Speaker 1: a continuation of the dollar weakening. Now, dollar weakness is

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Speaker 1: something that this administration has been pushing from day one,

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Speaker 1: when President Trump has talked about making the US more competitive,

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Speaker 1: and that's certainly the case, and we're seeing weakness in

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Speaker 1: the US all However, it's it's expounded somewhat by what's

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Speaker 1: happening with reserve managers and how they're managing the reserves

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Speaker 1: given uh, you know, how they're moving money into China

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Speaker 1: and moving it out of the US or not allocating

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Speaker 1: towards US treasuries as much as they used to. And

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Speaker 1: what's really interesting is that once the SDR the I

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Speaker 1: M S currency came into being, and then they decided

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Speaker 1: that China should be part of that, they made China

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Speaker 1: ten percent or eleven percent allocation, and that man to

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Speaker 1: bother the US is and it means that if the

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Speaker 1: folks and reserve managers start building up Chinese reserves as

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Speaker 1: you'd expect to, because China is now a rather large

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Speaker 1: trade um trade partner with them, then they need to

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Speaker 1: really start moving money into Chinese currency and out of

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Speaker 1: US currency. We re estimate right now that if they

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Speaker 1: allocate ten percent of the reserves to China, that's about

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Speaker 1: one point three trillion dollars that they would no longer

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Speaker 1: be buying in US treasuries but instead be putting into China.

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Speaker 1: And that ends up as being of all of the

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Speaker 1: holdings of US traasors that are held by foreigners right now.

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Speaker 1: And so this constant drip we're seeing from reserve managers

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Speaker 1: and the Bundesbank has already said that they're buying China,

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Speaker 1: and they said the Central Bank and Francis said they're

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Speaker 1: buying China. They're not the only ones, as more of

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Speaker 1: folks by Chinese and that means there's less dollar demand

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Speaker 1: that obviously the US dollar is going to start weakening,

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Speaker 1: and we've been seeing that continually over the past year.

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Speaker 1: Doug Borthwick more prosaic question, did you uh forecast the

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Speaker 1: strength and sterling against the dollar? I haven't forecasted the

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Speaker 1: strength and sterling against the dollar. I've sort of stepped

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Speaker 1: away from sterling given Brexit, but certainly we did say

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Speaker 1: when it was euro was at one oh four at

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Speaker 1: the start of last year, that it was going to

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Speaker 1: weaken considerably through one tent and we see the euro

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Speaker 1: continuing to weaken and we see no reason why we

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Speaker 1: won't see one thirty in the next coming months. Okay,

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Speaker 1: but the reason I'm bringing up the pounds sterling is,

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Speaker 1: you know, when we speak to four X experts, and

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Speaker 1: it's always about how the market, you know, trades off

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Speaker 1: of you know, little pieces of news. I didn't hear

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Speaker 1: anybody over the last you know, two weeks say, boy,

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Speaker 1: you know you've really got to go short the dollar

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Speaker 1: along the pound, and you know you would have a

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Speaker 1: four and a quarter percent just on a spot basis.

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Speaker 1: That seemed like a really good trade, and I haven't

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Speaker 1: heard anyone mention it. Yeah, I think that coin flippers

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Speaker 1: would be very good in telling you where sterling is going,

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Speaker 1: but not necessarily four EX experts. The interesting thing that

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Speaker 1: the pound is because of the uncertainty and Brexit. Is

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Speaker 1: it going to be a hard Brexit a soft Brexit,

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Speaker 1: folks are mostly staying away from discussing it. And what

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Speaker 1: you do find though, is that you know, as the

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Speaker 1: dollars weakly cross the board against every single currency. Sterling

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Speaker 1: is picking up on that, yeah, is really based on

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Speaker 1: the euro strength or the weakness and dollar against the end,

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Speaker 1: it's it's just getting picked up in the whole front

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Speaker 1: of it. Yeah, But I mean, all you gotta do

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Speaker 1: is look at a chart. You've got higher highs and

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Speaker 1: higher lows. That's certainly the case. But then you know

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Speaker 1: they could turn around in the UK and so they're

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Speaker 1: doing a hard, hard Brexit and we're looking at one

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Speaker 1: thirty in the Sterlings. So it's sterling is Sterling is

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Speaker 1: less simple to to really identifying the divine all right,

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Speaker 1: So what's the best call you've got right now to

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Speaker 1: make some money over the last Over the next let's

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Speaker 1: say two to three months, I continue to believe that

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Speaker 1: sterling is going to move much much higher, and it's

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Speaker 1: just really the beginning of the cycle. I think we're

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Speaker 1: going to see these ten moves annually for the next

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Speaker 1: couple of years of dollar weakness. Euro is gonna be

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Speaker 1: a big beneficiary of this. I think folks thinks that

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Speaker 1: dollyn is going to continue in this one ten, maybe

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Speaker 1: moved back to one fift. I think that's wrong. I

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Speaker 1: think we'll see one O five and dollar in dollar Canada.

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Speaker 1: Canada has the trade surpace with the US. I think

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Speaker 1: we're going to see that move lower the dollar against

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Speaker 1: the Canada, and I think the dollar Mexican continue to

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Speaker 1: move lower as well. So you're a dollar bear dollar

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Speaker 1: bear across the board. Absolutely. So one thing that I'm

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Speaker 1: trying to square is let's say, uh, the US economic

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Speaker 1: picture is as good as people think it is, and

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Speaker 1: perhaps even better, let's say that there's an upside surprise.

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Speaker 1: We have seen the City Surprise Index showing that there

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Speaker 1: have been more upside surprises of late um. At what point,

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Speaker 1: especially given the fact that the Federal Reserve is going

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Speaker 1: to be hiking interest rates, at what point is that

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Speaker 1: enough to encourage people back to the dollar or is

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Speaker 1: this something that's structural that that is going to continue regardless, Certainly,

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Speaker 1: I think that if the sudden is very structural. Remember

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Speaker 1: before the European bailout of Greece, you know, the euro

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Speaker 1: was trading around this one thirty level, and then you

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Speaker 1: saw a huge move into the dollar and out of

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Speaker 1: the European currency. And now, if anything, we have we've

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Speaker 1: heard nothing about Greece, nothing about Italy, leaving the euro Zone.

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Speaker 1: And so what we're seeing now is folks not necessarily

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Speaker 1: deciding they don't like the US, but they're certainly deciding

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Speaker 1: that maybe it's time to get back into the Euro

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Speaker 1: and unwind some of their safety play that they moved

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Speaker 1: into the United States. And so, you know, moving up

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Speaker 1: to one thirty doesn't mean that we don't like the

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Speaker 1: dollar anymore. It just means that, you know what, we

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Speaker 1: feel more comfortable with the Euro. And so where the

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Speaker 1: Fed is, I think the Feds very much behind the curve,

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Speaker 1: you know. I think that the fact that probably raised

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Speaker 1: another hundred and fifty basis points before folks start thinking, oh,

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Speaker 1: you know what, now the US dollar is more interesting

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Speaker 1: to us. Remember, interest rates over in China are much

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Speaker 1: harder than they are in the US right now. And

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Speaker 1: as long as reserve managers need to get into China,

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Speaker 1: and that means taking reserves maybe out of the United States,

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Speaker 1: then that's that's that's going to be a move that's

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Speaker 1: going to see dollar weakening. It's going to see us

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Speaker 1: and streets naturally start to rise. One thing that certainly

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Speaker 1: will allow the Fed to raise rates will be if

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Speaker 1: the dollar we can considerably does that mean that we're

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Speaker 1: going to see about of accelerated inflation. I think that inflation,

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Speaker 1: you know, I think one of the best indicators of

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Speaker 1: inflation was when Walmart moved into Mexico and suddenly pricing

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Speaker 1: inflation almost disappeared overnight. And I think that the Internet

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Speaker 1: has done something very similar to that with the prices,

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Speaker 1: and that we don't there's now we have so much

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Speaker 1: clarity in what pricing should be that it's hard to

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Speaker 1: raise prices because we can always find somewhere else that's cheaper.

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Speaker 1: So I think that when you look at prices rising

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Speaker 1: above two percent in the US, I think that sometimes

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Speaker 1: it's a fool's dream and that we can always seem

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Speaker 1: to find pricing less ultras. I think high inflation something

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Speaker 1: that's really going to be the back burner for a

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Speaker 1: number of years. All Right, we're gonna leave it there,

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Speaker 1: but thanks very much for being with us. Douglas Borthwick

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Speaker 1: is managing director and the head of f X at

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Speaker 1: at Chapolin, Dane and Company. President Donald Trump slapping tariffs

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Speaker 1: on solar panels and also on washing machines imported into

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Speaker 1: the United States. Here to tell us more about the

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Speaker 1: tariffs and the effect on the solar industry is James Evans.

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Speaker 1: He is our global clean Energy analyst for Bloomberg Intelligence. James,

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Speaker 1: thanks for being with us. You know, last time I

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Speaker 1: believe that we went through this whole tariff issue regarding

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Speaker 1: the solar industry, Chinese companies decided to just relocate their

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Speaker 1: firms to Taiwan. Isn't that correct? Yes, that's correct. So

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Speaker 1: there was unecdotal evidence that a little of the Chinese

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Speaker 1: manufacturers trying to get the previous tariffs at the US

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Speaker 1: put on the imports of solar modules and cells by

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Speaker 1: setting up operations in other countries in Southeast Asia like Vietnam,

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Speaker 1: Malaysia and Thailand. So hopefully with the new section to

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Speaker 1: a one tariffs that have been imposed, that won't happen

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Speaker 1: because these tariffs are effectively impacted on every single country,

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Speaker 1: no matter where you are. So that's not something that

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Speaker 1: can be so easily skirted by a lot of the

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Speaker 1: Chinese solar producers. Okay now, and I just want you

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Speaker 1: to hold that thought and then tell me the manufacturers

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Speaker 1: that are in the United States that have been asking

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Speaker 1: for there's terror for leave their bankrupt, right, I mean,

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Speaker 1: there's a SNIVA and Solar World. So a lot of

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Speaker 1: the manufacturers that used just mentioned have gone bankrupt over

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Speaker 1: the recent years. Part of that is because of a

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Speaker 1: massive build up in production capacity of the solar modules

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Speaker 1: in the in China and in Southeast Asia, and so

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Speaker 1: a lot of those panels are being able to be

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Speaker 1: produced at a very very low cost. And you know,

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Speaker 1: we're operating in a very global market. So those pan

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Speaker 1: are ending up in the US market, and it's been

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Speaker 1: hard for a lot of the US manufacturers to compete

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Speaker 1: with the scale of production that a lot of the

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Speaker 1: Chinese manufacturers have been able to produce, so James, So,

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Speaker 1: if this is going to potentially allow producer producers in

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Speaker 1: the US to charge higher rates for their solar panels,

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Speaker 1: that means that some consumers may not choose solar panels

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Speaker 1: because it's more expensive. How much does this damp in

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Speaker 1: the expansion of solar energy in the US. That's right, Lisa.

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Speaker 1: So the big fear amount about these tariffs is that

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Speaker 1: actually most of the jobs in the US market aren't

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Speaker 1: related to manufacturing of solar panels or solar cells. They're

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Speaker 1: actually in installing the panels, in developing the projects, and

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Speaker 1: in making equipment that goes around the panels, so kind

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Speaker 1: of the trackers, the racks, and a lot of the

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Speaker 1: electrical equipment. So there's concerns about some of those job implications.

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Speaker 1: But but also you're right. If the panel costs that

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Speaker 1: are imported into the US will increase, then we're going

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Speaker 1: to see the impact of that on love of the

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Speaker 1: project economics are going to worsen. Um. It's going to

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Speaker 1: have the most impact on the larger utility scale projects

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Speaker 1: where kind of module costs are a higher share of

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Speaker 1: the total system um the kind of residential and commercial scales.

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Speaker 1: So the smaller kind of solar developments may be less

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Speaker 1: impacted by this because there's a little bit more margin

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Speaker 1: in there. There's a little bit more room for a

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Speaker 1: lot of the panel producers to to get a higher price,

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Speaker 1: whereas you may see some delays in development of utility

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Speaker 1: scale the large solar developments over the next year or

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Speaker 1: two until this kind of module tariff digresses over the

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Speaker 1: next four years. James, did the US producers are poly

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Speaker 1: silicon Did they end up connecting or hooking up with

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Speaker 1: Chinese companies after the first round of UH sort of

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Speaker 1: imports of of low cost solar panels, so poly silicon,

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Speaker 1: you're you're referring to the raw material of solar panels

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Speaker 1: and um. Effectively, what happened was when the US Imports

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Speaker 1: imposed tariffs on imports of US modules UM sorry in

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Speaker 1: Chinese modules into the US market, China responded by imposing

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Speaker 1: tariffs on polysilicon, which is the raw material for solar panels,

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Speaker 1: into China from the US, and that's still not been resolved.

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Speaker 1: That's still an issue that's ongoing, and there are a

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Speaker 1: number of US polysilicon manufacturers of producers that have found

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Speaker 1: it really really hard to compete now that China has

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Speaker 1: such a stranglehold on global module production and they can't

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Speaker 1: effectively get their product into the main consuming market of China.

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Speaker 1: So as part of the I t C investigation and

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Speaker 1: this kind of announcement, they've also said that they want

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Speaker 1: to have a separate investigation into whether there's any kind

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Speaker 1: of deal that can be done to remove the previous

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Speaker 1: tariffs and the Chinese tariffs on polysilicon. But given the

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Speaker 1: fact that the Section two or one tariffs haven't really

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Speaker 1: gone down very well, not only in China but in

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Speaker 1: in the rest of the world, especially in Southeast Asian markets.

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Speaker 1: UM that is going to be a bit of a

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Speaker 1: long long shot. If you ask me, how much of

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Speaker 1: a price increase our consumer is going to see in

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Speaker 1: solar panels as a result of this. So from a

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Speaker 1: typical basis, you're you're talking about a kind of ten

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Speaker 1: percent um increase, So it's on the larger scale utility

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Speaker 1: salt kind of side. From a consumer perspective, it's going

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Speaker 1: to be in in the lower single digits. So there's

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Speaker 1: going to be some small increase incremental increase in this um,

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Speaker 1: but that's going to fade with time. It's going to

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Speaker 1: fade as the tariffs go down over the next four years.

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Speaker 1: They start at thirty and they decreased by five percent

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Speaker 1: every year. But they're also going to go down because

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Speaker 1: panel costs are going to continue to fall. You know,

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Speaker 1: we've seen dramatic declines in the cost of a solar panel.

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Speaker 1: Last in you saw a decline of about a third

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Speaker 1: in the cost of a solar panel. Last year is

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Speaker 1: about twelve percent, and we're anticipating that those panel cross

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Speaker 1: de planes are going to continue going forwards. So you

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Speaker 1: don't think necessarily that this move is going to undermine

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Speaker 1: the expansion of solar or the industry more broadly. I

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Speaker 1: think it's gonna it's going to be slightly disruptive in

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Speaker 1: the near term, especially for some of the larger projects

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Speaker 1: as I mentioned, but I think that the fundamentals are

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Speaker 1: there and that solar is a technology the costs are

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Speaker 1: coming down. It's not like you have a fixed fossil

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Speaker 1: fuel base that you have to try and support all

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Speaker 1: the fossil fuel prices. So this is a bit like

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Speaker 1: on the semi conductor side. The costs are coming down

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Speaker 1: over time and that's going to continue. That trend is

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Speaker 1: going to continue. So there is I think a secular

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Speaker 1: shift towards not only solar but also other technologies like

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Speaker 1: wind energy UM that is going to see these costs

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Speaker 1: declined further and further UM and you're going to see

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Speaker 1: more and more of this into the market. There might

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Speaker 1: be some near term disruption at least in the US

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Speaker 1: over the next year or two as a result of these,

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Speaker 1: but it's it's definitely going to be a trend that

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Speaker 1: we're going to see continue going forwards. James Evans, thank

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Speaker 1: you so much for being with us. James Evans is

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Speaker 1: global clean energy analyst with Bloomberg Intelligence coming to us

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Speaker 1: up from London talking about the tariffs that are being

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Speaker 1: placed on solar panels and what that means for the industry. Well,

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Speaker 1: we got some sense today of what JP Morgan plans

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Speaker 1: to do with the money that it is saving from

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Speaker 1: the tax overhaul. It's saying that it's playing the earmark

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Speaker 1: twenty billion dollars over five years to boost lending, expand

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Speaker 1: its branch network, and increase gifts to charity. Here to

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Speaker 1: tell us what this means for shareholders is Charles Peabody,

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Speaker 1: who we always love having on Managing director and research

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Speaker 1: analyst at Compass Point. Charles, thank you so much for

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Speaker 1: joining us. So what's your first dake on this? Well,

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Speaker 1: you know, I think it's clearly a net positive for

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Speaker 1: Morgan in the industry in the sense that it's clear

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Speaker 1: that those institutions that have invested in their franchise and

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Speaker 1: their employees over long period of time and consistently have

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Speaker 1: done better than those that have not. Um Just in

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Speaker 1: the last decade we saw JP Morgan do much better

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Speaker 1: than City Group, and that's because Morgan was investing in

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Speaker 1: its products and businesses where a City Group was capital

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Speaker 1: constrained well, could just I want to break in there,

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Speaker 1: because do we really have a sense of what these

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Speaker 1: investments really mean? I mean, we do have a sense that,

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Speaker 1: you know, the sort of minimum wage that they'll pay

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Speaker 1: for workers will go from fifteen to eighteen dollars an hour.

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Speaker 1: But beyond that, what does this really mean? Well, you know,

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Speaker 1: I break it down into four pieces. I mean, there's

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Speaker 1: ten billion being airmarked for affordable housing finance, and I

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Speaker 1: think as an aside, you're gonna see JP Morgan invest

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Speaker 1: much more aggressively going forward in and building out their

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Speaker 1: mortgage banking operation, which had really shrunk over the last

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Speaker 1: ten years. UM and I suspect acquisitions may be part

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Speaker 1: of that. Um You're gonna see four billion invest in

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Speaker 1: in supporting small business growth and that's been the fastest

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Speaker 1: growing portfolio. They've got about a twenty billion dollar portfolio there.

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Speaker 1: And you're gonna see another half a billion incremental investment

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Speaker 1: in philanthropic investments. UM. So the balance of that twenty billion,

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Speaker 1: which is about five and a half billion, is going

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Speaker 1: to be invested in things like employees, branch expansion, innovation,

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Speaker 1: et cetera. UM So, I think those investments, you know,

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Speaker 1: JP Morgan has done invested wisely. I think they will

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Speaker 1: enhance the value the franchise over a long period of time.

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Speaker 1: So I'm just curious, Charles, why do you think the

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Speaker 1: stock is not reacting today? Well, you know, short term, Um,

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Speaker 1: one of the things that you have to acknowledge is

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Speaker 1: this is going to add about a billion to a a

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Speaker 1: billion and a half to UM JP Morgan's expense operating

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Speaker 1: expense structure, and so you're in a sense increasing the

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Speaker 1: fixed costs of that expense structure, hoping that growth will

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Speaker 1: offset that that fixed cost uh. Um, But that remains

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Speaker 1: to be seen. So one thing that I was noticing,

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Speaker 1: Charles is that you actually or not that bullish though

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Speaker 1: on JP Morgan's shares. Well, I think the shares are

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Speaker 1: pretty fully priced. Um is where I'm coming from. Um,

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Speaker 1: you know these actions aside, I mean, the stock is

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Speaker 1: um trading you know almost at two times book, you know,

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Speaker 1: and Jamie Diamond even said that, you know, at two

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Speaker 1: times book his own investment in his own stock was

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Speaker 1: not necessarily the best investment where he rationalized that he

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Speaker 1: could buy the stock between one and a half two

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Speaker 1: times book. But he's sort of captain at two times book.

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Speaker 1: All right, So if you believe that the stock is

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Speaker 1: a little too expensive for investors, what stock do you

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Speaker 1: recommend people buy? What company do you think is not

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Speaker 1: been overpriced? Well, you know, I will tell you him.

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Speaker 1: The b k X index, which reflects the large cap banks,

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Speaker 1: is around one fifteen today um the pre crisis top,

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Speaker 1: and that b k X index was about one. So

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Speaker 1: we're worthin five of that all time high UM. And

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Speaker 1: as a as a relative to the SMP five hundred,

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Speaker 1: the b k X index hit a high in March

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Speaker 1: up two thousand seventeen, and despite all the hooplab around

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Speaker 1: deregulation and tax reform, that b k X index has

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Speaker 1: not been able to make a new high relative to

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Speaker 1: the SMP five hundred. So I'm I'm thinking we're topping

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Speaker 1: out here, and I'm not anxious other than very very

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Speaker 1: very short term training. I'm not anxious to add to

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Speaker 1: my long positions here to be peeling off. I wanted

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Speaker 1: to just follow up in one aspect that you said.

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Speaker 1: You said that you think that JP Morgan could potentially

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Speaker 1: make an acquisition of a mortgage lender. Is did I

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Speaker 1: hear you correctly? Yeah? I mean they there, they want

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Speaker 1: to reinvest in the mortgage space. UM. What has held

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Speaker 1: them back has been the litigious environment UM. And if

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Speaker 1: if we can get some cleanup of that litigation risk, UM,

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Speaker 1: I think you'll see them go out and start to

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Speaker 1: invest in both organically and inorganically UM, in that space

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Speaker 1: and rebuild that that mortgage banking franchise that used to

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Speaker 1: be quite substantial ten years ago. And would they start

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Speaker 1: to issue UH non agency mortgage backed securities again. You know,

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Speaker 1: if you can, as I said, you can clean up

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Speaker 1: the little litigation risk, I think they would do f

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Speaker 1: h A lending again. I think you know Jamie Diamond

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Speaker 1: talked about that in his annual letter UM two shareholders. Well,

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Speaker 1: Charles said, if JP Morgan is too expensive, and you

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Speaker 1: mentioned the possibility of adding to their mortgage business, is

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Speaker 1: there a particular stock or even a non bank financial

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Speaker 1: company that you believe is undervalue well on a relative basis.

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Speaker 1: You know, Goldman Sachs has been treated very poorly by

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Speaker 1: the marketplace UM year to date, largely because of their

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Speaker 1: week thick trading businesses UM. Yet the other three businesses

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Speaker 1: UM plus they're equity trading, are doing very well. UM.

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Speaker 1: I think if we get some added volatility, and there

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Speaker 1: are indications that we're starting to see that we could

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Speaker 1: see better activity. So in many respects, I would say

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Speaker 1: the thick trading business bottomed in the second quarter of

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Speaker 1: seventeen and there's some leverage from that going back this year.

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Speaker 1: I want to thank you very much for being with us.

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Speaker 1: Charles Peabody, he is managing director Research Channelists at Compass

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Speaker 1: Point in giving us his thoughts about the banking industry,

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Speaker 1: House of Cards and other Netflix originals, Orange is the

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Speaker 1: New Black, Stranger Things. Here to tell us about the

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Speaker 1: success of Netflix is Paul Sweeney, US director of Research

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Speaker 1: and senior Media and Internet analyst for Bloomberg Intelligence. Alright,

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Speaker 1: Paul Sweeney, is this all about subscriber growth or is

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Speaker 1: it about something else? Yeah, it really is about subscriber growth. Um.

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Speaker 1: You know, this is a company where investors really focus

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Speaker 1: on the growth of the subscribers, not you know, and

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Speaker 1: really internationally. That's really really the bulk of the growth

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Speaker 1: is coming from for this company. Um, you know, it's

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Speaker 1: not really an earning story yet, it's not even a

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Speaker 1: revenue growth story at the moment. It's really investors are

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Speaker 1: focusing on subscribers because eventually, you know, you get the

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Speaker 1: more subscribers, you get paying more every month in the

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Speaker 1: company just put through another price increase in October of

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Speaker 1: last year that drives revenue and ultimately profits in cash flow. UM.

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Speaker 1: So this is clearly a momentum. Stock has been. It's

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Speaker 1: been a phenomenal stock, up another sixty percent last year. Uh.

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Speaker 1: And what's driving the momentum is the subscriber story. I

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Speaker 1: guess if people like the shows, it perhaps doesn't surprise

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Speaker 1: them that it dominates their life more than Goldman Sacks does.

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Speaker 1: Because their market cap is now beyond where Goldman Sacks is.

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Speaker 1: And I'm just struggling what needs to happen with Netflix

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Speaker 1: to legitimize this market cap and even translate into upside

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Speaker 1: for share investors. That's what you know the company when

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Speaker 1: they kind of came well, not when they came public,

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Speaker 1: but when they really started talking about their uh you know,

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Speaker 1: they're over the top of viewing as opposed to the CDs.

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Speaker 1: They said, listen, this is gonna be an expensive gambit

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Speaker 1: for us. We're gonna have to buy a lot of programming.

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Speaker 1: We're gonna have to invest in a lot of programming. Um,

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Speaker 1: But we believe in what they called the virtuous psycho,

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Speaker 1: which is the more we spend on programming, the more

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Speaker 1: subscribers will sign up, and the more subscribers that sign

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Speaker 1: up and pay more, that will drive revenue, that will

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Speaker 1: drive cash flow, and that will drive profitability, which will

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Speaker 1: give us even more money to invest in more product,

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Speaker 1: which again will attract more subscribers. So, um, where they

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Speaker 1: are in the life cycle there is it's they're absolutely

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Speaker 1: in this toward growth uh stage. Uh there in every

433
00:24:00,080 --> 00:24:02,800
Speaker 1: entry around the world, with a notable exception of China.

434
00:24:03,200 --> 00:24:05,440
Speaker 1: And so their strategy now is to invest in programming

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00:24:05,480 --> 00:24:08,840
Speaker 1: to drive subscribers. And the US market has become and

436
00:24:08,880 --> 00:24:13,000
Speaker 1: continues to be very profitable, and the profitability margins in

437
00:24:13,040 --> 00:24:16,639
Speaker 1: the US continue to grow. Many of their international markets

438
00:24:16,640 --> 00:24:19,719
Speaker 1: have also turned profitable and expect to be fully profitable

439
00:24:20,080 --> 00:24:21,920
Speaker 1: by the end of this year. And then that's really

440
00:24:21,960 --> 00:24:25,440
Speaker 1: when the street looks for earnings and free cash low growth,

441
00:24:25,480 --> 00:24:26,840
Speaker 1: because when you take a look at the company now,

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00:24:26,920 --> 00:24:31,080
Speaker 1: they are significantly free cash flow negative. Let's let's put

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00:24:31,080 --> 00:24:34,000
Speaker 1: that in plain English. You're expecting to burn through four

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00:24:34,160 --> 00:24:37,640
Speaker 1: billion dollars of cash this year exactly. It's just extraordinary

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00:24:37,640 --> 00:24:39,920
Speaker 1: and where's that cash going. It's going to fund about

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00:24:40,000 --> 00:24:43,320
Speaker 1: eight billion dollars of programming, which is the biggest programming

447
00:24:43,320 --> 00:24:46,360
Speaker 1: budget in Hollywood by far. Just by point of comparison,

448
00:24:46,520 --> 00:24:48,440
Speaker 1: HBOS will spend about two and a half billion dollars

449
00:24:48,480 --> 00:24:52,520
Speaker 1: on programming. Uh So how are they financing that programming? Uh?

450
00:24:52,560 --> 00:24:55,640
Speaker 1: In the debt market. They they have been issuing dead

451
00:24:55,680 --> 00:24:58,160
Speaker 1: over the past couple of years. UM. And the debt

452
00:24:58,200 --> 00:25:01,199
Speaker 1: market loves this company, and so that is kind of

453
00:25:01,200 --> 00:25:03,240
Speaker 1: their source of capital. And really, if you take a

454
00:25:03,240 --> 00:25:06,160
Speaker 1: look at street consensus numbers, UM, you know they don't

455
00:25:06,160 --> 00:25:09,320
Speaker 1: have this company turning three casual positive to one or

456
00:25:09,320 --> 00:25:13,840
Speaker 1: maybe two keeps getting pushed back UM as a continue

457
00:25:13,880 --> 00:25:16,760
Speaker 1: to invest. Paul Sweeney, Alright, they've got about six and

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00:25:16,760 --> 00:25:20,480
Speaker 1: a half billion dollars of debt and they've got all

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00:25:20,520 --> 00:25:25,200
Speaker 1: these great deals to create original programming, I believe is

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00:25:25,240 --> 00:25:27,600
Speaker 1: the target for Netflix. They want to have at least

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00:25:27,640 --> 00:25:30,480
Speaker 1: fifty of it the original content. I wonder if you

462
00:25:30,520 --> 00:25:33,840
Speaker 1: could contrast that with what's going on at Twitter and

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00:25:33,960 --> 00:25:37,600
Speaker 1: their content, which is a user generated And just a

464
00:25:37,640 --> 00:25:41,520
Speaker 1: note that Bloomberg LP has a venture with a Twitter

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00:25:41,880 --> 00:25:46,200
Speaker 1: for at TikTok. That's a twenty four seven streaming news service.

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00:25:46,560 --> 00:25:51,440
Speaker 1: So what is Twitter need in order to grab those eyeballs?

467
00:25:51,840 --> 00:25:55,520
Speaker 1: Twitter has about five million monthly users, which you know,

468
00:25:55,600 --> 00:25:57,439
Speaker 1: sounds like a lot. It is a big number, but

469
00:25:57,560 --> 00:26:00,200
Speaker 1: relative to the facebooks and the Instagrams of the world,

470
00:26:00,240 --> 00:26:03,720
Speaker 1: which have you know, one to two billion subscribe subscribers

471
00:26:03,760 --> 00:26:06,480
Speaker 1: every every month, it's not. And uh so when you're

472
00:26:06,520 --> 00:26:09,479
Speaker 1: out there competing for advertising dollars, which Netflix doesn't have

473
00:26:09,560 --> 00:26:13,400
Speaker 1: to do, Twitter really realized on advertising dollars. What they're

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00:26:13,440 --> 00:26:16,560
Speaker 1: finding is that three million user base is not enough

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00:26:16,600 --> 00:26:19,880
Speaker 1: to really attract digital advertising dollars. So and it's unlikely

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00:26:19,920 --> 00:26:23,399
Speaker 1: that they can materially grow that much more um although

477
00:26:23,440 --> 00:26:24,920
Speaker 1: we are seeing some growth. So what they have to

478
00:26:24,960 --> 00:26:26,639
Speaker 1: do is they have to make sure that those people

479
00:26:26,680 --> 00:26:29,800
Speaker 1: that are on Twitter stay longer, are more engaged. And

480
00:26:29,840 --> 00:26:31,720
Speaker 1: how do you do that. Like a lot of companies,

481
00:26:31,720 --> 00:26:34,480
Speaker 1: Twitters investing in video because that actually is engaging and

482
00:26:34,480 --> 00:26:37,040
Speaker 1: that's where advertisers want to place their money. So we

483
00:26:37,080 --> 00:26:39,920
Speaker 1: did just get the news this morning that Anthony not

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00:26:40,080 --> 00:26:43,560
Speaker 1: to the former now chief operating officer of Twitter, was

485
00:26:43,600 --> 00:26:47,639
Speaker 1: departing to join a lending start up. So far or

486
00:26:47,680 --> 00:26:50,000
Speaker 1: not really start up but a lending arm so far.

487
00:26:50,520 --> 00:26:52,600
Speaker 1: How big of a of a problem is this for Twitter?

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00:26:52,960 --> 00:26:55,479
Speaker 1: You know? I I do think it's an issue for Twitter,

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00:26:55,760 --> 00:26:58,760
Speaker 1: both the media term and longer term. Anthony Noo is

490
00:26:58,920 --> 00:27:02,359
Speaker 1: very well regarded by investors in Wall Street in general.

491
00:27:02,880 --> 00:27:05,680
Speaker 1: H He has that rare combination of operational experience which

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00:27:05,680 --> 00:27:08,560
Speaker 1: he's gleaned over the last several years at at Twitter,

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00:27:08,600 --> 00:27:10,840
Speaker 1: as as well as a very deep financial background having

494
00:27:10,920 --> 00:27:13,720
Speaker 1: been a banker in the CFO. Uh. So, he really

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00:27:13,760 --> 00:27:16,720
Speaker 1: brought some stability to Twitter. And it's really it's it's

496
00:27:16,760 --> 00:27:20,320
Speaker 1: doubly important at Twitter his role because the CEO, Jack Dorsey,

497
00:27:20,359 --> 00:27:23,080
Speaker 1: the founder and CEO, always spends half of his time

498
00:27:23,119 --> 00:27:25,399
Speaker 1: at Twitter, spends the other half at his other public

499
00:27:25,440 --> 00:27:28,199
Speaker 1: company Square. So you kind of have a part time CEO.

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00:27:28,520 --> 00:27:31,040
Speaker 1: You need a strong CEO. That's what Anthony Noto is.

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00:27:31,080 --> 00:27:33,000
Speaker 1: Now what do you do? Yeah? Paul Sweeney, thank you

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00:27:33,040 --> 00:27:35,120
Speaker 1: so much. We will find out what they do as

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00:27:35,160 --> 00:27:38,399
Speaker 1: we follow this and other stories in the media with you.

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00:27:38,440 --> 00:27:42,120
Speaker 1: Paul Sweeney, US director of Research and senior media Internet

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00:27:42,160 --> 00:27:46,720
Speaker 1: analyst for Bloomberg Intelligence. Uh definitely a tale of two

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00:27:46,920 --> 00:27:54,119
Speaker 1: stories this morning. Thanks for listening to the Bloomberg P

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00:27:54,240 --> 00:27:57,200
Speaker 1: and L podcast. You can subscribe and listen to interviews

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00:27:57,240 --> 00:28:01,280
Speaker 1: at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.

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00:28:01,680 --> 00:28:05,280
Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm

510
00:28:05,280 --> 00:28:08,600
Speaker 1: on Twitter at Lisa Abramo. It's one before the podcast.

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Speaker 1: You can always catch us worldwide on Bloomberg Radio