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Speaker 1: Radio, I want to get to our Drive to the Close.
Speaker 1: Guest back with us is Joyce Swang. She's senior client
Speaker 1: portfolio manager for American Century Investments.
Speaker 3: They have about two.
Speaker 1: Hundred and eighty two billion in assets under management, and
Speaker 1: she's back here in our Bloomberg Interactive Brokers studio. When
Speaker 1: you're back at American Century and you're surrounded by your
Speaker 1: team and your colleagues, what is it that you talk
Speaker 1: most about?
Speaker 4: I mean, right now, there's actually a lot of things
Speaker 4: going on. So as a fixed income person, you usually
Speaker 4: we're in the boring part of the market, there's a
Speaker 4: lot to talk about. So recently it's obviously been the
Speaker 4: job's number, you know, inflation, looking at the underlying data there,
Speaker 4: thinking about how to understand the three percent GDP number
Speaker 4: we saw and we're really talking about tariffs, right, So
Speaker 4: it's everything of the above, just given how rates have
Speaker 4: been relatively calm despite a lot of this news coming out.
Speaker 5: So when you look at i mean, the tenure yield
Speaker 5: at four to twenty, we've been talking about a lot
Speaker 5: of the last couple of days, especially considering the structural
Speaker 5: measures that should be pushing yields higher.
Speaker 6: Right.
Speaker 5: We were just talking about with Stuart Paul from Bloomberg Economics,
Speaker 5: what's holding us down this low for now?
Speaker 7: And does that yield bounce?
Speaker 4: Yeah, I mean, we think the tenures likely to be
Speaker 4: range bound for the rest of this year. The issues
Speaker 4: that are keeping it down would be the data, right,
Speaker 4: So the hard data is finally starting to soften. At
Speaker 4: American Century, we've been thinking that the slowdown is the
Speaker 4: most likely scenario for the economy in the US this year.
Speaker 4: It's finally showing up, right, Jobs un berbs first, So
Speaker 4: that fear, even if it's a small risk of recession,
Speaker 4: is going to keep the tenure below five.
Speaker 8: We think likely the range is four to four.
Speaker 1: Or five longer term though, you think you know, we
Speaker 1: talked with our Stuart Paul about demographics, baby boomers, the debt,
Speaker 1: the US debt that longer term what did he say
Speaker 1: up above ten?
Speaker 5: Six percent of the six percent is the long term
Speaker 5: natural rate, which, yeah, that's.
Speaker 4: Shockingly high for the ten year yield, right, that would
Speaker 4: be extremely high.
Speaker 8: Again, I think fact.
Speaker 1: They ever interior discussions when you when you look longer term.
Speaker 8: Longer term yees.
Speaker 4: So the most frequently asked question I get is the
Speaker 4: deficit in terms of longer term things. That is obviously
Speaker 4: going to be a problem that needs to be resolved.
Speaker 4: As investors, we're thinking more tactically, so let's say six months,
Speaker 4: a year, two years, it's more short term trends rather
Speaker 4: than these burgeoning long term trends. But yes, that is
Speaker 4: something that weighs on our minds. And you do get
Speaker 4: these bouts of volatility by scaresth.
Speaker 3: So you buy what in terms of the US treasury market.
Speaker 4: So we're actually liking the short end of the curve
Speaker 4: right now, so not treasuries, though. We are looking at
Speaker 4: income opportunities because while spreads are pretty tight across corporates,
Speaker 4: across securitized markets are at pms, and analysts are looking
Speaker 4: for areas of the market that are less trafficked. So
Speaker 4: looking at, you know, smaller deal secondaries on the corporate side,
Speaker 4: looking at potentially high yield names that are going to
Speaker 4: be upgraded rather than downgraded, looking at non traditional asset
Speaker 4: backed securities, stuff that's not in the index.
Speaker 5: By the way, is there a cool name for that?
Speaker 5: Because I know, if you're like in the BS and
Speaker 5: you fall down, you're a fallen angel.
Speaker 6: Right.
Speaker 5: Is there a cool name for junk that becomes investment grade.
Speaker 8: It's rising stars.
Speaker 7: Oh, that's pretty that's pretty clear.
Speaker 5: Look, spreads are so tight, right, and we just saw
Speaker 5: I thought the Wall Street Banker bonus story was amazing
Speaker 5: because equity underwriters are not getting paid and debt underwriters are.
Speaker 5: It tells me that, you know, IPOs just aren't there
Speaker 5: and everybody wants to sell bonds.
Speaker 7: Is that market going to stay open like that?
Speaker 8: I hope so.
Speaker 4: And I hope that, you know, asset management bonuses for
Speaker 4: fixed income people.
Speaker 7: Are up to I hope so for you also.
Speaker 4: But yes, I mean, one of the biggest changes that
Speaker 4: we've seen since rates have gone up in twenty twenty
Speaker 4: two is that things that were booming from the global
Speaker 4: financial crisis until then aren't quite so attractive. Things like IPOs,
Speaker 4: private equity, private credit. Stuff that worked when rates were
Speaker 4: at zero suddenly don't when rates are at four.
Speaker 5: But why is everybody buying why buy corporate debt when
Speaker 5: spreads are this type? Is it just they're so happy
Speaker 5: to be getting some yield?
Speaker 4: And I mean, you have to look back to the
Speaker 4: global financial crisis to get anything close to where we
Speaker 4: are today. You were there, I was there at least
Speaker 4: were right. Yeah, So I was there the last time
Speaker 4: we saw yield this attractive. And I think when you
Speaker 4: look at institutional investors and retail investors advisors, most people
Speaker 4: are trying to get let's say, seven percent on their portfolio.
Speaker 4: If you can get five to six on high quality
Speaker 4: fixed income, that looks pretty attractive.
Speaker 1: But high quality, especially if you think growth is slowing
Speaker 1: down right at this point, you want to be pretty
Speaker 1: quickly and pretty chuck.
Speaker 4: Highield spreads are tight too, they are they are, so
Speaker 4: we are selective in high yield.
Speaker 8: It's again those rising.
Speaker 4: Star stories, very select idiosyncratic names. Not beta definitely. I
Speaker 4: don't suggest going passive in this environment.
Speaker 1: Joyce. What's the implications or impact of tariffs that have
Speaker 1: an effective rate of fifteen to sixteen percent, the highest
Speaker 1: since nineteen forty six, very different than the world that
Speaker 1: we've been living in. What is though, ultimately the impact
Speaker 1: on companies, You know, as we look longer term and
Speaker 1: I think about whether it's their debt positions or their
Speaker 1: equity positions, whether I look at you across the balance
Speaker 1: sheet in terms of margins, profit growth, like, what's the impact.
Speaker 3: It's a different environment, right it is.
Speaker 4: And that's what we've been really paying attention to during
Speaker 4: earnings calls, because while the tariff situation is just getting finalized,
Speaker 4: I think companies are still deciding how much they have
Speaker 4: to absorb, how much in concessions they can get from
Speaker 4: their suppliers, and how much they can pass through to consumers.
Speaker 4: And that's where I think the active management piece comes in,
Speaker 4: because it's going to impact companies in different sectors and
Speaker 4: in different leadership positions differently.
Speaker 6: Right.
Speaker 4: So, if you have pricing power, you can pass through
Speaker 4: your price increases to the consumer, and if people love
Speaker 4: your brand, they're going to be willing to buy it.
Speaker 4: But in terms of corporations, the debt coverage ratio is
Speaker 4: very strong, so despite tight credit spreads, corporations are in
Speaker 4: a great spot. There's no risk of like big defaults
Speaker 4: happening even in high yield, so we're not terribly concerned
Speaker 4: about that aspect of it.
Speaker 5: Crazy considering like if I had told you at the
Speaker 5: end of last year, Joyce, we're going to have you know,
Speaker 5: tariffs at sixteen percent on the rest of the world,
Speaker 5: what would you forecast?
Speaker 4: Yeah, well, I mean we were definitely thinking at the
Speaker 4: end of the year.
Speaker 8: When President Trump.
Speaker 4: Was elected and he started, you know, during the campaign,
Speaker 4: he was targeting stuff and released tariffs up to forty
Speaker 4: fifty percent on Liberation Day, we were thinking recession was
Speaker 4: going to be the most likely massive inflation.
Speaker 6: Yeah.
Speaker 1: Is this just companies really focusing on their balance sheet?
Speaker 1: I just think about this since the Great Financial Crisis
Speaker 1: and then you know, layer on top of that the pandemic.
Speaker 1: I mean, CFOs working with their CEOs making sure that
Speaker 1: they've got maybe not fortress balance sheets, but pretty close.
Speaker 8: Yes.
Speaker 4: Absolutely, And that's where our corporate team is actually partnering
Speaker 4: with CFOs and the finance teams at companies to approach
Speaker 4: them when they see debt coming due in the next
Speaker 4: one or two years.
Speaker 8: They'll go to them and be like, we know you.
Speaker 4: Don't want this to get to the level of attention
Speaker 4: of your CEO asking how you're going to refinance this debt. Right,
Speaker 4: Let's work together and come up with a way to
Speaker 4: refinance your upcoming maturities.
Speaker 1: So that group really busy, because that's what's happening.
Speaker 4: Yes, exactly. So we're looking for those opportunities. Again, we're
Speaker 4: not just buying the broad index, but we're looking for
Speaker 4: these unique opportunities to generate some alf on a security
Speaker 4: selection basis.
Speaker 1: Great to have you here, Thank you, Thank you, so
Speaker 1: appreciate joy the rest of the summer.
Speaker 3: Joyce Wang.
Speaker 1: She is senior client portfolio manager at American Century Investments.
Speaker 1: We mentioned two hundred and eighty billion two hundred eighty
Speaker 1: two billion in assets.
Speaker 3: Under management right here in our interactive broker studio.
Speaker 2: Be Well, you're listening to the Bloomberg Business Weekdaily podcast.
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Speaker 6: Well.
Speaker 1: India's government is scrambling to contain the economic fallout from
Speaker 1: President Trump's threatned tariff action, which has left some officials
Speaker 1: in New Delhi reeling meantime time in terms of what
Speaker 1: we got from the President earlier this morning on CNBC,
Speaker 1: you talked about maybe US tariffs and semiconductors and pharmaceutical
Speaker 1: imports which would be announced quote within the next week
Speaker 1: or so. This as the administration really gets ready to
Speaker 1: target key economics sectors in its effort to remake global trade.
Speaker 3: Heres what the President said.
Speaker 9: We'll go into pharmaceuticals. They make a fortune with pharmaceuticals,
Speaker 9: and they make our pharmaceuticals in China and Ireland and
Speaker 9: everything else. And pharmaceuticals will be putting a initially small
Speaker 9: tariff on pharmaceuticals, but in one year, one and a
Speaker 9: half year's maximum, it's going to go to one hundred
Speaker 9: and fifty percent, and then it's going to go to
Speaker 9: two hundred and fifty percent because we want pharmaceuticals made
Speaker 9: in our country.
Speaker 1: All right, That, of course was President Trump earlier on CNBC.
Speaker 1: One thing that I want to add to that, the
Speaker 1: US is looking at ways to equip chips with better
Speaker 1: location trucking capabilities.
Speaker 7: So chips, microchips, microchips.
Speaker 5: Look, they want to put an air tag on those
Speaker 5: times incy Ween Sea, itsy bitsy little microchips.
Speaker 1: Yeah, like you know that look like that Apple tag.
Speaker 1: This is the creutail, the flow of semis made by
Speaker 1: the likes of Nvidia to China. All right, tracking all
Speaker 1: of it. There's a lot coming at us. Is Bloomberg
Speaker 1: News Senior editor for Technology and Strategic Industries. He's Michael Shepherd.
Speaker 1: He's out there in our DC bureau.
Speaker 3: Mike. A lot going on here.
Speaker 1: Get us up to speed on what we are hearing
Speaker 1: from the President when it comes to various sectors and
Speaker 1: what we are getting in terms of still waiting for
Speaker 1: terms with some big trading partners.
Speaker 10: Well in the tariffs front, one of the most significant
Speaker 10: things that we heard from Donald Trump today was a
Speaker 10: timeline for both the pharma tariffs and the levees that
Speaker 10: we have long been expecting to come on semiconductors. He
Speaker 10: has been going sector bisector, as we've already seen, in
Speaker 10: addition to his country by country reciprocal tariffs, but he
Speaker 10: has already targeted the auto industry, the steel and aluminum
Speaker 10: industries with levees aimed at trying to boost more output
Speaker 10: and production here at home, and next moving onto the
Speaker 10: drug industry and chip makers and the idea is again
Speaker 10: to try to get them to build more plants here
Speaker 10: in the US, spur domestic investment in plants and production,
Speaker 10: and maybe try to boost hiring as well, and perhaps
Speaker 10: also goose some exports in those areas.
Speaker 6: It's going to be a long road though.
Speaker 10: Even if he announces those tariffs in the next week
Speaker 10: or so, it will take years for those plants to
Speaker 10: actually be built for companies to migrate, and in the meantime,
Speaker 10: a number of companies, businesses, consumers will face the prospect
Speaker 10: of potentially higher costs based on the increases in those inputs. Remember,
Speaker 10: chips are in everything. It is not just the AI
Speaker 10: accelerators that we heard so much about from the likes
Speaker 10: of Meta Platforms and Microsoft Corp. When it comes to
Speaker 10: their AI businesses. It goes down to all the way
Speaker 10: down to things like those light up sneakers that small
Speaker 10: children wear. They're in cars, they're in everything. So businesses
Speaker 10: have been bracing for this and they're going to have
Speaker 10: to really read the fine print when those tariffs come
Speaker 10: out to see if there are any exemptions whatsoever. We're
Speaker 10: not expecting any, but some companies are still holding out hope.
Speaker 7: You know, we just report the news.
Speaker 5: We don't editorialize or give our opinions, but you got
Speaker 5: to point out when something makes no sense at all.
Speaker 5: Ship and the President on Sunday said he was going
Speaker 5: to lower drug prices for American consumers by fourteen hundred
Speaker 5: to fifteen hundred percent, which is mathematically impossible unless drug
Speaker 5: producers are paying customers. At the same time, he wants
Speaker 5: to have tariffs at two hundred and fifty percent on
Speaker 5: imported pharmaceuticals, which is almost all of them. So how
Speaker 5: do you, I mean, how does any of that make
Speaker 5: any sense at all?
Speaker 10: Well, the math really is not working when you lay
Speaker 10: it out just on paper. He even talked today about
Speaker 10: increasing the drug tariffs, starting small and then after a
Speaker 10: year increasing very significantly to one hundred and fifty or
Speaker 10: two hundred percent.
Speaker 6: Matt.
Speaker 10: If you think think about trying to build a drug plant,
Speaker 10: it takes years for that to happen. Let's think on
Speaker 10: a four or five year timeline, and he is not
Speaker 10: talking about that. He has a sense of urgency and
Speaker 10: he wants to see these results immediately. In his mind,
Speaker 10: these plants should already be underway, and he is expecting
Speaker 10: investment from US trading partners, including the European Union, from
Speaker 10: Japan and others, to really start plowing that money into
Speaker 10: the ground and start getting those factories underway.
Speaker 3: Mike, what do we know though?
Speaker 1: I mean already we've talked about Puerto Rico right, certainly
Speaker 1: in the past being a big home to big pharma.
Speaker 1: There's some back and forth there, but I mean, we
Speaker 1: already do it. Is it that we've maxed out what
Speaker 1: we can.
Speaker 7: Do or what?
Speaker 9: Well.
Speaker 10: Part of the problem is that a lot of other
Speaker 10: jurisdictions outside the US have for years been lower cost
Speaker 10: and they have offered themselves as a venue to produce
Speaker 10: these medicines and even medical equipment at a far lower cost.
Speaker 10: And that actually has benefited consumers here in the US
Speaker 10: over the years, even though it doesn't look like it.
Speaker 10: Producing a lot of that material here in the United
Speaker 10: States would be more expensive based on labor costs, land costs,
Speaker 10: regulatory hurdles, and other things. Some of these the President
Speaker 10: has promised to sweep aside, especially in the land use
Speaker 10: some permitting and rules bayside. But there are other structural
Speaker 10: issues too, and that includes the labor supply and whether
Speaker 10: there is a workforce. And this is especially true for
Speaker 10: semiconductors and other advanced technology, having enough people who can
Speaker 10: move into the precision tooling, the advanced engineering jobs in
Speaker 10: the factories that could step in and take those jobs
Speaker 10: right away. And Matt, when you were asking about the
Speaker 10: math question, when it comes to chip making, one of
Speaker 10: the biggest inputs in a new plant, and these are
Speaker 10: the kinds of factories that the President and his team
Speaker 10: want to see built across. You know, in certain locations
Speaker 10: in the US, one of the biggest inputs is the
Speaker 10: semikin doctor manufacturing equipment itself, the deep ultra violet lithography
Speaker 10: machines made by one company in the world, and that's
Speaker 10: ASML in the Netherlands. Now, chips tariffs could increase the
Speaker 10: cost of those machines, which run about four hundred million
Speaker 10: dollars apiece, by another as much as one hundred million dollars,
Speaker 10: and for companies that are planning those plants, it is
Speaker 10: a big cost that have to absorb all of a sudden.
Speaker 5: Well, maybe that's why when President Trump was talking about
Speaker 5: the TSMC investment in its Arizona chip making plants, which
Speaker 5: has previously been stated at one hundred and sixty five billion, dollars.
Speaker 5: The President said, now it's a three hundred billion dollar investment.
Speaker 7: He just doubled that number, you know, also for fun.
Speaker 5: So I want to ask about chips ship because the
Speaker 5: idea of putting a tracking device on our you know,
Speaker 5: teenc weensy, it'sy bitsy most advanced AI semiconductors, I mean,
Speaker 5: the space constraints, the thermal budget, the power consumption, this
Speaker 5: signal interference.
Speaker 7: Seems like it would be difficult. It's a great question.
Speaker 10: And I've asked folks in the chip industry whether this
Speaker 10: capability is theoretically possible, and they have said yes, but
Speaker 10: they are wary of doing it for a number of reasons.
Speaker 10: One is that they don't want to create the appearance
Speaker 10: of their possibly being some sort of a back door
Speaker 10: to the US government that other buyers outside the United
Speaker 10: States might be able to see that, Oh wait, the
Speaker 10: US government has some means of following us, tracking us,
Speaker 10: finding us, knowing where we are, and maybe knowing what
Speaker 10: we are using these chips. For Invidia Corp, for instance,
Speaker 10: the maker of the most advanced AI chips, has insisted
Speaker 10: that there is no such back door, but it is
Speaker 10: theoretically possible. Matt and it is something that's key to
Speaker 10: the administration's strategy of exporting more chips, more AI compute globally.
Speaker 1: Not to sound like a crazy enough, but Mike, couldn't
Speaker 1: it already be there trying device?
Speaker 10: Well, it is theoretically, yeah, theoretically possible that they're already
Speaker 10: in there.
Speaker 7: I feel like it's terribly unlikely.
Speaker 5: You a very small piece of real estate and you're
Speaker 5: trying to put as much of the tiniest circuitry in
Speaker 5: the world.
Speaker 1: I understand, but do you know what they already put
Speaker 1: on that tiny, tiny little star no idea amazing capabilities?
Speaker 1: So tracking would that be such a big deal?
Speaker 7: I mean, look, how big an AirTag is?
Speaker 1: All Right, this is a little debate that Matt and
Speaker 1: I are having, all right, Mike Shepherd so appreciated. Bloomberg News,
Speaker 1: Senior editor for Technology and Strategic Industries out there in
Speaker 1: our DC bureau works.
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Speaker 3: I feel like you.
Speaker 1: Should go like this because there is something happening in
Speaker 1: the startup community, a twist, if you will, and this
Speaker 1: is according to a story out from our Bloomberg BusinessWeek team.
Speaker 1: You can find it on the Bloomberg and at Bloomberg
Speaker 1: dot com slash BusinessWeek. The twist is that a big
Speaker 1: tech company pays to hire a startups top talent and
Speaker 1: licenses technology, but does not actually acquire the company itself,
Speaker 1: and the remaining crew is left to pick up the pieces.
Speaker 5: Not a great way to be, no, but I guess
Speaker 5: it's kind of like silly season, especially in AI, so
Speaker 5: they're willing to pay anything to get not as much
Speaker 5: as previously you would.
Speaker 3: Have, and they kind of want the people in a
Speaker 3: big way.
Speaker 1: Let's get into it because it is a Bloomberg BusinessWeek
Speaker 1: story and it's caught our attention and fascination if you will.
Speaker 1: Bloomberg News Tech and venture capital reporter Kate Clark is
Speaker 1: in our Bloomberg Interactive Brokers story to tell us more,
Speaker 1: and as we mentioned, you can find your story at
Speaker 1: Bloomberg dot com slash BusinessWeek. All right, welcome, welcome, thank you.
Speaker 1: Tell us about an aqua hier.
Speaker 3: What is it? And what's a reverse aqua hier?
Speaker 11: So an AQUHIRER in startup land is just when a
Speaker 11: company comes in and buys another company, usually a small one,
Speaker 11: because they want the employees. They don't really care about
Speaker 11: the tech or anything else. They just want the smart
Speaker 11: people that are there. Now what's happening, And honestly the
Speaker 11: name doesn't fully fit, but no one can think of
Speaker 11: a better name, so we're going with reverse acu hire
Speaker 11: for now. You have a bigger company come in, take
Speaker 11: some of the people, maybe like five or ten or twenty,
Speaker 11: and license the technology and then leave the existing company.
Speaker 11: So they're not actually buying the company, they're just taking
Speaker 11: the good people and leaving the company behind. So, as
Speaker 11: you can imagine, not everybody is super thrilled with this
Speaker 11: new deal type.
Speaker 5: What are the biggest examples of this and I'm thinking
Speaker 5: of I'm not sure if they all fit, but you
Speaker 5: know Microsoft with open Ai and then open Ai with
Speaker 5: that Apple spinoff hardware company.
Speaker 11: Yeah, those are actually not examples, but they are similar.
Speaker 11: Weird silly things that are happening at startup plan right now.
Speaker 11: The big examples, there's six of them. There are startups
Speaker 11: called character AI, Scale AI, Inflection AI, A lot of
Speaker 11: companies most people haven't heard of who have made deals
Speaker 11: with larger companies like Google and Microsoft to come in
Speaker 11: and take their mainly their CEOs, their founders, but not
Speaker 11: the rank and file of startup employees.
Speaker 1: Why has this kind of shift, this twist started to happen.
Speaker 11: There are two big reasons. One of them is just
Speaker 11: the broader antitrust environment. Like people at companies like Meta,
Speaker 11: they don't think they can actually get these acquisitions over
Speaker 11: the line, so they created something funky and silly instead.
Speaker 7: The other big reason.
Speaker 11: Is they want the talent really badly, and they want
Speaker 11: the talent yesterday, and they don't want to wait a
Speaker 11: year for us for a deal to close to then
Speaker 11: get that talent. They need them right now.
Speaker 5: Well, and the fact that you have this insane concentration
Speaker 5: in the market right that gives companies like Microsoft and
Speaker 5: Meta so much capital doesn't matter if they had to
Speaker 5: pay one hundred million dollars for one person.
Speaker 11: Trying three billion dollars. I mean, these deals are huge,
Speaker 11: and they like There's been many stories recently that I've
Speaker 11: reported that people like Mark Zuckerberg are more than willing
Speaker 11: to pay a billion dollars. Maybe that is on the
Speaker 11: far end of things, but to get some of these
Speaker 11: AI researchers in house, because these companies feel they are
Speaker 11: behind open aie, behind anthropic, and these are big tech,
Speaker 11: massive companies that can't afford to be behind startups.
Speaker 1: Help me understand, because I'm thinking about early on in
Speaker 1: my career and I worked for media company that was
Speaker 1: bought by our competitor who was actually not doing so
Speaker 1: well we were, and it basically took some of that
Speaker 1: kind of key talent and some of our technology at
Speaker 1: that point. So it sounds like a very similar thing.
Speaker 1: So we've seen this kind of before. What is there
Speaker 1: something distinct or different about it this time around?
Speaker 11: Yeah, I mean, I think I'm sure there have been
Speaker 11: cases of this before, but in Silicon Valley there have
Speaker 11: never been such high profile, large deals like this before
Speaker 11: for companies that were otherwise seemed to be in a
Speaker 11: good place. There is arrange some of these startups were
Speaker 11: not doing so well, but a company like SCALEAI, I
Speaker 11: mean that was a company that was generating significant revenue
Speaker 11: was potentially plotting a massive IPO in the next couple
Speaker 11: of years.
Speaker 8: Like there was a lot like that.
Speaker 11: Wasn't a company that people necessarily expected would do a
Speaker 11: deal like this. So I think that's what's different is
Speaker 11: the types of companies that are doing.
Speaker 5: I can imagine this happening on Wall Street with a
Speaker 5: hedge fund or media. I would buy any company just
Speaker 5: to get you as an anchor on my show, and
Speaker 5: then I don't need the rest of the company. But
Speaker 5: in I feel like, especially in Silicon Valley, this guts
Speaker 5: the social contract of startups.
Speaker 9: Right.
Speaker 5: You go to a startup because you're you're one of
Speaker 5: the best and vietors. You could go work for Google
Speaker 5: or Meta too, but you're hoping to, you know, build
Speaker 5: something amazing, and then all of a sudden, your CEOs
Speaker 5: like the C suites out and you you kids, are
Speaker 5: done with your jokes.
Speaker 11: Yeah, I mean people are not happy about that. There
Speaker 11: are people at these companies who do feel betrayed. Some
Speaker 11: of them have gone public with those complaints. We've seen
Speaker 11: many many tweets from these people, and yes, it does
Speaker 11: betray those startup social contract. And I think what I'm
Speaker 11: hearing from the venture capital the employees.
Speaker 3: Of these companies.
Speaker 1: That's what's also interesting. The venture capitalists. I'm like, listen,
Speaker 1: I'm with you from the beginning, right, and I'm going
Speaker 1: to pony up more. And there's different rounds and so
Speaker 1: on and so forth, and then all of a sudden
Speaker 1: you're like, wait, you're out, and what's left for me?
Speaker 6: Right?
Speaker 11: And like, in some of these cases, you know, they
Speaker 11: get paid back first. So in many of many cases,
Speaker 11: they're getting their money back, but they're not making a profit.
Speaker 7: Or maybe they are.
Speaker 11: All of these have been structured differently, but by and large,
Speaker 11: this is not a great thing for a venture capitalists
Speaker 11: who are hoping for a home run return with an IPO.
Speaker 11: This isn't really they don't want to see their star
Speaker 11: founder jump to big tech, right.
Speaker 5: You tend to know their founders, right, Maybe a little
Speaker 5: bit better if some of them are jumping ship to
Speaker 5: go to big companies.
Speaker 6: Yep.
Speaker 1: You talk about Microsoft back in twenty twenty four and
Speaker 1: kind of point the finger at what they did.
Speaker 3: Do we blame them in some way?
Speaker 4: No?
Speaker 11: I mean it's interesting because we don't really know who
Speaker 11: architected the deal that we feel started this trend, which
Speaker 11: was Microsoft's aqu reverse aqu higher up inflection. We don't
Speaker 11: really know who was that person center. Who are those people?
Speaker 6: You know?
Speaker 11: Reid Hoffman was a co founder of Inflection AI. He's
Speaker 11: also a board member at Microsoft, so you know, imagine
Speaker 11: he played a role. I would love for him to
Speaker 11: talk about like how that came together, but it was.
Speaker 11: It is quite an original method, and I think for
Speaker 11: a while people were like, oh, so tricky, this is
Speaker 11: going to totally work. Get past you know, anti trust scrutiny.
Speaker 8: Norm will notice.
Speaker 11: I do think at this point there have been enough
Speaker 11: that you wonder, how is the FDC going to respond?
Speaker 11: They do have investigations into several of these deals already.
Speaker 5: They do they do, yeah, because this is meant to
Speaker 5: or is a way to get around regulation, but still
Speaker 5: has a lot of the same negatives, totally consequences of
Speaker 5: the things that the regulation is meant to block in
Speaker 5: the first place.
Speaker 1: So what happens to these companies that are left behind?
Speaker 1: Do they survive?
Speaker 3: Some don't? Did they shift their focus? You write about this.
Speaker 8: The all of the above.
Speaker 11: Some of them have not survived and have basically become
Speaker 11: what we just what we called zombie companies, where maybe
Speaker 11: a couple people work there to kind of like keep
Speaker 11: a few, you know, keep filing a few different PaperWorks,
Speaker 11: and then eventually it shuts down. A couple of them
Speaker 11: have really worked hard to stay afloat and are planning
Speaker 11: to raise some more money to help. That's Inflection and
Speaker 11: Character AI, which is a pretty well known chatbot company, right.
Speaker 11: But yeah, a lot of them have pivoted because they've
Speaker 11: had really had no choice, because they've lost, you know,
Speaker 11: the original people who had the vision and maybe the
Speaker 11: skills for what they were originally building. They've had to
Speaker 11: pivot to kind of figure out who are we without
Speaker 11: those original geniuses or whatever it was that started this company.
Speaker 1: There's part of me that says all's fair in love
Speaker 1: and war and capitalism, and so I do wonder like
Speaker 1: how that lost, Thank you very much, But I mean
Speaker 1: I also wonder about, you know, our venture capitalists then
Speaker 1: going to be thinking, all right, I don't know, is
Speaker 1: there something they write into future investments? Has become a
Speaker 1: little bit stickier for those startup entrepreneurs.
Speaker 11: I think, yeah, that's a really good question that I've asked,
Speaker 11: and you know, it's funny, I think right now the
Speaker 11: answers no, because venture capitalists right now have no leverage
Speaker 11: with AI founders because everybody wants to give all these
Speaker 11: AI founders one hundred million a billion dollars. They're competing
Speaker 11: with every venture capital firm. They can't be like, well,
Speaker 11: you also promised me that you won't make a deal,
Speaker 11: you know, with Microsoft. They can't do that. So for now, no,
Speaker 11: I think, you know, let's see how the market changes.
Speaker 11: Let's see where the AI boom, you know, does it.
Speaker 11: Does the bubble pop? You know, then things will change.
Speaker 11: For right now, I would say, like the venture capitalists
Speaker 11: don't have a lot of control over these situations.
Speaker 1: Let's feel like an AI power grab right now.
Speaker 5: Yeah, okay, so many different in your reporting for this story.
Speaker 5: Did you talk to anyone who did say, like, this
Speaker 5: is a ridiculous amount of money being spent and it's
Speaker 5: just reminding people of nineteen ninety nine or you know,
Speaker 5: another period when valuations.
Speaker 7: Were so frothy that people.
Speaker 11: Just twenty twenty one is what comes up the most often.
Speaker 11: The bubble that occurred, you know, during the end of
Speaker 11: the pandemic era, the zero interest rate era, that is
Speaker 11: mostly what people compare it to. I mean absolutely yes,
Speaker 11: you could compare it to the dot com boom, or
Speaker 11: even like the crypto boom or there have been many
Speaker 11: of them in the last twenty years, and I think
Speaker 11: people right now have a lot of concerns about some
Speaker 11: of those similarities.
Speaker 3: What I love about these stories and BusinessWeek does this
Speaker 3: so well.
Speaker 1: Yeah, it's like a big trend that's happening, and we
Speaker 1: talk about the execs and the companies and where things go.
Speaker 1: But you know, at the end of the day, there
Speaker 1: are people that are left in offices, and I'm assuming
Speaker 1: you talked to a bunch of them. Tell us about
Speaker 1: like just some of what you heard from those folks
Speaker 1: that are kind of left behind.
Speaker 11: I mean we heard like after one of these companies,
Speaker 11: Cognition or sorry, Windsurf, after they completed a reverse ACU higher,
Speaker 11: we heard that there were many employees who were like
Speaker 11: sobbing in the offices that weekend, and you know, we're
Speaker 11: devastated by it, and I think it really just damages,
Speaker 11: like we said, the trust in this system. And if
Speaker 11: you're just an average person working at one of these startups,
Speaker 11: which you know there are startups all over the country,
Speaker 11: all over the world, not everybody has the same understanding
Speaker 11: of like what this is. And I think it's just
Speaker 11: confusing and It's just created a lot of confusion and
Speaker 11: distrust in this Silicon valley world.
Speaker 1: I would say it's a risk right when you go
Speaker 1: to a startup risk reward, but there's also you know,
Speaker 1: maybe things are intensifying because of this, especially when it
Speaker 1: comes to AI and the grab that we're seeing. Really
Speaker 1: great story, great reporting, a new risk right, yet another
Speaker 1: risk right, another thing that you kind of layer into this. Kate,
Speaker 1: thank you so much, So glad we can get some
Speaker 1: time with you. Bloomberg News Tech and venture capital reporter
Speaker 1: Kate Clark. Check out our story. You can find it
Speaker 1: on the Bloomberg and at Bloomberg dot com, slash BusinessWeek.
Speaker 7: Are you here? Are you based out of New York?
Speaker 7: You wrote the story with Sharon Gaffrey. I am based
Speaker 7: out of New York.
Speaker 9: Hey.
Speaker 5: Yeah, really really well reported story and a great reading
Speaker 5: on the terminal or in Business Week.
Speaker 1: Like a snapshot of where we are right now on
Speaker 1: so many different things.
Speaker 2: You are listening to the Bloomberg Business Weekdaily podcast. Catch
Speaker 2: us live weekday after News from two to five pm
Speaker 2: Eastern Listen on Applecarplay and Android Auto with the Bloomberg
Speaker 2: Business app, or watch us live on YouTube.
Speaker 1: So We'll keeping a watch on shares of Axon Gaming
Speaker 1: as much as well. Just shy of nineteen percent today
Speaker 1: intra day the most sense February enough to reach a
Speaker 1: record intra day high. Right now, the stock is up
Speaker 1: just under fifteen percent. This is after the maker of
Speaker 1: tasers and other public safety equipment reported second quarter earnings
Speaker 1: per share of that topped expectations. Analysts also noted strong
Speaker 1: bookings for the company's AI plan.
Speaker 7: What look at the five year charts? I know, I
Speaker 7: mean often who cares about today?
Speaker 5: It's up eight hundred and twenty five percent over the
Speaker 5: past five years.
Speaker 3: It's had quite a run and a big move today.
Speaker 1: I should point out that coming off of earning several
Speaker 1: analysts including Barkley's and td Cow and raising their price
Speaker 1: targets on the stock, it is up more than forty
Speaker 1: percent year to date.
Speaker 3: Let's get to it. Delighted to have.
Speaker 1: With us Rick Smith, founder and CEO of Axon, to
Speaker 1: talk about the business, the outlook.
Speaker 3: Welcome, Welcome, Rick, How are you.
Speaker 6: I'm having a good day?
Speaker 1: All right, great, you are having a good day. Talk
Speaker 1: to us about the business. Who's buying you know, what's
Speaker 1: going on? We talk about tasers, but you go to
Speaker 1: your website, you guys have videos to remind us that
Speaker 1: you guys.
Speaker 3: Are not just about that, You're about a lot more.
Speaker 6: Yeah, that's why we changed the name of the company
Speaker 6: to Axon a few years ago, because Taser is it
Speaker 6: is a sledgehammer brand associated with our lessing the weapons.
Speaker 6: That's where we started. That got us into body cameras
Speaker 6: to basically help protect the public and police by preserving
Speaker 6: a factual record of what they did. And then from
Speaker 6: there we got into cloud software to manage all the data,
Speaker 6: and then the business just exploded. So today we're the
Speaker 6: market leader and in car video you know obviously body cameras,
Speaker 6: record management systems, and drones and robotics through their partnerships
Speaker 6: or first party things that we do I think the
Speaker 6: largest virtual reality training business and public safety, and now
Speaker 6: we're also expanding into adjacent markets. Any enterprise it as
Speaker 6: a security function, has to be able to communicate with
Speaker 6: their local police, and you can either do that through
Speaker 6: an old school nine to one one call, or we
Speaker 6: have a number of tools on our platform that allow you,
Speaker 6: for example, if you're a school or a business, to
Speaker 6: share your security cameras in an emergency with police. So
Speaker 6: if you have something like an active shooter, you're not
Speaker 6: trying to describe it over the phone. You can immediately
Speaker 6: give video access to law enforcement at your control. You
Speaker 6: can shut it off when it's not necessary. And then,
Speaker 6: of course we're layering artificial intelligence on cross of this
Speaker 6: entire enormous network of sensors so that we can try
Speaker 6: to make everybody a little bit safer, but also doing
Speaker 6: it in a way that is very cautious about privacy,
Speaker 6: to make sure we're doing this in a way that
Speaker 6: doesn't create out of control surveillance.
Speaker 5: Rick your I mean, your investors will know, analysts will know,
Speaker 5: but not everyone is familiar with your founding story, which
Speaker 5: is intensely personal. Give us a quick recap of that,
Speaker 5: and tell me if you you'll see the company's mission,
Speaker 5: which is cutting police gun deaths as realistically achievable in
Speaker 5: say this decade.
Speaker 6: Yeah, so I started this. I was in business school
Speaker 6: in Europe and I was having dinner with some people
Speaker 6: there who were you know, we were all talking about
Speaker 6: our hometown and they said I would never go to
Speaker 6: America because of all the gun violence. And I said, well,
Speaker 6: hold on, it's not like you see on television, and
Speaker 6: then one of them asks me, do you know anybody
Speaker 6: who's been shot and killed? And as I thought about it, well, yeah,
Speaker 6: there's two guys from my high school football team, and look,
Speaker 6: we weren't super close friends. But that's not the point.
Speaker 6: The point of it was that all of us, I
Speaker 6: mean I met each of you know people in your
Speaker 6: immediate circle who've been shot and killed. This is a
Speaker 6: problem that touches everybody. And by the time I added
Speaker 6: it up, I think I know five or six people
Speaker 6: who've been shot and killed. And that just struck me
Speaker 6: as a bizarre state of the universe that the way
Speaker 6: we protect ourselves in the nineteen nineties, much less twenty
Speaker 6: twenty five, is shooting bullets of people. We were doing
Speaker 6: that with like pirates in the sixteen hundreds, and so
Speaker 6: we're on a mission to make the bullet obsolete by
Speaker 6: creating better technology, basically something similar to Captain Kirk's phaser
Speaker 6: from Star Trek fame. That's what we're out to build,
Speaker 6: because if we have that weapon, it would no longer
Speaker 6: make sense to shoot anybody. And yeah, we're getting pretty close.
Speaker 6: Not it's not wireless like Captain Kirks but we are
Speaker 6: approaching a level of reliability where we now have countries
Speaker 6: outside of the US talking about using the taser instead
Speaker 6: of a gun. In the US, you know, we wouldn't
Speaker 6: suggest that, but we can suggest that the tasers came
Speaker 6: to the point where you would use it first. It
Speaker 6: would become your primary weapon and the gun would be
Speaker 6: more of a backup only for the most extreme cases.
Speaker 6: And if we achieve that, then yeah, we think we
Speaker 6: can cut gun deaths in American policing by fifty percent
Speaker 6: by twenty thirty three is our goal.
Speaker 1: So, as you can understand, we're all feeling a little
Speaker 1: sensitive this week here in New York City following the
Speaker 1: active shooter at a office building on Park Avenue last
Speaker 1: week where individuals lost their lives as well.
Speaker 3: As policeman lost his lives.
Speaker 1: So tell me about the numbers where you are seeing
Speaker 1: that as a result of your devices, that things are
Speaker 1: getting better, at least for police folks and security folks.
Speaker 6: Well, we have not yet bent the curve, meaning we're
Speaker 6: not seeing the numbers coming down, because the overall trend
Speaker 6: is still slowly inching upward, although this year it's lower
Speaker 6: than last year. But I think it's premature for us
Speaker 6: to claim that that is our effect. Yet we do
Speaker 6: know that over the past thirty years I've been doing this,
Speaker 6: there's around three hundred thousand uses where police could have
Speaker 6: been legally justified to use lethal force, but they were
Speaker 6: able to resolve it with the taser instead. This next
Speaker 6: two years is going to really be critical because up
Speaker 6: until now, taser weapons have been largely used, not really
Speaker 6: in the most critical situations. They would use it to
Speaker 6: capture somebody who is potentially violent but not an immediate risk.
Speaker 6: We've introduced a couple of key technologies that we're testing
Speaker 6: now in the field, and I can go into detail
Speaker 6: if you're interested, that we think move our effective reliability
Speaker 6: up into the ninety nine percent area, at which point
Speaker 6: then we think it becomes reasonable that the police would
Speaker 6: begin using taser as their primary first weapon, always keeping
Speaker 6: the taser the gun as a fallback.
Speaker 5: Rick, you you mentioned business school in Europe. I guess
Speaker 5: you went to school in Belgium before Chicago, but you
Speaker 5: studied first neuroscience at Harvard. How does that kind of
Speaker 5: background influence your decisions today at a company that touches
Speaker 5: so many nerves.
Speaker 6: Yeah, well, I mean the whole name of the company, Axon,
Speaker 6: is a little bit of neurobio geek speak, because the
Speaker 6: Axon is the name of the long nerve fibers that
Speaker 6: connect your brain to your muscles, and indeed it touches
Speaker 6: a number of ways. When I first wrote my college
Speaker 6: application and actually showing my son I had a copy
Speaker 6: of it, they asked, what do you want to do
Speaker 6: with your life? And I said I wanted to build
Speaker 6: robotic limbs. And it was like Luke Skywalker's robotic hand.
Speaker 6: I love this idea of a machine that can interface
Speaker 6: to the human body and almost become a part of you. Then,
Speaker 6: after this incident and I make my interest rising in
Speaker 6: gun violence, I took a different turn. Instead of building
Speaker 6: a machine that your brain could control, I build machines
Speaker 6: that control your body through your nervous system. I mean
Speaker 6: that's what Ataser does. We plug in, we tune this
Speaker 6: electricity so that it overwhelms communication, and you have something
Speaker 6: that looks like a seizure. Because we're flooding your nervous
Speaker 6: system with electrical energy. Your muscles lock up. I just
Speaker 6: saw five people volunteer here in my office this morning.
Speaker 6: It is a temporary effect, but extremely debilitating. And then
Speaker 6: if we think about the other parts of our business.
Speaker 6: When we got into the camera business, we realized the
Speaker 6: camera themselves are kind of kind of interesting, but it's
Speaker 6: it's not nearly the business that if we can connect
Speaker 6: all these sensors together and begin to think of this
Speaker 6: like a giant neural network, like for a police department
Speaker 6: like an NYPD with a thirty five thousand officers. What
Speaker 6: if we could begin to have live data feeds that
Speaker 6: would enable command and control in more real time, so
Speaker 6: we could identify, Hey, this situation is escalating, Let's send
Speaker 6: reinforcements before the officer even calls over the radio. Or
Speaker 6: we might even identify things like, hey, this situation over
Speaker 6: here is spinning out of control. If you think about
Speaker 6: all the horrible policing situations like George Floyd over the
Speaker 6: past ten years, I believe now that any one of
Speaker 6: those could be detected with AI running on the audio
Speaker 6: video feed of a camera. And that is a capability
Speaker 6: that we're building now. We do have live feeds now,
Speaker 6: but to have live feeds being AI monitored in real time,
Speaker 6: that'll happen in the next twelve months, and I think
Speaker 6: that's going to be a huge boon to make policing
Speaker 6: more effective, safer, and to help agencies identify if a
Speaker 6: situation spinning out of control so they can intervene now
Speaker 6: instead of you know, prosecuting somebody tomorrow, you know, if
Speaker 6: something wrong is happening.
Speaker 1: How much of your business's governments and I'm just curious.
Speaker 1: It does feel like there's going to be some municipalities
Speaker 1: under pressure in terms of funding, and I'm just curious
Speaker 1: how that could play into or impact demand at your company.
Speaker 6: Yeah, so we're still majority government business, but the fastest
Speaker 6: growing segment is enterprise, and so the enterprise security is
Speaker 6: two to three times larger than public policing in the
Speaker 6: United States in terms of manpower, and so there's a
Speaker 6: huge opportunity there. But if I come back to your
Speaker 6: question about municipal policing, you know, I remember the two
Speaker 6: thousand and eight financial crisis and others, And what we
Speaker 6: have found is if you look at a police agency,
Speaker 6: the majority of their spend is on cops, cars, in gas.
Speaker 6: It's that's like ninety percent of their spend. So their
Speaker 6: tech spend is a relatively small portion of their overall budget.
Speaker 6: And when budgets get compressed. What we see is they
Speaker 6: really look to technology where they're saying, look, we need
Speaker 6: to get more efficient. We can't just throw bodies at things.
Speaker 6: And I'll give you one example. Our first major AI
Speaker 6: product using generatord ai is a service called Draft one,
Speaker 6: and what we do very simply, we take your body
Speaker 6: camera footage, we feed it through an AI model, and
Speaker 6: we actually just use the audio. We don't even need
Speaker 6: the video. We use the audio track and we do
Speaker 6: the first draft of your police report because it turns out,
Speaker 6: you know, police interactions are pretty standard. You know, he
Speaker 6: oh man, what's your name? Data birth, you know why
Speaker 6: I stopped you, and you can from that extract the
Speaker 6: information that we need to put the structured report narrative together.
Speaker 6: It's about the eighty percent completion and that basically means
Speaker 6: we're cutting the amount of time police spend on bureaucracy
Speaker 6: by up to sixty or seventy percent, which is meanither're
Speaker 6: out doing more work.
Speaker 5: Huge because only fourteen percent of police departments across the
Speaker 5: nation are actually fully staffed, and in the most recent survey,
Speaker 5: seventy five percent of police who responded said they do
Speaker 5: want AI to help them out. It seems like and
Speaker 5: this is not a pun on your neuroscience degree, but
Speaker 5: seems like a no brainer.
Speaker 3: It's a little bit of all.
Speaker 6: I'm a little biased, but I.
Speaker 1: Think so, Hey, just thirty seconds. I'm curious because we
Speaker 1: talked about I think robotics kind of came.
Speaker 3: Up and you talked about your interest.
Speaker 5: Empire strikes back the last scene, you know, Luke Skywalker
Speaker 5: with his hand.
Speaker 1: Yes, Like, is robotics something that you guys are thinking
Speaker 1: in terms of security going forward?
Speaker 3: Is that an area that you guys might.
Speaker 6: Stay tuned, stay tuned. The solution to the American gun
Speaker 6: violence problem, in my personal belief is we've got to
Speaker 6: change the game. And what I mean by that is today,
Speaker 6: when an active shooter shows up, they have no illusions
Speaker 6: they're going to come out of it alive. They want
Speaker 6: to go down in some sick twisted vision of a
Speaker 6: glorious gun battle with the police. In a couple of years,
Speaker 6: we are going to deny them that if you show
Speaker 6: up with a gun somewhere, we will zip in very
Speaker 6: quickly with a robot using less lethal force. You'll be
Speaker 6: arrested and under control very quickly, and we're going to
Speaker 6: deny them the entire sort of motivation to get in
Speaker 6: gun fights. And I think we can do things with
Speaker 6: drones and robotics that you could never do with people,
Speaker 6: and we can do it without having to resort to
Speaker 6: lethal force. So stay tuned. We're making a big play
Speaker 6: in that space.
Speaker 3: Sounds like you got to come back real soon. So appreciated,
Speaker 3: So appreciate it.
Speaker 1: Rick Smith be Well, founder and CEO of ex On
Speaker 1: joining us on this Tuesday. And as we mentioned, we're
Speaker 1: seeing that stock move in a big way following me
Speaker 1: its latest results.
Speaker 3: Let me just pull it up for.
Speaker 7: You can add that guy to the list of guests.
Speaker 3: Don't take it.
Speaker 7: I steal from your show and use on my show.
Speaker 3: Do not have that co host anymore?
Speaker 7: Done?
Speaker 9: All right?
Speaker 5: One story, I mean, what an incredible the stock chart
Speaker 5: is a maz The story behind it. When he started
Speaker 5: that company in nineteen ninety three, Well he's been at
Speaker 5: this for thirty two years.
Speaker 1: I love these people who come have different backgrounds. It's
Speaker 1: like doctors who are engineers who are looking at the
Speaker 1: body in a different payment. Here he is in terms
Speaker 1: of his background and understanding how the brain works and
Speaker 1: the impact on things.
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