Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Lisa A.
Speaker 2: Bromwoyd's along with Tom Keen and Jonathan Farrow, join us
Speaker 2: each day for insight from the best in economics, geopolitics,
Speaker 2: finance and investment.
Speaker 1: Subscribe to Bloomberg Surveillance.
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Speaker 2: and always on Bloomberg dot Com, the Bloomberg Terminal, and
Speaker 2: the Bloomberg Business App. And right now, I don't want
Speaker 2: you delay a great conversation coming up. Bloomberg's owner Yusef
Speaker 2: Gamela Aldin is joining us, sitting by with Jennifer Johnson,
Speaker 2: President and CEO of Franklin Templeton In Riad.
Speaker 1: Let's head over, Yousef, Hey.
Speaker 3: Hey Lisa.
Speaker 4: Yeah, So let's pick up on the big debate on
Speaker 4: the health of the US economy and a few other
Speaker 4: angles as well. Jenny, thank you for making the time
Speaker 4: so we had Jamie Diamond come out strong. He's saying
Speaker 4: there should be a lot more humility from central banks.
Speaker 4: They got all their forecasts wrong. Ray dallyus pessimistic. I
Speaker 4: want to know where Jenny Johnson stands in this debate.
Speaker 5: Well, I mean I have a little concern about US
Speaker 5: debt and its impact on interest rates, right. I mean,
Speaker 5: I think the conversation on rates is constantly focused on
Speaker 5: what Pal's going to do next month or December, and
Speaker 5: I actually think the bigger story is really around you know,
Speaker 5: we've got a US debt that is gone from nine
Speaker 5: trillion to thirty one trillion, and you have to have
Speaker 5: buyers of that debt, and that means you have to
Speaker 5: have a rate that's reasonably priced to attract debt, and
Speaker 5: it potentially crowds out some of the other investment opportunities.
Speaker 5: So you know, that's that's a concern. And you've got
Speaker 5: a deficit this year that's gonna add two trillion dollars to.
Speaker 6: The debt, So I think that can weigh on the economy.
Speaker 3: And when do you see interest rates going then?
Speaker 4: I mean, two weeks ago you still had to view
Speaker 4: that there's one more hike in the in the plan.
Speaker 3: You still stand by that.
Speaker 5: I think Pell kind of came out and said, probably
Speaker 5: won't do it in November, but he's watching the data,
Speaker 5: so I think, you know, maybe he'll do December.
Speaker 6: I think he'll be data driven. Uh, maybe he'll just
Speaker 6: kind of leave it for where it is and see
Speaker 6: how it plays out.
Speaker 5: I think the bigger story has been around the ten
Speaker 5: year and I think that's more of an issue around
Speaker 5: the you know, US debt.
Speaker 4: I mean, you've seen the volatility and treasury yields and
Speaker 4: of course some of the you know, prolific commentators, let
Speaker 4: me put it that way, including mister Actman and many others. Uh,
Speaker 4: do you think that we're gonna start consolidating now at
Speaker 4: the current levels?
Speaker 3: I mean, what's going to bring them down?
Speaker 4: Because there was a big debate on what's going to
Speaker 4: carry them up if they are going to go down
Speaker 4: from here?
Speaker 3: Where you know, what's gonna push them down?
Speaker 6: I mean, honestly, there's a lot of things.
Speaker 7: You know.
Speaker 5: I think that the Fed has done a good job
Speaker 5: on kind of jamming on the brakes and raising rates
Speaker 5: and slowing things. But you know, there's tremendous headwinds to
Speaker 5: slowing inflation. Oil prices are inflationary. Uh. You know, some
Speaker 5: of the union wage negotiations are inflationary.
Speaker 6: Uh. So there's factors that makes it tough.
Speaker 5: The the you know, spending on things like renewable energy,
Speaker 5: government spending and incentives on renewal energy, and things like
Speaker 5: the Chipsack are all pumping money into the system. That
Speaker 5: becomes a headwind to somebody who's trying to tamp down inflation.
Speaker 4: One of the stories that's been trending the last twenty
Speaker 4: four hours on the terminal is about six hundred billion
Speaker 4: dollars worth of client cash that it's headed for the
Speaker 4: exits from some of the bigger investment funds, and it
Speaker 4: raises the question, how does Franklin sort of thrive amid
Speaker 4: a shift to more passive solution.
Speaker 5: Well, first of all, let me take on the back
Speaker 5: on the passer active. Right, anytime you have a full
Speaker 5: momentum market where you've literally had central banks printing money
Speaker 5: right and interest rate zero, the only place to go
Speaker 5: is the equity markets. Have pumped the equity markets up
Speaker 5: but today right, And first of all, nobody ever talks
Speaker 5: about market beta or passive as going up or down
Speaker 5: a risk.
Speaker 6: The day Tesla was added to the S.
Speaker 5: And P five hundred, market beta became more risky, right,
Speaker 5: and we don't talk about that.
Speaker 6: Now you're sitting here today, You've got a market where you.
Speaker 5: Look at it and say it's up thirteen percent, but
Speaker 5: actually most of it that's because of seven stocks and
Speaker 5: Magnificent seven, you're seeing the highest concentration.
Speaker 6: You know, at the peak ofthe dot.
Speaker 5: Com ten stocks and count for twenty five percent on
Speaker 5: market cap today that's thirty percent, so you're thirty two percent, right,
Speaker 5: so you're even higher from a concentration usually doesn't end
Speaker 5: well after that. And from the return standpoint, top five
Speaker 5: stocks have a PE ratio of forty nine and the
Speaker 5: rest of the market has a PA ratio of like fourteen.
Speaker 5: So you know those are really different from a risk scenario.
Speaker 5: Now you've got to navigate interest rates. You got to
Speaker 5: figure out the impact of rates on different companies.
Speaker 6: I think it's a time for app Yeah.
Speaker 4: That's that warrants its own debate. I want to get
Speaker 4: to your meetings here in Saudi Arabia. Talk to me
Speaker 4: about the opportunity set here and where you could sort
Speaker 4: of lock in additional growth.
Speaker 6: Yeah.
Speaker 5: So you know, I'm here at FII, and you know
Speaker 5: one of the reasons to be here is because you
Speaker 5: can you have Franklin Templeton's a global company. We have
Speaker 5: clients in one hundred and sixty countries. You come to FII,
Speaker 5: you can meet your clients from Asia from the US,
Speaker 5: from Europe, from and all Africa, all over the world,
Speaker 5: and so it's a great place to.
Speaker 6: Convene and efficiently meet with clients.
Speaker 5: But it's also I mean, I tend to think energy transition.
Speaker 6: A lot of the.
Speaker 5: Innovation is coming out of this region, and I know
Speaker 5: that sort of sounds counterintuitive, but what you find is
Speaker 5: a mentality of multiple generations, thinking about how do we
Speaker 5: position ourselves for generations, and a recognition that at at
Speaker 5: some point oil goes away, we.
Speaker 6: Better diversify the economy.
Speaker 5: And you see initiatives like in Saudi Arabia where by
Speaker 5: twenty thirty they want fifty percent of their energy.
Speaker 6: Coming from renewables.
Speaker 5: UAE, I think has said by twenty fifty they want
Speaker 5: fifty percent. This is a region that has the will
Speaker 5: and the capital to actually focus on that innovation.
Speaker 4: We're closely monitoring what's happening with the Israel Gaza conflict.
Speaker 3: That's a human tragedy in the first instance.
Speaker 4: In terms of sort of second round effects capital markets,
Speaker 4: what extent is that going to take away from some
Speaker 4: of the ambitions that the golf has as an investment
Speaker 4: destination longer term.
Speaker 5: Well, first of all, I mean it's an absolute humanitarian crisis.
Speaker 6: It is a terrible, terrible situation.
Speaker 5: It's very difficult to watch it unfold, and it's awful.
Speaker 5: If it stays contained, it probably won't have longer term
Speaker 5: impacts other than in obviously tremendous impacts in the areas
Speaker 5: in both Israel and Gaza. But as long as it's remains,
Speaker 5: you know, contained, then I think it doesn't slow things down.
Speaker 6: And honestly, I think, you know, places like.
Speaker 5: Saudi and the UAE are so motivated to try to
Speaker 5: come up with a resolution because they don't want to
Speaker 5: derail the progress that they're making on their visions, you know,
Speaker 5: and trying to attract capital into the region.
Speaker 4: So closing question on broader strategy, you've been acquisitive, what's
Speaker 4: sort of next.
Speaker 3: On the purchase list? How much are you willing to allocate?
Speaker 5: Well, we've been very open about the fact that we
Speaker 5: think sort of the last area that we'd love to
Speaker 5: fill is infrastructure. I think the spending on infrastructure, whether
Speaker 5: it's energy transition or even just updating infrastructure.
Speaker 6: Across the globe because so many.
Speaker 5: Of the develop markets have aged infrastructure, is a great opportunity.
Speaker 5: So that would probably be the last area that we'd
Speaker 5: feel we need to complete sort of our product capabilities.
Speaker 3: Denny, great to touch base. Thank you very much.
Speaker 4: Less of luck with your meetings over the next couple
Speaker 4: of days. It's Jenny Johnson, the CEO of Franklin Templeton
Speaker 4: joining me now.
Speaker 8: Is mendeep seeing senior tech analysts for Bloomberg Intelligence.
Speaker 9: It's a relief to see me rather than the other three.
Speaker 8: Ah okay, so we're going to get a few more
Speaker 8: tech results. Part of Magnificent seven are going to get
Speaker 8: delivered today. Talk to me about Google owner, Alphabet, Google,
Speaker 8: whatever weight run.
Speaker 9: Do you like to look at it?
Speaker 8: Are they more immune just simply because I've got to
Speaker 8: advertise on the platform relative let's say Mata or to Snap.
Speaker 8: I mean, that's the consensus in the story.
Speaker 9: Do you believe that?
Speaker 10: Yes?
Speaker 7: And also the divergence and expectations. So Meta is expected
Speaker 7: to grow twenty one percent, Google ten percent, and when
Speaker 7: you parse through their business segments, you know the search
Speaker 7: will likely be resilient. We know they're not losing any
Speaker 7: share to Open AI and bing and YouTube. I mean
Speaker 7: that ten percent is a low bogie, so you probably
Speaker 7: should expect some upside there cloud another big segment for them,
Speaker 7: And you mean we really.
Speaker 8: Used to get very obsessed. Well not uc are obsessed,
Speaker 8: but we are absolutely obsessed. What happens in cloud at Amazon,
Speaker 8: what happens in cloud with Alphabet, How has that grown
Speaker 8: and where can that get to and how important is it?
Speaker 9: Yeah?
Speaker 7: So, think of the three hyperscalers Amazon, Microsoft and Google.
Speaker 7: That makes up about one hundred and eighty billion in
Speaker 7: cloud revenue, and they were growing at north of thirty percent.
Speaker 7: This year, the growth has decelerated to about eighteen to
Speaker 7: twenty percent. So what everyone is looking for that acceleration
Speaker 7: next year because these are the companies that are buying
Speaker 7: all the nvidio GPUs and if that doesn't translate into
Speaker 7: real revenue, then we got a problem. But so far,
Speaker 7: the story has been that hyperscalers will provide the GPU
Speaker 7: capacity for generative AI, and that's going to reflect in
Speaker 7: twenty twenty four numbers, and.
Speaker 8: That those hyperscalers are also critically important to Amazon as well,
Speaker 8: aren't they? And Amazon's going to be a lovely insight
Speaker 8: into how strong we are or not on the consumer
Speaker 8: side as well.
Speaker 10: Yeah.
Speaker 7: So Amazon is the largest player in the public cloud
Speaker 7: one hundred and eighty billion dollar revenue that I mentioned,
Speaker 7: it's about forty five percent. Microsoft is the second big player,
Speaker 7: and in the case of Amazon, everyone is thinking they
Speaker 7: are behind in that generative AI race and the other
Speaker 7: two are ahead, but clearly you know they are the
Speaker 7: largest player in cloud and if anything, this generative AI
Speaker 7: wave is going to accelerate that shift to cloud because
Speaker 7: you can only do AI training on the cloud. You
Speaker 7: can't do it on prem.
Speaker 8: Are you going to be on AI workkind in this
Speaker 8: reporting season and magnificent seven, I mean, it's all you
Speaker 8: got to do is print those two letters and you're
Speaker 8: off to the races.
Speaker 10: Well, now I think the time has come.
Speaker 9: To guide to make it a bit more discerning, and.
Speaker 10: The twenty twenty four guide is very important.
Speaker 7: So that's where you are going to see companies that
Speaker 7: actually guide to that lift from GPU revenue on the cloud.
Speaker 7: That's where you're going to see, you know, the multiples
Speaker 7: and the estimates go up.
Speaker 10: But so far it's been a huge investment here.
Speaker 7: Everyone is hoping twenty twenty four is when it translates
Speaker 7: into revenue.
Speaker 8: And then if I talk about Microsoft, Microsoft is interesting
Speaker 8: for all of the aspects that We've just touched on
Speaker 8: a little bit of AI, a great deal of cloud,
Speaker 8: but also for them there's the hardware sign of this
Speaker 8: as well. Where does Microsoft fit into the Magnificent seven.
Speaker 7: Well, Microsoft clearly had that early open AI partnership and
Speaker 7: that helped them, you know, in terms of publishing that
Speaker 7: generative AI leadership. But I think the PC side is
Speaker 7: still weak and you're seeing that decline in that Windows revenue.
Speaker 7: Clearly that hasn't changed. Everyone is calling for a PC
Speaker 7: bottom this quarter, but we don't know.
Speaker 10: If that's going to be the case. And in the case.
Speaker 8: Though dine next year, it could be that Microsoft takes
Speaker 8: the bigger hits perhaps out of this grouping.
Speaker 7: Well, so Microsoft has a lot of application software revenue,
Speaker 7: and if they don't, you know, add those co pilots
Speaker 7: to really complement that, and if there is actually real
Speaker 7: destruction from generative AI, I would argue Microsoft is at risk.
Speaker 7: But nobody doubts that office you know, will continue to
Speaker 7: be strong because they added these copilots and that will
Speaker 7: be a nice add on to you know, what you
Speaker 7: already have from the office suite.
Speaker 9: So Europe is under pressure.
Speaker 8: Technically, we can argue about recession China. You can debate
Speaker 8: whether they're going to make five percent growth or not,
Speaker 8: but it's tough in China at the moment with those
Speaker 8: two global markets very much under pressure. Sure, who is
Speaker 8: perhaps the weakest link in the Magnificent seven vicariously exposed
Speaker 8: to the China story.
Speaker 10: I mean, I would say Apple, no doubt about it.
Speaker 7: To buy a new Apple fix revenue perspective, twenty percent
Speaker 7: revenue and the supply chain exposure is huge, So there
Speaker 7: is a big risk that clearly lies with Apple. The
Speaker 7: other ones are somewhat insulated because they don't have a
Speaker 7: lot of revenue exposure. And that's where the Internet names
Speaker 7: like alphabet and Meta, I mean, they have no exposure
Speaker 7: at all. So clearly Apple is the one to watch
Speaker 7: out for in terms of that geo revenue exposure.
Speaker 8: Okay, and then of course we have the friends showing
Speaker 8: on shore and let's see what the numbers are when
Speaker 8: they drop. Thank you so much for stopping buy That
Speaker 8: is Mandy sing on All Things Technology.
Speaker 2: Mans Cranny and Cameron Dawson CIO at New Edge Wealth
Speaker 2: both with us right now in Marcuts.
Speaker 1: We can see a bit of a lift. We do
Speaker 1: see those.
Speaker 2: Earnings coming out and Cameron, it's just been catching my eye.
Speaker 1: Everything has been beating.
Speaker 11: Yeah, much better than expected when it's looking at the consumer,
Speaker 11: better than expected, some industrials better than expected. We just
Speaker 11: got share. When Williams come out, they raise guidance significantly.
Speaker 11: That's a housing related stuff, right, it's paint people spending
Speaker 11: more in their houses. So clearly the consumer in these
Speaker 11: earnings is holding up better than expected, somewhat confirming that
Speaker 11: better retail sales that we got in September.
Speaker 8: Do you think the whole narrative, the whole story about
Speaker 8: excess savings running off is we're overplaying it when you
Speaker 8: look at the wealth report that we both all three
Speaker 8: of us looked at yesterday. So do you think the
Speaker 8: xcess savings narrative dropping so aggressively is folly?
Speaker 9: You should be. You know, the resilience of the consumer
Speaker 9: is a bind in these numbers.
Speaker 11: I think that it's a fading tailwind, but it's not
Speaker 11: a headwind because the consumer balance she is healthy.
Speaker 8: The risk is it turns into a head too in
Speaker 8: twenty twenty four. That's the debate, isn't it.
Speaker 11: Certainly, But if you look at things like consumer credit
Speaker 11: card as a percentage of disposable income. They're just back
Speaker 11: to their twenty nineteen levels, meaning that it's gone up
Speaker 11: a lot. Consumers are using more debt, but it's not
Speaker 11: nearly where it was during the Great Financial Crisis. So
Speaker 11: ASTs have been growing faster than liabilities pretty much consistently
Speaker 11: for the last seven years. The consumer balance sheet still
Speaker 11: is healthy, even though at the margins it's deteriorating.
Speaker 2: So there's a real sort of bigger picture question about composition.
Speaker 2: And we're talking about this with Tom Sousaurus yesterday when
Speaker 2: it came on and said, what you're seeing is that
Speaker 2: the Fed policy rates have really affected lower income individuals
Speaker 2: as smaller businesses disproportionately.
Speaker 1: You have seen this again and again.
Speaker 2: So when do they start to have a bigger impact
Speaker 2: on the overall general narrative, or can you see this
Speaker 2: dispersion and continue where the overall averages keep chugging along.
Speaker 3: Well.
Speaker 11: The thing that lower income individuals and smaller businesses have
Speaker 11: in common is that they tend to have more of
Speaker 11: that floating rate debt. It's bigger companies and higher income
Speaker 11: people who are a to turn out their debt borrow
Speaker 11: at thirty year mortgages or issue thirty year bonds, and
Speaker 11: so it's those larger borrowers that have not been pinched
Speaker 11: by these higher interest rates. It's why small caps and
Speaker 11: microcaps are underperforming so much, they have more floating rate debt.
Speaker 8: But this was the we were just talking about this
Speaker 8: in the break, as Gina left I said, I thought
Speaker 8: we were supposed to run into some kind of a
Speaker 8: significant debt cliff moment for corporates refinancing.
Speaker 9: They have refinancing.
Speaker 8: Now, we haven't made a huge deal out of anybody
Speaker 8: missing the refinancing yet, but as you look at debt
Speaker 8: costs going forward, and you look at the returns going
Speaker 8: forward with debt costs, surely that begins to impinge as
Speaker 8: well well.
Speaker 11: Certainly because eventually you have to refinance that debt. And
Speaker 11: if you look at the corporate treasury market, a lot
Speaker 11: or corporate bond market, a lot of them have average
Speaker 11: yields that are less than the entirety of the treasury curve.
Speaker 11: Entirety of the treasury curve. So eventually you will have
Speaker 11: to refinance at these much higher rates. And that's the
Speaker 11: reality of higher for longer starting to bite.
Speaker 2: This is what everyone thought, Okay, and this to me,
Speaker 2: I'm so glad you brought this up. Mannis, because to me,
Speaker 2: there's been this sort of overhang. Back in twenty fifteen,
Speaker 2: twenty sixteen, we were.
Speaker 1: Talking about beer goggles.
Speaker 2: Dallas FED President Kaplan came on and said, everyone's looking
Speaker 2: at this world with beer goggles of low rates, and
Speaker 2: that's why they're buying anything. Anything can look beautiful when
Speaker 2: you go out and you take a little assets with
Speaker 2: low rates, with zero rates, and now you're expecting armageddon
Speaker 2: because you've had a world refinance at that and you haven't.
Speaker 2: And that's really sort of the surprise. How much can
Speaker 2: companies survive by just basically relying on investors to force
Speaker 2: them to stay afloat so the investors don't get totally
Speaker 2: slammed with losses, right, I mean, this is something that
Speaker 2: they've you've been seeing with helping refinance at decent rates.
Speaker 11: I think we're just now starting to see the pinch
Speaker 11: come through because we've been in this for eighteen months
Speaker 11: a little almost two years now. That's allowed extend and
Speaker 11: pretend you can try to push off the refinancing as
Speaker 11: much as possible, because remember we're also conditioned for the
Speaker 11: FED to come in and cut rates really quickly, and
Speaker 11: the Fed's telling you they're not going to do that.
Speaker 11: So it's the reality setting in that, Hey, I've delayed
Speaker 11: refinancing as long as possible. Now I kind of have
Speaker 11: to face the music, and the end result is much
Speaker 11: higher rates.
Speaker 1: So have you shifted your views over the past couple
Speaker 1: of weeks.
Speaker 11: Yeah, So we have been underweight duration for the entirety
Speaker 11: of the year, thinking that there was this floor under
Speaker 11: interest rates because of that higher for longer and an
Speaker 11: upward bias to interest rates. But now we're starting to
Speaker 11: see a world where the risk reward simply looks better.
Speaker 11: If you take a one hundred basis point move higher
Speaker 11: in yields versus lower in yields, at least you have
Speaker 11: this higher base yield offsetting some of those losses. So
Speaker 11: when we think for long term investors, we're starting to
Speaker 11: find interest in compelling opportunities, not just within treasuries but
Speaker 11: within munis. We're not tactically going full overweight duration, saying
Speaker 11: the peak and yields is in. There's still a lot
Speaker 11: of risk, but that's where we're starting to find opportunities
Speaker 11: at the market.
Speaker 8: It's almos going to give cameras are like her introductor
Speaker 8: drum drum roll, because she's in good company and she
Speaker 8: used got wayly from Black Walk. She's got Alliance Alliance
Speaker 8: alongside you. So what goes through my mind and I'm
Speaker 8: just going to I'm going to slightly combat you there,
Speaker 8: which is isn't it just fear of being left behind
Speaker 8: that you've got to pivot on your duration call?
Speaker 11: Certainly, of course we don't want to be too cute
Speaker 11: with it with the timing, but we're long term investors.
Speaker 11: And if you think of it just in terms of
Speaker 11: asset liability matching and thinking.
Speaker 8: So aplication you're shifting, is it a dramatic shifting in
Speaker 8: you're taking a duration or is it incremental manners? In
Speaker 8: other words, we see an opportunity and we add incrementally.
Speaker 11: It's incremental because tactically we have not made this call
Speaker 11: that we say we've seen a peek and yields. We
Speaker 11: still see this supply and demand issue where we do
Speaker 11: know we have higher deficits and that is increasing supply
Speaker 11: at the same time that demand is falling. Hue is
Speaker 11: not here to save the day. We don't have the
Speaker 11: flight to safety bid. Yet We'll have to see how
Speaker 11: data emerges, and we shouldn't forget we have this big
Speaker 11: unknown about the Bank of Japan and potential changes to
Speaker 11: yield curve control policy. What could that mean for demand
Speaker 11: for treasuries as we go into twenty four.
Speaker 2: Do you think that that could have been underpinning some
Speaker 2: of the wild moves over the past couple of days.
Speaker 11: You can track the ownership of treasuries by Japan and
Speaker 11: it's actually gone up slightly. They've sold more corporate bonds,
Speaker 11: so I don't know if that's necessarily, but it is
Speaker 11: the fear that they could be less buyers on the margin.
Speaker 2: Like just I'm wondering though, just going forward, when you
Speaker 2: talk about how you are legging in just on the
Speaker 2: margin to duration, is it out of equity risk because
Speaker 2: we heard this yesterday from Katie Nixon.
Speaker 11: Yeah, you have to do it in a very tax
Speaker 11: efficient way, because if you're selling equities with big gains
Speaker 11: and layering into bonds, that may not be the best trade.
Speaker 11: One of the ways that we've been doing it is saying,
Speaker 11: if we have dibbitting income, instead of reinvesting into equities,
Speaker 11: we'll reinvest into fixed income. Because at the end of
Speaker 11: the day. If you can get your same return at
Speaker 11: less risk, then maybe you've should do that. Now, how
Speaker 11: unrisky is long bonds given the fact that the TLT
Speaker 11: is down forty five percent in the last two years.
Speaker 8: Listen, you know what, when you get to my juncts
Speaker 8: used to say, you know what, ten year paper actually
Speaker 8: doesn't look too bad.
Speaker 9: Maybe at five percent.
Speaker 2: Well that's what a lot of people seem to say. Basically,
Speaker 2: it got five percent. The market basically said we reject that.
Speaker 1: No, you know, we're going to pounce on that, but it.
Speaker 8: Comes Actually, you're back into sort of general historical norms.
Speaker 8: If I'm not wrong, I mean, you know, we are
Speaker 8: many people out there are flum ex by rates at
Speaker 8: five percent, paranoid at the risk of five and a
Speaker 8: half percent. The reality is, when I took my first
Speaker 8: mortgage in nineteen ninety four, it was not seven percent.
Speaker 8: In the United Kingdom. I have lived through seven percent
Speaker 8: and fifteen percent. So for me, okay, it was free
Speaker 8: money as zero. It was free money at zero. Now
Speaker 8: I'm choking at eight.
Speaker 2: I've got to be honest, these conversations, when people say
Speaker 2: this kind of stuff, they kind of bug me a
Speaker 2: little bit.
Speaker 1: Wow, no offense.
Speaker 2: But just because the world was so different then prices
Speaker 2: were different. They were more adjusted to a seven percent rate.
Speaker 2: How much to the prices of assets change the scenario
Speaker 2: when you have high prices that were backed by low
Speaker 2: rates and then all of a sudden you've got to
Speaker 2: deal with the rate going back to where it used
Speaker 2: to be.
Speaker 11: Yeah, you were able to see house prices go up
Speaker 11: twenty percent coming out of the pandemic shutdown simply because
Speaker 11: the average mortgage rate did not reflect that because mortgage
Speaker 11: rates were falling so much or the average cost of
Speaker 11: paying for that mortgage. So now when you add very
Speaker 11: high prices to very low interest rates, that's where it
Speaker 11: becomes simply on the floor.
Speaker 10: Beat O.
Speaker 2: No, you can come back at me next time, because honestly,
Speaker 2: you are correct, and I think that it's a valid point.
Speaker 2: But so many people have come on here and said
Speaker 2: right around, Well you.
Speaker 1: Weren't around, but I remember I took out a mortgage tech.
Speaker 1: Well you know, come on.
Speaker 2: It's a little bit of a different scenario. Paul Jacobson,
Speaker 2: CFO of General Motors joining us. Now, you did report
Speaker 2: earnings earlier this morning. You beat estimates, but you withdrew
Speaker 2: your fourteen billion dollar profit forecast because of the uncertainty
Speaker 2: due to these strikes. Do you think that it will
Speaker 2: materially affect the outlook given the contours of where negotiations
Speaker 2: are right now of twenty three to thirty percent increase.
Speaker 12: Well, good morning, Lisa, and thanks for having me. You know,
Speaker 12: just before I start, I would like to just give
Speaker 12: a big thank you to the entire GM team for
Speaker 12: an outstanding quarter across the board, including the employees that
Speaker 12: are working every day and producing the high quality vehicles
Speaker 12: that our customers love. It's a strong testament to everything
Speaker 12: that we're going through right now. You know, when we
Speaker 12: made the decision to withdraw the guidance, it was really
Speaker 12: based on not wanting to speculate on the length or
Speaker 12: scope of the strike. You know, clearly this has been
Speaker 12: a very different UAW leadership strategy and one that we've
Speaker 12: adapted to. But at the same time, given that we
Speaker 12: don't want to speculate where the next plant might be
Speaker 12: or how long that might be out, we thought the
Speaker 12: prudent thing to do was to withdraw guidance, despite the
Speaker 12: fact that the underlying business was actually performing at the
Speaker 12: top end of our range prior to this, so we'll
Speaker 12: provide an update with investors as soon as it's over,
Speaker 12: but we're still focused on making sure that we execute
Speaker 12: every day.
Speaker 2: Can GM make a profit with a twenty five percent
Speaker 2: raise for the UAW like Sean Fayin has requested.
Speaker 12: You know, what we need to do is obviously strike
Speaker 12: a balance. We've said from the beginning that we really
Speaker 12: want to reward our people for the quality work that
Speaker 12: they're doing at each and every plant, each and every day,
Speaker 12: and that's a testament to the demand that we've created
Speaker 12: for the vehicles that we're producing, which I think is
Speaker 12: the best portfolio in GM's history. So what we've also
Speaker 12: got to do is make sure that we sign an
Speaker 12: agreement that allows us to compete in the global marketplace
Speaker 12: when we look at the pressures and the challenges on
Speaker 12: ev profitability as well as some of our foreign competitors.
Speaker 12: We've got to make sure we can continue to price
Speaker 12: our vehicles and produce our vehicles profitably, which gives us
Speaker 12: the cash to be able to invest in the next generation,
Speaker 12: not only the models, but the plant refurbishments and the
Speaker 12: transformations that we have to do. So we've got to
Speaker 12: be able to strike that balance of rewarding our people
Speaker 12: but making sure that we're absolutely able to invest in
Speaker 12: our future.
Speaker 1: Just twenty five percent allow you to strike that.
Speaker 12: Balance, you know, I think it does. We're not going
Speaker 12: to sign a deal that doesn't allow us to be competitive.
Speaker 12: You know, there are obviously challenges that the teams responded
Speaker 12: to over the last few years, whether it be COVID
Speaker 12: or the semiconductor shortage or supply chain issues. The team's
Speaker 12: been remarkably resilient, and I think this is another challenge,
Speaker 12: but one that we can rise to, and I believe
Speaker 12: that we can still hit our goals.
Speaker 8: Paul, very good morning to you. You've withdrawn the guidance.
Speaker 8: We've cleared that away. I'm curious to know if you're
Speaker 8: withdrawing guidance. Is there any risk to anything to do
Speaker 8: with dividend, any guidance on that. Obviously, dividend and buybacks
Speaker 8: were re insteaded just last year after two year hiatus,
Speaker 8: So is there any any quirk there?
Speaker 12: Well, Manics, I would say that, you know, our balance
Speaker 12: sheet is incredibly strong right now, with about fifty billion
Speaker 12: dollars in total liquidity available to us. We went out
Speaker 12: and we got an additional line of credit about a
Speaker 12: month ago to make sure we're prepared, because while the
Speaker 12: uncertainty and while the team is working at the bargaining
Speaker 12: table in order to try to find a deal, we've
Speaker 12: got to make sure that the business continues to run.
Speaker 12: We make the investments we can, we fulfill the commitment
Speaker 12: we've made to our shareholders, and we continue to do
Speaker 12: business as usual the best we can. And the strong
Speaker 12: balance sheet's going to enable us to do that.
Speaker 8: As I was sort of getting more familiar with the
Speaker 8: dynamics of this strike, I've just landed in this country
Speaker 8: after five years some more else. The question that goes
Speaker 8: through my mind to close these strike deals and to
Speaker 8: deliver on pensions, it's a very British thing. I'm curious,
Speaker 8: do you have a number that you will have to
Speaker 8: contribute to the defined pension? This is one of the
Speaker 8: most contentious parts of the negotiations as I understand, So
Speaker 8: is there a number that you're going to have to
Speaker 8: make good and restitution to the pension to make this
Speaker 8: deal good?
Speaker 12: Well, our defined benefit plan, which has been frozen for
Speaker 12: quite some time, is actually funded very very strongly right now,
Speaker 12: and we feel good about that. You know, the participants
Speaker 12: participate in a defined contribution plan where under the current
Speaker 12: agreement we contribute six point four percent before an employee
Speaker 12: has contributed anything. So there's a there's a good balance
Speaker 12: across the retirement plans, and we think one that's very
Speaker 12: favorable and one that that you know, we we've been
Speaker 12: able to adjust the business to make sure that we
Speaker 12: can put into the calculus going forward. So anything that
Speaker 12: we do to retirement goes into that bucket of what
Speaker 12: I would what I said earlier, which is we need
Speaker 12: to be able to compete in the global marketplace. And
Speaker 12: you know, where we spend our money isn't isn't necessarily
Speaker 12: as important as how we spend it. So we're really
Speaker 12: trying to strike the balance as to what's important with
Speaker 12: the UAW.
Speaker 8: If you had Elon Musk in front of you and
Speaker 8: I and you were talking about prices, I bet you
Speaker 8: wouldn't be having a nice conversation. I mean, how how
Speaker 8: brutal have his price cuts been for your plans for
Speaker 8: twenty twenty four?
Speaker 9: In ev.
Speaker 12: Well, when you when you look at what our average
Speaker 12: trends action prices have done this year, they've actually been
Speaker 12: remarkably stable. In the midst of it. Now that's primarily
Speaker 12: the internal combustion engine portfolio, which I would say is
Speaker 12: not necessarily a direct competitor with evs, although evs do
Speaker 12: work to try to disrupt ice vehicles as much as
Speaker 12: they can, So it's one that we've been really competitive.
Speaker 12: When you look at our ev slate, we've kept our
Speaker 12: pricing very stable, and while we're delivering in smaller quantities
Speaker 12: than some of our competitors, we are expanding rapidly. We
Speaker 12: have a strong order book that we're fulfilling, and customers
Speaker 12: have stuck with us through this. So in the third
Speaker 12: quarter we've produced about two x the number of Altium
Speaker 12: platform vehicles as we did in the second quarter. So
Speaker 12: we're growing rapidly and pricing has been very stable for
Speaker 12: us and our products and our customers have stayed with it.
Speaker 2: Well, do you think that the prices of vehicles are
Speaker 2: going to go up because of the strikes.
Speaker 12: Well, you know, we've seen some tension, and obviously when
Speaker 12: you look at the inventor levels, there's a little bit
Speaker 12: of challenge. We saw some increases in the used car
Speaker 12: market in particular leading up to the labor stoppage, so
Speaker 12: we're watching that closely. Obviously, the consumer has seen a
Speaker 12: lot of pressure on monthly payments as a result of
Speaker 12: higher interest rates over the last couple of years. But
Speaker 12: that's something that we strike a strong balance with. But
Speaker 12: it all starts with having strong demand for your portfolio vehicles,
Speaker 12: and right now, GM's got a very very good demand book.
Speaker 2: How much is demand starting to wan though, especially you
Speaker 2: talk about taking out loans and how much interest rates
Speaker 2: have gone up, and we've seen that subprime auto loans
Speaker 2: are seeing delinquities at rates that are unprecedented in data
Speaker 2: going back to the early nineteen nineties. How much is
Speaker 2: that impacting How much do you expect demand to grow
Speaker 2: going forward.
Speaker 12: We really haven't seen much of an impact lease on
Speaker 12: that demand. It's been pretty consistent. So when you look
Speaker 12: at our average transaction prices actually up year over year.
Speaker 12: Wholesale volumes were up about two percent in the third quarter.
Speaker 12: They've been up about eight percent year to date, and
Speaker 12: inventory hasn't built, so we're moving the vehicles that we're
Speaker 12: producing despite the fact that that monthly payments have gone
Speaker 12: up and prices have gone up. So I think that's
Speaker 12: a strong testament to the products that we have, We've
Speaker 12: obviously got to watch that uh and and make sure
Speaker 12: that we're running the business to be resilient. And that's
Speaker 12: one of the things that we have to strike in
Speaker 12: the in the in the labor negotiations is we've got
Speaker 12: to strike that balance of making sure that we're rewarding
Speaker 12: our people while balancing the need to compete in the
Speaker 12: global marketplace.
Speaker 2: Just real quick here, Paul Ken of us truly compete
Speaker 2: with China when it comes to EV production, when it
Speaker 2: comes to EV.
Speaker 12: Sales, well, I think when you when you when you
Speaker 12: look at what Tesla has done, when you look at
Speaker 12: the infrastructure that we're building, not just in the in
Speaker 12: the battery joint ventures, but also in the raw materials,
Speaker 12: we believe we can be competitive with China. And our
Speaker 12: vehicles that we've gotten now the customers love them, and
Speaker 12: we think there's a lot more to come from the
Speaker 12: General Motors team.
Speaker 2: Paul Jacobs in General Motors CFO, thank you so much
Speaker 2: for being with us. The International Energy Agency was created
Speaker 2: fifty years ago in the wake of price fikes and
Speaker 2: all sorts of geopolitical violence. Today, we're facing a similar
Speaker 2: type of moment. Joining us right now Fadi b Role,
Speaker 2: Executive Director of the ie A, and Fadi I want
Speaker 2: to start there even as you put out your report,
Speaker 2: which has a lot of really interesting projections, how is
Speaker 2: today similar to nineteen seventy four?
Speaker 13: Thank you Aman. The main similarity is once again a
Speaker 13: major geopolitical crisis in a Middle East and once again
Speaker 13: a oil marqus risk to provide major shock with a
Speaker 13: high and volatile oil prices, oil securities at risk is
Speaker 13: the But one third of the global oil exports come
Speaker 13: from the region, especially for Asia, so there are some
Speaker 13: similarities between now and fifty years ago.
Speaker 9: Fatty, good morning.
Speaker 8: Every time there is a moment of real angst than
Speaker 8: we are at the moment of war here. So it's
Speaker 8: not just angst, it's war between Hamas and Israel. The
Speaker 8: question is the boundaries, the risk, the risk to Iranian
Speaker 8: crude moving, the risk to the rest of the Persian
Speaker 8: Gulf from this Israel Gaza crisis.
Speaker 9: How do you look at that right now?
Speaker 8: And what is the risk of major escalation in your
Speaker 8: view and the risk of the oil market.
Speaker 13: So if one or more oil major oil producing exporting
Speaker 13: countries are involved in this crisis, we have all the
Speaker 13: reasons to expected the process will go up, not only
Speaker 13: in terms of production export supply cuts, but there is
Speaker 13: a strait, the state of Homos, which is responsible about
Speaker 13: bantward of the global oil transit and the major part
Speaker 13: of the global energy natural gas transit. We may well
Speaker 13: see substantial impacts on the oil and natural gas markets.
Speaker 13: Of course, we don't know, at least I don't know
Speaker 13: how the geopolitical developments will go in the next days
Speaker 13: or the weeks to come, but the risk is rather
Speaker 13: high for the energy markets.
Speaker 8: One of the narratives that is either at the moment
Speaker 8: is that obviously you still have unilateral counts from Saudi
Speaker 8: Arabia and from Russia. No back has made a care.
Speaker 8: It's too soon to talk about what they would do
Speaker 8: in November. If there is a significant escalation, is that
Speaker 8: step one of an immediate release five to the market,
Speaker 8: of where Siety and Russia may well put out some
Speaker 8: narrative in regards to the unilateral cuts or indeed act
Speaker 8: before the November meeting.
Speaker 13: It's a good point in fact, when we look at
Speaker 13: the station today, even before the crisis, is this geopratical
Speaker 13: crisis started. We hit oil prices around ninety dollars, very
Speaker 13: high prices compared to averages. Why we have it for
Speaker 13: two reasons. One, global oil demand is strong, mainly is
Speaker 13: a result of the rebound in the Chinese economy after
Speaker 13: the COVID. But second, the point you mentioned, the Russia
Speaker 13: deliberately cut the oil production and since beginning of this year,
Speaker 13: the International Agency we said, if you go in that direction,
Speaker 13: we may well see titened oil markets, which could be
Speaker 13: a major problem for the global economy and for inflation,
Speaker 13: especially for emerging and developing countries. Now, this crisis come
Speaker 13: on top of the ninety dollars oil prices, and the
Speaker 13: one of course plausible scenario here if we see such
Speaker 13: a crisis, and if we see a deepening of this
Speaker 13: crisis as a result of some other countries being part
Speaker 13: of this geopedical crisis there then one possible option is
Speaker 13: the Saudi ab and Russia would change their production policies,
Speaker 13: and they have ample amount of spare production capacity they
Speaker 13: comfort the markets. There.
Speaker 14: Can we zoom out a little bit and talk about
Speaker 14: your long term views on what's going to happen in
Speaker 14: the energy complex. I mean, we've got this great World
Speaker 14: Energy Outlook report out today from your organization talking about
Speaker 14: in the long term, global fossil fueld demand will peak
Speaker 14: by twenty thirty.
Speaker 1: As we see the transition occur.
Speaker 14: Does that presume that the geopolitical tensions is what are
Speaker 14: the presumptions behind that peak forecast by twenty thirty.
Speaker 13: Now we are an agial organization, We cannot focus what
Speaker 13: geopoltical context. But the reason that we see, for example,
Speaker 13: oil were talking about oil demand to peak in the
Speaker 13: next five for six years is the following. There is
Speaker 13: a big move on the transportation sector, which is a
Speaker 13: big chunk of the global oil consumption. Electric cars. When
Speaker 13: you look at the electric cars two years ago, one
Speaker 13: out of twenty five cars sold in the wort was electric.
Speaker 13: One out of twenty five two years ago. This year,
Speaker 13: one out of five cars sold is electric and in
Speaker 13: twenty thirty, with the current investment plans, current policies, every
Speaker 13: second car sold will be an electric car in twenty thirty.
Speaker 13: This is one on the consumption side will be biger
Speaker 13: the second and most important one. And I am surprised
Speaker 13: that the analysts don't see this. China. China changed the
Speaker 13: energy markets in the last ten years, and Chinese is
Speaker 13: changing itself Now, when you look at the last ten years,
Speaker 13: more than two thirds of the global oil demand growth
Speaker 13: came from China, only more than two thirds, and Chinese
Speaker 13: economy increased over six percent per year on average, and
Speaker 13: this was the main driver. And we all know it's
Speaker 13: a consensus view include the Chinese government. Chinese economy will
Speaker 13: slowed down and this will be another driver for the
Speaker 13: global oil demand peak in the next year's to cast.
Speaker 1: But you only have a minute left. But this is
Speaker 1: a really important point.
Speaker 2: Are you saying that even if China has an economic boom,
Speaker 2: it is not going to increase the demand for oil
Speaker 2: based on the changes in that economy.
Speaker 13: I mean, China may have growth in the economy as
Speaker 13: a result of studness a year or so, but the
Speaker 13: structure Chinese economy, when you look at the structure, the
Speaker 13: balass in the Chinese economy, the cement production, the idens
Speaker 13: cry production, the household stocks, they all come to a
Speaker 13: situation on a decline, China wouldn't need major amount of energy.
Speaker 13: So China will be determinated next year's the fate of
Speaker 13: fossil fuse. And also at the same time, of course,
Speaker 13: clid energy. Is there a champion that as.
Speaker 1: Well Fatty by role of the International entertain Agency. Thank
Speaker 1: you so much for taking the time.
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