WEBVTT - General Motors, Big Tech, GE, and Spotify 0:00:00.840 --> 0:00:04.000 Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside 0:00:04.040 --> 0:00:05.280 my co host Matt Miller. 0:00:05.640 --> 0:00:09.600 Every business day we bring you interviews from CEOs, market pros, 0:00:09.720 --> 0:00:13.600 and Bloomberg experts, along with essential market moving news. 0:00:14.160 --> 0:00:17.279 Find the Bloomberg Markets Podcast on Apple Podcasts or wherever 0:00:17.400 --> 0:00:20.480 you listen to podcasts, and at Bloomberg dot com slash podcast. 0:00:21.520 --> 0:00:24.000 I tell you this auto strike just it ain't going 0:00:24.040 --> 0:00:25.759 away here. It seems like it's getting even worse. The 0:00:25.800 --> 0:00:28.800 UAW just came across the Bloomberg terminal around ten to 0:00:28.840 --> 0:00:32.040 fifteen Wall Street time. The UAW says five thousand members 0:00:32.080 --> 0:00:37.480 at GM Arlington Assembly join strike. So this is kind 0:00:37.479 --> 0:00:38.640 of going the wrong way, and it got to the 0:00:38.640 --> 0:00:40.800 point now where General Motors today I have to putt 0:00:40.800 --> 0:00:43.920 out some good numbers removes guidance because of the strike. 0:00:44.040 --> 0:00:45.960 So I don't know what's going on there. But I 0:00:46.000 --> 0:00:47.840 know who does know, Kevin Tyne, and he's a senior 0:00:47.840 --> 0:00:50.560 automotive analyst for Bloomberg Intelligence. He joined just via zoom 0:00:50.600 --> 0:00:55.320 from our Princeton office. Kevin, tell us what GM said today, 0:00:55.880 --> 0:00:58.560 you know about the strike and how it's impacting their 0:00:59.000 --> 0:01:00.480 I guess operations. 0:01:00.840 --> 0:01:05.160 Yeah, well, look that was strike started late late in 0:01:05.240 --> 0:01:07.760 the third quarter, so it would be the impact. I 0:01:07.760 --> 0:01:10.000 mean every day of the fourth quarter so far has 0:01:10.080 --> 0:01:14.160 been impacted by the strike. But you know, the backwards 0:01:14.160 --> 0:01:17.160 looking results were actually pretty good, better than expected, and 0:01:17.400 --> 0:01:21.360 just show the profitability that the company can produce and 0:01:21.480 --> 0:01:24.959 the you know, removing some guidance. There is just an 0:01:24.959 --> 0:01:27.920 issue of not flaunting that you're going to make fourteen 0:01:28.000 --> 0:01:32.520 billion when you're trying to negotiate with the union. But 0:01:33.360 --> 0:01:36.200 you know, it could mean it's close, right that this 0:01:36.280 --> 0:01:39.640 is the final turns of the screw that kind of 0:01:39.640 --> 0:01:43.800 gets the manufacturer to give what the union thinks they deserve. 0:01:44.319 --> 0:01:49.280 I think they're probably close on the wage, the increase, 0:01:49.320 --> 0:01:53.320 the percentage, and probably the ratification bonus. I think it's 0:01:53.360 --> 0:01:56.000 all the sort of secondary issues there in terms of 0:01:56.320 --> 0:02:01.440 headcount capacity, you know, new product plants and things like that, 0:02:01.440 --> 0:02:05.400 that are the sticking points this late in the negotiations. 0:02:05.720 --> 0:02:07.920 Why are only some plants on strike? 0:02:10.560 --> 0:02:13.639 Well, you know, it looks bad for everyone, and it's 0:02:13.720 --> 0:02:16.600 very difficult to put out that many workers, right because 0:02:16.600 --> 0:02:19.200 then they go to the strike fund and then you 0:02:19.280 --> 0:02:22.440 completely shut down everything. And I think it's just counterproductive 0:02:22.520 --> 0:02:25.000 to say, you know, we're not going to produce anything 0:02:25.000 --> 0:02:30.840 at all, then you're putting the host in real danger. 0:02:31.400 --> 0:02:34.760 All right, So, Kevin, I guess the big issue, as 0:02:34.760 --> 0:02:38.960 I understand it, is, you know, as the industry, I 0:02:38.960 --> 0:02:42.079 guess he continues its evolution in the EV front, there's 0:02:42.120 --> 0:02:44.080 a real question as to how many jobs are going 0:02:44.160 --> 0:02:46.120 to be needed and where those jobs are going to be, 0:02:46.240 --> 0:02:48.680 and they're going to be different types of jobs, to 0:02:48.720 --> 0:02:50.560 the point where I guess the companies are saying, hey, 0:02:50.600 --> 0:02:54.160 we can't guarantee X number of positions because quite frankly, 0:02:54.200 --> 0:02:56.840 we don't know what positions we're going to need. Is 0:02:56.840 --> 0:02:58.400 that kind of where we are? And if so, I 0:02:58.400 --> 0:02:59.560 don't know how you resolve that. 0:03:00.440 --> 0:03:02.520 Yeah, And look in the other issue too, is that 0:03:02.639 --> 0:03:09.000 as labor costs increase for those union shops, they're only 0:03:09.560 --> 0:03:13.919 GM Ford and STILLANTIS brands. So even if there were 0:03:14.040 --> 0:03:19.079 no EV transition, the domestic manufacturers and their brands are 0:03:19.080 --> 0:03:22.880 going to be less competitive against even you know, Honda 0:03:22.960 --> 0:03:26.880 in Ohio, or Nissan and Tennessee or any of the 0:03:26.880 --> 0:03:30.240 plants down in the South that are not unionized. Never 0:03:30.320 --> 0:03:33.760 mind the EV manufacturers who are not unionized. 0:03:33.800 --> 0:03:34.200 As well. 0:03:34.280 --> 0:03:39.400 So you know, there's the EV transition is part of it. 0:03:39.840 --> 0:03:43.360 But the manufacturers have been very profitable on internal combustion, 0:03:43.560 --> 0:03:46.040 but by making fewer vehicles. So I think that's where 0:03:46.040 --> 0:03:49.440 the capacity and the headcount uncertainty comes in as well, 0:03:49.480 --> 0:03:52.120 where you're saying, you know, yes, we're making money, but 0:03:52.200 --> 0:03:55.920 we're doing it on fewer units. We can't be behold 0:03:55.960 --> 0:04:00.720 into these capacity you know, in footprint requirements going forward 0:04:00.800 --> 0:04:02.720 when we don't know that we're actually going to need 0:04:02.760 --> 0:04:03.360 that much. 0:04:03.880 --> 0:04:07.160 What are the UAW members being paid and what are 0:04:07.160 --> 0:04:07.880 they asking for? 0:04:09.400 --> 0:04:12.280 Yeah, so you know, when you look at it all 0:04:12.320 --> 0:04:16.320 in as the cost to the manufacturer, it's probably in 0:04:16.360 --> 0:04:19.280 the sixty dollars per hour range, and it'll go up 0:04:19.320 --> 0:04:21.800 into the nineties and maybe even higher depending where the 0:04:21.839 --> 0:04:24.279 contract is ultimately done. 0:04:24.000 --> 0:04:24.200 You know. 0:04:24.240 --> 0:04:27.640 And then you compare that all in to the transplants 0:04:27.920 --> 0:04:33.120 of European or Asian manufacturers or EV manufacturers and there there, 0:04:33.160 --> 0:04:36.000 you know, the cost to the company is significantly less, 0:04:37.120 --> 0:04:39.760 you know, And that's what probably needs to be reconciled 0:04:39.800 --> 0:04:42.080 and what the domestic manufacturers are saying, Look, if you 0:04:42.120 --> 0:04:45.320 want to increase your membership, you can't just keep coming 0:04:45.360 --> 0:04:48.000 back to us, right, you take your twenty five percent 0:04:48.160 --> 0:04:50.599 increase and go show it to some of these other 0:04:50.680 --> 0:04:53.599 manufacturers and try and build your base that way, because 0:04:53.600 --> 0:04:54.840 we don't have much more to give. 0:04:55.720 --> 0:04:59.159 So, Kevin, when we do get a resolution, is it 0:04:59.200 --> 0:05:01.520 going to be are we just assuming that it's going 0:05:01.600 --> 0:05:04.200 to apply to all three of the big three automakers? 0:05:09.360 --> 0:05:09.680 Oops? 0:05:09.760 --> 0:05:13.320 Kevin hears uh, I think we lost Kevin. All right, 0:05:13.560 --> 0:05:15.480 Well that was my big smart question the day, and 0:05:16.839 --> 0:05:20.200 we need to know. I think we lost the audio 0:05:20.200 --> 0:05:21.960 with Kevin, so we'll have to go back to that. 0:05:22.000 --> 0:05:25.680 But again, you know, it's serious here for these automakers 0:05:25.680 --> 0:05:27.800 because you know, I mean Jim again pulling its guidance. 0:05:27.800 --> 0:05:29.200 But as Kevin said, maybe that just might be a 0:05:29.279 --> 0:05:32.360 negotiating tactic here. You don't want to say, oh, yeah, 0:05:32.360 --> 0:05:35.960 we we reiterate our profit guidance of fourteen billion dollars 0:05:36.120 --> 0:05:38.680 or something like that when you're trying to plead, you know, 0:05:38.720 --> 0:05:39.960 and trending to negotiate salaries. 0:05:40.000 --> 0:05:43.479 And especially given what we were talking about earlier, GM 0:05:43.520 --> 0:05:47.719 beating a third quarter estimates despite losing two hundred million 0:05:47.760 --> 0:05:51.080 dollars from the walkout during that quarterly period. But then 0:05:51.120 --> 0:05:53.960 also what it means for when it comes to a 0:05:53.960 --> 0:05:56.880 automaker like that that has been rethinking its growth plans 0:05:56.920 --> 0:06:00.279 for EV sales because those sales have plug in have 0:06:00.320 --> 0:06:02.960 been actually slower than anticipated. So a lot of different 0:06:02.960 --> 0:06:04.080 moving pieces there. 0:06:04.640 --> 0:06:06.000 All right, let's go back to Kevin Tyne and we 0:06:06.000 --> 0:06:07.760 got them back, We got the audio back. So Kevin, 0:06:07.800 --> 0:06:10.960 my question was, just, when we do get an agreement, 0:06:11.080 --> 0:06:14.080 is it going to apply to all three automakers just 0:06:14.160 --> 0:06:14.960 kind of automatically? 0:06:15.800 --> 0:06:19.960 Yeah, Well, typically what would happen. Historically you'd have negotiation 0:06:20.160 --> 0:06:24.440 between the union and one manufacturer, usually the most financially sound, 0:06:24.800 --> 0:06:27.160 and then the other deals fall into place. This has 0:06:27.200 --> 0:06:29.880 been unique in that the union has been negotiating with 0:06:29.920 --> 0:06:32.400 all three at the same time. So yeah, this one 0:06:32.440 --> 0:06:36.240 would probably happen amongst all three and one shot, and 0:06:36.279 --> 0:06:38.400 then it'll just be a matter of catching up on 0:06:38.520 --> 0:06:42.920 production over the subsequent quarters going into twenty twenty four. 0:06:43.040 --> 0:06:48.280 Yeah, as far as looking ahead and what could all 0:06:48.360 --> 0:06:50.880 this play out, what exactly do you think would be 0:06:50.960 --> 0:06:54.480 the remaining timetable for how long this actually. 0:06:54.120 --> 0:06:55.120 Could continue on for? 0:06:56.960 --> 0:07:00.760 Yeah, I think it's close, you know, I think people 0:07:00.800 --> 0:07:03.040 look at it like this is a lot of pressure 0:07:03.080 --> 0:07:05.560 on the manufacturers, and it certainly is, but it's also 0:07:05.600 --> 0:07:09.960 pressure on the union as well. You know, you have 0:07:10.040 --> 0:07:12.040 a lot of people that aren't earning what they're used 0:07:12.080 --> 0:07:15.560 to earning, and they're in the strike fund, and everybody, 0:07:15.600 --> 0:07:17.680 I think wants to move forward. So I would say 0:07:17.680 --> 0:07:20.880 we're probably closer. And this is based on nothing than 0:07:21.000 --> 0:07:24.760 just what we're hearing in the rhetoric is that it's 0:07:24.760 --> 0:07:28.040 probably closer than it isn't, And I think it's the 0:07:28.440 --> 0:07:31.560 wage number is probably there, and then it's just some 0:07:31.640 --> 0:07:34.360 of these other secondary issues that just need to be 0:07:34.440 --> 0:07:38.160 hammered out in terms of details, because manufacturers, again, they 0:07:38.200 --> 0:07:42.080 want that flexibility to say, what this industry looks like 0:07:42.160 --> 0:07:44.480 in three four years from now may not be what 0:07:44.520 --> 0:07:47.520 it is today, and we need the flexibility to rationalize 0:07:47.560 --> 0:07:48.880 cost if that's the case. 0:07:49.080 --> 0:07:52.080 Hey, Kevin, A big picture. I just replaced the twenty 0:07:52.080 --> 0:07:54.480 fourteen BMW with the stick shift, and I got the 0:07:54.560 --> 0:07:58.040 twenty twenty four BMW X three, extraordinarily happy. Didn't even 0:07:58.080 --> 0:08:00.679 think about getting ev because it was such the premium price. 0:08:01.400 --> 0:08:05.040 So is the world rethinking, Are you guys as industry 0:08:05.120 --> 0:08:09.040 rethinking what the ultimate end market is for evs, I mean, 0:08:09.480 --> 0:08:11.560 it seems like it's not as strong as I maybe 0:08:11.640 --> 0:08:12.120 once thought. 0:08:12.760 --> 0:08:15.440 Yeah, I think so. And that's playing out in a 0:08:15.440 --> 0:08:19.640 lot of different ways. You know, dealers were you know, 0:08:19.800 --> 0:08:21.760 the manufacturers are going to the dealers and saying, look, 0:08:21.800 --> 0:08:23.840 you need to fit your outfit your stores for this, 0:08:24.000 --> 0:08:26.440 and now they're kind of holding back a little bit, 0:08:26.440 --> 0:08:28.160 and the dealers are waiting it out and not being 0:08:28.200 --> 0:08:31.240 the first ones to move. But I think if the 0:08:31.320 --> 0:08:37.040 demand and profitability profile of EV doesn't improve significantly through 0:08:37.080 --> 0:08:40.439 twenty twenty four, and we've already seen it, right, Ford 0:08:40.440 --> 0:08:43.839 pushed out its building its battery plan, General Motors put 0:08:43.880 --> 0:08:47.000 another year on the timeline. I think if not by 0:08:47.000 --> 0:08:49.560 the end of next year, there will be some of 0:08:49.559 --> 0:08:52.560 those one hundred percent by twenty thirty five, and the 0:08:52.640 --> 0:08:55.320 longer term goals are going to start to be walked 0:08:55.320 --> 0:08:59.280 back because the addressable market might not be what it 0:08:59.360 --> 0:09:01.960 seemed to be when it was first going. And ultimately, 0:09:02.200 --> 0:09:04.120 when you look at it, you know, on the one hand, 0:09:04.200 --> 0:09:07.320 you have everybody saying how Tesla dominates an EV, but 0:09:07.400 --> 0:09:11.280 if demand goes away, you know, then you're questioning really 0:09:11.520 --> 0:09:14.200 everybody else, Right, If there's no demand for Tesla. What 0:09:14.280 --> 0:09:17.320 is the demand for a forty V or GMEV, which 0:09:17.320 --> 0:09:19.600 don't even exist yet in any kind of volume. 0:09:19.960 --> 0:09:22.960 Yep, very interesting. It seems like the market's changing a 0:09:22.960 --> 0:09:26.520 little bit. And again I went internal combustion engine in 0:09:26.600 --> 0:09:29.400 old school. Kevin Tony, thanks so much for joining us. 0:09:29.600 --> 0:09:34.240 Kevin is the senior automotive analysts for Bloomberg Intelligence. He's 0:09:34.280 --> 0:09:38.160 a sconce down in our Princeton, New Jersey headquarters. Down there, 0:09:38.520 --> 0:09:40.040 great lunches down there by the way. 0:09:40.080 --> 0:09:44.640 Ooh, you're listening to the team. Ken's are live program 0:09:44.800 --> 0:09:48.720 Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot com, 0:09:48.840 --> 0:09:51.960 the iHeartRadio app, and the Bloomberg Business app, or listen 0:09:52.040 --> 0:09:54.160 on demand wherever you get your podcasts. 0:09:56.000 --> 0:09:58.840 I want to continue talking about these markets here because 0:09:58.840 --> 0:10:01.400 again we are right in the middle of earnings. We've 0:10:01.440 --> 0:10:04.679 got yields moving all over the place, kind of, as 0:10:04.880 --> 0:10:07.319 Gina said, kind of dictating the market to a certain degree. 0:10:07.679 --> 0:10:10.440 Let's bringing Liz Young, she's head of investment strategy at 0:10:10.520 --> 0:10:13.800 so Far and Liz, thanks so much for joining us. 0:10:14.360 --> 0:10:17.800 I know you cut your teeth on small caps. And 0:10:17.840 --> 0:10:20.280 Gina Martin Adams and Bloomberg Intelligence was just talk about 0:10:20.480 --> 0:10:22.880 kind of the tough headwinds they face. How do you 0:10:22.880 --> 0:10:25.960 think about the small cap space right here? 0:10:27.679 --> 0:10:29.000 Yeah, Hi, thanks for having me. 0:10:29.080 --> 0:10:31.920 So I did cut my teeth as a small cap analyst, 0:10:31.920 --> 0:10:33.840 and I have a soft spot in my heart for them, 0:10:34.360 --> 0:10:36.240 and it does pain me at a time like this 0:10:36.400 --> 0:10:37.719 to say, I just don't think that. 0:10:37.640 --> 0:10:39.040 They're a goodbye yet. 0:10:39.240 --> 0:10:41.680 And you look at where we are in the economic 0:10:41.720 --> 0:10:45.160 cycle and where yields are. Many small cap companies, because 0:10:45.160 --> 0:10:48.800 they're new and because they're growing, need financing in order 0:10:48.880 --> 0:10:52.920 to produce that growth. So as yield rise, as borrowing 0:10:52.960 --> 0:10:56.560 costs rise, and capital is constricted, small cap companies feel 0:10:56.600 --> 0:10:59.360 that much more than large cap companies do, who can 0:10:59.480 --> 0:11:03.400 usually find announce their growth internally. So small caps are 0:11:03.440 --> 0:11:07.520 probably feeling the pain of capital constriction much more. Also, 0:11:07.760 --> 0:11:10.120 just where you are in the economic cycle, I still 0:11:10.120 --> 0:11:12.800 think there are many many signals telling us that we 0:11:12.840 --> 0:11:17.280 are late cycle. Small caps tend to outperform in early cycle, 0:11:17.400 --> 0:11:20.360 so we would need to finish late cycle, get through 0:11:20.360 --> 0:11:22.920 probably a bit of a slowdown, and then restart the 0:11:22.960 --> 0:11:24.880 early part of the cycle, which I just do not 0:11:25.000 --> 0:11:26.280 think is where we are today. 0:11:26.559 --> 0:11:30.760 What are small cap stocks in the technology sector telling 0:11:30.840 --> 0:11:33.320 us at this point, because typically if they're holding up better, 0:11:33.400 --> 0:11:36.120 that couldn't mean brighter times ahead for small caps or 0:11:36.200 --> 0:11:38.200 we see any indication of that right now. 0:11:39.720 --> 0:11:42.400 Well, I think sectors as a whole. As you move 0:11:42.480 --> 0:11:45.880 down the market cap spectrum, the makeup is very different. 0:11:45.960 --> 0:11:47.480 So technology is one of those. 0:11:47.480 --> 0:11:51.480 Obviously you're not seeing big tech stocks, and the behavior 0:11:51.520 --> 0:11:53.080 that we're seeing in big tech stocks, you're not going 0:11:53.120 --> 0:11:55.680 to see that in the small cap space. Generally speaking, 0:11:55.720 --> 0:11:57.880 in small cap tech, you're seeing things that are down 0:11:57.920 --> 0:12:01.480 the supply chain, so they're making components or maybe they're 0:12:01.840 --> 0:12:05.560 early software companies, so they're still going to be quite 0:12:05.600 --> 0:12:09.120 sensitive to moves in the market and probably quite sensitive 0:12:09.160 --> 0:12:12.880 to yields as well. Small cap is actually quite dominated 0:12:12.920 --> 0:12:16.800 by things like healthcare, and the differences in industry makeup 0:12:16.800 --> 0:12:21.040 of healthcare can affect the performance of small caps tremendously. 0:12:21.920 --> 0:12:24.760 As you move down the market cap spectrum, beta in 0:12:24.880 --> 0:12:27.920 general is increased, so I would be careful in a 0:12:28.000 --> 0:12:32.200 rising rate environment, I would be careful with really growthy names, 0:12:32.200 --> 0:12:36.880 particularly in the small cap space, and generally speaking, even 0:12:36.920 --> 0:12:39.920 when you do enter that early cycle behavior, and small 0:12:39.960 --> 0:12:43.440 caps tend to outperform. What usually tends to outperform is 0:12:43.480 --> 0:12:46.760 small cap value because a lot of those are dominated 0:12:46.760 --> 0:12:50.200 by the financial space. So it really does make a 0:12:50.200 --> 0:12:52.840 difference when you look at the sector makeup of different 0:12:52.880 --> 0:12:56.240 size categories, and investors should keep that in mind as 0:12:56.320 --> 0:12:58.400 we move through these different parts of the business cycle. 0:12:58.920 --> 0:13:01.160 Hey, Lis, I wonder just kind of stepping back here, 0:13:01.559 --> 0:13:03.280 you know, in a world where you've got you know 0:13:03.360 --> 0:13:05.520 that the ten year at four point eight seven to 0:13:05.640 --> 0:13:08.120 thirty year, boy, it's at five percent. Haven't seen that 0:13:08.160 --> 0:13:10.000 in a while, and of course a two year at 0:13:10.000 --> 0:13:12.720 five point one percent and that kind of world, can 0:13:12.760 --> 0:13:16.160 equities perform? 0:13:16.360 --> 0:13:18.440 Well, so far they've done okay. 0:13:18.920 --> 0:13:22.200 I mean we've seen we've seen yields be pretty volatile 0:13:22.240 --> 0:13:25.200 all year since the end of July, so that local 0:13:25.240 --> 0:13:28.480 equities top in July July thirty first. Obviously we saw 0:13:28.640 --> 0:13:31.600 quite a swift rise in the ten year since that point, 0:13:31.720 --> 0:13:35.720 and equity saw a down draft. That's logically and rationally 0:13:35.840 --> 0:13:38.560 how I think it should work. You should see some 0:13:38.760 --> 0:13:41.800 pressure on valuations as yields rise. So I think that 0:13:41.800 --> 0:13:45.679 that's actually been a pretty rational change in tone in 0:13:45.720 --> 0:13:49.240 the market, and it's been quite orderly, I mean the drawdown, 0:13:49.320 --> 0:13:52.080 although it feels like it's been prolonged because we were 0:13:52.160 --> 0:13:54.800 used to such a strong up up movement in the 0:13:54.800 --> 0:13:57.400 beginning of the year. It feels long, but it really 0:13:57.400 --> 0:13:58.079 has not been that. 0:13:58.080 --> 0:13:59.720 Long, nor has it been that terrible. 0:13:59.720 --> 0:14:01.800 I mean, it hit maybe seven and a half percent 0:14:01.920 --> 0:14:05.520 down on the SMP at worst, so not even in 0:14:05.600 --> 0:14:10.400 correction territory. Now, as yields stay high, I think that's 0:14:10.440 --> 0:14:13.760 where valuations really come into question. And as we go 0:14:13.880 --> 0:14:17.839 through Q three earning season, obviously looking out into Q 0:14:17.960 --> 0:14:20.880 four and into twenty twenty four, expectations are really high, 0:14:20.920 --> 0:14:24.080 and I think the market is priced for those expectations 0:14:24.080 --> 0:14:27.200 to come true. So as we get more information from 0:14:27.320 --> 0:14:30.240 CEO th than guidance, if we find out that those 0:14:30.240 --> 0:14:34.120 earnings are not realistic to achieve, we're probably going to 0:14:34.120 --> 0:14:38.120 see more pressure on valuations, and yields are not necessarily 0:14:38.200 --> 0:14:41.800 helping that story. So I don't think that stocks can 0:14:41.840 --> 0:14:44.640 maintain these valuations if we keep yields this high for 0:14:44.720 --> 0:14:47.280 a very very long period of time. But it's not 0:14:47.400 --> 0:14:50.920 going to happen in a broad swath across the market. 0:14:50.920 --> 0:14:54.720 You're going to see probably discerning choices in each sector 0:14:54.800 --> 0:14:58.160 of companies that are less sensitive to rates doing better. 0:14:58.800 --> 0:15:01.120 What's the make or break lef in the ten year 0:15:01.240 --> 0:15:04.640 treasury yield to where there would be a potentially bigger 0:15:04.680 --> 0:15:07.400 calibration in the broader US stock market. 0:15:09.800 --> 0:15:12.280 I don't know that there's necessarily a level that's going 0:15:12.320 --> 0:15:15.120 to send it all one direction or another. Five percent 0:15:15.320 --> 0:15:18.320 was clearly a very mental threshold for people. 0:15:18.720 --> 0:15:20.760 I still think that that's probably the case. 0:15:22.240 --> 0:15:24.480 There's still people out there calling for six percent and 0:15:24.520 --> 0:15:27.960 maybe even seven percent and higher. So I think when 0:15:28.000 --> 0:15:31.440 you look at it from the investor standpoint, you have 0:15:31.560 --> 0:15:34.200 individual investors or retail investors who are going to be 0:15:34.200 --> 0:15:37.000 more sensitive to hearing about mortgage rates going up. So 0:15:37.040 --> 0:15:39.760 as mortgage rates crept towards eight percent, I think that 0:15:39.800 --> 0:15:42.840 gave people a lot of pause about whether or not 0:15:42.880 --> 0:15:45.400 they wanted to be throwing all their money at risk assets. 0:15:45.880 --> 0:15:50.520 And then you've got institutional investors and money managers who 0:15:50.600 --> 0:15:53.240 are watching yields and the inversion much more closely, and 0:15:53.280 --> 0:15:56.000 they're watching the cost of capital much more closely. So 0:15:56.120 --> 0:15:59.360 the ten year treasury at five percent or above gives 0:15:59.560 --> 0:16:02.640 them a little bit more consternation. So I don't think 0:16:02.640 --> 0:16:05.320 that there's a magic number that you know, oh my gosh, 0:16:05.360 --> 0:16:08.720 if we get to that, everything changes. But as it 0:16:08.720 --> 0:16:12.200 gets higher, it does get more difficult to sustain. 0:16:12.280 --> 0:16:15.920 And as you have corporate debt coming due next year. 0:16:15.960 --> 0:16:18.640 In the year after, many corporations have to renew their debt, 0:16:18.840 --> 0:16:22.200 and those corporations took that debt out when rates. 0:16:21.960 --> 0:16:22.720 Were much lower. 0:16:22.760 --> 0:16:25.280 So I think we're slowly going to hear about things 0:16:25.320 --> 0:16:28.920 being unsustainable at this level of rates. I'm not entirely 0:16:28.960 --> 0:16:30.720 sold that we're going to be able to stay this 0:16:30.920 --> 0:16:33.760 high for very, very long, because I just don't think 0:16:33.760 --> 0:16:35.160 the economy can withstand it. 0:16:35.880 --> 0:16:38.480 Hey, Liz, Tech is going to take center stage here 0:16:38.920 --> 0:16:41.880 after the close today with Microsoft and Alphabet. How do 0:16:41.920 --> 0:16:43.080 you guys think about tech right here? 0:16:45.520 --> 0:16:47.960 Tech is definitely going to take center stage this week, 0:16:48.200 --> 0:16:50.280 and I think everybody's going to be watching and listening. 0:16:50.760 --> 0:16:52.840 I would say this tech has. 0:16:52.760 --> 0:16:56.960 Been the darling this year, and almost as if it 0:16:57.000 --> 0:16:59.520 can do well in any environment. If rates are going up, 0:16:59.560 --> 0:17:01.120 it's suppose to do well. If they're going down, it's 0:17:01.160 --> 0:17:05.280 supposed to do well. Sideways, up, down. Everything has been 0:17:05.320 --> 0:17:09.560 true at certain points that's not typically how an asset 0:17:09.600 --> 0:17:12.359 class will work. So I think we're going to start 0:17:12.400 --> 0:17:17.120 seeing separation, especially among big tech and we talk about them, 0:17:17.320 --> 0:17:19.520 whether you want to call them the Magnificent seven or 0:17:19.600 --> 0:17:22.040 just big tech stocks in general. We talk about them 0:17:22.440 --> 0:17:25.560 as a homogeneous asset class, but they're really not, and 0:17:25.600 --> 0:17:28.840 many of them are dependent on different parts of the consumer, 0:17:28.920 --> 0:17:31.040 on different parts of the economy, and I think we're 0:17:31.040 --> 0:17:34.880 going to start seeing some divergence in performance among those 0:17:35.000 --> 0:17:38.120 names where it's not just okay, you win because you're 0:17:38.119 --> 0:17:41.600 in that big tech basket. So this week, I think 0:17:41.680 --> 0:17:46.159 is really important, not just for the results, because interestingly, 0:17:46.520 --> 0:17:49.359 as earnings have come in so far, we're seeing even 0:17:49.400 --> 0:17:51.440 companies that have beat still be punished. 0:17:51.600 --> 0:17:53.040 So it's not just about the results. 0:17:53.080 --> 0:17:55.960 It's about the sentiment and the commentary that comes out 0:17:56.000 --> 0:17:58.280 of those companies, because that's what we'll send the market 0:17:58.280 --> 0:17:59.080 in a different direction. 0:18:00.000 --> 0:18:01.800 Thank you so much for joining us. We really appreciate 0:18:01.840 --> 0:18:04.359 getting some of your time. Liz Young. She's head of 0:18:04.520 --> 0:18:07.040 investment strategy at SOFI. 0:18:07.440 --> 0:18:10.600 You're listening to the tape. Cat's are Live program Bloomberg 0:18:10.640 --> 0:18:14.240 Markets weekdays at ten am Eastern on Bloomberg Radio, the 0:18:14.280 --> 0:18:17.520 tune in app, Bloomberg dot Com, and the Bloomberg Business App. 0:18:17.560 --> 0:18:20.359 You can also listen live on Amazon Alexa from our 0:18:20.400 --> 0:18:24.800 flagship New York station, Just say Alexa play Bloomberg eleven thirty. 0:18:26.560 --> 0:18:31.080 Sony Challa joins us. She is a portfolio manager partner 0:18:31.119 --> 0:18:35.800 at times Square Capital Management located guess where Jess, Time Square. 0:18:36.320 --> 0:18:38.800 How about that go figure some good naming rights there, 0:18:38.920 --> 0:18:40.600 So no, thanks so much for joining us. You're live 0:18:40.600 --> 0:18:42.760 here in on our Bloomberg Interactive Broker studio, so we 0:18:42.800 --> 0:18:46.320 appreciate you making the time here. What you call on 0:18:46.400 --> 0:18:48.960 technology here, boy, I hear some big, big numbers in 0:18:49.040 --> 0:18:51.919 terms of Capex the cloud, and then the kids are 0:18:51.920 --> 0:18:54.960 talking about this thing, AI. How do you put that 0:18:55.080 --> 0:18:56.800 all together and have a tech call? 0:18:57.200 --> 0:18:57.440 Yeah? 0:18:57.520 --> 0:19:01.600 Sure, I would say the investor sentiment positioning is broadly 0:19:01.680 --> 0:19:05.280 cautious as we head into Q three earning season, as 0:19:05.320 --> 0:19:09.320 there's angst building around twenty twenty four outlooks and whether 0:19:09.359 --> 0:19:12.399 we will get a Q four budget flush. If we 0:19:12.440 --> 0:19:17.399 look at channel checks and alternative data providers, they're painting 0:19:17.600 --> 0:19:21.200 a conflicting message on the health of IT spending environment. 0:19:21.920 --> 0:19:22.800 And I would. 0:19:22.680 --> 0:19:26.240 Describe the visibility as clear as mud at this point. 0:19:27.000 --> 0:19:32.120 And what I would say is that today's tonight's earnings 0:19:32.160 --> 0:19:37.080 calls from the megacaps like Google and Microsoft will give 0:19:37.119 --> 0:19:41.359 us a better understanding of whether the public cloud consumption 0:19:41.560 --> 0:19:45.119 headwinds or abating or not, and the trajectory of the 0:19:45.240 --> 0:19:51.240 hyperscale or capex into twenty twenty four. You know, the 0:19:51.320 --> 0:19:55.480 thing is that if you rewind to the start of 0:19:55.520 --> 0:20:00.760 twenty twenty three, as cost of capital has risen, you know, 0:20:01.040 --> 0:20:05.120 all these companies went on an endeavor to become financially fit. 0:20:05.280 --> 0:20:06.160 So we've seen. 0:20:06.200 --> 0:20:13.119 Significant positive earnings and free cash revisions upwards. Margin expansions 0:20:13.359 --> 0:20:17.239 have taken place, but what has been pressured is the 0:20:17.320 --> 0:20:21.960 net revenue retention rates as expansions have slowed as customers 0:20:21.960 --> 0:20:29.080 have cut back on spending and optimized their budgets with these. 0:20:28.400 --> 0:20:31.159 Big megacaps and other software providers. 0:20:31.600 --> 0:20:35.080 So the question is going forward into twenty twenty four 0:20:35.480 --> 0:20:40.359 with genai products from all these software companies ramping, whether 0:20:40.840 --> 0:20:46.439 that will serve as an incremental monetization driver into twenty 0:20:46.480 --> 0:20:51.600 four to drive you know, better revenue growth, especially given 0:20:51.640 --> 0:20:55.159 that the macro environment continues to be broadly stable and 0:20:55.200 --> 0:20:59.359 the comps are going to be easier into twenty twenty four. 0:21:00.200 --> 0:21:04.360 Point I would highlight on this front is that we 0:21:04.400 --> 0:21:08.600 should not overlook the lapping of the precipitous decline in 0:21:08.680 --> 0:21:12.520 ventor capital funding that started in two Q of last year. 0:21:13.160 --> 0:21:17.480 If you look at the trailing twelvemonth VC funding, it 0:21:17.600 --> 0:21:20.320 is sitting at two hundred and sixty two billion, which 0:21:20.359 --> 0:21:23.359 is down a little over fifty percent year of a 0:21:23.440 --> 0:21:25.640 year from five hundred and thirty. 0:21:25.440 --> 0:21:27.200 Eight billion last year. 0:21:27.880 --> 0:21:31.360 And the biggest negative step step down occurred between Q 0:21:31.400 --> 0:21:32.640 two and Q three. 0:21:32.480 --> 0:21:33.359 Of last year. 0:21:33.960 --> 0:21:37.960 And you know, assuming a certain percentage of these VC 0:21:38.200 --> 0:21:41.680 funds end up as public cloud revenues, the drag from 0:21:41.760 --> 0:21:45.800 that collapse in VC funding exactly a year ago, by 0:21:45.880 --> 0:21:48.399 our estimate, is, you know, is a drag of about 0:21:48.480 --> 0:21:50.639 ten percent of public cloud revenues. 0:21:51.040 --> 0:21:51.840 So I think the. 0:21:51.840 --> 0:21:55.960 Comps are are easing into into the back half. So 0:21:56.680 --> 0:21:59.520 that's the backdrop, and you know, we're very interested to 0:21:59.560 --> 0:22:04.479 see how the revenues flow are reported tonight. 0:22:05.040 --> 0:22:08.800 Something I'm keeping a close eye on is buybacks because 0:22:08.840 --> 0:22:11.720 we know that technology companies in particular have been a 0:22:11.800 --> 0:22:13.760 key pillar of support when you think about the broader 0:22:14.320 --> 0:22:16.840 stock market in last year with those buybacks being at 0:22:16.880 --> 0:22:18.680 a record, but they did slow in the first half 0:22:18.760 --> 0:22:21.360 of the year. As technology companies, obviously we're going through 0:22:21.359 --> 0:22:24.360 a lot of cost cutting efforts. What are you expecting 0:22:24.440 --> 0:22:26.359 to hear on that front from some of these big 0:22:26.400 --> 0:22:27.040 tech companies. 0:22:27.640 --> 0:22:33.280 Yeah, we expect capital allocation to be an important top 0:22:33.359 --> 0:22:36.320 and going forward, given the cost of capital is higher, 0:22:36.920 --> 0:22:42.320 and so I think expect a similar strategy going forward 0:22:42.400 --> 0:22:45.200 in terms of buybacks as. 0:22:45.000 --> 0:22:46.760 Free cash flows have ramped up. 0:22:47.119 --> 0:22:51.960 I do expect, I do expect a balance between investments 0:22:52.000 --> 0:22:58.479 and buybacks, and I don't expect any major surprises on 0:22:58.520 --> 0:22:59.879 that front going forward. 0:23:00.400 --> 0:23:02.520 So now, for the first half of the year, we 0:23:02.560 --> 0:23:05.919 all learned a new term AI, and every company that 0:23:06.000 --> 0:23:08.360 reported earnings for two or three quarters, whether they may 0:23:08.800 --> 0:23:11.879 dog food or where they may, you know, missiles talked 0:23:11.880 --> 0:23:15.119 about how AI is transforming their business in the supercharge 0:23:15.119 --> 0:23:22.000 at Kroger Croker when they's McDonald's. What is AI to 0:23:22.080 --> 0:23:25.080 you and is it incremental to spending? 0:23:25.760 --> 0:23:28.480 Yes, it's an interesting uh. 0:23:29.359 --> 0:23:32.439 You know initially when uh, if you look at the 0:23:32.560 --> 0:23:36.040 equity performance between me and July, we got we were 0:23:36.080 --> 0:23:40.639 in the hype cycle of AI, and in general, I 0:23:40.680 --> 0:23:45.840 would say investors generally overestimate the impact of new technologies 0:23:45.960 --> 0:23:49.440 like jen ai and the near term, but under estimate 0:23:49.560 --> 0:23:53.719 the longer term impact. So what is jen A I definitely, 0:23:53.800 --> 0:23:56.840 I think, you know, we've been, as part of our 0:23:56.880 --> 0:23:59.800 ongoing due diligence, talk to a lot of customers. We've 0:24:00.000 --> 0:24:07.040 spoken to leaders of IT departments at big financial institutions, industrials, 0:24:07.080 --> 0:24:13.399 and healthcare companies, and there is definitely a view internally 0:24:13.520 --> 0:24:19.520 that GENI could be a meaningful productivity enhancer, and all 0:24:19.600 --> 0:24:26.560 these companies are exploring different GENI use cases within their organizations. 0:24:26.560 --> 0:24:32.040 Our senses that the first use cases for GENI are 0:24:32.080 --> 0:24:37.640 probably going to be internal use cases to improve productivity improvement, 0:24:39.160 --> 0:24:44.760 be it in a call center agent, for a marketing professional, 0:24:44.880 --> 0:24:49.119 for a software developer. These tools, anecdotally, what we've heard, 0:24:49.920 --> 0:24:53.320 increased productivity by twenty five to thirty percent, so they're 0:24:53.359 --> 0:24:58.280 definitely pretty impactful. There's a lot of interest within organizations, 0:24:58.600 --> 0:25:04.160 but they're also mindful and want to understand the data 0:25:04.240 --> 0:25:11.159 privacy issues around GENI, security issues around GENI, and the cost, 0:25:12.320 --> 0:25:15.639 you know, the cost of implementing JENI. So they're moving 0:25:15.800 --> 0:25:19.919 thoughtfully and conservatively. That's why I said we overestimate the 0:25:19.960 --> 0:25:23.840 impact of the near term but underestimate the longer term impact. 0:25:24.200 --> 0:25:29.800 So as GENI products from software vendorors become generally, you know, 0:25:29.840 --> 0:25:33.840 more generally available. Microsoft's is coming out on November first, 0:25:33.880 --> 0:25:37.040 for example, a lot of these tools will be rolled out. 0:25:38.160 --> 0:25:42.080 Then the enterprises will, you know, decide whether it makes 0:25:42.119 --> 0:25:45.560 sense for them at the cost at the price points. 0:25:45.440 --> 0:25:46.520 That they're being delivered. 0:25:47.240 --> 0:25:51.119 But from our vantage point, it's more of twenty twenty 0:25:51.160 --> 0:25:53.640 four twenty twenty five revenue growth. 0:25:53.440 --> 0:25:56.600 Through did we only have about a minute left. But 0:25:56.840 --> 0:25:59.080 if you are able to join the earnings call for 0:25:59.400 --> 0:26:03.400 Microsoft or Alphabet, what question would you ask for each company? 0:26:03.920 --> 0:26:09.400 Yeah, the number one question is what is happening on 0:26:09.560 --> 0:26:17.160 the consumption optimized optimization? Have customers optimize the spend or 0:26:17.240 --> 0:26:19.600 is there more to go on that front? And the 0:26:19.680 --> 0:26:24.560 second is the trajectory of the capex spending. You know, 0:26:25.040 --> 0:26:28.600 that's an important tell for future demand that may be 0:26:28.600 --> 0:26:30.600 coming on the GENI front. 0:26:30.600 --> 0:26:32.520 Because the expect I mean the understanding or a least 0:26:32.520 --> 0:26:37.320 my understanding is jen Ai is incremental to existing budgets. 0:26:37.440 --> 0:26:39.040 Is that true in your mind? 0:26:39.480 --> 0:26:44.959 So there will be definitely repurposing off budgets, So savings 0:26:45.040 --> 0:26:48.400 in some parts of the budget will be repurposed to JENNI. 0:26:49.680 --> 0:26:52.600 But you know, I do believe that. 0:26:53.440 --> 0:26:57.400 You know, our conversations are suggesting that the IT budgets 0:26:57.400 --> 0:27:00.840 are looking to go up mid to high single percentage 0:27:00.880 --> 0:27:04.760 points in twenty twenty four. So and part of that 0:27:04.960 --> 0:27:08.840 is Jenny I related. And that view is that budget 0:27:08.840 --> 0:27:11.040 outlook is slightly better than what we've seen in twenty 0:27:11.080 --> 0:27:11.560 twenty three. 0:27:11.720 --> 0:27:14.919 Okay, very good. We'll certainly be paying attention to the 0:27:15.280 --> 0:27:18.760 Microsoft and to the Google numbers after the closed tonight. 0:27:18.840 --> 0:27:23.600 So neutrala partner and portfolio manager at Times Square Capital Management, 0:27:24.480 --> 0:27:26.960 timely discussion here as we get ready to kick off 0:27:26.960 --> 0:27:28.560 some big, big tech earnings. 0:27:29.520 --> 0:27:33.360 You're listening to the Team Ken's live program Bloomberg Markets 0:27:33.400 --> 0:27:36.480 weekdays at ten am Eastern on Bloomberg dot com, the 0:27:36.560 --> 0:27:39.720 iHeartRadio app, and the Bloomberg Business app, or listen on 0:27:39.760 --> 0:27:41.879 demand wherever you get your podcasts. 0:27:44.200 --> 0:27:48.560 Ank Rate dot Com US homeworkers thirty year fixed seven 0:27:48.600 --> 0:27:52.200 point ninety eight percent. Just extraordinary. That is the high 0:27:52.280 --> 0:27:54.280 since March of two thousand. 0:27:54.440 --> 0:27:54.720 Wow. 0:27:54.960 --> 0:27:58.080 Makes me feel less dumb for my six percent mortgage 0:27:58.119 --> 0:28:00.320 I got back in March of this year. I did 0:28:00.320 --> 0:28:02.959 feel a little like a knucklehead back then. Six percent, 0:28:03.040 --> 0:28:05.600 but not too bad. But that can't be good for 0:28:05.800 --> 0:28:07.879 like the housing market overall. Let's check in with somebody 0:28:07.880 --> 0:28:12.320 who knows this stuff, Brad Dilman, Chief Economists, RPM Living 0:28:12.560 --> 0:28:14.479 is the firm. Hey, Brad, we got a mortgage RDE 0:28:14.520 --> 0:28:17.760 up there at eight percent on the thirty year fixed man, 0:28:17.800 --> 0:28:19.840 what's that mean for the residential real estate market? 0:28:21.000 --> 0:28:22.479 Well, I think we can see that in the existing 0:28:22.520 --> 0:28:23.000 home sales. 0:28:23.080 --> 0:28:26.760 Right If that number is now at four million seasonally annualized, 0:28:26.760 --> 0:28:28.879 that's pretty ugly that we got to go back to 0:28:28.920 --> 0:28:30.760 the Great Recession to see a figure that bad. 0:28:30.840 --> 0:28:33.280 So it translates into low volume, that's for sure. 0:28:33.760 --> 0:28:36.080 And we're going to get a batch of housing data 0:28:36.160 --> 0:28:39.360 throughout this week, so starting tomorrow will have us new 0:28:39.440 --> 0:28:43.040 home sales for the month of September. When we did 0:28:43.040 --> 0:28:45.960 get August data, it did fall to a five month low. 0:28:46.320 --> 0:28:49.040 What are you thinking that we'll end up seeing from 0:28:49.080 --> 0:28:50.240 this data tomorrow? 0:28:51.640 --> 0:28:53.680 I think the the consensus figure I had in front 0:28:53.680 --> 0:28:54.840 of me was six eighty six. 0:28:55.080 --> 0:28:56.320 I think we may actually beat that. 0:28:56.320 --> 0:28:59.240 AT's say, six hundred eighty six thousand seasonally, just at annualized, 0:28:59.240 --> 0:29:00.840 I think it will come in seven hundred, but I 0:29:00.880 --> 0:29:02.480 think it'll have a little bit more strength to it. 0:29:03.120 --> 0:29:05.360 New home sales obviously came down from their peak, but 0:29:05.400 --> 0:29:07.920 you know, if you compare them to pre COVID era, 0:29:08.160 --> 0:29:09.280 they're still pretty strong. 0:29:10.120 --> 0:29:13.560 Also, though, another data point that will get later this week, 0:29:13.600 --> 0:29:15.760 which is important to look at the future direction when 0:29:15.800 --> 0:29:17.560 it comes to the housing market is also when you're 0:29:17.560 --> 0:29:20.280 looking at housing starts and building permits, and when you're 0:29:20.320 --> 0:29:23.040 looking at pending home sales. Obviously a leading indicator of 0:29:23.080 --> 0:29:25.800 existing home sales, given typically they're going to go under 0:29:25.880 --> 0:29:28.720 contract a month or two before they're end up being sold. 0:29:29.000 --> 0:29:31.400 What are you seeing on that end, and is that 0:29:31.520 --> 0:29:34.320 showing any sort of promising signs? More broadly for the 0:29:34.320 --> 0:29:36.120 housing market, You know, I. 0:29:36.080 --> 0:29:38.120 Really look at the builders when I think about this, 0:29:38.200 --> 0:29:39.840 and what I saw with them was really in the 0:29:39.880 --> 0:29:42.720 last ninety days or so, the reporting of a material 0:29:42.760 --> 0:29:45.960 slowdown in community traffic that's very clearly tied to the 0:29:46.000 --> 0:29:48.360 recent move in the ten year treasury rate. I think 0:29:48.480 --> 0:29:50.320 when we look at the existing home sales side and 0:29:50.360 --> 0:29:52.440 pending home sales and how that may move. We really 0:29:52.520 --> 0:29:54.600 end up with a question of geography here, and it 0:29:54.600 --> 0:29:56.400 translates to what we see on the rental market too. 0:29:56.480 --> 0:29:57.800 The areas that are really strong thing. 0:29:57.960 --> 0:30:03.240 It's Madison, Wisconsin, Maha, Nebraska, Urbana, Champagne, Illinois. It's markets 0:30:03.280 --> 0:30:05.160 that really haven't been in the spotlight in terms of 0:30:05.160 --> 0:30:07.360 housing in quite some time. And these may be the 0:30:07.440 --> 0:30:10.040 kinds of areas that actually lead even in this high 0:30:10.080 --> 0:30:11.000 interest rate environment. 0:30:11.720 --> 0:30:15.240 So, Bret, I've heard, I've heard from real estate folks 0:30:15.240 --> 0:30:17.800 like yourselves that there's just not enough housing in the 0:30:17.920 --> 0:30:21.240 United States And A Tory, how did that happen? If 0:30:21.240 --> 0:30:24.880 that's even true? And I mean, b how do you 0:30:24.920 --> 0:30:25.320 fix it? 0:30:26.520 --> 0:30:28.240 So A, Yeah, I think it is true. 0:30:28.600 --> 0:30:30.800 My own analysis shows that we're under built by about 0:30:30.800 --> 0:30:33.280 six hundred and fifty thousand units right now. How that 0:30:33.360 --> 0:30:35.280 happened really goes all the way back to the Great 0:30:35.320 --> 0:30:38.080 Recession and really our efforts to stimulate home prices for 0:30:38.120 --> 0:30:40.160 about five years by. 0:30:39.960 --> 0:30:42.400 Increasing affordability on the margin. 0:30:42.480 --> 0:30:45.280 Back then, it resulted in less affordability and subsequent time 0:30:45.320 --> 0:30:48.840 periods and therefore lower construction volume, particularly in single family 0:30:48.840 --> 0:30:52.440 where it took more savings and migration to affordability for 0:30:52.520 --> 0:30:55.600 people to own. Now we are closing this gap. The 0:30:55.640 --> 0:30:57.840 degree to which we're underbuilt has been made up four 0:30:57.840 --> 0:31:00.400 in two parts. One has been that we have seen 0:31:00.440 --> 0:31:03.080 a de facto housing supply stimulus in terms of COVID 0:31:03.080 --> 0:31:06.280 era response. We saw fiction moratoria translates to high rank 0:31:06.280 --> 0:31:08.760 growth and that into high multifamily starts. And then of 0:31:08.760 --> 0:31:10.720 course the really low interest rates that we had back 0:31:10.720 --> 0:31:13.440 then in terms of mortgages translating to home price appreciation, 0:31:13.800 --> 0:31:16.560 which translated into a lot of single family starts. We're 0:31:16.560 --> 0:31:18.400 closing this gap. I think we're under built by six 0:31:18.440 --> 0:31:21.520 hundred and fifty thousand units today. Let's put that in context. 0:31:21.600 --> 0:31:24.240 There's nearly one point seven million housing units under construction 0:31:24.480 --> 0:31:27.400 right now, so that means we've just by today's figures. Yeah, 0:31:27.440 --> 0:31:29.479 you've got to figure in obsolescence and such. But if 0:31:29.520 --> 0:31:32.400 we finished everything that's under construction right now, we'd be 0:31:32.440 --> 0:31:33.600 overbuilt by a million units. 0:31:34.280 --> 0:31:37.240 What about when it comes to particular home builders, because 0:31:37.320 --> 0:31:40.480 dear Horton Lenard, they have a particular demographic when it 0:31:40.520 --> 0:31:43.520 comes to that, But when it comes to housing affordability 0:31:43.880 --> 0:31:47.320 for lower income demographics, what builders do you think are 0:31:47.360 --> 0:31:50.760 out there that could help this particular segment of the population. 0:31:51.800 --> 0:31:53.480 I just think it's going to be smaller builders, some 0:31:53.480 --> 0:31:55.479 of which may not even be publicly traded, right These 0:31:55.520 --> 0:31:56.960 are going to be folks who are in these much 0:31:56.960 --> 0:31:59.080 smaller markets that actually have a pretty. 0:31:58.800 --> 0:31:59.720 Good land basis. 0:32:00.040 --> 0:32:01.920 If we look at the big builders that focus on 0:32:01.960 --> 0:32:03.760 that move up buyer, that's really where a lot of 0:32:03.800 --> 0:32:06.480 the pain is right now. These people can't sell their 0:32:06.480 --> 0:32:09.080 existing home at an attractive enough price really because of 0:32:09.120 --> 0:32:11.239 mortgage rates, and then they can't turn around and get 0:32:11.280 --> 0:32:13.400 the discounts that they'd really need into the home that 0:32:13.400 --> 0:32:14.240 they would move into. 0:32:14.440 --> 0:32:15.840 So the move up buyers really hurt. 0:32:15.880 --> 0:32:17.960 Right now, we're seeing a little bit of a shift 0:32:17.960 --> 0:32:20.520 i'd say to you know, call it C locations, not 0:32:20.560 --> 0:32:22.880 so much in the D locations anymore, but a shift 0:32:22.920 --> 0:32:25.720 back in to see a focus on kind of smaller 0:32:25.720 --> 0:32:29.160 and higher quality product that really might kind of reflect 0:32:29.360 --> 0:32:31.959 a bumping down effect when it comes to ownership. We 0:32:32.000 --> 0:32:34.080 can flip that to the rental side, where it looks 0:32:34.160 --> 0:32:37.560 like supply, you know, is siphoning demand from Class B 0:32:37.920 --> 0:32:40.440 and providing a lot of alternatives now for renters who 0:32:40.520 --> 0:32:42.960 look to more affordable but still quality options. 0:32:43.440 --> 0:32:45.720 Are you? Are you down in Atlanta, Bread? 0:32:46.920 --> 0:32:48.400 No, I'm in Clintonville, Wisconsin. 0:32:48.520 --> 0:32:48.920 Clinton. 0:32:49.640 --> 0:32:50.200 I'm remote. 0:32:50.240 --> 0:32:52.280 I work for a company that's based out of Austin, 0:32:52.320 --> 0:32:54.560 and I spend time there, but I'm in rural Wisconsin, 0:32:54.600 --> 0:32:55.760 which is where the wife is from. 0:32:56.080 --> 0:32:57.760 Clinton. Where's Clinton, Wisconsin? 0:32:58.680 --> 0:33:01.240 Clintonville is about forty five five minutes west of Green Bay. 0:33:01.800 --> 0:33:03.040 They make fire trucks out here. 0:33:03.400 --> 0:33:04.800 So how's the winter treating you so far? 0:33:05.680 --> 0:33:07.040 It's not too bad. Yeah, I got a little bit 0:33:07.040 --> 0:33:08.080 of a storm right now, but. 0:33:07.960 --> 0:33:09.400 It's actually a beautiful fall. 0:33:09.920 --> 0:33:11.480 But may we talk in a few months when it's 0:33:11.480 --> 0:33:12.840 you know, dark at four o'clock contea? 0:33:13.040 --> 0:33:13.120 Right? 0:33:13.160 --> 0:33:13.440 All right? 0:33:13.440 --> 0:33:15.000 If I want so, if I want to buy a 0:33:15.040 --> 0:33:19.800 four bedroom fairly new construction, Clintonville, Wisconsin, what's that going 0:33:19.800 --> 0:33:20.200 to run me? 0:33:21.200 --> 0:33:22.840 Well, there's not too much supply out here, I'll tell 0:33:22.840 --> 0:33:23.120 you that. 0:33:23.720 --> 0:33:25.640 But you know, we I think we can say that, 0:33:25.760 --> 0:33:28.040 you know, on the on the new home side, prices 0:33:28.080 --> 0:33:29.160 are down from their peak. 0:33:29.440 --> 0:33:31.080 I would think if you wanted to build. 0:33:30.800 --> 0:33:32.720 In rural America, if you wanted to go build, and 0:33:33.080 --> 0:33:35.440 you know Urbana Champaign, which is is rural enough for 0:33:35.440 --> 0:33:37.640 anybody who's sitting in New York or a major metropolitan 0:33:37.640 --> 0:33:40.400 area and you want your four bedroom house. 0:33:40.160 --> 0:33:42.360 That's really nice. You've been looking anywhere from three fifty 0:33:42.440 --> 0:33:43.360 to four to fifty. 0:33:43.800 --> 0:33:46.360 Do you talk to brokers often and if so, what 0:33:46.400 --> 0:33:49.000 are they telling you about what they're hearing anecdotally from 0:33:49.000 --> 0:33:49.920 potential buyers. 0:33:51.000 --> 0:33:53.280 You know, I don't talk to brokers personally. I'm a 0:33:53.360 --> 0:33:55.400 data guy, right, so I see through this in data 0:33:55.440 --> 0:33:56.240 and reading reports. 0:33:56.440 --> 0:33:58.440 But what I am hearing from the home builders. 0:33:58.200 --> 0:34:00.840 Has been this really this decline in community trap that 0:34:00.880 --> 0:34:03.000 you know, the builders have been buying down rate for people. 0:34:03.000 --> 0:34:05.760 They're really getting to the end of that. They're not 0:34:05.800 --> 0:34:08.279 wanting to cut their asking price yet, and so they're 0:34:08.320 --> 0:34:08.839 turning around. 0:34:08.840 --> 0:34:11.560 They're trying to make up margin by basically going after 0:34:11.600 --> 0:34:13.719 the trade so labor and materials cost and trying to 0:34:13.719 --> 0:34:15.000 get concessions on that front. 0:34:16.040 --> 0:34:18.680 Dude, you're not kidding, man. I just popped up Clintonville 0:34:18.719 --> 0:34:22.120 on the Google Maps. You are west of Green Bay, 0:34:23.400 --> 0:34:27.720 northwest of Appleton. That, dude, you are like the center 0:34:27.760 --> 0:34:30.440 of American No, no question, right, what's it? How's life 0:34:30.480 --> 0:34:31.000 out there? 0:34:31.840 --> 0:34:31.960 Oh? 0:34:32.000 --> 0:34:33.400 I've only been out here for about a month and 0:34:33.440 --> 0:34:35.640 a half in California. 0:34:35.760 --> 0:34:38.080 I was in Seattle, I was in Boston, I was 0:34:38.120 --> 0:34:39.919 in London, and then I was in Atlanta. 0:34:40.040 --> 0:34:42.040 All for me, it's the holy region of the country, 0:34:42.080 --> 0:34:42.480 and it's. 0:34:42.320 --> 0:34:45.160 Still neat all right, look at less about like the economy, Like, 0:34:45.200 --> 0:34:46.160 what are you seeing out there? 0:34:47.600 --> 0:34:50.080 Some growth? Right, you know, an area like this. HA 0:34:50.200 --> 0:34:51.640 had a tough time coming out. 0:34:51.560 --> 0:34:53.719 Of the Great Recession for quite a long time, and 0:34:53.719 --> 0:34:56.239 I'd say really around twenty eighteen twenty or nineteen or 0:34:56.239 --> 0:34:58.440 so things started to pick up awesome, and then of 0:34:58.440 --> 0:35:01.200 course the pandemic led to enough remote work and then 0:35:01.280 --> 0:35:03.440 some continued growth out here. You know, out here though 0:35:03.440 --> 0:35:05.800 it's a lot of farming, it's manufacturing, right, We build 0:35:05.800 --> 0:35:07.759 fire trucks and a little. 0:35:07.480 --> 0:35:09.640 Bit in terms of wind turbines and things like this. 0:35:09.880 --> 0:35:13.000 Awesome, all right, Brad, Great chatting with you. Great getting 0:35:13.000 --> 0:35:16.560 the local color from Clintonville, Wisconsin. Bradilman, he's the chief 0:35:16.560 --> 0:35:18.440 economist RPM Living. 0:35:18.760 --> 0:35:21.800 You're listening to the tape Cat's are live program Bloomberg 0:35:21.920 --> 0:35:25.520 Markets weekdays at ten am Eastern on Bloomberg Radio, the 0:35:25.560 --> 0:35:28.799 tune in app, Bloomberg dot Com, and the Bloomberg Business app. 0:35:28.840 --> 0:35:31.640 You can also listen live on Amazon Alexa from our 0:35:31.680 --> 0:35:36.040 flagship New York station, Just Say Alexa, play Bloomberg eleven. 0:35:35.760 --> 0:35:39.680 Thirty, Coley Smith plus twenty live here in our Bloomberg 0:35:39.719 --> 0:35:42.200 Interactor Broker Studio Earnings Here, we're all been focusing on 0:35:42.200 --> 0:35:44.440 the tech earnings coming out after the close. We had 0:35:44.480 --> 0:35:48.480 some good industrial earnings out three M and Gee Boast 0:35:48.480 --> 0:35:50.680 had some pretty good numbers, boosted the profit outlook. The 0:35:50.680 --> 0:35:52.600 stocks are up five or six percent. We said we 0:35:52.680 --> 0:35:54.640 got to get Brook Sutherland in here. She is the 0:35:54.680 --> 0:35:59.720 Bloomberg opinion person who covers industrial America like no one else. Hey, Brook, 0:36:00.120 --> 0:36:02.720 I don't know, it seems like industrial America is doing Okay, 0:36:02.760 --> 0:36:05.200 what are your takeaways from three M? Do you know 0:36:05.239 --> 0:36:10.759 what THREEM stands for? This is an awkward mining and 0:36:10.800 --> 0:36:12.399 manufacturing three M? And GE? 0:36:12.600 --> 0:36:14.880 What G stands for General Alegen? 0:36:15.320 --> 0:36:17.880 There you go, got one of us exactly what your 0:36:17.920 --> 0:36:19.600 takeaway brooks from some of these companies here. 0:36:19.840 --> 0:36:23.680 Sure, So there's unique stories happening at both GE and 0:36:23.840 --> 0:36:26.560 three M, and so you know at GE it's really 0:36:26.560 --> 0:36:29.759 a story of just the aerospace market is continuing to 0:36:29.840 --> 0:36:33.319 boom and there is a supply problem there rather than 0:36:33.360 --> 0:36:36.600 a demand problem that the airlines of the world air 0:36:36.680 --> 0:36:40.040 lessers want more aircraft, more jet engines than these companies 0:36:40.080 --> 0:36:43.640 can produce, and demand is really fair to robust still. 0:36:43.840 --> 0:36:46.720 So GE, do you not have the supply chain product 0:36:47.160 --> 0:36:49.759 in I guess the stuff to make them, or you're 0:36:49.800 --> 0:36:51.160 just a capacity. 0:36:51.400 --> 0:36:53.360 It's a little bit of both. And so what was 0:36:53.400 --> 0:36:56.800 interesting in the US is that while we extended payroll 0:36:56.840 --> 0:36:59.360 aid to the airlines during the pandemic, we did not 0:36:59.560 --> 0:37:02.279 do that the aircraft manufacturers, and so all of these 0:37:02.280 --> 0:37:07.200 companies slashed their workforces very aggressively, and then when they 0:37:07.480 --> 0:37:10.200 tried to rehire them, they found that that was more 0:37:10.440 --> 0:37:12.279 difficult than they thought it was going to be. That 0:37:12.320 --> 0:37:14.640 a number of people had sort of retired. There was 0:37:14.640 --> 0:37:17.480 obviously a lot of competition for skilled labor. That is 0:37:17.520 --> 0:37:22.280 particularly true this labor shortage issue at the smaller supplier. 0:37:22.360 --> 0:37:25.080 So if you're a company like GE, your ability to 0:37:25.120 --> 0:37:28.120 compete for top talent is better than somebody further down 0:37:28.160 --> 0:37:31.160 the line. But of course GE depends on these smaller 0:37:31.400 --> 0:37:33.400 suppliers to be able to churn out jet engines. I 0:37:33.400 --> 0:37:36.480 talked with Larry Cole this morning actually, and the CEO 0:37:36.520 --> 0:37:39.320 of GE and talked about how they're still seeing supply 0:37:39.440 --> 0:37:42.880 chain constraints and the delinquent trees were up in the 0:37:42.920 --> 0:37:45.439 third quarter relative to the second quarter. They're working hand 0:37:45.480 --> 0:37:47.399 in hand with their supply chain to try to really 0:37:47.520 --> 0:37:49.840 ramp up output, but it is it's challenging. 0:37:50.480 --> 0:37:54.680 How much has a story of materials versus labor issues. 0:37:55.200 --> 0:37:58.200 I think it's more on the labor front at this point. 0:37:58.280 --> 0:37:59.960 That's really where the constraints are. 0:38:00.520 --> 0:38:03.319 All right, So three M what's the story there? Three 0:38:03.360 --> 0:38:05.359 at the Saint Palm, Minnesota, great town by the way, 0:38:05.360 --> 0:38:05.640 if you. 0:38:05.560 --> 0:38:10.240 Haven't been, it is it is not a demand story. 0:38:10.280 --> 0:38:11.920 At three AM to the same extent as what we're 0:38:11.920 --> 0:38:15.680 seeing in GE, they actually cut their organic sales growth 0:38:15.760 --> 0:38:18.319 outlook for the year. They're continuing to see a lot 0:38:18.360 --> 0:38:22.919 of weakness and consumer markets, electronics, some spottiness in industrials 0:38:22.920 --> 0:38:25.520 amid a slow down in Europe, and you know, less 0:38:26.000 --> 0:38:28.160 robust performance in China than I think a lot of 0:38:28.239 --> 0:38:29.960 companies were hoping for. As we came out of the 0:38:29.960 --> 0:38:33.359 other end of the COVID lockdowns there, they did raise 0:38:33.400 --> 0:38:36.640 their profit guidance and that reflects very aggressive cost cutting 0:38:36.640 --> 0:38:38.880 actions that they're taking. Now, this is not the first 0:38:39.239 --> 0:38:42.800 restructuring effort by three AM under any stress of the imagination, 0:38:42.880 --> 0:38:45.600 but this one does appeal appear, excuse me, to have 0:38:45.640 --> 0:38:48.279 a little bit more heft to it where it is 0:38:48.320 --> 0:38:50.440 actually showing up on the bottom line. One of the 0:38:50.560 --> 0:38:53.239 long standing complaints that analysts have had about three M 0:38:53.400 --> 0:38:55.719 is that it announces is restructuring programs and then we 0:38:55.840 --> 0:38:59.840 just never really see any kind of impact. That it 0:39:00.000 --> 0:39:02.000 appears to be different this time around, and I think 0:39:02.000 --> 0:39:04.200 that's why you're seeing some enthusiasm around the stuff today. 0:39:04.280 --> 0:39:07.040 Well, tell us a little bit about the restructuring efforts 0:39:07.040 --> 0:39:09.640 that three M has made. I got a little loss 0:39:09.680 --> 0:39:11.960 trying to get ready for this to see just how 0:39:11.960 --> 0:39:14.520 many job cuts they've made and what kinds of different 0:39:14.719 --> 0:39:16.480 stages it's come in. So if you could give us 0:39:16.480 --> 0:39:19.200 a little bit of the backstory there, sure, it's been. 0:39:19.080 --> 0:39:21.960 Going on for a few years now. I mean, the 0:39:22.000 --> 0:39:25.800 bigger issue with three M, apart from arguably a bloated 0:39:25.800 --> 0:39:29.040 cost structure, is that they have these legacy liabilities hanging 0:39:29.040 --> 0:39:33.000 over their head that involve Forever Chemicals or pfas and 0:39:33.600 --> 0:39:36.320 also ear plugs that they sold to the military that 0:39:36.440 --> 0:39:40.319 veterans have alleged contributed to hearing loss. So those have 0:39:40.400 --> 0:39:43.600 really been weighing on the company because they were somewhat 0:39:43.640 --> 0:39:45.799 open ended. It was not really clear what was going 0:39:45.840 --> 0:39:49.080 to happen. Now three M does have a settlement for 0:39:49.239 --> 0:39:52.719 the public water claims related to PFAS that which is 0:39:52.760 --> 0:39:54.480 working its way through the court, and it also has 0:39:54.520 --> 0:39:57.960 a settlement for the combat arms the ear plugs issue, 0:39:57.960 --> 0:39:59.960 which is also going to work its way through the system. 0:40:00.120 --> 0:40:02.839 So they've made progress in certain terms of clearing out 0:40:02.840 --> 0:40:05.279 some of these legacy issues, but there are still some 0:40:05.400 --> 0:40:08.560 p fast items outstanding that I think will continue to 0:40:08.560 --> 0:40:11.879 make this a tricky stock to own for investors because 0:40:11.880 --> 0:40:14.320 you're not really just betting on industrial markets or costcut. 0:40:14.360 --> 0:40:15.719 That's what I was just going to ask you about, 0:40:15.719 --> 0:40:17.600 because I'm looking at the stock price performance in three 0:40:17.680 --> 0:40:19.360 M is down about twenty five percent year today, but 0:40:19.440 --> 0:40:22.799 GE is up about seventy five percent year to date. 0:40:22.880 --> 0:40:24.840 So when I think of GE, I'm back. I go 0:40:24.920 --> 0:40:27.640 back to the day's when it was everything it was 0:40:27.760 --> 0:40:31.520 GE was the economy, including the financial system. Obviously, they've 0:40:31.560 --> 0:40:34.800 paired it down dramatically over the last ten fifteen years. 0:40:35.680 --> 0:40:37.799 Is Larry Colp to see are they done. Do we 0:40:37.880 --> 0:40:41.080 have the new ge ors. There's still stuff to sell 0:40:41.160 --> 0:40:41.720 or spend offers. 0:40:41.880 --> 0:40:44.439 So their plan is to spin off ge Vernova, which 0:40:44.480 --> 0:40:47.280 will be the energy businesses, so that's their gas turbines, 0:40:47.280 --> 0:40:50.839 but also the renewable energy the wind turbine businesses. They 0:40:50.960 --> 0:40:53.120 said today that that is going to happen in the 0:40:53.120 --> 0:40:55.640 second quarter of twenty twenty four, which is around the 0:40:56.040 --> 0:40:58.320 sort of general timefirme that they've given before, but a 0:40:58.400 --> 0:41:02.520 little bit more specific in detail. And then once that happens, 0:41:03.760 --> 0:41:07.799 you're mostly done as far as the streamlining process. It's 0:41:07.800 --> 0:41:11.759 an aerospace and defense company with some legacy insurance liabilities 0:41:11.800 --> 0:41:14.520 that they likely will want to sort out sooner rather 0:41:14.600 --> 0:41:17.239 than later, just to really clean up the story. And 0:41:17.280 --> 0:41:19.640 then I think the conversation really shifts to do you 0:41:19.680 --> 0:41:23.200 start looking at acquisitions really, which is crazy to think 0:41:23.239 --> 0:41:26.120 about after you know, the dark days of ge and 0:41:26.280 --> 0:41:28.040 cash flow burn and all of that. But the balance 0:41:28.080 --> 0:41:29.400 sheet is in a much better place. 0:41:29.200 --> 0:41:31.080 And I'm just I was just going to point that out. 0:41:31.080 --> 0:41:32.640 You talk about the balance sheet, I'm looking for on 0:41:32.680 --> 0:41:34.759 my FA function and back in twenty nineteen they had 0:41:34.800 --> 0:41:36.840 ninety four billion of debt. That's down to like twenty 0:41:36.880 --> 0:41:38.359 three twenty four billion of debt. 0:41:38.400 --> 0:41:40.759 That's pretty good, right, because they've sold off all these 0:41:40.760 --> 0:41:42.800 businesses and so they've been able to bring in money 0:41:42.800 --> 0:41:45.360 and really ship away at that debt load, and that 0:41:45.480 --> 0:41:47.640 puts the company in position where we can't have these 0:41:47.640 --> 0:41:50.800 conversations about you know, what kinds of acquisitions might make sense. 0:41:51.120 --> 0:41:54.360 You know, GE will be once they've spun off the 0:41:54.440 --> 0:41:56.480 energy business. It will be somewhat unique in that the 0:41:56.600 --> 0:42:01.000 aerospace business will be highly focused on engines. You don't 0:42:01.040 --> 0:42:05.600 really have a comparable raytheon of course produces the GTF 0:42:05.600 --> 0:42:07.120 out of its Pratt and Whitney unit, but they have 0:42:07.160 --> 0:42:10.279 a much more robust defense business. So that raises a 0:42:10.360 --> 0:42:12.200 question of would g you want to get, you know, 0:42:12.280 --> 0:42:14.840 deeper into defense or are there other parts of aerospace 0:42:14.880 --> 0:42:17.719 that might be appealing to the company, whether that's avionics 0:42:17.800 --> 0:42:19.640 or other types of aircraft parts. 0:42:19.920 --> 0:42:23.040 This is all really impressive for Larry Culp, you'd think, right, 0:42:23.120 --> 0:42:27.040 I mean, look at like the story that he's inherited. Obviously, 0:42:27.080 --> 0:42:29.040 like there's been a bit of turnover at the top, 0:42:29.080 --> 0:42:31.640 but he's been really you know, the man of the 0:42:31.640 --> 0:42:34.080 past couple of years here at the top of the 0:42:34.120 --> 0:42:36.640 GE ladder. I mean, what kind of legacies that mean 0:42:36.719 --> 0:42:38.520 for him? And like all that he has done to 0:42:38.560 --> 0:42:41.040 turn this company around. I mean I used to cover 0:42:41.120 --> 0:42:43.680 it back when the bonds were not trading so well. 0:42:43.719 --> 0:42:45.200 I mean, this is like you were saying now, the 0:42:45.280 --> 0:42:48.160 deleveraging story has been incredible, but it's got to be 0:42:48.320 --> 0:42:50.000 like I mean, he's got to be like CEO of 0:42:50.000 --> 0:42:50.560 the century. 0:42:51.560 --> 0:42:53.680 Sure, he's certainly being paid a lot of money to 0:42:53.760 --> 0:42:57.600 do this, but he really has accomplished a lot at GE, 0:42:57.640 --> 0:43:01.120 and it's really been impressive to see. It's been a 0:43:01.120 --> 0:43:04.319 long process with some stops and starts, but to make 0:43:04.400 --> 0:43:06.920 this kind of progress on the debt load particularly gives 0:43:06.960 --> 0:43:09.560 GE a future that really just was not, you know, 0:43:09.680 --> 0:43:11.799 conceivable a few years ago. And I think that's really 0:43:11.880 --> 0:43:12.720 to Larry's credit. 0:43:12.840 --> 0:43:14.919 Yeah, and to even have the discussion, which I can't 0:43:14.920 --> 0:43:17.440 remember the last time we didn't with G about growing. 0:43:17.880 --> 0:43:19.960 I mean it's been almost twenty years. I mean, I 0:43:20.000 --> 0:43:24.799 think since Jack Welch left it's been at a The 0:43:24.840 --> 0:43:26.000 conversation has been. 0:43:25.960 --> 0:43:28.759 Folks, and well, they did some acquisitions in the in 0:43:28.800 --> 0:43:31.279 the era that didn't work out so much kind of 0:43:31.719 --> 0:43:32.960 but yes, correct. 0:43:32.719 --> 0:43:34.600 All right, brook thanks so much for joining us. Brooks Souther. 0:43:34.719 --> 0:43:37.040 Then she's a columnist for Bloomberg Opinion, covering all the 0:43:37.080 --> 0:43:40.320 industrial America, some great companies, some great industries. She covers 0:43:40.360 --> 0:43:41.960 the deal. She kind of does it. Also, we appreciate 0:43:41.960 --> 0:43:43.960 getting a few minutes of Brooks time here in our 0:43:43.960 --> 0:43:45.520 Bloomberg Interactive Broker Studio. 0:43:45.760 --> 0:43:48.880 You're listening to the tape Cat's are live program Bloomberg 0:43:48.960 --> 0:43:52.520 Markets weekdays at ten am Eastern on Bloomberg Radio, the 0:43:52.600 --> 0:43:55.799 tune in app, Bloomberg dot Com, and the Bloomberg Business App. 0:43:55.840 --> 0:43:58.680 You can also listen live on Amazon Alexa from our 0:43:58.680 --> 0:44:03.720 flagship New York station. Just say Alexa, play Bloomberg eleven thirty. 0:44:04.680 --> 0:44:07.799 Right now, people want to talk big, big media. We're 0:44:07.880 --> 0:44:10.040 talking music, can talk Hollywood and all that kind of stuff. 0:44:10.040 --> 0:44:11.960 There's lots to talk about, and we go to our 0:44:12.000 --> 0:44:15.000 go to analyst, Keitha Ranganathan. She is the media analyst 0:44:15.040 --> 0:44:19.480 for Bloomberg Intelligence, joining us via zoom from the headquarters 0:44:19.520 --> 0:44:22.760 of BIATDN in Princeton, New Jersey. Keitha, let's start with Spotify. 0:44:22.880 --> 0:44:25.319 Good story, some good numbers. Tell us what we got 0:44:25.320 --> 0:44:26.600 from our friends at Spotify. 0:44:27.320 --> 0:44:30.759 Yeah, excellent story. Paul at Spotify when they reported their 0:44:30.800 --> 0:44:33.880 three Q today, so they beat on almost every metric 0:44:33.920 --> 0:44:36.960 that we were looking at. User numbers came in really strong, 0:44:37.080 --> 0:44:41.000 premium subscriber momentum will continue into four Q. They said 0:44:41.040 --> 0:44:43.480 that they expect their monthly active users to reach the 0:44:43.560 --> 0:44:46.040 six hundred million mark by the end of this year. 0:44:46.280 --> 0:44:49.319 They're targeting about a billion in the next three to 0:44:49.320 --> 0:44:52.040 four years time. But I think most important for this 0:44:52.160 --> 0:44:55.680 story was really the inflection in the profitability metric. I mean, 0:44:55.719 --> 0:44:58.560 this is this is a streaming company that has plenty 0:44:58.600 --> 0:45:01.359 of subscribers. Before, for some reason, they haven't been really 0:45:01.400 --> 0:45:05.160 able to generate profits and that really kind of goes 0:45:05.200 --> 0:45:07.600 to their business model. But for the first time in 0:45:07.640 --> 0:45:11.959 two years, they actually generated a nice surprise profit, which 0:45:11.960 --> 0:45:13.520 is I think what is really driving most of that 0:45:13.560 --> 0:45:14.920 stock reaction today and. 0:45:14.920 --> 0:45:19.360 Tell us, Githa, is that profitability because Spotify was raising 0:45:19.440 --> 0:45:22.880 prices in the period or like more to the strength 0:45:22.920 --> 0:45:24.560 of the business that you're talking about. 0:45:25.600 --> 0:45:28.319 That's a great point. Yes, they did raise prices, and 0:45:28.360 --> 0:45:30.520 I think what it tells us in terms of their 0:45:31.640 --> 0:45:35.080 you know, not just their the operating income number, but 0:45:35.200 --> 0:45:37.239 the fact that they were able to gain subscribers even 0:45:37.239 --> 0:45:38.960 as they increased prices, it just tells us that they 0:45:38.960 --> 0:45:41.120 have a lot of pricing power. There's obviously a lot 0:45:41.120 --> 0:45:43.640 of stickiness for the product. But in terms of the 0:45:43.680 --> 0:45:47.200 margin story itself, they have really been looking at cost 0:45:47.280 --> 0:45:50.560 discipline very very carefully, and so they have been able 0:45:50.600 --> 0:45:53.160 to finally cut down on their marketing spend. They've been 0:45:53.160 --> 0:45:55.680 able to cut down on personnel costs, which is what 0:45:55.800 --> 0:46:00.000 drove that operating profit as well as a slight mode 0:46:00.040 --> 0:46:00.960 margin expansion. 0:46:01.760 --> 0:46:05.799 All right, Githa, you cover everything. We can go many 0:46:05.800 --> 0:46:07.680 different directions. Right now, we're going to switch gears and 0:46:07.719 --> 0:46:11.360 go to Hollywood. The actors. What's going on? They're still 0:46:11.360 --> 0:46:12.920 on strike, don't they know? They don't live in the 0:46:13.000 --> 0:46:15.359 real world. What's going on with the actors? 0:46:15.840 --> 0:46:18.040 Yeah, I mean, you know, a few days ago, actually 0:46:18.080 --> 0:46:20.200 maybe a couple of weeks ago, you know that they 0:46:20.239 --> 0:46:21.759 you know, they had been talking to the studios, but 0:46:21.800 --> 0:46:24.759 then everything kind of hit a stalemate again when they 0:46:24.760 --> 0:46:28.520 basically said that they wanted a viewership bonus. I think 0:46:28.560 --> 0:46:30.920 they said the industry basically said it would cost them 0:46:30.960 --> 0:46:32.880 something like about a billion dollars and I think that 0:46:33.000 --> 0:46:35.719 was kind of a no go. We had, you know, 0:46:35.719 --> 0:46:37.480 the Netflix CEO kind of talk about it at the 0:46:37.480 --> 0:46:40.560 Bloomberg screen Time conference, and that's where kind of things 0:46:40.719 --> 0:46:44.200 have have been left out so that it's supposed to restart, 0:46:44.280 --> 0:46:46.200 I think today, but we'll see where it goes. In 0:46:46.239 --> 0:46:50.520 the meantime, studios are really kind of facing a difficult situation. 0:46:50.560 --> 0:46:52.520 There's a lot of uncertainty in terms of the twenty 0:46:52.560 --> 0:46:54.960 twenty four content slate. We just saw that Paramount pushed 0:46:55.000 --> 0:46:58.520 out Mission Impossible eight by a whole year now to 0:46:58.600 --> 0:47:01.319 twenty twenty five. You know, we know Disney pushed out 0:47:01.320 --> 0:47:04.400 Dead Poultry. So yeah, the film slate, especially for twenty 0:47:04.440 --> 0:47:06.800 twenty four looks really really shaky. 0:47:06.840 --> 0:47:07.080 Paul. 0:47:07.520 --> 0:47:11.560 Can you tell us either what the studios and the 0:47:11.600 --> 0:47:15.719 actors want that is maybe if it's different, or how 0:47:15.719 --> 0:47:19.560 does it compare to the writer's strike that has already resolved. 0:47:20.680 --> 0:47:22.640 Yeah, so, you know, with the writer's strike, of course, 0:47:22.680 --> 0:47:24.719 a lot of it was in terms of remuneration. A 0:47:24.719 --> 0:47:27.080 lot of it was in terms of transparency in terms 0:47:27.080 --> 0:47:30.360 of viewership metrics, and I think the studios have promised 0:47:30.400 --> 0:47:33.239 to do better both in terms of paying them as 0:47:33.239 --> 0:47:36.000 far as residuals are concerned, as far as releasing you know, 0:47:36.040 --> 0:47:38.040 some of the viewership numbers, as well as some more 0:47:38.080 --> 0:47:41.960 guardrails around kind of the use of AI. I think 0:47:42.000 --> 0:47:43.799 what the with the actors, it's a little bit of 0:47:43.840 --> 0:47:46.239 a different situation though. First of all, there are four 0:47:46.239 --> 0:47:48.480 times the number of actors that there are writers, and 0:47:48.520 --> 0:47:52.000 so the whole calculus kind of changes from an economics perspective, 0:47:52.440 --> 0:47:55.080 and it's going to be pretty onerous for the studios 0:47:55.080 --> 0:47:57.600 to kind of accept all of the actors' conditions. And 0:47:58.239 --> 0:48:01.319 so that's where I think there is you know, a 0:48:01.360 --> 0:48:04.279 lot of you know, the differences of opinion kind of 0:48:04.320 --> 0:48:06.480 creeping up on top of that. I think the actors 0:48:06.520 --> 0:48:10.200 are getting I don't know if greedy is the right 0:48:10.239 --> 0:48:12.719 word to use, but they definitely want a lot more 0:48:12.840 --> 0:48:16.560 so for shows that are being viewed, probably more often 0:48:16.600 --> 0:48:19.600 they want, you know, what the studios are calling this 0:48:19.719 --> 0:48:22.520 viewership bonus kind of a payment is almost like a 0:48:22.520 --> 0:48:24.839 little bit of a tax. That's how you know, death 0:48:24.880 --> 0:48:28.040 Serrando's kind of called it. So they're not happy with that. 0:48:28.160 --> 0:48:30.120 So we'll have to see, I mean, somebody has to 0:48:30.400 --> 0:48:32.600 cave there has to be some compromise. 0:48:32.719 --> 0:48:37.160 All right, pivot yet again, Disney they're looking to kind 0:48:37.200 --> 0:48:40.080 of I don't know restructures are right word, but certainly 0:48:40.080 --> 0:48:42.160 looking at all their assets. And one of the big 0:48:42.200 --> 0:48:46.799 assets is their satellite business in India, which I think 0:48:46.840 --> 0:48:49.480 they got from the Fox acquisition. I'm not sure talk 0:48:49.520 --> 0:48:51.000 to us about what's going on there that there's a 0:48:51.040 --> 0:48:53.200 story that they may be looking to sell some or 0:48:53.200 --> 0:48:53.640 all of it. 0:48:54.560 --> 0:48:56.520 You know, you're absolutely right. So when they paid the 0:48:56.560 --> 0:48:58.640 seventy one billion dollars for a huge chunk of the 0:48:58.680 --> 0:49:01.120 Fox assets, a big part of that actually Star India 0:49:01.760 --> 0:49:04.200 and Star India is really a collection of plenty of 0:49:04.280 --> 0:49:08.080 local TV networks, about sixty TV channels and a very 0:49:08.200 --> 0:49:11.239 very robust streaming service which was called hot Star. And 0:49:11.320 --> 0:49:13.480 this was really one of the crown jewels that Disney 0:49:13.520 --> 0:49:16.120 thought they got when they kind of acquired when they 0:49:16.120 --> 0:49:19.520 made that acquisition, because Hotstar really had a lot of 0:49:19.719 --> 0:49:23.200 users on its streaming platform, over about one hundred hundred 0:49:23.200 --> 0:49:25.319 and fifty million, and so it kind of really helped 0:49:25.360 --> 0:49:27.960 them juice that Disney plus subscriber number because they were 0:49:27.960 --> 0:49:31.400 selling it as Disney plus Hotstar. And so when subscriber 0:49:31.560 --> 0:49:33.799 numbers were the main metric of success. I mean, this 0:49:33.960 --> 0:49:36.600 was this was the huge story for them. Of course, 0:49:36.640 --> 0:49:40.000 all of that changed because the main problem with hot 0:49:40.000 --> 0:49:43.640 Star was, yes, subscriber growth was good, but the revenue 0:49:43.640 --> 0:49:47.479 that a hot Star user brought in was very, very 0:49:47.520 --> 0:49:49.919 low compared to a US subscriber, but only about one 0:49:50.000 --> 0:49:52.640 tenth the revenue that a US Disney Plus subscriber would 0:49:52.640 --> 0:49:54.800 bring in, so it obviously was kind of really hurting 0:49:54.880 --> 0:49:58.200 the bottom line. There was this additional issue with you know, 0:49:58.320 --> 0:50:01.680 sports rights and you know, the rights of cricket, which 0:50:01.719 --> 0:50:04.720 is really important in a country like India, but Disney 0:50:04.719 --> 0:50:07.000 didn't want to pay up and so they started losing 0:50:07.080 --> 0:50:10.759 subscribers and eventually Disney kind of came to a point 0:50:10.760 --> 0:50:12.840 where they decided that the best thing to do in 0:50:12.920 --> 0:50:16.200 terms of, you know, the business and the overall strategy 0:50:16.200 --> 0:50:18.960 would be to kind of get rid of the whole 0:50:19.000 --> 0:50:21.480 Star India operation. And so right now they're looking to 0:50:21.520 --> 0:50:25.760 talk with one of the biggest telecom operators in India, 0:50:25.800 --> 0:50:29.799 which is Reliance. I think the sticking point right now 0:50:29.840 --> 0:50:32.600 is really the price. It ranges anywhere from about seven 0:50:32.640 --> 0:50:34.680 billion to ten billion. I think Disney wants ten billion, 0:50:34.800 --> 0:50:37.240 Reliance probably wants to pay closer to seven to eight billion, 0:50:37.480 --> 0:50:39.920 so they're looking to probably not sell the whole thing 0:50:39.960 --> 0:50:42.880 to still kind of keep some kind of steak. But 0:50:42.960 --> 0:50:46.879 definitely any progress there and any influx of cash would 0:50:46.880 --> 0:50:48.879 I think be great for Disney, which has a lot 0:50:48.920 --> 0:50:51.840 more strategic kind of decisions to make, especially with the 0:50:51.880 --> 0:50:54.600 purchase of Hulu. They still have to buy out Comcast 0:50:54.719 --> 0:50:57.080 thirty three percent stake, so that's hanging in the balance 0:50:57.120 --> 0:50:59.239 along with all the other things in terms of their 0:50:59.239 --> 0:51:01.040 linear TV network as well as ESPN. 0:51:01.239 --> 0:51:03.359 All Right, Gith, I think we kind of got through 0:51:03.400 --> 0:51:06.320 everything in which we can do with you. Keith Ranganathan. 0:51:06.360 --> 0:51:09.840 She is the media analyst for Bloomberg Intelligence breaking it 0:51:09.880 --> 0:51:13.239 all down. We've got Spotify, good numbers, Hollywood actors in 0:51:13.280 --> 0:51:16.560 the studios, still at an impasse and dizzy thinking about 0:51:16.600 --> 0:51:17.520 what to do with her assets. 0:51:17.520 --> 0:51:21.440 And thanks for listening to the Bloomberg Markets podcasts. You 0:51:21.440 --> 0:51:24.799 can subscribe and listen to interviews at Apple Podcasts or 0:51:25.040 --> 0:51:28.759 whatever podcast platform you prefer. I'm Matt Miller. I'm on 0:51:28.800 --> 0:51:31.600 Twitter at Matt Miller nineteen seventy three. 0:51:31.800 --> 0:51:34.240 And I'm fall Sweeney I'm on Twitter at pt Sweeney 0:51:34.280 --> 0:51:36.960 Before the podcast. You can always catch us worldwide at 0:51:37.000 --> 0:51:38.719 Bloomberg Radio