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Speaker 2: So we talk a lot about inflation, Jess, We know that, right.
Speaker 2: It's kind of almost like a ping pong game, don't
Speaker 2: you feel like, because there's people who have some really
Speaker 2: strong thoughts about it and where it's going.
Speaker 3: Right, whether it's not going to come dramatically down to
Speaker 3: that two percent target for the Fed or the sticky
Speaker 3: word everybody likes to keep mentioning for stagflation.
Speaker 2: Darren say, all right, so let's get to it into
Speaker 2: a most read story in the Bloomberg A team of
Speaker 2: Bloomberg reporters covering how trillions of dollars are at stake
Speaker 2: as Wall Street is super split over the path of inflation.
Speaker 2: With us as Bloomberg News chief correspondent for Global Macro Markets,
Speaker 2: A favorite here at Bloomberg, Liz McCormick, she's with us
Speaker 2: via zoom in New York City. Hey Liz, so good
Speaker 2: to have you here with Jess and myself love this story.
Speaker 2: It is show a story of our times. It isn't unusual, though,
Speaker 2: I feel like that there's disagreement between economists or market
Speaker 2: strategists on Wall Street, and yet this is a pretty
Speaker 2: big one. Walk us through it.
Speaker 4: Yeah, true, we always kind of have a lot of disagreement.
Speaker 4: But what I think Carol gets to why this is
Speaker 4: even more important now? This like just says, is it sticky?
Speaker 4: Is inflation going to keep coming down? Is we're, you know,
Speaker 4: seemingly getting at a pivotal point with the Fed because
Speaker 4: supposedly they're getting close to done. Let's say, we can't
Speaker 4: call when, but maybe they hike next week, they might
Speaker 4: hike in June, but nonetheless they're close. So after that
Speaker 4: what happens And a lot of that depends on inflation, right,
Speaker 4: So I think what the divide is and the views
Speaker 4: on inflation is kind of even more important now because
Speaker 4: we're close to the end, and that means does the
Speaker 4: f stay there or do they ease? Like you know,
Speaker 4: you guys have talked the market is pricing that, so
Speaker 4: I think, you know, and like I said, there's lots
Speaker 4: of big investors here in this story. Like I said,
Speaker 4: there's a swath of US reporters, and they don't all agree,
Speaker 4: but I think it's kind of compelling. There's that strong
Speaker 4: views by several of them that say, you know, inflation's
Speaker 4: come down pretty fast, but it's going to be slow
Speaker 4: moving from here.
Speaker 5: The FED is not going to be able.
Speaker 4: To pivot to easing even if the economy falters a
Speaker 4: little bit, because they're just there, you know, enemy number
Speaker 4: one remains inflation, and there's the other side that just says,
Speaker 4: you know, hey, it's going to go on and the
Speaker 4: economy is going to creter.
Speaker 5: FED has to ease. So there you go in a nutshell.
Speaker 3: Hey, Liz, break it down as far as when it
Speaker 3: comes to these specific firms, because you have double Line
Speaker 3: thinking that inflation is still going to be sticky, but
Speaker 3: then you have Alliance, you have TCW in a different
Speaker 3: type of camp. Who's on which sort of team at
Speaker 3: this point?
Speaker 5: Yeah? Right, So like it's funny Like TCW. I spoke
Speaker 5: to Steve Kane and he was saying, you know.
Speaker 4: And it's funny because in Palells one of his pressers,
Speaker 4: someone was saying, how many times it said he said
Speaker 4: disinflation or whatever.
Speaker 2: Steve, it's the new drinking game should be anyway.
Speaker 4: Yeah, but Steve Gay was saying we're seeing a lot
Speaker 4: of disinflationary forces already and that that's going to carry
Speaker 4: momentum plus, like you know, bearing in mind that there
Speaker 4: is this sting still to come of all the FED
Speaker 4: tightening they've already done, which we know there's those long
Speaker 4: and variable lags we've started to see, like people say
Speaker 4: the FED started to break some things, like you were
Speaker 4: talking about what the issues in the regional banks and
Speaker 4: that they feel like this is just going to kind
Speaker 4: of keep coming in force that you know, I don't
Speaker 4: know if if you was just mentioning Carol that about
Speaker 4: the consumer, like when the consumer like people have had
Speaker 4: a job, so they're doing okay, But you see, I
Speaker 4: saw a consumer confidence go on when the consumer really
Speaker 4: says I'm not going to spend more and my prices
Speaker 4: aren't down that much, you know that maybe then the
Speaker 4: momentum on inflation keeps coming. And I think that's like
Speaker 4: TCW is saying, it's going to build.
Speaker 5: You know.
Speaker 2: So I do think about as as a consumer, if
Speaker 2: I look at prices still staying high, I'm going to
Speaker 2: start making choices about where I'm going to have to
Speaker 2: like in terms of where I spend my money my money.
Speaker 2: I want to go back for a second when it
Speaker 2: comes to FED policy, Liz, what is the lag? Officially?
Speaker 2: Is it a year? Like when do we really feel
Speaker 2: the punch from this past year of FED heightenings? You know,
Speaker 2: in raising of rates?
Speaker 4: Well, that's another one, and economists they all have their
Speaker 4: different particular views, but let's say they're saying usually it's
Speaker 4: twelve months.
Speaker 5: I remember in the beginning of the tightening there were.
Speaker 4: Some saying the lag would be less this time around,
Speaker 4: but I don't think it was. So. I mean, the
Speaker 4: FED started in March of twenty twenty two. That's last year, right,
Speaker 4: it was that we're about a little over a year
Speaker 4: from there, and they went faster than they've ever gone,
Speaker 4: at least in my era of watching FED.
Speaker 5: So I think you're going to start continuing.
Speaker 4: To feel it more. I think we've talked about this before.
Speaker 4: You know, you say, ah, dude, I want to fix
Speaker 4: my deck. Maybe not because my heelock is it's seven
Speaker 4: percent now, right, you know what I mean? So I
Speaker 4: think on the margin, people are going to start saying
Speaker 4: things like that more and more, Like you can choose.
Speaker 4: I don't really need this new thing, even though I
Speaker 4: want it, because it's more expensive.
Speaker 5: There's no like free money anymore, unfortunately.
Speaker 3: Right, Yeah, Liz, what is the bond market telling us?
Speaker 3: Because we did see a record short position when it
Speaker 3: came to hedge funds against the tenure treasury. So does
Speaker 3: that mean the bond market isn't positioned correctly for potential
Speaker 3: posites here.
Speaker 4: Well, that's a great question, Jess, because you know, my
Speaker 4: colleague Garfield Reynolds had written a story about that. And
Speaker 4: what's interesting is you have this kind of hot hedge
Speaker 4: fund money that's leaning very hard into being short. But
Speaker 4: you know, so that's in some of the CFTC data
Speaker 4: we can look at. They're like the leverage funds and
Speaker 4: then I'm I'm kind of like a little surprised because
Speaker 4: they got a big burned in March when the banking
Speaker 4: crisis broke and yields tumbled.
Speaker 5: But I think they have a strong conviction.
Speaker 4: But on the other side, because you can look at
Speaker 4: in the other parts of the data, there's some of
Speaker 4: the kind of call it asset managers, kind of regular money,
Speaker 4: they're still long. So there's a bit of a divide there.
Speaker 4: There's also some kind of arb trading you can do.
Speaker 4: But I do think the kind of the trend followers,
Speaker 4: the quants are still leaning too short, and that means,
Speaker 4: like you're.
Speaker 5: Right, it depends what happens.
Speaker 4: They kind of think inflation is going to stay around.
Speaker 4: Fed's going to stay, you know, at least high, even
Speaker 4: if they stop tightening. But if this stuff unravels, and
Speaker 4: there's so many uncertainties. I hate to even bring up
Speaker 4: the debt ceiling because it's the thing we all love
Speaker 4: to hate.
Speaker 5: To revisit every couple of years. But but it's fair, right, Yeah,
Speaker 5: we have to right that risk is looming. You know,
Speaker 5: Kevin McCarthy's supposed to have a vote tomorrow.
Speaker 4: They don't know the votes, and you know, Biden says
Speaker 4: I don't want anything with spending cuts. So we're a
Speaker 4: long way from a deal on the debt ceiling. And
Speaker 4: you know, treasury is are my thing. I'm not saying
Speaker 4: there's going to be a default, but I'm just saying
Speaker 4: it's going to slowly create more angst. And you have
Speaker 4: other things like we're watching the banking sector.
Speaker 5: Is it over? Is it the worst? So there's just
Speaker 5: so much unknown.
Speaker 2: Liz, I want to jump in. I'm thinking, you know,
Speaker 2: I feel like those who are trading on Wall Street
Speaker 2: or working at Wall Street for you know, in a
Speaker 2: lot of our audience, like they get why we are
Speaker 2: having this discussion. I think there's folks out there, like,
Speaker 2: you know, their eyes glaze over when it's the deat
Speaker 2: sailing conversations, or you know, whether or not we get
Speaker 2: to two percent versus you know, maybe a three or
Speaker 2: four percent you know target ultimately in terms of inflation
Speaker 2: by the FED. What's the significance of you know, whether
Speaker 2: we go back to normal and the FED gets it right,
Speaker 2: whether we end up higher on a FED rate, you know,
Speaker 2: and we don't go back to normal. What are the
Speaker 2: implications because it feels like if we end up at
Speaker 2: a higher rate environment right, we're talking about things costing more,
Speaker 2: maybe higher wages at companies, you know, rethink on you know,
Speaker 2: asset valuations. I mean there are implications right.
Speaker 5: Right exactly.
Speaker 4: I mean just think for like regular people who don't
Speaker 4: live and breathe this stuff. Luckily for them like us
Speaker 4: all day is that Number one is jobs. Like we've
Speaker 4: talked about, let's not get into my family, but young
Speaker 4: college students graduating there. You know, we've seen less job opening,
Speaker 4: so that, you know, if the economy slows, that's not
Speaker 4: good for any young person starting their career. If it's
Speaker 4: harder to find a job, or anyone working who's kind
Speaker 4: of saying.
Speaker 5: I want to make a change.
Speaker 4: If there's less job opportunities, that's never good for the
Speaker 4: regular person. I always come back to everyone in their
Speaker 4: retirement and their four to one k if they're being
Speaker 4: good and not you know, market timing and moving around,
Speaker 4: they do get worried and say, oh my goodness, if
Speaker 4: the value of my funds are down. It it's like,
Speaker 4: I guess it's I'm not consumer confidence, but personal confidence.
Speaker 4: How do I feel that wealth effect that you don't
Speaker 4: feel too good if the value of your stuff is down.
Speaker 5: And if the FED keeps going on, it has to
Speaker 5: go tighter and tighter.
Speaker 4: That's going to hurt financial assets and that's going to
Speaker 4: make people opening their quarterly retirement accounts saying oooh, what happened?
Speaker 6: You know?
Speaker 3: Yeah, and Liz, as you know, this is the blackout
Speaker 3: week for the FED, so we won't have any FED
Speaker 3: speakers on the calendar, but on Friday we do have
Speaker 3: the PCE, the feds preferred gauge for inflation, as well
Speaker 3: as the Employment Cost Index, which we all know Pale
Speaker 3: watches very closely for wages. How much of an impact
Speaker 3: does this inflation data actually have on the bond mark?
Speaker 3: Is it less so at this point than last year
Speaker 3: or do you expect there to be any sort of
Speaker 3: meaningful move so when it comes out.
Speaker 4: Yeah, well, I actually think it still really does matter
Speaker 4: because again we're getting at like we said, we've gone
Speaker 4: some decent ways of inflation falling, but are we're going
Speaker 4: to plateau? You know, I think those numbers are like
Speaker 4: four point one and four percent, whether it's you know,
Speaker 4: the deflator or the core number, and you know, if
Speaker 4: it's higher, then it's like then we might have some
Speaker 4: answers to are we going to have a bit more
Speaker 4: move from the Fed and a pause if it tumbles
Speaker 4: below a freak fore handle which is not forecast. I'm
Speaker 4: not predicting, but I think that will take notice. And
Speaker 4: with the bond market, it's been like insane volatility all year.
Speaker 4: We've had a bit of calm lately, but I would
Speaker 4: never underestimate that the market can't react in size, especially
Speaker 4: to the Fed's favorite inflation gauge.
Speaker 2: Hey, twenty thirty seconds left here. I mean we need
Speaker 2: to be fair to the Fed. That monetary policy not
Speaker 2: an exact science.
Speaker 4: Liz, absolutely, and you know they're doing the best they can.
Speaker 4: Clearly they don't want to implode the economy. Pal is
Speaker 4: always hopeful trying to have a soft landing if possible,
Speaker 4: but he knows that if if there's no price stability,
Speaker 4: as he always says, it's not good for anyone. So
Speaker 4: they're clearly trying their best.
Speaker 2: All right, So glad we could check in with you.
Speaker 2: As we said, folks, this is one of the most
Speaker 2: read stories on the Bloomberg And as Liz just detailed,
Speaker 2: you understand why Liz McCormick, she's chief correspondent for Global
Speaker 2: macro markets, really does have global macro market perspective here
Speaker 2: at Bloomberg News. Joining us via zoom from New York City, you're.
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Speaker 2: All right, folks, So a few companies as you know,
Speaker 2: as we've been reporting, Charlie included companies reporting in the
Speaker 2: consumer space making the stuff we eat and buy or
Speaker 2: moving it around. They are out with earnings, so we're
Speaker 2: talking McDonald's, PepsiCo Ups also three am. So with our
Speaker 2: consumerie earnings round up, let's get to Bloomberg News anchor
Speaker 2: Markets correspondent Cretygupta and Bloomberg News reporter Simone Foxman, both
Speaker 2: in our Blue Interactive Broker studio. So great to have
Speaker 2: you guys here. We want to get into the pacifics,
Speaker 2: but I want to start big picture first if I could.
Speaker 2: Is there a theme or trend that we are seeing Cretty,
Speaker 2: and I want to start with you when in this
Speaker 2: kind of space, if you.
Speaker 7: Will, Yeah, it's it's pretty clear. And I think all
Speaker 7: four earnings stories are telling you the economic data slow down,
Speaker 7: that we're seeing that recession that we feared it is coming,
Speaker 7: So you are starting to see this show up in
Speaker 7: corporate earnings. I think the difference here is that a
Speaker 7: lot of these companies.
Speaker 2: Have weathered it quite well, and.
Speaker 7: I think that's a real testament to the management that's
Speaker 7: in some of these companies. The idea that they are
Speaker 7: tackling it through layoffs, through in some ways through cutting.
Speaker 2: Amazing how layoffs has become the thing, like we're on it,
Speaker 2: fos it.
Speaker 7: Is, and you know, it's also interesting how they're received differently.
Speaker 7: We can dive into the specifics of it, but the
Speaker 7: big picture takeaway is that slow down that we thought
Speaker 7: was coming, it's here. You're seeing it in the data.
Speaker 2: It's just not showing up in these earning.
Speaker 7: Speeds because companies are adapting, and they're adapting way faster.
Speaker 2: Than they have in the past, and in some cases
Speaker 2: past on those higher costs. Yeah, some of your thoughts
Speaker 2: on the big picture.
Speaker 5: Yeah, certainly.
Speaker 8: Well, you know, I think there's a difference between today
Speaker 8: and six months from now, and that's the same kind
Speaker 8: of detail that we got in the consumer confidence numbers
Speaker 8: from the Confidence Board today. You know, the half of
Speaker 8: consumers said jobs were plentiful right now, and only twelve
Speaker 8: point five percent expect more jobs than six months.
Speaker 2: That's the worst than seven years.
Speaker 8: But if we go back to twenty sixteen, twenty sixteen
Speaker 8: wasn't that bad, And maybe that's what's showing up in
Speaker 8: some of these earnings. You know, consumers not really changing
Speaker 8: their behavior so much at the moment and just concerned
Speaker 8: about what's to come. But I mean, and who can
Speaker 8: tell the future.
Speaker 2: You know, right now they still feel confident.
Speaker 3: I wanted to get your thoughts on the margin picture
Speaker 3: because that's been such a focus when it comes to
Speaker 3: these consumer type names. What are you seeing in some
Speaker 3: of these names and do you think that those indications
Speaker 3: there of some glimmers of hope because it seems like
Speaker 3: it's coming better than expected from guys.
Speaker 2: Mean you hear that, I'm going to start counting.
Speaker 6: I love it.
Speaker 7: I feel the way I feel right at home.
Speaker 9: Yeah.
Speaker 7: But to answer your question about the margin story, look,
Speaker 7: I think I mean, I'm going to go with PepsiCo
Speaker 7: as my favorite example of this because and you can
Speaker 7: see it in ups. You actually see it in all
Speaker 7: four earning stories. I mean these Pepsco as an example
Speaker 7: because look, food is expensive and it has been expensive.
Speaker 7: Commodities have been expensive, and it's something that a lot
Speaker 7: of these consumer companies have had to hedge. Coca Cola
Speaker 7: talked about it yesterday, PepsiCo has talked about it today
Speaker 7: on Bloomberg Television as well, And the way that they
Speaker 7: dealt with that is simply by increasing their prices, and
Speaker 7: they've done that for about a year now, and prices
Speaker 7: increased I think something like sixteen percent on lot beverages
Speaker 7: and chips, and nobody noticed. I mean, I certainly if
Speaker 7: I will go and grab a can of PEPSI I'm
Speaker 7: not checking the price to do that. And that has
Speaker 7: really worked in their favor. But it has also just
Speaker 7: kept those margins steady. It hasn't created this massive improvement,
Speaker 7: but at a time where margins a steady, okay, right exactly, so,
Speaker 7: at a time when margins are getting squeezed, steady is
Speaker 7: actually an accomplishment to your point, and I think PepsiCo
Speaker 7: is a great example of that because they were doing
Speaker 7: that by price hikes. The CFO was on Bloomberg TV
Speaker 7: earlier and also said productivity is also helping with the
Speaker 7: margin story a little bit. But when it comes to
Speaker 7: consumer goods, and we're going to hear this with I
Speaker 7: think you brought this up earlier, Procter and Gamble and
Speaker 7: Church and Dwight all reporting next week about them and
Speaker 7: whether they're going to do price hikes.
Speaker 6: Right.
Speaker 8: The labor part of this equation is really interesting, and
Speaker 8: we saw that come out in various threads today in
Speaker 8: these earnings ups, mind you, has to renegotiate its contract
Speaker 8: with its teamsters, some three hundred and thirty thousand unionized
Speaker 8: workers by the end of July. They are pushing for
Speaker 8: price hikes or sorry for wage hikes, and so that
Speaker 8: may end up featuring into this story. I mean we
Speaker 8: saw that to a degree. I mean maybe we didn't.
Speaker 8: We didn't see it with the market reaction to three
Speaker 8: m cutting six thousand jobs, you.
Speaker 2: Know, but there's a bigger story. Yeah, it's a restructuring
Speaker 2: where they keep brook Sutherland was out on TV earlier
Speaker 2: and just this whole idea of they keep throwing stuff
Speaker 2: out there, right, and it's supposed to be kind of
Speaker 2: improving more, but it hasn't quite happened yet. So I
Speaker 2: think the bet or the street is still kind of like, well,
Speaker 2: we're waiting to see.
Speaker 8: But I mean, if more and more companies have to
Speaker 8: start dealing with these wage increases, because I think all
Speaker 8: these executives were out there talking about how the labor
Speaker 8: market remains pretty tight for them, and you know, heck,
Speaker 8: we have some of the restaurant brands with Starbucks coming
Speaker 8: out next week. I mean, how much do they see
Speaker 8: these price increases. We heard about it from the airlines.
Speaker 8: Does is this a theme we start hearing more of
Speaker 8: as earning season.
Speaker 2: And Chipotle after the close? Can we talk attle bit
Speaker 2: more about UPS? It is down the most in more
Speaker 2: than eight years. We're talking about a nine percent drop,
Speaker 2: and I guess I just need some context.
Speaker 9: Is this just a.
Speaker 2: Case of still writing this ship from the pandemic? Or
Speaker 2: is it a case of folks, things are slowing down.
Speaker 7: This is a case of things are slowing down. And
Speaker 7: the reason is because the story of the comp sales,
Speaker 7: which is I think we're referring to the case of
Speaker 7: the pandemic when everyone was at home, everyone was getting
Speaker 7: these packages. That was the story of twenty twenty one,
Speaker 7: arguably twenty twenty to and UPS and FedEx took two
Speaker 7: very different approaches when it came to tackling those comps.
Speaker 7: FedEx said, We're going to hire a bunch of people.
Speaker 7: We're going to make sure our network and our delivery
Speaker 7: systems are just airtight, and we're going to do and
Speaker 7: that's how we're going to make sure that people we
Speaker 7: don't lose our consumer base. UPS took a very different strategy.
Speaker 7: They said, look, we know eventually the recession is going
Speaker 7: to come around the corner. Whenever that may be, we're
Speaker 7: going to take a different strategy. Instead of hiring a
Speaker 7: bunch because inflation is high, wages are high. As Simone
Speaker 7: just pointed out, we're going to target the small businesses.
Speaker 7: Here's the problem if there's a recession around the corner.
Speaker 7: Who were the first people who pull back on that
Speaker 7: medix into small businesses. So that strategy has completely kind
Speaker 7: of worked against them at a time when UPS actually
Speaker 7: was outperforming the market because people were saying FedEx spent
Speaker 7: so much on their employees, they're the ones taking the
Speaker 7: bigger cost. And then FedEx laid off a bunch of people,
Speaker 7: and the market is now changing their tune. So now
Speaker 7: we're worried a little bit more about the actual package decline.
Speaker 7: And that's where UPS is I think a really great
Speaker 7: example for the broader economy, which is economic activity is
Speaker 7: slowing down.
Speaker 3: I just feel like this is a tale of these
Speaker 3: companies because about six months ago is when FedEx had
Speaker 3: warned about their outlook, but then last month we saw
Speaker 3: them boost their outlook for this year. So you don't
Speaker 3: see them necessarily going in the same direction at this but.
Speaker 2: They're two different models. I remember that FedEx and FedEx
Speaker 2: is moving increasingly towards the UPS model. But UPS everything
Speaker 2: is in house. Everybody is a UPS driver. FedEx, that
Speaker 2: hasn't been the way, although they're starting to shift that.
Speaker 7: Yeah, FedEx has had that independent contractor. And I think
Speaker 7: to your point about that profit outlook, the reason they
Speaker 7: said that is they said they're again going to eliminate
Speaker 7: all those independent contractors because of that restructuring. And I
Speaker 7: want to get the most take on this in a second.
Speaker 7: But like one of the other things you have to
Speaker 7: keep in mind with a lot of these companies is
Speaker 7: that when you talk about price hikes, which seems to
Speaker 7: be the kind of method du jour of staying alive,
Speaker 7: Basically in this environment, prices are sticky. So if you
Speaker 7: have a price hike, you're not going to have a
Speaker 7: price cut on a can of pepsi or a price
Speaker 7: cut on a package. And that's from an economic perspective.
Speaker 7: What's scary for kind of carol? You always say, what's
Speaker 7: the so what? For our listeners? This is the so
Speaker 7: what one? Corporate America hops on the price hike train. Yeah,
Speaker 7: they don't come down and that's the problem.
Speaker 2: And the thing is, what I would say is things
Speaker 2: like a can of pepsi or some Friedo's, which I
Speaker 2: would consider a staple and must have. No but I
Speaker 2: mean there's small indulgences and you always hear, like economists
Speaker 2: or market watch er say these are the things that
Speaker 2: hold up smoke kamone.
Speaker 8: Yeah, but I mean, I think when we start hearing,
Speaker 8: you know, questions even asked about our consumers switching to
Speaker 8: cheaper products, and we did hear that today, both with
Speaker 8: McDonald's as well as with pepsi and you know pepsi.
Speaker 8: The message from the CFO was, you know, it's never
Speaker 8: that much of a hit to our business.
Speaker 2: These numbers stay pretty low.
Speaker 8: But I you know, McDonald's, it's not really it doesn't
Speaker 8: seem to be really showing up yet. But perhaps that's
Speaker 8: part of why we saw such a decent outlook from them,
Speaker 8: and decent you know moving forward.
Speaker 2: Although the stock was a little lower, right, yeah, but.
Speaker 8: You know, the market's down a little bit.
Speaker 3: But overall McDonald's stock is still around records. If you
Speaker 3: look at the fifty two week high list in the
Speaker 3: terminal underweb. I mean, these names you have McDonald's on there,
Speaker 3: you have Pepsi Co on there, You have Kimberly Clark
Speaker 3: that reported this morning on there as well. You have
Speaker 3: Starbucks on there, you have Mandoli's on there. There's are
Speaker 3: very consumer oriented type companies that are trading around these
Speaker 3: fifty two week high and don't forget.
Speaker 2: The dollar exposure on all of good points exactly do
Speaker 2: they hedge still?
Speaker 7: McDonald's I don't think they've hedged for a couple of
Speaker 7: years now, but PepsiCo hedges. They talked about that today.
Speaker 8: McDonald's, you know, still gets a lot of its business
Speaker 8: internationally hot. Strong earnings there too. I mean, you know
Speaker 8: whether that's consumer switching to a degree not everyone is
Speaker 8: seeing so much strength in their their foreign business. Three
Speaker 8: ams certainly not.
Speaker 2: Okay, good point, right, It's not all the same story,
Speaker 2: even if you're looking at companies in a certain category
Speaker 2: creating up DA anchored markets. Course me at Bloomberg News,
Speaker 2: Simone Foxman, reporter at Bloomberg News. Thank you so much.
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Speaker 2: Continuing to follow some of the earnings momentum. Having said that,
Speaker 2: you do wonder how it all factors into what's going
Speaker 2: on in terms of the venture capital world and where
Speaker 2: venture capitalists want to invest their money. And it's interesting
Speaker 2: on a day where we are definitely focusing on artificial intelligence,
Speaker 2: whether it was in Microsoft's report, whether it's what Google
Speaker 2: wants to do, and specifically we talked a little bit
Speaker 2: earlier about Apple planning an AI powered health coaching service
Speaker 2: and mood Tracker. So jess there's a lot going on.
Speaker 2: As our next guest sees it, twenty twenty three will
Speaker 2: be the year that AI truly breaks into the general
Speaker 2: population's awareness. In particular, he's focusing on healthcare. So let's
Speaker 2: get back to a guest that is joining us once again.
Speaker 2: Lonnie Jaffe is Managing director at Insight Partners via zoom
Speaker 2: from New York City. Lonnie, nice to have you back
Speaker 2: with us. AI this year a big one. Explain why
Speaker 2: you think that's the case.
Speaker 9: So it has been a wild year in AI.
Speaker 2: So far already.
Speaker 9: Already, and from what we're seeing, things will continue to
Speaker 9: accelerate for the rest of twenty twenty three, including in healthcare.
Speaker 9: I think the best way to get a sense of
Speaker 9: the pace of improvement of AI and healthcare is through
Speaker 9: some real world examples of health tech companies that are
Speaker 9: have AI products that are working so like one example
Speaker 9: our portfolio company, Iterative Health. So colon cancer is the
Speaker 9: second most common cancer cause of death in the United States,
Speaker 9: and they have this ability to use computer vision AI
Speaker 9: and their FDA cleared product called Scout, and it significantly
Speaker 9: reduces the number of cancer's pollups that a gasnerentrologists would miss,
Speaker 9: and this can decrease the risks of a bad outcome
Speaker 9: in all sorts of different ways. But then their technology
Speaker 9: can use some of the new generative tech that's come out,
Speaker 9: similar to something like chat GPT to handle the medical
Speaker 9: documentation work at the end of the day, sort of
Speaker 9: like a copilot for medical documentation, making suggestions and saving
Speaker 9: the doctor enormous amount of time and increasing the accuracy
Speaker 9: of the documentation. And then they can also identify patients
Speaker 9: who would be good candidates for clinical trials for promising
Speaker 9: biologics for diseases like IBD.
Speaker 3: So how specifically, because AI, as we've been talking about
Speaker 3: such a hot topic, now, how exactly does this end
Speaker 3: up reshaping healthcare in particular because you did mention some
Speaker 3: of the companies that are in your portfolio book more specifically,
Speaker 3: is this a way to really reshape all of that
Speaker 3: in that sector.
Speaker 9: Yeah. One healthcare AI area in which we've invested a lot,
Speaker 9: least recently is this applied computer vision AI capability. So
Speaker 9: this is a little different from the generative AI tech
Speaker 9: that's been getting a lot of attention since the release
Speaker 9: of CHATCHPT. But some of these computer vision systems may
Speaker 9: soon match or even exceed human expert physician performance across
Speaker 9: certain domains. And if an AI system starts to exceed
Speaker 9: human expert performance in healthcare, domean it's not just a
Speaker 9: minor efficiency improvement anymore. It can be more of a
Speaker 9: phase change, like ice turning to water, and it allows
Speaker 9: you to reimagine the way care is delivered. Vision is
Speaker 9: absolutely instrumental in healthcare. So a huge portion of healthcare
Speaker 9: data is made up of pictures and videos.
Speaker 2: You know, Well, I have to say I've been thinking
Speaker 2: about AI a lot lately and how it can help us.
Speaker 2: And I know there's been this fear of, oh my god,
Speaker 2: we're all going to be replaced. But I thought, even
Speaker 2: as a journalist, wouldn't it be great if I don't
Speaker 2: have to write introductions to my guests, as much as
Speaker 2: I love to do it, but if somebody else does it,
Speaker 2: I can spend more time just prepping and researching, you know,
Speaker 2: for the actual conversation. So I do wonder in terms
Speaker 2: of the smart way for all of us to be
Speaker 2: thinking putting our fear aside to some extent till we
Speaker 2: know more, but about how it can be AI particularly
Speaker 2: be an assist like you were talking about in healthcare,
Speaker 2: freeing doctors up to actually care for patients rather than
Speaker 2: doing all of the jotting and noting down and so
Speaker 2: on and so forth.
Speaker 9: That's really well put. And in healthcare, prices have been
Speaker 9: increasing much faster than inflation. I mean, all prices have
Speaker 9: been increasing faster than our inflation target. But one way
Speaker 9: we can help to address the problem of provider shortages
Speaker 9: or in some geographic areas, patients with needs are not
Speaker 9: close enough to the doctors who have the relevant skills
Speaker 9: and agent population. So one way we can help to
Speaker 9: address this price challenge is to dramatically improve healthcare productivity
Speaker 9: and quality, to pull forward investments in AI and automation
Speaker 9: that you would otherwise make many years into the future,
Speaker 9: and to do it now, sort of like what we
Speaker 9: did with collaboration technology during the pandemic. So it could
Speaker 9: be that healthcare AI is a little bit of the
Speaker 9: unsung hero of some of the recent inflation crisis that
Speaker 9: we've been dealing with.
Speaker 2: Do you think Apple is going to be someone who's
Speaker 2: very innovative in this space when it comes to healthcare
Speaker 2: and merging combining that with AI.
Speaker 9: One thing we've seen with some of the newer AI
Speaker 9: technologies is that there's been this big democratization effect of
Speaker 9: how much easier they are to use than prior generations
Speaker 9: of technology. It used to be that you needed to
Speaker 9: hire one hundred mL engineers and build out enormous data
Speaker 9: pipelines and systems like that, but now so much of
Speaker 9: the capability is being provided via as a service over
Speaker 9: the Internet via what are called APIs and can be
Speaker 9: incorporated into other technology. And so I think the vendors
Speaker 9: who have a real focus on privacy security, who understand
Speaker 9: the difference between correlation and causality. Who are able to
Speaker 9: make systems that are reliable and craft beautiful products will
Speaker 9: have a huge advantage.
Speaker 3: Hey, Lonnie, can you take a step back and explain
Speaker 3: to us exactly how the technology works, Say, because when
Speaker 3: it comes to some of these companies that you're working with,
Speaker 3: when it comes to screening for mammograms or breast cancer
Speaker 3: or detection in colonoscopies, how does that tech work?
Speaker 9: Yeah, So, like one example, we have a portfolio company Overjet,
Speaker 9: which is led by CEO Warda and our team, and
Speaker 9: they can use AI to analyze dental X rays to
Speaker 9: assist dentists and deciding whether two needs like a filling
Speaker 9: or a crown. So this improves patient outcomes. But then
Speaker 9: you can also use their AI platform as a dental
Speaker 9: insurer to detect fraud or speed up the claims adjudication process.
Speaker 9: And then by using the technology on both the dentist
Speaker 9: and the insurer side, you can re imagine the whole
Speaker 9: dental care process. For example, you can use the AI
Speaker 9: for instant insurance pre approvals, so the dentist can do
Speaker 9: an important procedure right away instead of having to send
Speaker 9: a patient home and then wait until an insurance approval
Speaker 9: comes in, like often happens today.
Speaker 2: Hey, Lonnie, Oh go ahead, go ahead, please got about
Speaker 2: thirty forty seconds left.
Speaker 9: Yeah. One other example is we have this company Profluent
Speaker 9: that has large language model like technology similar to chat chept,
Speaker 9: and it can suggest novel protein sequences that will fold
Speaker 9: into non structures. So it has a deep understanding of
Speaker 9: patterns and amino acid sequences. It's a little bit like
Speaker 9: words and a text generation AI, and so it opens
Speaker 9: up all sorts of new opportunities in drug discovery and
Speaker 9: protein engineering.
Speaker 2: Lonnie, fifteen seconds. You guys invest in some for how
Speaker 2: much of what you are doing is AI healthcare related?
Speaker 2: What percentage of your investing at this point?
Speaker 9: Just quickly, And we have dozens of investments that we've
Speaker 9: made just over the last couple of years, and that
Speaker 9: the piece of improvement has been increasing significantly. It's amazing
Speaker 9: what the big change in the technology is that it
Speaker 9: started to work.
Speaker 2: But the majority of your investing in startups and so on,
Speaker 2: is it healthcare ANDAI related?
Speaker 9: Just quickly. It's not a majority, but it's a significant portion,
Speaker 9: and it's been increasing over time.
Speaker 2: All right, So good to check in with you, especially
Speaker 2: on today when we continue to hear about AI from
Speaker 2: the big tech Lonnie Jaffy at Inside Partners.
Speaker 1: This is Bloomberg Business Wait Inside from the reporters and
Speaker 1: editors who bring you America's most trusted business magazine, plus
Speaker 1: global business, finance and tech news. The Bloomberg Business Week
Speaker 1: Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
Speaker 2: All right, we're gonna switch gears a little bit. Bitcoin
Speaker 2: continue to trade well above, well below, excuse me, thirty thousand,
Speaker 2: which it recently wet above. So we continue to see, right,
Speaker 2: you know, just a pushing up against that level definitely
Speaker 2: and backing off of it.
Speaker 3: It has and especially last month we were talking about
Speaker 3: this with with what was happening with the banks under pressure,
Speaker 3: but then you saw Bitcoin continuing to get closer and
Speaker 3: closer to that threshold and eventually eclipsing it.
Speaker 2: All right, so we're looking at the cryptocurrency world, and
Speaker 2: you know, you've got to remember that there's a lot
Speaker 2: when it comes to that world. It's not just about bitcoin.
Speaker 2: And this next story that is in the upcoming issue
Speaker 2: of Bloomberg Business Week, which is out later this week.
Speaker 2: On newstands already on the Bloomberg terminal and online at
Speaker 2: Bloomberg dot com. Slash BusinessWeek has to do with what's
Speaker 2: going on with some of those other areas of the
Speaker 2: crypto world. So let's get to it with Bloomberg News
Speaker 2: bankruptcy reporter Stephen Church. He joins us on Zoom from
Speaker 2: our Wilmington, Delaware bureau. Hey, Steve Stephen, it's great to
Speaker 2: have you here with us. The headline on your story
Speaker 2: is about crypto quest for freedom ends in bankruptcy bureaucracy.
Speaker 2: There are a lot of bankruptcy cases going on right now.
Speaker 2: Set this stage for us and tell us exactly what's
Speaker 2: going on.
Speaker 6: Well, we looked at some of the crypto investors, some
Speaker 6: of the customers, and it turns out that they have
Speaker 6: been way more active than your average creditor in a
Speaker 6: bankruptcy case. They've raised a lot of specific issues, they
Speaker 6: fought with the judges. One guy got thrown out of
Speaker 6: a Zoom hearing because most of the hearings for these
Speaker 6: bankruptcy cases are happening on Zoom nowadays. There's just been
Speaker 6: a lot of emotion, a lot of anger and frustration
Speaker 6: among the hundreds of thousands of creditors in these cases.
Speaker 3: So which ones are at the heart of the issue
Speaker 3: when we're talking about these digital asset makers.
Speaker 6: Well, there are three that I'm mostly following. One is Voyager,
Speaker 6: the other one is Celsius, and then the big one
Speaker 6: which hasn't yet exploded, is FTX. We've heard a lot
Speaker 6: about FTX before it went bankrupt, but there's been kind
Speaker 6: of quiet the last few months. The first two cases
Speaker 6: are the ones that are generating the most active in court.
Speaker 2: Interesting Well, and you know what I think is interesting too,
Speaker 2: And why don't you go into those cases that are
Speaker 2: generating the most interest and maybe engagement. Tell us a
Speaker 2: little bit of what's been going on. Especially I love
Speaker 2: the idea that's happening in Zoom.
Speaker 6: Yeah, well, that's that's a product of the pandemic. A
Speaker 6: lot of lawyers and judges got used to using Zoom.
Speaker 6: They've been doing it for the last few years. But
Speaker 6: it's perfect for these crypto investors. They're very tech savvy.
Speaker 6: They know how to cruise right on too zoom without
Speaker 6: any problems. But that opens up a world of difficulty
Speaker 6: for some of these judges and some of the lawyers.
Speaker 6: They're used to moving through using the bankruptcy jargon, talking
Speaker 6: in very shorthand with the legal lees, and then all
Speaker 6: of a sudden, you have sometimes hundreds of people on
Speaker 6: these cases asking very blunt, basic questions and being confused.
Speaker 6: The biggest confusion is about what are they going to
Speaker 6: get their back? What are they going to get back?
Speaker 6: Why can't they just get their coins back? Why do
Speaker 6: they have to wait? Why is this case going on
Speaker 6: and on? And why are the lawyers making so much money?
Speaker 2: What I find fascinating about your story is this whole
Speaker 2: idea of wait. Crypto in some cases, as are in
Speaker 2: some regards as these bankruptcy cases are showing that it's
Speaker 2: not that much different than bank deposits, and then in
Speaker 2: other regards, yeah, wait, it is really different than bank deposits.
Speaker 2: So it's it feels like it's got to be very
Speaker 2: frustrating for folks who bought some kind of cryptocurrencies on
Speaker 2: whatever platform and it was supposed to be kind of powerful.
Speaker 2: They owned it, there's no middlemen, this is mine, and
Speaker 2: then to see it play out this way exactly.
Speaker 6: There were two kinds of basic accounts that were that
Speaker 6: are at issue. What does a custodial account that's like
Speaker 6: a safety deposit box in a bank. You put your
Speaker 6: coins in it, and when you want them, you go
Speaker 6: in and you take them back out. There's less dispute
Speaker 6: about that. Then there's the kind of deposit where you
Speaker 6: gave your crypto to an institution Voyager or Celsius or FTX,
Speaker 6: and then you allowed that company to then lend it out.
Speaker 6: You made interest, great, you make a higher return than
Speaker 6: you could get anywhere else. But it turns out that
Speaker 6: in the fine print, you don't own that crypto anymore.
Speaker 6: It's like a bank deposit. You don't own the money
Speaker 6: that you give to the bank. You own the credit
Speaker 6: for that money, You own the right to get that
Speaker 6: money back whenever you ask for it.
Speaker 3: But then also it's not fdic assured, like when say
Speaker 3: you have money in a bank versus when it's crypto.
Speaker 3: And how many people do you think ended up making
Speaker 3: that mistake.
Speaker 6: I think hundreds of thousands made that mistake. We're waiting
Speaker 6: on the biggest problem to crop up, and that's nine
Speaker 6: point six million customers of FTX. FTX hasn't decided whether
Speaker 6: they're going to claim that all of those customers' deposits
Speaker 6: are actually owned by FTX, and therefore you can't get
Speaker 6: your specific coins back. You can only get a share
Speaker 6: of them whatever happens to be available. Fight if it happens,
Speaker 6: will make these other two cases look small and insignificant
Speaker 6: by comparison.
Speaker 2: Now, I know you know what you do as you
Speaker 2: follow the bankruptcy situations, but I do understand and like
Speaker 2: what comes out of this, the rulings and how it
Speaker 2: plays out, how that might ultimately shape what we get
Speaker 2: in terms of regulatory oversight, because there's just you know,
Speaker 2: trying to figure out exactly what it is. As part
Speaker 2: of the problem.
Speaker 6: Well, I think part of what will happen is less
Speaker 6: influence on the regulators. They're going to do something separate,
Speaker 6: but it might influence investors, especially professional investors, because now
Speaker 6: you're going to see what the courts will do in
Speaker 6: the worst case scenario if you put your money on
Speaker 6: one of these platforms. Now we know the judges will
Speaker 6: say in some cases for specific types of investments, it's
Speaker 6: like a bank. You don't own it, it's pooled with
Speaker 6: everyone else's assets, and you have to wait in line,
Speaker 6: just like any creditor, bond holder, supplier in any old
Speaker 6: fashioned bankruptcy case.
Speaker 2: Welcome to the new world of disruption. Not exactly.
Speaker 6: It's kind of crazy.
Speaker 2: What about all the marketing that went on And I
Speaker 2: feel like that's something too where really looking into when
Speaker 2: it comes to the crypto world.
Speaker 6: Yeah, it was sold to appeal to certain kinds of
Speaker 6: investors that investors were trying to get away from the
Speaker 6: traditional banking system. They promised that crypto for all would
Speaker 6: become a reality, or you can unbank yourself, was the
Speaker 6: way one company put it. In other words, they appealed
Speaker 6: to the idea that you wouldn't be part of the
Speaker 6: traditional system, so you might have some benefits there. It
Speaker 6: turns out when you're not part of the traditional system,
Speaker 6: you're not protected the way the traditional system is.
Speaker 3: Can you talk about the customer agreements that people were
Speaker 3: signing where they maybe they signed it and they assumed
Speaker 3: they could be able to have their money back leader
Speaker 3: if they were going to lose it, but then that's
Speaker 3: not exactly how things played out.
Speaker 6: Oh well, how many of us read the customer agreements
Speaker 6: where see when they pop up online, it's like.
Speaker 3: The its thousands of pages.
Speaker 6: Life and that fine print is a line that says
Speaker 6: you are if you are making interest and this is
Speaker 6: in one of the cases. If you're making interest on
Speaker 6: this deposit, we technically own the deposit. Therefore, if things
Speaker 6: go bust, you may not have access to it.
Speaker 2: So Stephen, as you follow this process and the bankruptcy proceedings,
Speaker 2: kind of what jumps out for you? I mean, not
Speaker 2: everybody is in it like you are, but I do
Speaker 2: think you know, we're all just looking back at the
Speaker 2: last two year or so of crypto and trying to
Speaker 2: understand the way forward. So as you watch this bankruptcy process,
Speaker 2: what jumps out for you when you think about maybe
Speaker 2: what happens next in the world of crypto?
Speaker 6: I think the I think the people who are running
Speaker 6: this system, because we're talking about two very different systems
Speaker 6: and two very different philosophies. The people in the courthouse,
Speaker 6: the judges and the traditional lawyers who are now in
Speaker 6: charge of these companies, especially FTX. They're grappling with how
Speaker 6: do you deal with millions of people who are not
Speaker 6: going to get all their money back and they're going
Speaker 6: to want to understand why and how do you explain
Speaker 6: that to them? And you also have to make sort
Speaker 6: of I don't mean make up rules but they have
Speaker 6: to create a whole new system of dealing with these
Speaker 6: crypto investments because it's very difficult. There's some perplexing questions.
Speaker 6: How do you value crypto today? You were talking about
Speaker 6: what the price of bitcoin is? Well, can you value
Speaker 6: my coins based on what they were when I deposited them?
Speaker 6: Or is it worth what it is today? Very different things.
Speaker 6: Lots of complications that have come up that have not
Speaker 6: been seen in the past. So the system is trying
Speaker 6: to respond and so far it's done an adequate job.
Speaker 6: But the real test is coming on.
Speaker 2: Hey, because we're lucky that we have you, and you
Speaker 2: had another story on the Bloomberg about Binance ending a
Speaker 2: deal to buy bankrupt crypto firm Voyager, right, which is
Speaker 2: in your story just real quickly forty seconds. What do
Speaker 2: we need to know about that?
Speaker 6: The Voyager customers are going to have to find a
Speaker 6: way to get their money out without transitioning to new platform.
Speaker 6: That means that Voyager is going to have to go
Speaker 6: before to judge and figure out how to get this
Speaker 6: money back in a more complicated way. Finance was an
Speaker 6: easy way for them to deliver the money, deliver what
Speaker 6: they could to customers. They've got to come up with
Speaker 6: something new.
Speaker 2: All right, Well, brilliant take on all of this and
Speaker 2: a great perspective, Stephen, Thank you so much. Glad you
Speaker 2: could take us there. Stephen Church. He's bankruptcy reporter at
Speaker 2: Bloomberg News. The story in the upcoming new issue at
Speaker 2: Bloomberg BusinessWeek, but already on the Bloomberg and online. You're
Speaker 2: listening and watching Bloomberg.
Speaker 4: Bromac a journal.
Speaker 6: No, how about you let me drive?
Speaker 5: No, no, no, no, who's going to drive?
Speaker 10: Honey? Please, I'll do the gravels.
Speaker 9: Let's I want to try it. It's a good question
Speaker 9: that drives us.
Speaker 1: This is the drive to the globe dot com for me.
Speaker 1: Think well by it on Bloomberg rat.
Speaker 2: All right, everybody, we've got just under eighteen minutes left
Speaker 2: in today's trading session. It is time for our drive
Speaker 2: to the close and back. With us is Alan Zaffron,
Speaker 2: founding partner and co CEO at IQ Capital. He joins
Speaker 2: us on zoom once again from Foster City, California. Allen,
Speaker 2: nice to have you here with Jess and myself. There's
Speaker 2: a lot going on. It's pretty dense. The environment earning
Speaker 2: so far are telling you what story.
Speaker 10: Jess and Carol, thanks for having me on your program again.
Speaker 10: Earnings are telling me that the economy is indeed going
Speaker 10: to slow over the course of the year. The economy
Speaker 10: probably doesn't bottom until late this year or the first
Speaker 10: quarter of next year, and inevitably all the rate hikes
Speaker 10: put a little bit of concerned consumers who are two
Speaker 10: thirds of the economy, and as result to get a
Speaker 10: little more cautious. We saw that with consumer confidence dropping
Speaker 10: again this month. Spending drops, revenues drop, earnings drop a bit,
Speaker 10: and stocks drop a bit as a result of that environment.
Speaker 10: It's not a doomsday scenario, but we are grinding into
Speaker 10: a slow, modest recession. Stocks don't do so well to
Speaker 10: the economy bottoms. That's what we're seeing and that's what
Speaker 10: the earnings are telling us.
Speaker 3: Alan So what exactly is missing from this turning into
Speaker 3: a bull market? At this point, there.
Speaker 10: Isn't a catalyst yet. So if you look over the
Speaker 10: last twelve recessions, stocks tend to bottom about three or
Speaker 10: four months before the actual bottom and economic activity. And
Speaker 10: given that on average the full impact economically from a
Speaker 10: rate hike takes about twelve months to work through the system.
Speaker 10: If you work in the math, it tells you the
Speaker 10: bottom of this economy is probably the first quarter the
Speaker 10: next year. That tells you that investors aren't going to
Speaker 10: be really looking forward to a change in FED policy
Speaker 10: and stocks moving back up until you get until very
Speaker 10: late this year, if not early next year. There's a
Speaker 10: lack of a catalyst right now, and in the absence
Speaker 10: of that, we're just going to be grinding here. Valuations
Speaker 10: are modestly above long term averages or trading right now
Speaker 10: at roughly eighteen and a half times consensus estimates for
Speaker 10: this year. If you believe them, and if you think
Speaker 10: earnings are a little too high, maybe stocks fall about
Speaker 10: ten percent to reflect earnings being cut a little bit
Speaker 10: and multiple stropping a little bit. But it's not catastrophic.
Speaker 10: It's not like a deep recession with a thirty percent declimb.
Speaker 10: We do not see that in the forecast.
Speaker 2: Do you think earnings estimates are too high?
Speaker 6: Still?
Speaker 2: We had we shared with our TV colleagues in our
Speaker 2: simulcaster cross platform Sarah Hunter, you know, and she at Alpines.
Speaker 2: She talked about that the markets haven't yet really priced
Speaker 2: in some of the earnings slow down.
Speaker 10: I concur completely with that. Our guess here is estimates
Speaker 10: still are somewhere between five to ten percent too high
Speaker 10: for this calendar year and arguably about the same magnitude
Speaker 10: for next year, which tells you that markets themselves are
Speaker 10: probably about five to ten percent overvalid if you're using
Speaker 10: long term historical averages as a gauge for where stocks
Speaker 10: should trade. But we're also looking for something like twelve
Speaker 10: percent and earnings growth in the subsequent year. So what
Speaker 10: goes down is going to come back up, and it's
Speaker 10: not enough to date. If you're a long term investor,
Speaker 10: it isn't enough to make a meaningful shift in allocation.
Speaker 10: We could be wrong. Timing markets is fraught with risk,
Speaker 10: and the magnitude here isn't big enough to problem make
Speaker 10: a lot of strategic changes. So we're just guiding people
Speaker 10: if you want to enter the market goes slower than
Speaker 10: average dollar cost average. If prices fall, it is the
Speaker 10: proverbial buying opportunity. Be patient. The economic impact hasn't been
Speaker 10: fully reflected in earnings estimates yet.
Speaker 2: I just want to mention. I just want to mention
Speaker 2: First Republic extending it's plunged to fifty percent in today's session.
Speaker 2: We know the trouble Bank out with it's led as
Speaker 2: results last night, but exploring maybe possibly selling some one
Speaker 2: hundred billion dollars in asset sales. So I just wanted
Speaker 2: to put that out for everybody.
Speaker 3: So, Alan, how are you positioning at this point when
Speaker 3: we were just talking about all these different backdrops with
Speaker 3: the macro.
Speaker 10: Well, from a starting standpoint, diversification is your greatest risk mitigant,
Speaker 10: So stay well, diversify though.
Speaker 2: We come on, I feel like everybody says that.
Speaker 3: Right exactly, like what specifically how do we diversify?
Speaker 10: Okay, So what that means is a broad set of equities.
Speaker 10: Don't put your eggs in one basket if you're not
Speaker 10: built to deal with the swings that go up and
Speaker 10: down the markets. Make sure of ample amounts of high
Speaker 10: quality bonds. And if specifically to your question right now,
Speaker 10: we're sitting in high quality bonds. When markets decline, credit
Speaker 10: spreads wideen, so corporate bond prices and especially high yield
Speaker 10: public bonds fall in value as stocks fall. Historically, so
Speaker 10: we are largely avoiding anything that looks like non investment
Speaker 10: grade bonds. We're sticking with treasuries and very high quality
Speaker 10: corporates to in the public markets, there are opportunities. Selectively,
Speaker 10: in non publicly traded areas, we think there are compelling opportunities,
Speaker 10: and things like high quality real estate. Apartments have such
Speaker 10: a long term secular trend that ownershouldn't have in ownership
Speaker 10: of income generating apartment units or warehouses. With e commerce's
Speaker 10: growth is a sustainable trend, so there are ways to
Speaker 10: play it if you're looking for income with a long
Speaker 10: term perspective.
Speaker 3: I'm glad you brought up real estate. That's what I
Speaker 3: was going to ask you about. So you talked about
Speaker 3: the apartment side of things and some other corners, but
Speaker 3: what about when it comes to offices, and are there
Speaker 3: particular corners in real estate you think are still too
Speaker 3: risky at this point.
Speaker 10: Yeah. We actually are not big fans of real estate
Speaker 10: assets that are either in a cyclical risk that tends
Speaker 10: to be things like hotels that when the economy slows through,
Speaker 10: when people show up at hotels and vacancies escalate, which
Speaker 10: is not good. And we like to avoid things that
Speaker 10: are in secular decline. And example is retail in general
Speaker 10: real estate, there's still far too many retail building buildings
Speaker 10: relative down much space retailers need. We would argue that
Speaker 10: many office buildings are in a secular decline, so on balance,
Speaker 10: we are avoiding office building exposure as well. We prefer
Speaker 10: areas that are more commonplace apartment buildings, single family homes
Speaker 10: for rent, self storage units, industrial warehouses. Those are the
Speaker 10: secular trends that are going to take you through this recession,
Speaker 10: generate attractive income, and get you to the next cycle.
Speaker 2: Do you think real estate is the next shoe to drop?
Speaker 5: Though?
Speaker 2: Maybe office?
Speaker 10: Yes, but selected airs. I don't think it's too You
Speaker 10: can't broad brush it. If you have a type A
Speaker 10: office building, even in a centralized business district, a class
Speaker 10: A office space, it's still in demand. You can't. Not
Speaker 10: everybody's going to be remote in this economy. But sure,
Speaker 10: if you're in a tertiary city with a old office building,
Speaker 10: you're in your land order. You're in a lot of
Speaker 10: pain right now.
Speaker 3: We only have about thirty seconds left. But what do
Speaker 3: you think credit spreads are telling us at this point?
Speaker 10: Credit spreads are telling us a recession is coming, but
Speaker 10: they haven't widened out enough yet. And that's why we're
Speaker 10: avoiding publicly traded non investment grade bonds. They're not yet
Speaker 10: wide enough. But the bond mark, the treasure market is
Speaker 10: telling you a weakening is coming. That's why six months
Speaker 10: he bills at five percent and at ten your treasure
Speaker 10: right now is at three point four percent. It tells
Speaker 10: you every recession's coming.
Speaker 2: All right, Well, there you have it, but it sounds
Speaker 2: like it's not going to be too difficult ultimately to
Speaker 2: get through it. We really appreciate Allan always checking in
Speaker 2: with you. Alan Zaffron, who's founding partner and co CEO
Speaker 2: of at IQ Kapital, joining us via zoom from Foster City, California.
Speaker 2: I feel like we hear that a lot, right that
Speaker 2: it's kind of almost a touch and go with a
Speaker 2: recession to some extent, and.
Speaker 3: You have other people arguing that maybe the worst has
Speaker 3: already parents does when we're looking at some other models.
Speaker 2: So look at the chart you had up about right
Speaker 2: earnings estimates, right.
Speaker 3: Right, So basically that recession with earnings started in the
Speaker 3: second quarter of last year when excluding energy.
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