Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller.
Speaker 2: Every business day we bring you interviews from CEOs, market pros,
Speaker 2: and Bloomberg experts, along with essential market moven news.
Speaker 1: Find the Bloomberg Markets podcast called Apple Podcasts or wherever
Speaker 1: you listen to podcasts, and at Bloomberg dot com slash podcast.
Speaker 3: We are joined now by Brian moynihan. He's chair and
Speaker 3: CEO of Bank of America. Brian, thanks for being here.
Speaker 3: We're here for the Aspen Economic Strategy Group meetings, of
Speaker 3: which you are apart. It is about the economy, and
Speaker 3: last time we talked, you were projecting at Bank of
Speaker 3: America a recession, mild recession, maybe Q four in the
Speaker 3: Q one next year. You've changed your mind.
Speaker 4: Why?
Speaker 5: Well, first of all, it's a great setting. It's a
Speaker 5: beautiful setting, and there's a lot of great people here
Speaker 5: to talk about the economy. But our team basically has
Speaker 5: moved from a slight recession to no recession. And so
Speaker 5: in the early next year first quarter, second quarter they
Speaker 5: had a slight negative quarters they now having positive one
Speaker 5: percent and a half of percent positive, but more importantly
Speaker 5: behind that is what's really going on. In terms of
Speaker 5: the unemployment rate projections, they're now four point three peak
Speaker 5: unemployment in the latter part of twenty four early twenty five.
Speaker 5: You're saying that's sort of an unemployment was slow down,
Speaker 5: which is really what's going on, and we can talk
Speaker 5: more about it, but that's what's really going on is
Speaker 5: people employed, they have money, they're spending money, and the
Speaker 5: FED is trying to slow down the economy, and it
Speaker 5: looks like we're reaching a pretty good equo.
Speaker 3: Aby you've said, it's hard to have a recession when
Speaker 3: you've got unemployment in the foes, that's all.
Speaker 4: They hard to do.
Speaker 3: But what are you seeing in terms of jobs? Is
Speaker 3: there any softening in the market at all? Are that
Speaker 3: you're seeing at Bank America or more broadly, well, if
Speaker 3: you look.
Speaker 5: At if you talked to our clients, you sort of
Speaker 5: see very specialized roles. Welders are still in high demand,
Speaker 5: even because construction is going on in the IRA and
Speaker 5: all the different building That's one thing, but in general,
Speaker 5: if you take our companies example, last year this time
Speaker 5: it was a great resignation. Turnover was back up to
Speaker 5: fifteen percent, which was higher than pre pandemic. It's now
Speaker 5: down to seventy eight percent. Last year we heard thirty
Speaker 5: seven hundred people in the month of June. This year
Speaker 5: hard nine hundred, I mean. And yet headcount keeps drifting down,
Speaker 5: and so I think a lot of employers are doing
Speaker 5: that same thing, which is managing headcount carefully.
Speaker 6: And that's why you've.
Speaker 5: Seen job openings drop by twenty percent in the last
Speaker 5: twelve months or so. It doesn't mean people laying a
Speaker 5: lot of people off. That's happening here and there, really
Speaker 5: specialized industries, but people are being much more of conservative
Speaker 5: their employment. Last year, it was your post to every
Speaker 5: job known de mand because you didn't know what was
Speaker 5: going to happen. Now, with the lower turnover, the labor
Speaker 5: market is a lot looser this year that was last year,
Speaker 5: although the unemployment rate is still low.
Speaker 3: One of the things you have a lot of vantage
Speaker 3: into is consumer spending. At back of America, what are
Speaker 3: you seeing in consumer spending? The commersumer seems to still
Speaker 3: be spending, maybe softening a little bit, But how much
Speaker 3: dry powder do they have? Because we had thought that
Speaker 3: a lot of excess savings they can still express. We're
Speaker 3: now hearing for example, credit card bounces are really going up.
Speaker 4: Yeah.
Speaker 5: So if you think about a consumer, it's their wages
Speaker 5: and wage growth, it's the money they have in their
Speaker 5: accounts from the stimulus and other things that went into
Speaker 5: their accounts during the pandemic. It's their ability to borrow,
Speaker 5: and then it's a rate at which they have to
Speaker 5: pay to borrow. And so if you think about all that,
Speaker 5: what we see is consumer spending. If we were talking
Speaker 5: last year's time, it was ten percent year every year,
Speaker 5: and that was inconsistent with a low inflation economy. That
Speaker 5: now is down to five percent. So you've seen to
Speaker 5: drop by half and so year to date it's five percent.
Speaker 5: Month of July it's four and a half percent, so
Speaker 5: you're seeing it slow down. And what is spending at
Speaker 5: in the month of July is consistent.
Speaker 6: With a lower inflation.
Speaker 5: It's very much like it was in seventeen, eighteen and
Speaker 5: nineteen as a FED raised rates in economy sort of
Speaker 5: settled in. And so I think there's always been this
Speaker 5: battle between the consumer and the FED, and the consumer
Speaker 5: has pushed the won the battle back a bit, but
Speaker 5: they got to be careful of overwinning it now and
Speaker 5: now the risk really goes to overtightening and slowing down
Speaker 5: the consumer too much, and then we would have a recession.
Speaker 3: Well, let me take the flip side of that a second.
Speaker 3: I want to talk about soft landing. Also, some people
Speaker 3: are saying maybe they won't won't have a landing now
Speaker 3: is what's the risk actually of inflation reaccelerating here because
Speaker 3: they haven't gone far enough.
Speaker 5: Well, I think I think our economy is sincs A.
Speaker 5: Chances that are low, and I think I agree that
Speaker 5: personally and our team under Cannas Browning Platt is one
Speaker 5: of the best teams in business and they're good at
Speaker 5: But what there's see what the drag of higher rates
Speaker 5: comes through very quickly in housing instantaneously transmitted car purchases,
Speaker 5: things which happen faster. But with a line share, the
Speaker 5: mortgage is half for more undred three percent, And you
Speaker 5: really think about only half of the who people who
Speaker 5: live in America have a mortgage. It tied up in
Speaker 5: our housing they rent and other things it's rent and
Speaker 5: its new home purchases. Those both are UNDERTA those have
Speaker 5: now mitigated. So you're seeing inflation come under control. Even
Speaker 5: these places are rate sensive. What you haven't seen is
Speaker 5: the impact in corporate Yet that's still ahead of us.
Speaker 5: Because corporations, barring costs went up, they're starting to their
Speaker 5: activity is that they're using the lines less, which means
Speaker 5: they are finding less opportunities which overcome that borrowing cost.
Speaker 5: They're being more conservative on their debt. They've got to
Speaker 5: refinance some stuff. Good news is a lot of finance
Speaker 5: at lower rates and that has turned to it.
Speaker 6: But commercial real.
Speaker 5: Estate, the debate is so a lot of the fiscal drag,
Speaker 5: the drag from raising rates is still ahead of us.
Speaker 5: And that's why I think people forgetting that. They're still
Speaker 5: a pretty constraining lending conditions are tighter. Just at the
Speaker 5: Senior Loan Officers survey.
Speaker 6: Just said it.
Speaker 5: So the impact is more in front of us for
Speaker 5: some of the rate increases and behind us. Yet you're
Speaker 5: seeing it already tip inflation flattening out, not down yet
Speaker 5: with flattening out, and we still say it takes till
Speaker 5: twenty five to get back to the target rates.
Speaker 3: What does all that mean for Bank of America the
Speaker 3: way you run your business. You had a very strong quarter,
Speaker 3: particularly in trading and sales last quarter. Are you doubling
Speaker 3: down on that or are you being a little more conservative.
Speaker 5: Well, the trading and sales team, Jimmy Tomorrow, the team
Speaker 5: have done a great job and they had the best
Speaker 5: first half they've had and we've earned fifteen billion dollars
Speaker 5: plus in the first half of this year. The team's
Speaker 5: performing strong, the credits in great shape. Stress test just
Speaker 5: went on and our losses were lower than they were
Speaker 5: last year. And we're been the lowest of our peers
Speaker 5: for almost every year except for one. Have the last
Speaker 5: twelve or thirteen stress tests. So you put that all together,
Speaker 5: we're well prepared for whatever comes at us, and that's
Speaker 5: what we do. Jimmy and the team had done a
Speaker 5: great job in training, but about three or four years ago,
Speaker 5: first under Tom Montaggon and Jimmy took over all the trading.
Speaker 5: We increased the size of balance, the scope, the capitol,
Speaker 5: committed to business, the talent, and they've been able to
Speaker 5: get a good payback on that. You know, the way
Speaker 5: they do it is, you know, we made money every
Speaker 5: trading day. If you look back across the last several years,
Speaker 5: it's very rare. Maybe a couple of times a quarter
Speaker 5: will lose money. We just basically the team runs a
Speaker 5: great business and they're doing a great job.
Speaker 3: The markets woke up yesterday to announcement of the Fitch
Speaker 3: downgrade in the US sovereign debt and there's a debate
Speaker 3: debate about whether that was the right timing, was the
Speaker 3: right thing, and the bomb marker now is actually responding
Speaker 3: a little bit to that. What's your take on that
Speaker 3: D rating?
Speaker 5: Well, I think it's a bit of a non event
Speaker 5: in the sense that, you know, the US has the
Speaker 5: ability to pay its debts and has shown that ability.
Speaker 5: It's sometimes interesting how we get there with a debt
Speaker 5: ceiling increase and things like that, but they get there.
Speaker 5: It's the strongest economy world by a lot. It's the
Speaker 5: biggest economy, strongest economy. It's worth capital comes to them
Speaker 5: from around the world. Great incentives in the US for
Speaker 5: companies around the world to invest and grow here at
Speaker 5: the IRA, the Infrastructure Act, A, Chips Act, et cetera,
Speaker 5: et cetera. The tax rates are lower, which makes it
Speaker 5: more competitive. So I don't worry about the fundamental ability
Speaker 5: of PAARA debts. But if you separate the downgrade into
Speaker 5: two PAGs, is one is you know, sort of the
Speaker 5: debts that continue to accumulate, and will they start to
Speaker 5: outstrip the growth in the economy because right now, with inflation,
Speaker 5: they've been kept at a lower level. That's a question. And
Speaker 5: then secondly, is their willingness to deal with that, and
Speaker 5: that's that's an honest debate. But the two sides have
Speaker 5: to have that debate, and that's a political process and
Speaker 5: they have to have it. But the reality is the
Speaker 5: action downgrades a person holds three hundred million dollars more treasuries,
Speaker 5: it doesn't change our opinion of the US's credit winess.
Speaker 3: Well what about that holding the US treasure Because as
Speaker 3: you suggest, there is an issue at some point down
Speaker 3: the road, it's not clear what it would be. I mean,
Speaker 3: you talk about the process, the political process, it doesn't
Speaker 3: give a lot of comfort. That's one of the things
Speaker 3: that Fitch said, Actually, you know, we got a problem,
Speaker 3: but also we got a process that doesn't seem to
Speaker 3: be able to deal with it.
Speaker 5: Yeah, And I think that goes back to the structural
Speaker 5: changes in America. You know, the demographics, the demands on
Speaker 5: social security and the t you know so called and
Speaker 5: title what's over time as a percentage demands, Those are
Speaker 5: serious issues. That you know, the political process and the
Speaker 5: citizenry has to be involved in not solvable in ten minutes.
Speaker 5: And so that's all good, and that's what we're talking
Speaker 5: about here at the Aspen Economic Strategy Group. You know,
Speaker 5: what are the thought processes between balancing those outcomes better?
Speaker 5: But you know, those are long term questions. In the
Speaker 5: near term, there's much bigger risk of some of the
Speaker 5: things that go on outside the United States to the
Speaker 5: economies of the world than there is inside the United States.
Speaker 5: We're growing, people are employed, people are spending, and that's
Speaker 5: good news, and that will get mean that the fiscal
Speaker 5: receipts of the US will stay a little stronger on
Speaker 5: a relative basis.
Speaker 3: How much is it supported simply by the strength of
Speaker 3: the US dollar. That is to say, people tend to
Speaker 3: turn to dollars when in doubt.
Speaker 5: They should because it's you know, it's a safe haven.
Speaker 5: It's what commerce is conducted in because in the day,
Speaker 5: the consumption power of the United States drives economies around
Speaker 5: the world. Therefore there's you know, US consumers spend dollars.
Speaker 5: So if you're selling stuff in dollars, you got to
Speaker 5: be exposed a dollar. And so I think the idea
Speaker 5: of some of this debate about reserve currency status. It's
Speaker 5: been tightening in the flight to quality, and the US
Speaker 5: tends to come. Now ten year bonds moved up and
Speaker 5: everybody gets built up. We're talking about the difference between
Speaker 5: you know, three eighty three ninety and four ten, four twenty.
Speaker 5: These are not very big moves in a grand scheme
Speaker 5: of things. It is tapping quickly, and people get excited
Speaker 5: about who trade bond is living from the grander impact
Speaker 5: in economy. Those moves are needed to get the Ultimately,
Speaker 5: they old curve has to get back and sink or
Speaker 5: else we aren't taming the inflation or we're going to
Speaker 5: drive into a recession.
Speaker 3: When you talk about the strengthening the US dollar, is
Speaker 3: it stronger today as a reserve currency globally than it
Speaker 3: was ten twenty years ago?
Speaker 5: And if so, why because I think the opportunities in
Speaker 5: the US are the strongest. And that's why, you know,
Speaker 5: with a great financial system we have, with a great
Speaker 5: set of companies and innovation, we have the research universities,
Speaker 5: we have the things like if we keep investing in
Speaker 5: all that and let capitalism and you know, United States
Speaker 5: style capitalism drive the US will always be a favorite
Speaker 5: place because other places are struggling with different systems that
Speaker 5: proved not to be as beneficial, with less innovation, less
Speaker 5: ability tackle problems, and so yes, it's interesting from time
Speaker 5: to time all what goes on. But if you think about,
Speaker 5: you know, think about the late sixties to now, we've
Speaker 5: doubled them around. People work United States. We were supposed
Speaker 5: to be taken over by japan ankeeers. The computers are
Speaker 5: going to get rid of all the people. The people
Speaker 5: are still working. You know, we had to more in Vietnam.
Speaker 5: We had the political constitutional crist This and Nixon presidency.
Speaker 5: You had an oil and bar. All that stuff happened
Speaker 5: in the early seventies and still a dec you know,
Speaker 5: fifty years later, we have twice as many people work
Speaker 5: in this country.
Speaker 3: Since we talked last, Brian, and we now have the
Speaker 3: proposed regulations on capital requirements from the federal bank regulators.
Speaker 3: We talked before and you said one hundred basis points,
Speaker 3: as I recall, a difference in the capital requirements would
Speaker 3: amount one hundred fifty billion dollars lest year loan. Now
Speaker 3: we have the proposals. What would it mean for Bank
Speaker 3: of America and for our banking system.
Speaker 5: Well, what it does is it's not to get too
Speaker 5: technical in the grand skiving things, but it changes the
Speaker 5: calculation of risk WEDED asets RWA. And so the idea
Speaker 5: is that the estimates by the FED is it's fifteen
Speaker 5: to twenty percent of our WA increase. When you do that,
Speaker 5: then ten percent of our WA at X and ten
Speaker 5: percent of our WA at one point one times X
Speaker 5: means you have to have more capital, and so the
Speaker 5: amount of capital goes up. That then constraints leny because
Speaker 5: you can't do anything with that capital. If you did,
Speaker 5: then you'd have more rw and you have to have
Speaker 5: more capital. So so but I think if you step back,
Speaker 5: this industry is well capitalized. It just proved it again
Speaker 5: in another crisis. It's well managed, it's well rked related.
Speaker 5: You've had successive FED regime chairs and people working in
Speaker 5: a chair supervision vice chair over the years say the
Speaker 5: capital's adequate. Industry, it's well it's well managed as well.
Speaker 5: Capities they'll be. Banks will fail, they fail, they failed
Speaker 5: throughout history.
Speaker 4: That happens.
Speaker 5: But since the financial crisis, more people under the tent
Speaker 5: because the issue of the financial crisis a lot of
Speaker 5: stuff wasn't a tent. The problem is if you get
Speaker 5: the capital regulations of banking system too tight, you push
Speaker 5: stuff back outsides of tent. And that's a concern. So
Speaker 5: as I look at it, one, give a set of.
Speaker 6: Rules, we'll live with it.
Speaker 5: Two, it won't you know, bank Americal adjustice business model
Speaker 5: to make it work. But what's been interesting about this
Speaker 5: is it's competitive position United States versus Europe and others.
Speaker 5: This is making the bank industry, all banks less competitive
Speaker 5: to mid sized US companies than foreign banks are to
Speaker 5: mid sized US companies participating in a sing globe of
Speaker 5: supply chains in those countries. That's that's more of a
Speaker 5: trade question and a balance of power question.
Speaker 4: That's one.
Speaker 5: And then second, I'm surprised by the amount of descent
Speaker 5: that the governors of Federal Reserve. I've been working on
Speaker 5: Federal Reserve stuff for my whole or forty years now,
Speaker 5: and I was just surprised the amount of debate, which
Speaker 5: shows you that you know, whether it's mortgage loans one side,
Speaker 5: whether it's a tax benefits for and treatment for energy
Speaker 5: clean energy investments, or whether it's the basic trading and
Speaker 5: things like that there's been a lot of water that's
Speaker 5: got to go over the dam here to get these
Speaker 5: rules right, because there's a debate even among the governors
Speaker 5: themselves about what the right answer is.
Speaker 3: Over the years. Brian, you said there's a role for regulation,
Speaker 3: and you'll live with the regulation as you say you
Speaker 3: will with capital parts. But what is the problem it's
Speaker 3: being addressed. That's what I don't quite understand. You talked
Speaker 3: about the crisis we had back in March with the banks.
Speaker 3: I'm not sure this addresses that well.
Speaker 5: And that's been the debate, and that's go read the
Speaker 5: descents and the debate in the things. So strong regulation
Speaker 5: is important. Rapid growth in banks tends to come from
Speaker 5: things that turn out to be not so interesting after
Speaker 5: the fact, and so I think, you know that's the
Speaker 5: thing they need to sort of come to a common
Speaker 5: agreement on Basil three. Across the world. We're just applying
Speaker 5: it with much more rigidity and requirements. And so if
Speaker 5: you look at the largest bank in France, UK and Germany,
Speaker 5: they have about half the capital requirements in the largest
Speaker 5: banks in US do. So that could send a competitive
Speaker 5: question and so I think people just have to look
Speaker 5: at it seriously look at it relative to what we're
Speaker 5: trying to do here. We want the strongest banking industry.
Speaker 5: Our banking stry has better returns, has better things. But
Speaker 5: on the other hand, our multiples are half or less
Speaker 5: than the SMP multiples. There's a reason for that, which
Speaker 5: as investors or say, wait a second, if the capital
Speaker 5: demands don't stop, we aren't sure that we can continue
Speaker 5: to invest. So there's a little bit of a counter
Speaker 5: veil here that people have to pay attention to it.
Speaker 5: And then back to your point, every hundred base of
Speaker 5: points of capitals, one hundred fifteen hundred billion less loans
Speaker 5: we at Bank America could do, and this applies across
Speaker 5: what they can't be done other places. Those companies aren't
Speaker 5: that size.
Speaker 3: Man, Brian, thank you so much for spending times. Really
Speaker 3: appreciate it.
Speaker 4: That's Brian moynan.
Speaker 3: He is the share in CEO of Bank of America.
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Speaker 8: We did have another Central Bank decision today. Earlier the
Speaker 8: Bank of England did raise interest rates to a fresh
Speaker 8: fifteen year high and raising its key rate to five
Speaker 8: and a quarter percent. Here and really, as far as
Speaker 8: the central bankers, they're signaling how the UK still faces
Speaker 8: a longer period of higher rates. So we want to
Speaker 8: get straight to our next guest, A Vanias stav Rukiva,
Speaker 8: who's an economics professor at London Business School, joining us
Speaker 8: on zoom to break down this latest decision from the BOE.
Speaker 8: What's your takeaway from this.
Speaker 9: Hi, it's a pleasure to be here. I think we
Speaker 9: expected them to hike, given that the core APN numbers
Speaker 9: is still very high at six point nine percent.
Speaker 10: Also, it's a bit.
Speaker 9: Embarrassing for Bank of England to be essentially the central
Speaker 9: bank of an advanced economy with the highest CPI numbers
Speaker 9: at this point. I don't think they had a choice
Speaker 9: but to hike.
Speaker 1: Professor, here in US, we're seeing inflation come down pretty significantly,
Speaker 1: although some people call there some areas of stickiness. If
Speaker 1: you will give us a sense of what's driving the
Speaker 1: inflation in the UK and why is it perhaps a
Speaker 1: little bit more stubborn to bring down than in other
Speaker 1: parts of the world.
Speaker 9: I think the difference between the UK and the US
Speaker 9: is around the wage inflation. So the UK is particularly
Speaker 9: problematic because it got hit by Brexit at the same time,
Speaker 9: which of course limited the inflow of workers from the Urozone.
Speaker 9: But also they have other structural problems. So we know
Speaker 9: that the number of people that long term ill and
Speaker 9: they cannot return to the labor force is significantly higher
Speaker 9: in the UK than in other countries. Actually some of
Speaker 9: the numbers are as high as half a million. Moreover,
Speaker 9: we are seeing a lot most strikes, of course in
Speaker 9: the UK. We don't really see that in the US,
Speaker 9: and they're justified because there were decades of austerity and
Speaker 9: public sector wages are very y low. I don't think
Speaker 9: these trends are going to go away. So for example,
Speaker 9: the fact that they approved public sector wage increase of
Speaker 9: six percent, given the even you know, course CPR inflation
Speaker 9: is seven percent, I don't think public sector workers are
Speaker 9: going to be side with these wages. So I do
Speaker 9: think that actually strikes are going to continue and this
Speaker 9: is going to feed into higher wage inflation. Also, wage
Speaker 9: inflation in the private sector is above seven percent, so
Speaker 9: wage inflation is the biggest problem in the UK in
Speaker 9: my opinion.
Speaker 8: How has also the inflation picture impacted other economies in Europe.
Speaker 9: So the Eurozone is quite interesting because there is massive
Speaker 9: hetroogeneta across different countries in the Eurozone. So this is
Speaker 9: the usual problem when you have a single central bank
Speaker 9: and many different business cycles. So we know the southern
Speaker 9: European countries, for example, the inflation rates is significantly lower
Speaker 9: than Germany, and then you have Eastern EU operator inflation
Speaker 9: is still very very high. So historically CB has tended
Speaker 9: to put a higher weight on Germany, oversized weight on Germany,
Speaker 9: and that has been a problem as well, a political
Speaker 9: economy problem. And now they're going to have the same problem,
Speaker 9: right which which economy are going to target when you're
Speaker 9: fighting inflation. Of course, we're seeing the Eurozone is not
Speaker 9: really growing at the moment, I mean, at best, their
Speaker 9: flood the forecast forizationion and you know, the probability of
Speaker 9: soft lending is much lower in the Eurozone and in
Speaker 9: the UK relative to the US, So the picture is
Speaker 9: much gloomier for the eurozones and people even think that
Speaker 9: maybe they've overdone it at this point. It's unclear how
Speaker 9: it's going to develop, but it's going to be a
Speaker 9: biggest struggle given the heatorginating business cycles that we see
Speaker 9: in the Eurozone.
Speaker 1: One of the challenges I guess for the Eurozone that's
Speaker 1: perhaps a little bit more pronounced, is it ties with China.
Speaker 1: It's reliance on China, but primarily as a trading partner.
Speaker 1: What's the feeling there, how that will develop because obviously
Speaker 1: here in the US the tensions continue to be escalated.
Speaker 9: Yeah, and demand essentially hasn't really recovered in China, right,
Speaker 9: So the forecast for China and not particularly optimistic. So
Speaker 9: definitely this is putting a drug on exporting countries such
Speaker 9: as Germany in particular, and we're seeing that effectively. The
Speaker 9: growth in Germany is definitely lower, So it will play
Speaker 9: a factor. I'll be surprised if you don't see at
Speaker 9: least a mild recession in the Eurozone for sure.
Speaker 8: How do you think when you're looking at more global
Speaker 8: central bank policy, when the FED potentially is close to
Speaker 8: being done, but then you have these other central banks
Speaker 8: that still have to be aggressive. Can the US economy
Speaker 8: still be resilient and shielded from these other economies also the.
Speaker 9: US is a fairly close to economy. So the main
Speaker 9: way through which the US is connected to essentially our
Speaker 9: economies is through financial intermediation. Right, so essentially financial markets
Speaker 9: at global so to the extent that their disruption outside
Speaker 9: of the US, they're going to affect it, But trade
Speaker 9: is more second order for the US. Now, I'm a
Speaker 9: little bit less of the opinion that the US is
Speaker 9: necessarily completely out of the woods. So this soft lending
Speaker 9: narrative about the US is a bit surprising because they
Speaker 9: still have core CPI of four point eight percent, so
Speaker 9: it's not two percent. I am of the opinion that
Speaker 9: is going to be significantly harder for them to get
Speaker 9: it down to two percent. And the problem is the
Speaker 9: following so markets effectively uprising in the soft lending they
Speaker 9: are expecting, you know, the economy is doing better than
Speaker 9: expected as a result. Actually we're seeing that the credit spread,
Speaker 9: so the difference between the high yield corporate debt and
Speaker 9: let's say the treasure is this thing is actually narrowing
Speaker 9: despite the fact that we're increasing interest rates. So that's
Speaker 9: very surprising, and it's showing that actually risk appetite is growing,
Speaker 9: particularly for US assets, and that is making the job
Speaker 9: of the FED harder. Right, So if your credit spreads
Speaker 9: getting more narrow, even if you're increasing base rates, you're
Speaker 9: not that contractionary if you wish, unless at some point
Speaker 9: we start seeing more defaults. So the component, of course,
Speaker 9: you can decompose credit spreads into a component which is
Speaker 9: kind of risk premium risk, aversion component, and component due
Speaker 9: to default risk. If default risk increases and as a
Speaker 9: result credit the increase, then we're going to you know,
Speaker 9: find that essentially growth is going to slow down.
Speaker 10: In the US, but that's not self lending.
Speaker 9: That is going to be profitty recessionary. So I don't
Speaker 9: see how we're going to go down to two percent
Speaker 9: without a recession in the US. But there is a
Speaker 9: second option, which is that the FED actually doesn't really
Speaker 9: care to rush to go down to two percent, and
Speaker 9: they're just going to wait to the next for the
Speaker 9: next shock. Right, So we get another shock which is
Speaker 9: just going to slow down negative demandsion that is going
Speaker 9: to slow down the economy, which is not monetary policy,
Speaker 9: and inflation is going to come down. For example, we
Speaker 9: have elections around the corner, which market's not talking about,
Speaker 9: but elections come with high uncertainty. High uncertainty slows down investment,
Speaker 9: which naturally is going to slow down demand as well.
Speaker 9: So yes, I'm less clear on the soft lending scenario
Speaker 9: in the US than some other market participants.
Speaker 1: All right, doctor, thank you so much for joining us.
Speaker 1: Always appreciate getting your perspective.
Speaker 7: You're listening to the tape cancer on line program Bloomberg
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Speaker 1: Jess Met and Paul Sweeney here in our Bloomberg Interactive
Speaker 1: Broker Studio, streaming live on YouTube. Go over to YouTube
Speaker 1: and check it out. You can search Bloomberg Global News
Speaker 1: and that's where you'll find this markets. I think they're
Speaker 1: going to turn positive by the end of the day.
Speaker 1: This market just feels like it wants to go hired.
Speaker 1: It's coming off the laws. But what do I know.
Speaker 1: Let's check in with a professional who does this stuff
Speaker 1: for living. Phil Phillip Colemark, Managing Partner and Global strategist
Speaker 1: for MRB Partners Canadian Canadian.
Speaker 11: We've picked that up pretty quick.
Speaker 7: Phil.
Speaker 1: Thanks for joining us here in our Bloomberg Interactive Broker studio.
Speaker 1: You know twenty twenty two is ugly. There was nowhere
Speaker 1: to go stocks, bonds, a sixty to forty portfolio. You
Speaker 1: got crushed only Lisa Bromwits, who owns a big barrel
Speaker 1: of oil.
Speaker 12: In her apartment.
Speaker 1: They made money l last year, but this year a
Speaker 1: lot better.
Speaker 11: What do you guys?
Speaker 1: What's your market call at MRB Partners right here?
Speaker 13: Yeah, we've been we've been away from the recession call,
Speaker 13: so we've been favorable on equities.
Speaker 11: We continue to be.
Speaker 13: I mean I think people are capitulating away from that call.
Speaker 13: They've gone to the soft landing call. Now I caveate
Speaker 13: that with bond yields here, keep an eye on them
Speaker 13: because they're they're rushing in against their October highs. And
Speaker 13: as long as they remain capped, you've got a window
Speaker 13: or that sweet spot for for equities where you've got
Speaker 13: you know, economic upgrade and yet you capped yields. We
Speaker 13: start to blow through that, which I think we will
Speaker 13: later probably this year. Then it starts to get a
Speaker 13: bit rocky for equities again, particularly for some of those
Speaker 13: high flyers that are longer duration assets.
Speaker 8: And besides this Fitch downgrade, a lot of this movement,
Speaker 8: especially with tech and growth corners of the market this week,
Speaker 8: were really driven after the US Treasury did boost its
Speaker 8: quarterly sales when it comes to those bond sales to
Speaker 8: help really finance that surge in the budget deficits, which, obviously,
Speaker 8: to your point, since bond yields hire and really pressure
Speaker 8: those stocks. What's kind of your view here as far
Speaker 8: as where you think EU markets could go in the
Speaker 8: shorter term, because I'm kind of wondering if this was
Speaker 8: an opportunity for some people who may have bought some
Speaker 8: of these high fly names, whether it's in Nvidia and
Speaker 8: some of these other chip stocks this year that have
Speaker 8: really taken off, to maybe sell those and potentially buy
Speaker 8: the dip later on.
Speaker 13: Yeah, I think very much. We've had a big rally
Speaker 13: in some of those higher flying names. They were really
Speaker 13: leading the market the whole year, so there's a bit
Speaker 13: of profit taking going on. I think the key will
Speaker 13: be really is keeping the eye on that ten year
Speaker 13: treasury here, because they are very much linked to it.
Speaker 13: We had a situation where we had lower cap bondields
Speaker 13: after the twenty twenty two issue really from October, and
Speaker 13: that capping has allowed some of these higher flying, longer
Speaker 13: duration assets sort of to take off.
Speaker 11: Now we're seeing that come back up.
Speaker 13: We saw a lot of the bond yield back up
Speaker 13: in May, then we saw a digestion phase, and now
Speaker 13: we're seeing a brush with the highs. So we've seen
Speaker 13: people go from the recession call in deep raightcuts to
Speaker 13: pushing out that recession call was never our view, but
Speaker 13: pushing it out to next year and looking for the
Speaker 13: rate cuts there. There is an inconsistency there though that
Speaker 13: costa capital. The economic data is telling you the cost
Speaker 13: of capital is not biting. The household sector, employment or
Speaker 13: even housing starting to re accelerate here. So if the
Speaker 13: cost of capital is not biting, then that means interest
Speaker 13: rates or more likely bond yields will eventually go higher.
Speaker 13: At that point, some of those long duration assets will
Speaker 13: come at a selling pressure.
Speaker 8: What is the pain point specifically safe We're looking at
Speaker 8: the tenure because it is trading around right below four
Speaker 8: point two percent, highest level since November of twenty twenty two.
Speaker 11: Yeah, I think a decisive breakout.
Speaker 13: We've flirted with this a little bit and pulled back
Speaker 13: in in terms of the bond yield. I think a
Speaker 13: decisive breakout we start to blow through those levels. I
Speaker 13: think that takes us into uncharted territory again. So I
Speaker 13: think the equity investors were comfortable as long as they
Speaker 13: could sort of get it go from the recession camp
Speaker 13: to the soft landing camp, if you will, And so
Speaker 13: the idea being as the growth would improve and cost
Speaker 13: of capital wasn't going to be biting. That was sort
Speaker 13: of your goldilocks or sweet spat scenario. If we go
Speaker 13: from the soft landing cap a camp into either bondield's
Speaker 13: breakup or the no landing camp, so to speak, which
Speaker 13: would push those yields up and bring out some of
Speaker 13: those rate cuts in twenty twenty four, and then yields
Speaker 13: break higher. A decisive breakout I think gets us back
Speaker 13: into that uncharted territory. It puts a lot of volatility
Speaker 13: back in across financial asset markets. And in that case,
Speaker 13: given that we're flirting here, you know, our advice to
Speaker 13: our clients is to stick where you've got a bigger valuation.
Speaker 13: Discount and sectors that are less exposed to that higher
Speaker 13: interest rate environment. So it kind of pulls you back
Speaker 13: out at tech right now and puts you back into
Speaker 13: financials and things like that.
Speaker 1: So, you know, I'm looking at the world interest rate
Speaker 1: probability function on the Bloomberg terminal warp. It's been wrong forever,
Speaker 1: so who knows. But I mean, you know, kind of
Speaker 1: saying starting next year, starting the cut rates, it doesn't
Speaker 1: sound like you're in that camp.
Speaker 11: No, I mean, we haven't been in that camp.
Speaker 13: And the problem with that campus is always seems to
Speaker 13: be one year out you cut rates, that we're going
Speaker 13: to head into recession. It's easy for forecasts and people
Speaker 13: to say, well, we've we're normalizing interest rates, and it's not.
Speaker 13: We're not in a recession today clearly from the data,
Speaker 13: but a year out we will be, and so they
Speaker 13: keep pushing that out. We've seen two years of that
Speaker 13: pushing out. At the beginning of this year, we're in
Speaker 13: rate cuts now, right, and and so we've pushed that
Speaker 13: out to the beginning of next year, and now we
Speaker 13: pushed it into mostly backloaded to the second half of
Speaker 13: next year. The real issue, though, is has the cost
Speaker 13: of capital started to jeopardize the economy. So, in other words,
Speaker 13: for the rate cut cycle to occur, you have to
Speaker 13: have something that's really going to damage the economy, and
Speaker 13: right now that data is telling you that interest rates
Speaker 13: aren't that catalyst. So unless you're calling for a different
Speaker 13: black swan event, then then there's not a case for
Speaker 13: the FED to cut.
Speaker 11: And it may be a case where inflation comes down
Speaker 11: for the FED to go.
Speaker 13: On hold, but unless you're getting weakness in the economy
Speaker 13: based on previous rate cuts, then there's no case for
Speaker 13: the cuts. And I know there's a lot of people
Speaker 13: saying that there's this hope for soft landing, which brings
Speaker 13: down inflation enough to allow the FED to take the
Speaker 13: pressure off.
Speaker 11: But reality is is that a.
Speaker 13: Big chunk of that PC inflation a basket is core
Speaker 13: services x housing and that's linked to wages. So unless
Speaker 13: you're getting a recession, there's really no hope that we're
Speaker 13: coming back down to the near the two percent target.
Speaker 8: Do you expect to see because you were talking about
Speaker 8: value earlier, particularly some of these more cyclical quarters of
Speaker 8: the market that have picked up pace since the beginning
Speaker 8: of June, whether you're looking at small caps or even
Speaker 8: just within the S and P five hundred, say industrials
Speaker 8: trading around records also materials. Do you think they can
Speaker 8: basically take the baton from tech and growth that had
Speaker 8: really obviously outperformed in the first half of the year.
Speaker 4: Yeah.
Speaker 13: I think that's largely been our bet, is that you
Speaker 13: would end up as long as bond yields remain seemingly
Speaker 13: calm and didn't just swike higher here, then you ended
Speaker 13: up with a situation where growth expectations have been revised up,
Speaker 13: and really the sweet spot for your longer duration I
Speaker 13: guess your growth stocks is when you're in sluggish or
Speaker 13: weakish recessionary growth and lower interest rates. If you're coming
Speaker 13: away from that and you're getting into a broader, better
Speaker 13: growth back drop, it rotates back to value in general.
Speaker 13: The caveat is is that you'd like to have that
Speaker 13: happen in a constructive manner, where it takes that baton
Speaker 13: as you just characterize, and leads the market higher. I
Speaker 13: think that can happen as long as the bond market
Speaker 13: doesn't become disruptive. If we start to see a material
Speaker 13: spike up, say we blow through the highs and yields
Speaker 13: and we start to see that get run as people
Speaker 13: start to dump their treasury holdings, then I think we're
Speaker 13: going to be into a rocky period for that rotation
Speaker 13: might occur, but just not in such a structive manner.
Speaker 11: What do you think is the.
Speaker 8: Specific level for the ten year for instance, like around
Speaker 8: four and a half percent above that to really recalibrate
Speaker 8: tech and growth stocks.
Speaker 11: Yeah, I think that's probably a good target.
Speaker 13: I mean, I think we're going to ultimately have to
Speaker 13: go higher before we actually get into really a growth
Speaker 13: in pinging or impediment sort of area. But I think
Speaker 13: if we start to push through that, I think it
Speaker 13: was like four twenty four to twenty five was the
Speaker 13: high we start to break decisively above. So you get
Speaker 13: to four fifty, I think you're going to start to
Speaker 13: see that rotation occur like we saw in twenty twenty two.
Speaker 13: You're also going to see a lot of volatility come
Speaker 13: into the index. I wouldn't want to call it at
Speaker 13: twenty twenty two, but we make it an echo effect
Speaker 13: or a taste of that. As people get into that
Speaker 13: uncharted territory, then they start to work worry about growth
Speaker 13: again or the outlook again, but I think that rotation
Speaker 13: starts to facilitate itself as we start to punch higher.
Speaker 1: So what are you guys doing with emerging markets?
Speaker 13: Yeah, we like emerging Asia particular. I mean, most of
Speaker 13: our US is a very expensive market, so we've been
Speaker 13: rotating away from the United States, especially in a context
Speaker 13: of a broadening growth better growth BACKDOB.
Speaker 11: A lot of our bets has been in the Euro area.
Speaker 13: We have we also have an exposure and that's where
Speaker 13: the earnings power is on.
Speaker 1: And it is a euro call evaluation call.
Speaker 11: Yeah, it's a valuation call.
Speaker 13: But you've also got relative out performance in earnings right now,
Speaker 13: so your earnings are out performing the global aggregate. So
Speaker 13: you've got some tailwinds from a value and a fundamental story.
Speaker 13: We do like emerging markets, specifically Emerging Asia. We think
Speaker 13: that you know, the China reopening element should eventually help
Speaker 13: in terms of growth and earnings within the area. We
Speaker 13: also think the semiconductor cycle is getting towards a low
Speaker 13: and we'll start to see the.
Speaker 11: EBB the other way.
Speaker 13: So there's some support, which is a lot of beta
Speaker 13: to non Chinese Asian markets. So so we have a
Speaker 13: mild overweight in Emerging Asia.
Speaker 1: All right, good stuff. Philip Colemore, thanks for joining us
Speaker 1: live here in our Bloomberg Interactive Brokeerst Studio. Philip is
Speaker 1: a managing partner and a global strategist with m RB Partners.
Speaker 4: You're listening to the team.
Speaker 7: Ken's a live program Bloomberg Markets weekdays at ten am Eastern.
Speaker 4: On Bloomberg dot Com, the iHeartRadio.
Speaker 7: App and the Bloomberg Business App or listening demand wherever
Speaker 7: you get your podcast.
Speaker 1: Let's bring on our next guest, Jenniferree. She's a senior
Speaker 1: litigation analyst focused on antitrust at Bloomberg Intelligence. She joins
Speaker 1: us via zoom and she's got some work out because
Speaker 1: our good friends at Amazon, who again report earnings after
Speaker 1: the clothes, they've got a little bit of an issue
Speaker 1: with the Federal Trade Commission here, Jen, thanks so much
Speaker 1: for joining us here. Can you just summarize what the
Speaker 1: FTC is doing with Amazon right now?
Speaker 14: Sure?
Speaker 10: Thanks so much for having me. I mean, you know,
Speaker 10: this has been so anticipated.
Speaker 15: I feel like I've been writing about this coming lawsuit
Speaker 15: against Amazon by the FDC for about two years. And
Speaker 15: you know the reason, Paul, why we all knew this
Speaker 15: is because the current chair of the FDC, Lenacon, has
Speaker 15: been a vocal Amazon foe. I mean, in fact, she
Speaker 15: published a big paper where she basically described all the
Speaker 15: ways that she thinks Amazon is a monopolist and behaves
Speaker 15: in an anti competitive manner and it damages competition and
Speaker 15: it's bad for consumers. And so I think there was
Speaker 15: expectation that once she came into the FTC, she could
Speaker 15: launch an investigation. In fact, it was launched before she
Speaker 15: even started, I should say, but that investigation will culminate
Speaker 15: in a lawsuit. And now we're seeing some news that
Speaker 15: this lawsuit's coming, possibly in August. It'll be for monopolization
Speaker 15: most likely, which is, you know, one half of sort
Speaker 15: of the antitrust world.
Speaker 10: The other half is price fixing.
Speaker 15: But this is going to be about Amazon's conduct, and
Speaker 15: I do think it's going to be aggressive and wide
Speaker 15: ranging and probably seek ask a judge to try to
Speaker 15: break up parts of the company's business.
Speaker 8: Really, do we have any sort of scope of the
Speaker 8: timetable and how long this could take?
Speaker 10: You know what, It's going to take a long time.
Speaker 15: And it's funny because there will be a lot of
Speaker 15: news and honestly, then we're going to hear nothing because
Speaker 15: these take so long. I mean, the complaint will come out,
Speaker 15: it'll get started, and then what happens is the companies
Speaker 15: go through what's called the motion to dismissed process, which
Speaker 15: could take up to a year, where they try to
Speaker 15: at least get some of the complaints, some of the
Speaker 15: claims and the complaint thrown out, and then they get
Speaker 15: into the discover base, which can go a year or
Speaker 15: more before they really get into sort of the nuts
Speaker 15: and bolts of the litigation, summary, judgment, and trial. So honestly,
Speaker 15: we're looking at two years probably more could be three
Speaker 15: years before there's even a first decision, which could then
Speaker 15: be appealed.
Speaker 1: So jen are they looking at the retail side of
Speaker 1: Amazon as opposed to the web services side, or are
Speaker 1: they looking at it in its entirety. Where's really the
Speaker 1: focus here and what are some of the concerns that
Speaker 1: the FTC has.
Speaker 15: I think the main focus is going to be about
Speaker 15: the platform and the way they treat third party sellers.
Speaker 10: In the platform.
Speaker 15: They could get into cloud too, but I think this
Speaker 15: is mostly about the platform, right and about first whether
Speaker 15: they have provisions and contracts with third party sellers that
Speaker 15: prevent those third party sellers from offering their product outside
Speaker 15: of Amazon at a lower price that Amazon has to
Speaker 15: get the best price. You know, this is a pretty
Speaker 15: common It's called the most favored nations clause, and it's
Speaker 15: actually pretty commonly used in business. But in this case,
Speaker 15: because it is more expensive seller to sell on Amazon
Speaker 15: then let's say its own website or maybe on Etsy.
Speaker 15: What the consumers and some state attorney generals that have
Speaker 15: already sued about this have said is that it causes
Speaker 15: prices to go up on Amazon and on websites outside Amazon.
Speaker 10: I think that's probably going to be in their paul.
Speaker 10: And then I also.
Speaker 15: Think some allegation that the third party sellers on the
Speaker 15: site are either punished or rewarded for using other Amazon services,
Speaker 15: like their fulfillment services or like advertising on Amazon, so
Speaker 15: that they're sort of bundling or tying these products together,
Speaker 15: and that to really get good sales on the website,
Speaker 15: you're sort of forced to buy other services. I think
Speaker 15: that'll be in there too. Cloud might be as well,
Speaker 15: but it might be a little premature. I think the
Speaker 15: FTC has an open cloud industry investigation and they're looking
Speaker 15: at Amazon as part of that that could be a
Speaker 15: new complaint that comes down the road, or that could
Speaker 15: be part of this.
Speaker 8: What presidents has been said, if any, for other companies
Speaker 8: in a particular situation like this, really.
Speaker 10: Good question, because there are very few precedents.
Speaker 15: Honestly, there have been very few over the years lawsuits
Speaker 15: brought by an enforcer, the Department of Justice or the
Speaker 15: Federal Trade Commission against a company from anopolization. And the
Speaker 15: really big one, the one we kind of think of
Speaker 15: as the Bible, was a case the Department of Justice
Speaker 15: brought against Microsoft back in the nineteen nineties and it
Speaker 15: ultimately resolved. I think it's something like two thousand or
Speaker 15: two thousand and one now. Having said that, the FTC
Speaker 15: did suit Qualcom monopolization just a few years ago and
Speaker 15: they lost over the way Qualcom was licensing its chips.
Speaker 15: It wasn't as big a case as Microsoft, it didn't
Speaker 15: get quite as much press, and they weren't seeking to
Speaker 15: have Qualcom broken up, which is kind of a big deal.
Speaker 10: So there's very little.
Speaker 15: There are private suits, but there really is very little precedent,
Speaker 15: and mostly there's not a lot of precedent with plaintiffs
Speaker 15: winning these kinds of cases.
Speaker 10: They can win. They can win. It's hard.
Speaker 1: So what's the consensus here among legal experts like yourself,
Speaker 1: one is antitrusting. What's reasonable out look for the ft
Speaker 1: C here at this point?
Speaker 15: You know, Paul, I, this is how I think about
Speaker 15: this suit. I think there's a lot of risk because
Speaker 15: it won't settle. The FDC is not going to settle.
Speaker 15: That's the first thing. And secondly, they're trying to get
Speaker 15: a breakup, and you know what, you go into court
Speaker 15: asking for that.
Speaker 10: If everything falls into place, you get the right judge,
Speaker 10: maybe you get something like that.
Speaker 15: I think it would be overturned on appeal. I think
Speaker 15: some of these allegations actually might have merit, for instance,
Speaker 15: perhaps the use of the most Favored Nation clauses, or
Speaker 15: perhaps even you know, if it's true that they sort
Speaker 15: of forced sellers in order to really get sales in
Speaker 15: the platform, to also buy their fulfillment services or advertise
Speaker 15: on the site. You know that one might have some
Speaker 15: merit to in terms of any inter trust violation. But
Speaker 15: at the end of the day, when you ask what
Speaker 15: are the remedies, what are the remedies for these violations?
Speaker 15: A judge is really told from the Microsoft suit from
Speaker 15: that big precedent that you use the remedy that's the
Speaker 15: least drastic.
Speaker 10: That's going to fix the problem. And in my mind,
Speaker 10: there are a lot of remedies out.
Speaker 15: There that are behavioral in nature, that are much less
Speaker 15: drastic than structural that would fix the problem, for instance,
Speaker 15: a firewall, or for instance just saying you can't discriminate
Speaker 15: against sellers anymore based on which of their products they
Speaker 15: use or buy. And in fact, those kinds of remedies
Speaker 15: are already being used in the UK and in Europe.
Speaker 15: UK and Europe have the same complaints about Amazon, and
Speaker 15: Amazon is settling those cases and offering up exactly those
Speaker 15: kinds of remedies, and those regulators who are absolutely as
Speaker 15: aggressive as the USFTC are accepting those remedies. So when
Speaker 15: I think about this, I think about way down the road,
Speaker 15: even if the FDC wins pieces of it, they won't
Speaker 15: win all of it. The remedy is likely not to
Speaker 15: be particularly substantial or impactful to the company.
Speaker 10: That's kind of how I view the long.
Speaker 1: Term outlook pole and that's kind of I think the
Speaker 1: market music is again the stocks of fifty percent year
Speaker 1: to date.
Speaker 8: But we'll right I'm actually curious, what's the likelihood that
Speaker 8: the FTC would settle.
Speaker 15: I think it's very very low. This is not a
Speaker 15: settling FTC. They have expressed that overtly they're not interested
Speaker 15: in settling, particularly mergers, and this is a big deal.
Speaker 15: This is their case. This is the one Leona Cohn
Speaker 15: wants to make her name on. She is absolutely gunning
Speaker 15: for Amazon. I think in the same way that the
Speaker 15: Departner of Justice is kind of gunning for Google. And
Speaker 15: when you're really going all out and you really want
Speaker 15: to try to get that breakup, I don't think you're
Speaker 15: going to sell.
Speaker 1: Hey, Jen, thanks so much for bringing this to our attention.
Speaker 1: Amazon big story here. It's going to be a long
Speaker 1: term story. As they tend to be on the legal side,
Speaker 1: general stay on top of it as we will. Jenry,
Speaker 1: Senior at Litigation Analysts covering antitrust for Bloomberg Intelligence.
Speaker 7: You're listening to the tape Ken's Are Live program Bloomberg
Speaker 7: Markets weekdays at ten am Eastern on Bloomberg Radio, the
Speaker 7: tune in app, Bloomberg dot Com, and.
Speaker 4: The Bloomberg Business app.
Speaker 7: You can also listen live on Amazon Alexa from our
Speaker 7: flagship New York station, just say Alexa play Bloomberg eleven thirty.
Speaker 8: Keetha Raganathan, who's one of our great strategists here at
Speaker 8: Bloomberg Intelligence, US media analysts at the firm, joining us
Speaker 8: on Zoom to discuss that. But also first I wanted
Speaker 8: to start off with what's happening with Lionsgate buying E
Speaker 8: one and the news there so, hasbro actually sold Inner
Speaker 8: TV one film and its TV unit to lions Gate
Speaker 8: for three hundred and seventy five million dollars in cash
Speaker 8: plus the assumption of its loans. Geita walk us through
Speaker 8: this details when it comes to this deal.
Speaker 14: Yeah, absolutely so. Lionsgate, as you just pointed out, bought that.
Speaker 14: It's basically some film and TV production capabilities that they
Speaker 14: have brought from Entertainment One. And of course Entertainment One
Speaker 14: is really well known for you know, all of its
Speaker 14: preschool brands, right, whether it was Pepa Big or PJ Masks,
Speaker 14: you know, my Little Pony. But you know, none of
Speaker 14: those brands have been have been sold to Lionsgates. So
Speaker 14: this is really more you know, film and TV production
Speaker 14: especially gives them a lot of capacity to make unscripted content.
Speaker 14: And if you kind of think about lions Gate. I mean,
Speaker 14: this is one of the few independent studios that is
Speaker 14: still available kind of in Hollywood if you look at
Speaker 14: all of the other studios they're part of, you know,
Speaker 14: these bigger conglomerates, whether it's Warner or Disney or Paramount.
Speaker 14: So this is this is a company that has you know,
Speaker 14: obviously they have a great library, over seventeen thousand titles.
Speaker 14: They come up with some you know, they have some
Speaker 14: pretty good franchises, you know, whether it's The Hunger Games
Speaker 14: or The Twilight or even John Wick. So they do
Speaker 14: have some good franchises, and they could be a great
Speaker 14: add on for you know, a huge tech company, you know,
Speaker 14: maybe an Apple or an Amazon or a Google. And
Speaker 14: what they're trying to do is to really kind of
Speaker 14: find more value in their assets. So they currently have
Speaker 14: a film studio and they also have a cable network
Speaker 14: division called Stars, but they're in the process of separating
Speaker 14: those two businesses so that they can kind of unlock value.
Speaker 14: And I think what they're trying to do here is
Speaker 14: kind of really beef up their studio assets so that
Speaker 14: it could fetch them premium valuation when they decide to.
Speaker 1: Sell all right, getha, We're about to kick off some
Speaker 1: big earnings for the media companies. And actually today we
Speaker 1: had Warner Brothers Discovery. They took their guidance down a
Speaker 1: little bit, but talk to us about Warner Brothers Discovery
Speaker 1: because that's one of the leading media companies now with
Speaker 1: David Zasov as CEO, it's right up there trying to
Speaker 1: buy for some leadership position in their global media space.
Speaker 1: What do we learn today from Warner Brothers Discovery.
Speaker 14: Yeah, I'm actually a little bit surprised, Paul at the reaction.
Speaker 14: I think it's almost a little bit of an overreaction
Speaker 14: because the results that they reported were stellar. So the
Speaker 14: one metric I think that everybody is focused on these
Speaker 14: days in the media world is free cash flow and
Speaker 14: they absolutely blew it out of the water. So we
Speaker 14: were expecting about nine hundred million to about a billion
Speaker 14: and free cash flow for the second quarter. They came
Speaker 14: in at one point seven billion.
Speaker 4: Wow.
Speaker 14: Of course, they got a little bit of a boost
Speaker 14: from the writer's strike. They did say that about one
Speaker 14: hundred million boost, and they do expect to see a
Speaker 14: similar level of free cash flow again in three Q.
Speaker 14: So as far as you know, profitability metrics are concerned,
Speaker 14: you know, free cash flows concerned. I think it was
Speaker 14: absolutely stellar. Now, what they did do is they kind
Speaker 14: of walked back expectations a little bit just because of
Speaker 14: the strike. So, you know, they said that they're not
Speaker 14: completely sure whether they're going to be able to release
Speaker 14: the rest of the slate as they had planned, so
Speaker 14: there's a little bit of uncertainty. And then, of course,
Speaker 14: the tv AD market continues to be very, very choppy,
Speaker 14: so they had a thirteen percent decline in linear tv
Speaker 14: AD revenue, and it doesn't seem to be getting much
Speaker 14: better over the second half. So I think all of
Speaker 14: those factors kind of weighed a little bit. But as
Speaker 14: far as two Q results go, it was it was spectacular.
Speaker 8: Looking ahead to Disney's earnings results next Wednesday after the
Speaker 8: closing bell, if you look at its prior quarter, it's
Speaker 8: direct to consumer segment, which obviously includes that flagship Disney
Speaker 8: Plus streaming service, actually suffered a loss of more than
Speaker 8: six hundred and fifty million dollars. What are you looking
Speaker 8: ahead to for the outlook when it comes to Disney's report.
Speaker 14: Yes, and Disney, I don't think it's going to be
Speaker 14: so much about you know, the quarterly metrics as more
Speaker 14: about strategic direct You know, I don't think this this
Speaker 14: quarter is really going to do anything in terms of,
Speaker 14: you know, the numbers itself. I think it's really going
Speaker 14: to be more about what Bob Eigers says about what
Speaker 14: he's planning for ESPN, and there's been so much of
Speaker 14: speculation about what he's planning to get to streaming craftability.
Speaker 14: You brought that six hundred and fifty million loss number.
Speaker 10: Actually their streaming.
Speaker 14: Losses are expected to go up a little bit for
Speaker 14: this quarter, but that's not really the point. The point is,
Speaker 14: you know, what are they going to do with the
Speaker 14: linear TV assets? What are their plans you know for Hulu?
Speaker 14: So it's really more strategic direction that we're kind of
Speaker 14: going to be looking for when Disney reports next week.
Speaker 8: So how does the whole Bourbenheimer situation also affect their strategy?
Speaker 11: Have to ask?
Speaker 4: Yeah.
Speaker 14: So I think what it tells us is that Disney's
Speaker 14: content engine is clearly broken, right because we can talk
Speaker 14: about you know, maybe you know, box office demand kind
Speaker 14: of flagging a little bit, but it doesn't really look
Speaker 14: that way. I mean, if you look at the movies
Speaker 14: the top movies this year, whether it was a super
Speaker 14: Mario that came out from Universal, you look at you
Speaker 14: know obviously Barbie Oppenheimer, all of them doing really really well.
Speaker 14: So it really looks like the Disney franchises have gotten tired, right,
Speaker 14: whether it's Marvel, whether it's you know, Star Wars, and
Speaker 14: their animation studio has really had a string of misfires.
Speaker 14: The leading animation studio today is you know, surprisingly it
Speaker 14: is Universal. They've had they've had a string of his
Speaker 14: they're doing really really well. So definitely there has to
Speaker 14: be a huge reset in the film division, and it's
Speaker 14: going to be interesting to see what, you know, mister
Speaker 14: Traiger has to say when they report.
Speaker 1: I mean, I never thought i'd hear those words of
Speaker 1: Githa because I thought their movie strategy which is set
Speaker 1: forever just mining all the films out of Marvel and
Speaker 1: Pixar and all those types of things. But boy, that's
Speaker 1: if that's in fact the case, that's that's really big
Speaker 1: for this stock, and it really puts the pressure on
Speaker 1: Bob Iger. It's interesting has a company kind of admitted
Speaker 1: that or is that just kind of a you know,
Speaker 1: kind of a conservative take.
Speaker 14: I think they have somewhat admitted to it, which is
Speaker 14: why we're kind of you know, they kind of had
Speaker 14: a pause on some of their Star Wars properties, they're
Speaker 14: delaying some of their you know, other releases. I think definitely,
Speaker 14: you know, Barbieger is taking a hard look. But again,
Speaker 14: Paul Is you very well know you know, content production
Speaker 14: takes a while. I mean, if you want to make
Speaker 14: a good film, it's going to take three to four
Speaker 14: to five years. So this, you know, he has to
Speaker 14: be in this for the long haul, and that kind
Speaker 14: of explains why, you know, he extended his contract as well.
Speaker 14: I think it totally makes sense. But definitely, clearly something
Speaker 14: has to happen on the content front to kind of reinvigorate,
Speaker 14: re energize all of these franchises.
Speaker 1: What are the companies saying. You kind of just brought
Speaker 1: it up earlier, But these strikes, the writer strike and
Speaker 1: the actor strike, I mean, they got to get resolved
Speaker 1: like now. But I don't hear any sense of compromise
Speaker 1: from either side here.
Speaker 9: Yeah.
Speaker 14: I mean again, you know, as you had mentioned earlier,
Speaker 14: So the first thing David Zaslav said on the All
Speaker 14: today was, you know, we need to get these strikes
Speaker 14: sorted out. That's what Netflix said as well, So you know,
Speaker 14: obviously it is of paramount importance. They need to get
Speaker 14: it done. But again haven't really heard anything. Just as
Speaker 14: you said, as of right now, the only good thing
Speaker 14: that it's doing for all of these companies is it's
Speaker 14: really bomboosting. We're free cash flow numbers. But come twenty
Speaker 14: twenty four, it's going to be a blood bath, especially
Speaker 14: when you have a complete, you know pause. In terms
Speaker 14: of the content pipeline, do you think.
Speaker 8: That Barbenheimer can crush box office for a third week
Speaker 8: in a row.
Speaker 14: I absolutely think so. I mean there's going to be
Speaker 14: a few new films obviously this weekend, you know, Teenage Mutant, Ninja, Turtles,
Speaker 14: Meg Too again don't stand a chance at all by
Speaker 14: the end of this week, and Zaslav actually mentioned this
Speaker 14: on the call. They expect Barbie to cross a billion
Speaker 14: dollars at the global box office. So it's just been spectacular.
Speaker 1: What are the theater operators saying about the movie business
Speaker 1: in the future that.
Speaker 14: So they are actually so obviously this has really played
Speaker 14: well for you know, the operators. We've seen kind of
Speaker 14: box office estimates go up a little bit of course
Speaker 14: there are clouds on the horizon, Paul with those strikes,
Speaker 14: so again it's a little bit iffy still, but I
Speaker 14: think in general the sentiment seems to be good. I
Speaker 14: think what this The one thing that comes out of,
Speaker 14: you know, the Barbie success, is that people really want
Speaker 14: to go see original movies. They want to see something new,
Speaker 14: they want to see something fresh, and if you make
Speaker 14: good content, people will definitely.
Speaker 1: Go all right, Keitha, thanks so much once again for
Speaker 1: joining us. Bring us up to date on all things
Speaker 1: going on in the global media space. Githa Raganathan. She
Speaker 1: is the senior media analysty covers a lot more of
Speaker 1: the media at Bloomberg Intelligence base down there holding down
Speaker 1: the Ford in our Princeton studio.
Speaker 7: Down there, you're listening to the tape cancer Live program
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Speaker 8: Who better to talk with us about this latest earnings
Speaker 8: report than Will Lansing CEO of Fico, who's here to
Speaker 8: discuss the earnings results as well as what's happening with
Speaker 8: the outlook with the industry. Will thanks so much for
Speaker 8: joining Paul and myself walk us through with this latest
Speaker 8: earnings report.
Speaker 12: Well, it's it's been a really good quarter, it's been
Speaker 12: a good year, and frankly, it's been.
Speaker 6: A good decade for Fico.
Speaker 12: What's happened in the most recent quarter is that our
Speaker 12: software business has really taken it off, and we can
Speaker 12: talk a little bit about how the software business has
Speaker 12: evolved from the scores business that you're probably familiar with,
Speaker 12: and then our scores business is as strong as it's
Speaker 12: ever been. In the combination of these two businesses, which
Speaker 12: is really what Fyco's made of. Scores and software is
Speaker 12: driving the growth, big revenue growth, and we have new offering,
Speaker 12: the Fyco Decision Platform, and that's growing over fifty percent
Speaker 12: a year.
Speaker 6: So it's just been just a great story.
Speaker 1: So Will, I'm a stock jockey myself and I'm you know,
Speaker 1: Fico is a name we've used forever. It's been thrown around.
Speaker 1: Anytime we're going to get a loan, we think about
Speaker 1: where's our fight Gosco. What's our fight? Go Score and
Speaker 1: looking at your company went public in nineteen eighty seven,
Speaker 1: So it's just amazing hit all time high today on
Speaker 1: your stock price. But when public at nineteen eighty seven,
Speaker 1: lead manager Hambroock and Quist, who I remember quite well,
Speaker 1: they were leading investment bank on the West Coast, doing
Speaker 1: a lot of smart deals, including this one. In hindsight,
Speaker 1: so we'll talk to us. I think we're all kind
Speaker 1: of familiar with the Scores business. Talk to us about
Speaker 1: the software business. What is that business for you guys,
Speaker 1: and what are the key drivers? Well, maybe just a
Speaker 1: little bit of history to be able to frame appslware
Speaker 1: business because it evolved from our Scores business. So the
Speaker 1: company was found in nineteen fifty six by a mathematician
Speaker 1: and an engineer and their idea was pretty simple one.
Speaker 6: It was, let's use.
Speaker 12: Data to make more informed, fact based decisions. And if
Speaker 12: we can do that, you know, we can you know,
Speaker 12: we can lower the cost of making these decisions. We
Speaker 12: can make better, more precise decisions. And at the time
Speaker 12: we were really an analytics consulting firm and we would
Speaker 12: take any kind of work that came along, any kind
Speaker 12: of optimization work. Anything that required data to drive a decision,
Speaker 12: we were interested. We rapidly evolved through the fifties and
Speaker 12: sixties to doing custom projects for banks, for financial institutions
Speaker 12: who actually had big dollar value decisions to make, and
Speaker 12: so it made sense for them to invest in trying
Speaker 12: to make a better decision. And so for the first
Speaker 12: thirty forty years of fiko's existence, we were doing custom
Speaker 12: projects for different banks and also other industries, but a
Speaker 12: lot of banks. In nineteen eighty seven, we partnered with
Speaker 12: Equifax and launched the first kind of industry wide score,
Speaker 12: and the idea was, you know, we're doing these credit
Speaker 12: scores individually bank by bank, why don't we produce a
Speaker 12: score that the entire industry can use and it'll lower
Speaker 12: the costs of a evaluating credit, it will make credit
Speaker 12: more accessible to more people. And that was what kind
Speaker 12: of drove us to this idea in eighty seven and
Speaker 12: of launching an industry wide score. We rapidly followed that
Speaker 12: score with scores with Experience and TransUnion, and so suddenly
Speaker 12: we had multiple scores available to evaluate credit with and
Speaker 12: they were all built on the same kinds of data
Speaker 12: sets that the data comes from the credit bureaus, and
Speaker 12: most importantly they were fungible. It was the same oddset
Speaker 12: score ratio for a score where it was produced by
Speaker 12: Equifax or Experience or TransUnion, and so you can imagine
Speaker 12: that was.
Speaker 6: Quite popular with the lenders.
Speaker 12: They loved the idea of a low cost way to
Speaker 12: evaluate credit and to leverage any of the three credit
Speaker 12: bureaus credit files.
Speaker 6: So that was kind of the first half of.
Speaker 12: Fiko's life was with building these kinds of custom projects
Speaker 12: and then eventually building an industry wide score. Along the way,
Speaker 12: we came to a view that we should try to
Speaker 12: reduce this analytic ip that we have to software, because
Speaker 12: it's not just a credit file. You can look at
Speaker 12: a lot of different kinds of data to make a
Speaker 12: credit decision, and so we built software to do that,
Speaker 12: and the idea was we'd get returns to scale software
Speaker 12: returns as opposed to just being kind of an analytics
Speaker 12: body shot, right, And that was successful also, and we
Speaker 12: wound up becoming the pre eminent player in credit card
Speaker 12: fraud detection and a very strong player and originations and collections,
Speaker 12: recovery and customer communication virtually all the kind of key
Speaker 12: functions around undwriting and risk and a bank.
Speaker 4: This is.
Speaker 6: I'm sorry, go ahead, Jeff.
Speaker 8: I was curious because, obviously, since this is Bloomberg and
Speaker 8: we like to see what's ahead for the economy, I
Speaker 8: was curious as far as the analytics and what you're
Speaker 8: seeing when it comes to Americans and their credit and
Speaker 8: their credit scores, how that translates into either what you're
Speaker 8: viewing as far as the amount of people trying to
Speaker 8: take out loans and what that could mean for approval,
Speaker 8: as far as how that into the economy and consumer
Speaker 8: credit at this point.
Speaker 12: Well, you know, people are as interested in credit as
Speaker 12: they've ever been. Obviously, interest rates are higher and mortgage
Speaker 12: buyes are down a bit because of that, but there
Speaker 12: are very few people who are not interested in what
Speaker 12: their credit score means, and because it drives the price
Speaker 12: of credit, and it drives access to credit, and so
Speaker 12: we have a new found, i'd say, over the last
Speaker 12: ten years, sensitivity and awareness of the impact of a
Speaker 12: credit score on of your life. What we're seeing is
Speaker 12: as much appetite for credit scores as we've ever had.
Speaker 12: We're selling more scores than we ever have, and the
Speaker 12: industry relies on them very heavily.
Speaker 1: So we'll thirty seconds left here. What's the key issue
Speaker 1: that you're getting across to your shareholders these days?
Speaker 12: The number one issue, well, you know, our shareholders are
Speaker 12: well familiar with our Scores business and how strong it is,
Speaker 12: what powerful franchise it is. It's the industry standard and
Speaker 12: the cornerstone for US credit economy. Our software business, which
Speaker 12: is built on this decisioning platform, is very powerful, and
Speaker 12: that's also driving on our stock price. We've had this
Speaker 12: phenomenal run over the last decade over thirty percent cumulative
Speaker 12: return CAUFIN annual growth rate and twenty four x over
Speaker 12: the last decade in our stock price appreciation. So that's
Speaker 12: driven by recognition of the software or the software as
Speaker 12: well as listeners.
Speaker 1: All right, hey, well thanks for coming on. Really appreciate
Speaker 1: getting a few minutes of your time. Will Lansing, thanks.
Speaker 2: For listening to the Bloomberg Markets podcast. You can subscribe
Speaker 2: and listen to interviews at Apple Podcasts or whatever podcast
Speaker 2: platform you prefer. I'm Matt Miller. I'm on Twitter at
Speaker 2: Matt Miller nineteen seventy three.
Speaker 1: And I'm fall Sweeney. I'm on Twitter at pt Sweeney.
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Speaker 1: Bloomberg Radio,