Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jay Lee.
Speaker 1: We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. Let's
Speaker 1: bring Lindsay Bell. Why don't you start off, John? I
Speaker 1: mean your new show is going to be called The
Speaker 1: Real Equity, right, the Real Equity, the Real Dividend? To
Speaker 1: do every day? Do I do that weekly? It depends.
Speaker 1: I mean the amount of people that I've heard over
Speaker 1: the last couple of days saying I want to buy
Speaker 1: Europe and I'll want to buy Europe for income. I
Speaker 1: want to buy Europe for income for the dividend. What
Speaker 1: do you make of the argument, Lindsay, Well, I think
Speaker 1: it just talked it. It goes to show you how
Speaker 1: nervous people are in this environment. UM, and the valuation
Speaker 1: in Europe has come down so significantly too. You can
Speaker 1: actually see some good value there. Um And I think
Speaker 1: that you're seeing in general over the last several months,
Speaker 1: investors flocked to defensive sectors like real estate has been
Speaker 1: in the US outperforming UM most other sectors. Uh, consumer
Speaker 1: staples is another one that's been doing quite well. Um,
Speaker 1: and we're looking for healthcare to pick up some slack too.
Speaker 1: So this has been the story for me of the
Speaker 1: last couple of months. The headline numbers scream record highs,
Speaker 1: all time highs, and maybe tell a story of exuberance.
Speaker 1: Beneath the surface, it's a really defensive rally, isn't it. Utilities,
Speaker 1: consumer staples. What's the story that talked to us about it? No,
Speaker 1: you're absolutely right. While the market overall is, you know,
Speaker 1: hitting new all time highs. The SMP five up almost
Speaker 1: twenty on a year to day basis, and it's trading
Speaker 1: at a rich valuation right now, nearly eighteen times on
Speaker 1: a Ford pe basis. So not all is cheap, but
Speaker 1: it just doesn't feel exumer And underneath the surf attention
Speaker 1: to your defensive call is people are putting a premium
Speaker 1: on revenue growth in selected sectors as well. Is your
Speaker 1: defensive call because that belief in the revenue growth is
Speaker 1: going to disappear or diminish partially, you are revenue growth
Speaker 1: is expected expected to slow precipitously in some sectors. I'm
Speaker 1: buying nine or ten percent or revenue growth, and I'm
Speaker 1: paying a huge premium for that privilege, right right exactly.
Speaker 1: So financials or is one area. Healthcare is another area.
Speaker 1: Healthcare has always been done extremely well from a revenue
Speaker 1: and earnings perspective every single quarter. They don't always get
Speaker 1: the credit for it. Um But also, you know, you
Speaker 1: see investors flocking to your point to the tech sector
Speaker 1: because because they do want that growth, and that's where
Speaker 1: you're getting top line growth. Bottom line growth is expect change.
Speaker 1: What what will change the desire on a microeconomic basis
Speaker 1: the demand function for that tech revenue growth. You know,
Speaker 1: I think it's going to be difficult for it to
Speaker 1: change because tech is one sack there where investors actually
Speaker 1: feel very comfortable. Despite the defensive sectors doing well, tech
Speaker 1: is still the best performing sector on a year to date.
Speaker 1: Thank you. That's important state a believe that will continue.
Speaker 1: Yes we do. We're overweight the technology sector, will also
Speaker 1: overweight the communication services sector, which is an interesting play
Speaker 1: between that growth techy growth and defensive because you've got
Speaker 1: Google and Facebook and then A T and T and
Speaker 1: Verizon were those are the four largest companies in that sector.
Speaker 1: So you're you're bundling Verizon together with Google, not me.
Speaker 1: That's what the SMP five hundred is doing. The recalibration
Speaker 1: last year where they created the communication services sector out
Speaker 1: of the telecommunication services me neither, But what did they
Speaker 1: do with ana kind of copper? Save me? John? Did
Speaker 1: you see BSF this morning? Yes, imagined twice on air.
Speaker 1: I dazzled could be fit percent. You're so gloomy levels
Speaker 1: that blaming trade's the scapegoat for this, you know, I
Speaker 1: don't know if it's the scapegoat. I think it's reality.
Speaker 1: The trade is actually having an impact, and I think
Speaker 1: this is going to be the quarter where you start
Speaker 1: to hear corporate management teams really talk about the numerical
Speaker 1: impact UM and they're gonna take numbers and guidance down
Speaker 1: for the second half of the year. The second half
Speaker 1: of the year, you have a Q four that's expecting
Speaker 1: nearly seven percent earnings growth. That's gonna probably have to
Speaker 1: come down if trade there's not you know, a resolution
Speaker 1: at least on the tariffs in the near term, because
Speaker 1: as we discussed earlier, Tom, you're seeing the economic data
Speaker 1: in China, especially very much weakened. That's starting to bleed
Speaker 1: into Europe and at some point it will impact the
Speaker 1: U S Here, Lindsey, thank a good day to catch
Speaker 1: up with our Christopher Whalen. He has a number of
Speaker 1: books out and the one I would really highlight, folks,
Speaker 1: is his one volume Inflated, which is a fabulous walk
Speaker 1: through of the financial history of the United States of America.
Speaker 1: It is a different financial history then Germany. And he
Speaker 1: joins US now Chris Whalen on uh Deutsche Bank as well.
Speaker 1: Just just you know, two days into the saving plan,
Speaker 1: just your general thought and a likelihood that Deutsche Bank
Speaker 1: can execute this plan? I think low, tom My, guess
Speaker 1: is that what we're watching here is the final death
Speaker 1: struggle before the bank ends up being acquired or merged.
Speaker 1: What is the what is the reaction function that is
Speaker 1: key here? Is it a revenue dynamic? Is it a
Speaker 1: cost dynamic? Is it a capital raise dynamic? Capital raise
Speaker 1: is not possible at this point. The stock is trading
Speaker 1: below book value. All banks, at the end of the
Speaker 1: day live or die based on profitability, not capital. They
Speaker 1: have to have the profits to deal with problems and
Speaker 1: keep going, as the US banks illustrated a decade ago,
Speaker 1: and that's just not been the case in Europe as
Speaker 1: such as Deutsche mek Toom. The whole continent has a
Speaker 1: basic problem with bank profitability and you can see it
Speaker 1: in the stock prices. Even Santon they are, which is
Speaker 1: a reasonably healthy, broad based institution, is down thirty this year.
Speaker 1: So Chris, let's talk about that. What is it about
Speaker 1: Europe that is so difficult for a bank to make profit? Well,
Speaker 1: the role of the state in terms of financing. You have,
Speaker 1: you know Germany, for example, you have all different types
Speaker 1: of state institutions that provide most of the basic finance.
Speaker 1: You don't have an asset backs earties market as you
Speaker 1: do in the U S which was enormously important to
Speaker 1: helping us recover from the two thousand and eight crisis.
Speaker 1: It came back within months, and so you you lack
Speaker 1: these basic pieces. In Deutsche has been forced to look externally,
Speaker 1: not in Germany for opportunities. And it's so strange when
Speaker 1: we hear the CEO talk about going back to the
Speaker 1: old model. Well, that's seventy years ago when they banked
Speaker 1: small and medium sized enterprises. They have stopped doing that.
Speaker 1: They gave up their foreign markets. The French didn't do this.
Speaker 1: If you look at Associetation General, look at B and P.
Speaker 1: They still have a basic lending business to small and
Speaker 1: midsized enterprises, which gives them deposits. So Deutsche looks a
Speaker 1: lot like City. The only difference is is that it
Speaker 1: doesn't have a big consumer finance business as City does,
Speaker 1: which makes a lot of money, and that is a problem.
Speaker 1: I've often joked and and frankly I was more than
Speaker 1: half serious. I said we should just merge Deutschan City
Speaker 1: because they have capital markets, they have global payments, they
Speaker 1: have some important back office functions which I've been very
Speaker 1: concerned about. And it might make sense, but I don't
Speaker 1: think the Germans are willing to do it. Number one.
Speaker 1: Number two, you can't even talk about it in Europe.
Speaker 1: The politics are so poisonous, so you can't even mention
Speaker 1: the word bank and eight things to talk about Chris Whalen.
Speaker 1: But there's a lot of people walking out of the
Speaker 1: doors down on Wall Street today with cardboard boxes in
Speaker 1: their hands. How do you go about getting another job
Speaker 1: in New York in the mill you were in right now?
Speaker 1: I mean, is it you just assume you're going to
Speaker 1: go to a boutique firm well, that's certainly what I did. Um.
Speaker 1: I have specialized on the world of mortgage finance, which
Speaker 1: is a bit of a ghetto. Most of the public
Speaker 1: companies that are trade well below book value that you're
Speaker 1: a ghetto kind of guy. So it works well. Yeah,
Speaker 1: but it's an important sector. And this is one of
Speaker 1: the things about Deutsche Bank that most people don't know.
Speaker 1: They're very important in the world of both residential and
Speaker 1: commercial real estate. So these people have skill sets. You're saying,
Speaker 1: of the eighteen thousand people, some of them have some
Speaker 1: genuine skill sets. Yes, those that can differentiate themselves can
Speaker 1: stay in this business. But it's eat what you killed today. Tom.
Speaker 1: You know that the investment banks aren't handing up big
Speaker 1: salaries anymore, and I think for most people they're gonna
Speaker 1: have to go find something else. Do you want to
Speaker 1: make a six percent coupon? You can do that with
Speaker 1: Chris Whalen Chris Let's review from eight years ago. You're
Speaker 1: courage to say, shut up and buy the banks. But
Speaker 1: you did it through a high coupon preferred stock. How
Speaker 1: did that work out? It works great? They're boring. I
Speaker 1: own US Bank, I own Cities Trups, which we're awesome.
Speaker 1: In December they were yielding double digits and Bank America preferred,
Speaker 1: and I buy them for income. My beautiful wife has
Speaker 1: most of my money issues a private banker, and we're
Speaker 1: both in the world of investments, so it makes our
Speaker 1: lives a little simpler in terms of compliance. But I
Speaker 1: look for income. I look for idiosyncratic financials. Where are
Speaker 1: you looking right now? I mean, if the JP Morgan
Speaker 1: story is over and you know expercent look good earlier,
Speaker 1: you know, is the play been made in a high
Speaker 1: yield American banking securities for now? Yes? I think the
Speaker 1: banks are gonna have some weakness in the near terms
Speaker 1: simply because of interest rates, and that interest income is
Speaker 1: slat and it will be going down again this quarter. Um.
Speaker 1: I think there are credit concerns out there that will
Speaker 1: cause investors to lighten up on financials after loading up
Speaker 1: on them two years ago, and then you can go shopping.
Speaker 1: But to me, what is in prospect is that the
Speaker 1: FED may allow the next down cycle to chew up
Speaker 1: many of these non banks that are competing with the
Speaker 1: banks today, and then the banks are going to be
Speaker 1: a huge by tom are going to end up with monopoly.
Speaker 1: I want to go to your book Financial Stability. Where's
Speaker 1: the instability now? Is it leverage loans? It's somewhere that
Speaker 1: we haven't identified yet, but come on, but you're thinking
Speaker 1: about Chris, you did this a crawl. You're doing it
Speaker 1: at Whalen Global Advisors. Is it leverage loans? It's in bonds.
Speaker 1: It's not directly in the banks, but the banks have
Speaker 1: indirect exposure and that's what people worry about. Okay, Chris Whalen,
Speaker 1: thank you so much for the update. Greatly appreciate it.
Speaker 1: I can't say enough from a decade ago, the prescient
Speaker 1: nature of his read through of American financial history order
Speaker 1: Romini writing a nice forward to his book, Inflated. Can
Speaker 1: you imagine David's loom as an ambassador for anybody? Hsv
Speaker 1: C Global head of Currency Strategy joins us, Now do
Speaker 1: you want that job? Blew me. I'm no ambassador. Say
Speaker 1: it's strike luck. I think so. No, you're like the
Speaker 1: least diplomatic currency strategist I've ever met. David. Talk to
Speaker 1: me about the dollar. All these calls for the dollar
Speaker 1: to go weaker, weaker, It's not happening. That's your view,
Speaker 1: isn't it. Yeah? It's not happening. They need a bit
Speaker 1: of a brush to scrub the egg off their faces.
Speaker 1: Even when the market are just a couple of weeks ago,
Speaker 1: is passing in fifty by the Fed, the dollar was
Speaker 1: hardly selling off the dollars powerman. It's yet to stay.
Speaker 1: It offers high yields, it's a great currency. So many
Speaker 1: people look at rate differentials. They think the rate differentials
Speaker 1: reassert themselves. They believe that the Federal Reserve needs to
Speaker 1: cut rates, and that rates must narrow between the United
Speaker 1: States and Europe, and therefore dollar weakness. Why is that
Speaker 1: the wrong way of looking at it, David, Because at
Speaker 1: the zero bound of interest rates, the way you rate
Speaker 1: is not symmetrical. So the ECB can only copen and
Speaker 1: the Fed we could cut twenty five. So let's imagine
Speaker 1: on the same day the desire to cut and the
Speaker 1: ECB says things are going wrong in Europe, and the
Speaker 1: Fed goest things are going wrong in the U S
Speaker 1: and they're both cut on the same day. The one
Speaker 1: cuts twenty five, the other can only cut ten. Where
Speaker 1: you're saying that's positive for euro No, it's not. They
Speaker 1: can't cut more than ten. So that's the problem at
Speaker 1: the zero bound of interest rates, when your negative territory,
Speaker 1: the mount you can cut is limited, and you interest
Speaker 1: rate deferential doll that you used to see where things are.
Speaker 1: While you're flying this plane through financial markets, you look
Speaker 1: at the doll. It's broken. So forget about interest rate
Speaker 1: differentials from that perspective. But if you look at one
Speaker 1: your money where one your money can fall a long way,
Speaker 1: you're getting offer nearly two and one your money in
Speaker 1: the US, guaranteed by the U S taxplayer. It's beautiful.
Speaker 1: And what's important, folks, is this will be a podcast
Speaker 1: with Professor Bloom and what you just heard there was
Speaker 1: absolutely brilliant about the zero bound. Are we in a
Speaker 1: liquidity trap? I know it's an economist question, but a
Speaker 1: foreign exchange is a litmus paper of the system. Does
Speaker 1: it is suggest some kind of liquidity trap where monetary
Speaker 1: policy can't work. Well, we would argue it's even worse
Speaker 1: than that, in the sense at according to the US administration,
Speaker 1: now you can't use your currency as a lever and
Speaker 1: put your problem onto another country. This is now unacceptable practice.
Speaker 1: So before, when all the leavers were tied up, you
Speaker 1: might do quei and that drives your currency down, and
Speaker 1: that helps you, but now you're at risk. If you
Speaker 1: drive your currency down deliberately against the United States, you're
Speaker 1: at risk of a backlash. You know, the US administration
Speaker 1: is not prepared to have the dollar as your your
Speaker 1: your puppet, and this is changing the way we didn't
Speaker 1: foreign exchange and it's changing the world. So that extra
Speaker 1: lever that you thought you might have by manipulating your currency,
Speaker 1: this has all gone also out of the toolbox, and
Speaker 1: that puts us into a much narrower paradigm of what
Speaker 1: you can get away with it. Davis put a little
Speaker 1: bit more meat on that phrase backlash. What does a
Speaker 1: backlash actually mean? How does that play out in practice?
Speaker 1: What do they do well? We've seen that in terms
Speaker 1: of threats of tariffs, in terms of trade wars, in
Speaker 1: terms of you know, people countries getting upset with you
Speaker 1: and actually doing something about it. So when Albey came
Speaker 1: in in Japan, that did Kwie and Dollyan went from
Speaker 1: eight twenty five, and this created some inflation in Japan,
Speaker 1: but at someone else's cost. You can't do that anymore.
Speaker 1: The US administration doesn't want you another country to manipulate
Speaker 1: the dollar. At your own gain for someone else's expense,
Speaker 1: and they say, we've had enough of this, and you
Speaker 1: know that is the part of the backlash. And with
Speaker 1: the unit, we've seen threats of tariffs, so you can't
Speaker 1: just use the currency as a tool willy nilly anymore
Speaker 1: without thinking there may be some repercussions set up the
Speaker 1: range of some of these major pairs against your dollars
Speaker 1: stability and even dollars strength. What does euro drift to?
Speaker 1: What does Yan drift to? Well, we've got Euro drifting
Speaker 1: down to one ten. We've had it the whole year,
Speaker 1: you know, to break one ten, something new fundamental and
Speaker 1: different tests happened and I can't see it at the moment, Tom,
Speaker 1: I think you know, both economies struggling a little bit
Speaker 1: dead on the devilsh side, DCB on the dovish side.
Speaker 1: So you know, drifting down of the drifting down. You know,
Speaker 1: these are the currencies, the dollar, you know, having a
Speaker 1: nice little drift, a small little current, you know, which
Speaker 1: won't carry you away play nicely in it. If you're
Speaker 1: one of those tubes you get carried on the lazy river.
Speaker 1: You know, tell us about sterling farall, you know, we're
Speaker 1: trying to base season tickets to the charts me and
Speaker 1: generals Sherman, Can I translate for you called Tottenham Hospers
Speaker 1: the charts? Yeah, you know, you know, I mean, is
Speaker 1: that the rate? Yeah, I mean I'm gonna enjoin on
Speaker 1: one nineteen. You're going to be eating the beautiful prawn
Speaker 1: sandwiches as well, coming with your beautiful dollars. So um, yeah,
Speaker 1: look at Sterling's under pressure. People are worried about the
Speaker 1: no Brexit scenario. There's a lot going in basically on
Speaker 1: Parliament at the moment. We've got a leadership contest. You know,
Speaker 1: we change the data of Brexit from basically April Fools
Speaker 1: to Halloween and that tells you something about it. So basically,
Speaker 1: you know, Sterling is under pressure all the time. The
Speaker 1: only way that student is gonna really show a massive
Speaker 1: bird is if we get some kind of deal, and
Speaker 1: that's what we're all hoping for and that's what we
Speaker 1: think is very still possible in the HSBC world. And
Speaker 1: just there's the prawn sandwich brigade. Yeah. Well he just
Speaker 1: said to me he was making little posh seats at
Speaker 1: the point of Tottenham and you sit in the posh
Speaker 1: seat to go buy yourself of beautiful, proud and sandwich
Speaker 1: Sirenlex Ferguson of Manchester United. When he used to complain
Speaker 1: about the atmosphere at Old Traffic, he would say, the
Speaker 1: fans are sitting there eating their prawn sandwiches and aren't
Speaker 1: making any noise. That's David Bloom is not a football
Speaker 1: fan anyway. He likes m m A. He likes the
Speaker 1: mixed martial arts, he likes the UFC, that kind of stuff.
Speaker 1: I have no idea. And the sports called rugby and cricket.
Speaker 1: I'll show you pictures one day. They played mostly in
Speaker 1: the old Empire. David. We're going to before you cause anybo.
Speaker 1: Thank you so m HSV strategy Tom Psly joining us
Speaker 1: now our BC Capital Markets chief US economist Thomas. We
Speaker 1: look ahead to Chairman Pou What are you looking for?
Speaker 1: You know, it's this is the outstanding question at this point,
Speaker 1: and I'll tell you what I think he should say.
Speaker 1: I think he should say that things look really good
Speaker 1: in the United States. We couldn't be happier with the
Speaker 1: piece of job growth. We uh think that the economy
Speaker 1: does not need cuts right now. Um, this is what
Speaker 1: we think you should say. Um, it's, you know, given
Speaker 1: what he has been sort of hinting at and when
Speaker 1: others have been hinting at, I don't know if that
Speaker 1: is what he is going to say, but um, that's
Speaker 1: what he's supposed to be saying right now. This economy
Speaker 1: does not need job cuts as job cuts you see,
Speaker 1: just economy does not need uh pit funds eating. Um,
Speaker 1: this economy needs I'm gonna defend that is going to
Speaker 1: show support. Um. But at this juncture, we don't we
Speaker 1: don't need cuts. What is the price of waiting from
Speaker 1: July thirty one to September eighteen? I would suggest it's
Speaker 1: next to nothing. It is absolutely next to nothing. And
Speaker 1: again but it even begs the question Tom, it's you know, well,
Speaker 1: do we need cuts in September? Well, I don't know,
Speaker 1: but you know, we'll see the data. And there's a
Speaker 1: whole group of people we talked to Tom who are
Speaker 1: looking for a rate cut right now. But the answer is,
Speaker 1: if you just wait six weeks, aren't we all a
Speaker 1: lot smarter? I think that's absolutely true, and and and
Speaker 1: I think that's a completely fair way of of of
Speaker 1: thinking about And what I would say is, if you
Speaker 1: do want to wait six more weeks. I think in
Speaker 1: six four weeks you're gonna see exactly what you see
Speaker 1: right now, which is, hey, a backdrop that actually looks
Speaker 1: pretty decent and does not need any cuts at this point,
Speaker 1: Tommy through an argument that they've already talked themselves into
Speaker 1: an interest rate cut, and then we have loose financial conditions,
Speaker 1: largely because the Federals have got us here, and now
Speaker 1: they're in a position where if they don't cut, they're
Speaker 1: going to face a little bit of a market santrum.
Speaker 1: What are your thoughts on that situation? So, I think
Speaker 1: what the market has to recognize is what, you know,
Speaker 1: why is it tantruming right? Right? You know what what
Speaker 1: is actually going on in the economic backdrop? You know
Speaker 1: it's it's funny the Feds, f R b U S right,
Speaker 1: this is there, the big macro model, right furboce um.
Speaker 1: You know we and let me be very clear, we
Speaker 1: don't happen to love that model. Um. It's uh and
Speaker 1: and all models suffer from various limitations, not the least
Speaker 1: of which is it's not the real world. Right, You're
Speaker 1: you're creating this sort of this perfect environment um in
Speaker 1: in a model um sort of you know, spit out
Speaker 1: some output. But here, but let's just walk through, uh
Speaker 1: this idea for a second. If if you were to
Speaker 1: put a fifty basis point cut into the FEDS um model. Um, again,
Speaker 1: all else equal, a fifty basis point cut is only
Speaker 1: worth a couple of tends to growth. I mean that
Speaker 1: that's actually what you would be adding to growth at
Speaker 1: this point. So again, that sort of naturally begs a question,
Speaker 1: you know, why are we cutting rates? Cutting rates? Begin
Speaker 1: to what to get to? One ad from a growth perspective.
Speaker 1: They have a meeting. The thirty one job's day is
Speaker 1: August two, two days later, forty eight hours later. Do
Speaker 1: they know the numbers when they have their meeting? For
Speaker 1: which for does the Fed? Does the Federal at twelve
Speaker 1: noon on January thirty, July thirty one? What the job
Speaker 1: numbers are going to be at eight thirty on August two? No? No, no,
Speaker 1: come on, I mean, look, I that number comes out
Speaker 1: a few days later. Most of that report is compiled
Speaker 1: at that point. UM. So sure, I mean, you know,
Speaker 1: I think Tom, you're you're raising the right question. It's Oh,
Speaker 1: if they cut we're gonna get a really bad jobs number.
Speaker 1: I completely look again, I hate to be the practical
Speaker 1: one in the in the room on this. It's fun
Speaker 1: to be impractical. But but but let's let's just be clear.
Speaker 1: The FED is already looking for much slower job the
Speaker 1: whet anyone else's forecasting. Like, if you look at their forecast,
Speaker 1: they actually had the unemployment rate rising over the course
Speaker 1: of the next couple of years, what's their non farm
Speaker 1: payroll equipment they are They run into a hundred thousands,
Speaker 1: if that's exactly my point. So if you actually have
Speaker 1: an increase in the unemployment rate over the coming couple
Speaker 1: of years, then you necessarily write the math. The math
Speaker 1: behind it necessarily says that you're looking for below brick
Speaker 1: even from a job growth perspective, and brick even is,
Speaker 1: you know, sort of some one thousand right now. So
Speaker 1: the FED already has we got through Tom Perselli without
Speaker 1: talking about wage growth. Tom Priselli, thank you so much,
Speaker 1: OURBC Capital Markets A nice briefing there. Paul Sweeney is
Speaker 1: out at the RAM. The RAM has been there since
Speaker 1: ninety seven, sun Belly, Idaho. And you know it's like
Speaker 1: a manly breakfast. It's like a eggs and steak and
Speaker 1: the whole thing in a bud. Yeah, chaser for breakfast
Speaker 1: as well, and uh, he joins us right now on
Speaker 1: the edge of catch them in Idaho PASSWHENI why are
Speaker 1: you in the gorgiosity of Idaho? This morning? I am
Speaker 1: at the Allen and Company conference. Allen Company is a
Speaker 1: a boutique investment bank really focuses on the media and
Speaker 1: technology sectors, and they throw this conference every year in
Speaker 1: Sun Valley and it just brings together Tom and Li says,
Speaker 1: some of the you know, the leading players in media, entertainment, technology, telecommunications,
Speaker 1: and they all come together here in Sun Valley to
Speaker 1: kind of get a sense of the future trends of
Speaker 1: their businesses. But really they come together, uh, to talk
Speaker 1: to each other. And what happens many years is a
Speaker 1: lot of M and A transactions are hatched, Okay Valley,
Speaker 1: and those are things we read about during the year.
Speaker 1: What's the level of sweat out there this year? I mean,
Speaker 1: I know scale is in and all that, but what's
Speaker 1: the level of sweat you've discerned already? I think it's
Speaker 1: pretty high at here despite the low humidity. But I
Speaker 1: think it's pretty high because I think a lot of
Speaker 1: these media companies that have historically been the stalwarts of
Speaker 1: this conference look around and they say, we're not just
Speaker 1: in the media business. We're in the global technology business.
Speaker 1: And you know, we're looking against uh, we're competing against
Speaker 1: Facebook and Google and Apple and Amazon um. And when
Speaker 1: you think about it in those terms, a lot of
Speaker 1: the traditional media companies say we need to either get
Speaker 1: bigger or we need to get out. And we've seen
Speaker 1: over the last couple of years some big, big media
Speaker 1: companies already decided to kind of get out. Time Warner
Speaker 1: sold the A T and t Rupert Murdoch sold most
Speaker 1: of his company to the Walt Disney Company. So I
Speaker 1: think that trend is still very much play here. Well,
Speaker 1: one thing that I'm wondering, Paul, is, first of all,
Speaker 1: is how you get the gig to go out there,
Speaker 1: because right now I'm looking at the weather and it
Speaker 1: looks pretty amazing. They're not. There's not much squeaz forty
Speaker 1: four degrees right exactly beautiful. But Paul, I I do
Speaker 1: want to know from you, Uh. Scale can mean many things,
Speaker 1: and we've seen from some of the big industrial companies
Speaker 1: they've been starting to break themselves up at this point
Speaker 1: because scale has been ineffective. What is the crucial scale
Speaker 1: to get in media right now? Is it a content game?
Speaker 1: Is it a you know, a bandwidth game? What is it?
Speaker 1: It's a couple of things. Number one. I think it's
Speaker 1: it's a content game. I think if you just think
Speaker 1: about the uh the TV business, UM, the big disruptor
Speaker 1: over the last five or six years has been streaming
Speaker 1: of content. And of course when you think about streaming,
Speaker 1: you think about Netflix and and Bob Iger the Walt
Speaker 1: Disney company, that is his number one focus is a
Speaker 1: Netflix and the ability to have a direct to consumer
Speaker 1: relationship so that you can stream your content director to
Speaker 1: consumer with with without a middleman like a Comcast or
Speaker 1: a direct TV uh. And so we've seen the Walt
Speaker 1: Disney company, you know, basically double the size of its
Speaker 1: company about buying Fox just to get more content so
Speaker 1: that they can create direct to consumer relationships much like
Speaker 1: Netflix and and on a global scale. What are we
Speaker 1: learning about use of debt If we've had transactions where
Speaker 1: we've said the debts up to our eyeballs, we've got
Speaker 1: a migrate out regional sports networks just to salvage the
Speaker 1: debt picture, is this debt affected or can they actually
Speaker 1: do it by you know other other m and a ways.
Speaker 1: The media industry um really you know, enjoys a debt
Speaker 1: because these are big pre cash flow businesses. And so
Speaker 1: the credit markets, whether you're the JP Morgan banks or
Speaker 1: the high yield market, Uh, they love to lend to
Speaker 1: the media communications sector. So you take a look at
Speaker 1: a T and T is the biggest borrower outside of
Speaker 1: the financial sector, um and now, and that's just fine.
Speaker 1: Comcast is also a big borrow. So these media and
Speaker 1: tele companies they enjoy the ability to use their stock.
Speaker 1: Also they can go to the debt markets and only
Speaker 1: level up these businesses. Bloomberg says this morning when Paul
Speaker 1: Sweeney and Sun Valley, Idaho, Lisa brand wants and Tom
Speaker 1: Keane not there. This part of Bloomberg Surveillance brought you
Speaker 1: by the Needery Breakfast and Sun Valley including are you
Speaker 1: ready for this? Lisa Eggs black Stone. You think Steve
Speaker 1: Schwartzman was about eggs and black Stone poached eggs with
Speaker 1: a grilled season tomato. Thomas is English muffin top a
Speaker 1: chop bacon, home made. I mean Schwartzman's. Schwartzman's got his
Speaker 1: own eggs Benedict out there, Are you trying to make
Speaker 1: me like you're trying to create strife between me and
Speaker 1: my co hosts? We say good morning, we say good
Speaker 1: I'm glad Tom that you brought up debt, because that
Speaker 1: really is my question. Is there an eagerness to get
Speaker 1: deals done now? All debt markets are super hot, while
Speaker 1: there's less demand than there is there's less supply than
Speaker 1: there is demand right now to buy risky assets. I
Speaker 1: think so absolutely. I think the UH A lot of
Speaker 1: the companies recognize that they're really in a in a
Speaker 1: fantastic position. You're given the debt markets um and their stocks.
Speaker 1: Many of their stocks are trading a very high valuation.
Speaker 1: So when you think about some of these acquisitions, whether
Speaker 1: it's AT and T or Disney making acquisitions, a lot
Speaker 1: of these companies feel like they're in a very strong position.
Speaker 1: Asked the private equity companies, if you know you mentioned
Speaker 1: you know the folks of Blackstone and KKR. We've seen
Speaker 1: Apollo out buying TV assets over the last year, and
Speaker 1: they're doing all with debt, levering up the who's going
Speaker 1: to advantage who's got the big who's got the biggest
Speaker 1: pot of money out there? Is it private equity? Is
Speaker 1: it Jeff Bezos? I mean, who's stupid rich out of
Speaker 1: Ellen company? Right now? I think some of the technology companies,
Speaker 1: you know, we we have, you know, there's stock prices
Speaker 1: are so high, they're sitting on so much cash. The
Speaker 1: bar and rates are so low. You know, every year
Speaker 1: we come out here to the Sun Valley Conference and
Speaker 1: the question is when will we see a big technology company,
Speaker 1: whether it's a Facebook or Google or an Amazon, really
Speaker 1: step up and make a you know, a huge acquisition
Speaker 1: in the content space to kind of round out their portfolio.
Speaker 1: We haven't seen it, but that's kind of what the
Speaker 1: bankers here, I'm sure are, you know, pitching those deals
Speaker 1: left and right. All right, So Paul, please look into
Speaker 1: your Christal ball. Which mergers or acquisitions should we be
Speaker 1: expecting to hear about. I think some of the things
Speaker 1: will see probably in the next year. Um, you know
Speaker 1: kind of what when you're talking to a lot of
Speaker 1: investment bankers is they say a lot of the smaller
Speaker 1: companies like MGM, lions Gate, even Sony Pictures, Uh, all
Speaker 1: those are content players. Um. You look at Univision. Univision
Speaker 1: is the largest Spanish language media company in the US.
Speaker 1: They've actually kind of got hired some bankers and looking
Speaker 1: for a deal and maybe even Discovery Communications. They've bought
Speaker 1: Scripts Networks. They've gotten very big, but are they big enough?
Speaker 1: Maybe not? Major shout out in May of this year,
Speaker 1: Mr Iger and Disney. The peak is exactly a four
Speaker 1: standard deviation leap in Disney shares and they put it
Speaker 1: on two months in a row from there. Paul Sweeney
Speaker 1: out of Allen Company, Sun Valley, Idaho. Thanks for listening
Speaker 1: to the Bloomberg Surveillance podcast. Subscribe and listen to interviews
Speaker 1: on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer.
Speaker 1: I'm on Twitter at Tom Keane before the podcast. You
Speaker 1: can always catch us worldwide. I'm Bloomberg Radio.