WEBVTT - Such Strong GDP Isn’t Sustainable: KPMG’s Hunter 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg p m L Podcast. I'm pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Bramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg p m L 0:00:20.840 --> 0:00:30.880 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. We 0:00:30.960 --> 0:00:35.280 are broadcasting live from the Bloomberg Interactive Broker's studios. We 0:00:35.360 --> 0:00:39.600 did get the third quarter GDP report out earlier this morning. 0:00:39.600 --> 0:00:42.040 It came in ahead of expectations three point five percent. 0:00:42.520 --> 0:00:46.440 And interesting, that's an annualize right. Interestingly enough, the director 0:00:46.479 --> 0:00:49.159 of the U S Office of Management and Budget mcmulvaney 0:00:49.280 --> 0:00:52.760 came on Bloomberg Television. He said he expects this pace 0:00:52.800 --> 0:00:56.800 of growth to be sustainable. That is a key question here, 0:00:56.840 --> 0:00:59.080 and we are going to ask it of Constance Hunter, 0:00:59.160 --> 0:01:01.680 Chief Economistic APMG, who joins us here in our eleven 0:01:01.680 --> 0:01:05.840 three studios. Constants, do you think that three point is 0:01:05.880 --> 0:01:10.120 a sustainable annual rate of growth for US economy in 0:01:10.160 --> 0:01:12.840 the years ahead? I do not, and let me tell 0:01:12.880 --> 0:01:15.000 you why. There's a couple of reasons. First, if you 0:01:15.000 --> 0:01:18.160 look at potential GDP, which is the growth rate of 0:01:18.200 --> 0:01:21.600 the sum of the working age population plus the growth 0:01:21.720 --> 0:01:24.399 rate of productivity. That puts us it about a one 0:01:24.440 --> 0:01:27.679 point eight percent GDP growth. Now, we could have a 0:01:27.680 --> 0:01:32.039 productivity surge, right, could happen, But productivity is very difficult 0:01:32.080 --> 0:01:36.400 to predict um and so far we've had very lackluster 0:01:36.600 --> 0:01:40.200 capital deepening that is the amount of capital investment per 0:01:40.319 --> 0:01:45.480 labor hour during this expansion. It really lacks previous expansions. 0:01:45.560 --> 0:01:49.240 And so that would suggest that a productivity surge, while possible, 0:01:49.760 --> 0:01:52.800 is not something I would bank on. Now you put together, 0:01:53.280 --> 0:01:55.800 you and the folks at KPMG. You put together this 0:01:55.920 --> 0:01:59.640 great chart where you break down all of the components 0:01:59.680 --> 0:02:02.440 of g d P, and I want to go through 0:02:02.480 --> 0:02:04.280 some of them if you don't mind talk a little 0:02:04.280 --> 0:02:08.280 bit about residential investment. Yes, so we actually looked at 0:02:08.360 --> 0:02:11.720 just to sort of analyze this question. Okayen does it 0:02:11.760 --> 0:02:15.000 put it on a on a different trajectory than the 0:02:15.080 --> 0:02:17.920 previous years and the expansion. So we have took the 0:02:17.960 --> 0:02:20.320 first half and annualized the pace of growth. And now 0:02:20.400 --> 0:02:22.840 we've taken the first three quarters of the year and 0:02:22.880 --> 0:02:25.720 annualize this pace of growth. And it looks pretty good. 0:02:25.720 --> 0:02:29.000 Consumptions a little stronger, we have business investment inching up 0:02:29.040 --> 0:02:31.920 a little bit more. Uh. But the thing that's really 0:02:31.919 --> 0:02:36.280 concerning is that residential fixed investment is down compared to 0:02:36.840 --> 0:02:40.440 UM the full year residential fixed investment, so that's housing 0:02:40.480 --> 0:02:44.120 investment is down, and that is a big concern because 0:02:44.120 --> 0:02:47.720 housing is a leading indicator and if you recall it, 0:02:47.960 --> 0:02:51.160 prices started to detern for housing in two thousand and six, 0:02:51.520 --> 0:02:54.760 when everybody was still popping their champagne and saying raw 0:02:54.919 --> 0:02:57.400 raw c D O S. Well. But I want to 0:02:57.400 --> 0:03:00.200 pick up exactly on this, right, this decline of the 0:03:00.200 --> 0:03:02.200 first time since late to thousan date in early two 0:03:02.240 --> 0:03:04.440 thousand nine, right, So this is uh, this is an 0:03:04.480 --> 0:03:09.200 unusual development, this decline in residential investments. And I'm just wondering, 0:03:10.080 --> 0:03:13.720 given the fact that homeownership has changed and that more 0:03:13.760 --> 0:03:16.920 people rent, fewer people own and have their sort of 0:03:16.960 --> 0:03:20.560 net worth tied up with their residence, could it be 0:03:20.639 --> 0:03:24.399 different this time? Well, it could be different in terms 0:03:24.440 --> 0:03:27.760 of the impact on households. And certainly, UM there have 0:03:27.880 --> 0:03:31.440 been tighter lending standards, so I wouldn't expect if we 0:03:31.480 --> 0:03:35.400 even had I mean and remember, house prices declining is 0:03:35.440 --> 0:03:38.920 actually not the norm. What happens when housing gets softer 0:03:39.000 --> 0:03:41.920 as you see less investment there, you you see you 0:03:41.960 --> 0:03:46.000 don't see the multiplier effects of an expanding um expanding 0:03:46.040 --> 0:03:48.320 housing markets. You don't see another housing crash coming. Is 0:03:48.320 --> 0:03:51.480 that we basically housing crisis? But but I think it's 0:03:51.480 --> 0:03:54.960 a warning sign in terms of the overall strength of GDP. 0:03:55.120 --> 0:03:58.560 And there are some really important structural reasons why housing 0:03:58.560 --> 0:04:00.960 has an advance. I mean there that is one area 0:04:01.000 --> 0:04:04.400 where there are severe construction shortages. Another area where there's 0:04:04.440 --> 0:04:09.560 shortages is in transportation, so getting the materials to the builders. Um. 0:04:09.720 --> 0:04:12.560 And then there's of course increase in prices for building materials, 0:04:12.600 --> 0:04:15.400 so you've an increasing cost of labor and increasing cost 0:04:15.440 --> 0:04:18.440 of materials and a shortage of labor, so people can't 0:04:18.520 --> 0:04:21.080 do projects that they want to do. So this is 0:04:21.120 --> 0:04:26.040 a classic macroeconomic business cycle situation. Right, This is exactly 0:04:26.080 --> 0:04:29.400 what causes slowdowns of the business cycle, is you have 0:04:29.480 --> 0:04:33.400 supply constraints that prevent expansion and then in fact bring 0:04:33.440 --> 0:04:39.640 about declines. Tell us about business investment right now? Yes, so, um, 0:04:39.680 --> 0:04:42.840 we saw this quota decline in structures. Well, let me 0:04:42.880 --> 0:04:46.880 actually go out to thirty feet first, So business investment 0:04:46.880 --> 0:04:50.440 has been on an upswing for about six quarters seven quarters, 0:04:50.520 --> 0:04:53.320 and uh when we started this year, of course, we 0:04:53.360 --> 0:04:56.440 had the tax law change, and we saw a surge 0:04:56.440 --> 0:04:58.480 in business investment in the first half of the year. 0:04:58.520 --> 0:05:01.039 So moving up around ten percent is five point three 0:05:01.040 --> 0:05:04.480 percent for all. Now it's a little bit more moderated, 0:05:04.520 --> 0:05:07.160 Right's up six point three percent on an annualized basis, 0:05:07.200 --> 0:05:10.039 So a faster pace, but a faster pace that you 0:05:10.080 --> 0:05:12.560 would expect. This had been accelerating, and I say you 0:05:12.600 --> 0:05:16.440 would expect absent any tax law change. So this is 0:05:16.480 --> 0:05:18.560 going to be debated for a long time. Has this 0:05:19.160 --> 0:05:21.599 increase in business investment this year been as a result 0:05:21.640 --> 0:05:23.839 of the tax wealth change or a result of the 0:05:23.880 --> 0:05:27.200 trend that was already under way at the end of 0:05:28.120 --> 0:05:32.000 into So given the fact that we actually saw not 0:05:32.240 --> 0:05:37.120 a decrease but a slowdown in business expenditures investments in 0:05:37.440 --> 0:05:41.880 the third quarter, does that give you confidence in one 0:05:41.920 --> 0:05:44.400 view or another in terms of the tax cuts playing 0:05:44.400 --> 0:05:47.919 a role or not? No, Um, I mean it, and 0:05:47.960 --> 0:05:50.560 it doesn't even make me overly concerned. In general, we 0:05:50.600 --> 0:05:54.080 sell structures decline, but we saw um and we saw 0:05:54.120 --> 0:05:59.400 a slower pace of growth in intellectual property and equipment, 0:05:59.760 --> 0:06:02.880 but those numbers fluctuating in quarter to quarter. It's also 0:06:02.920 --> 0:06:05.360 the first reading, so I I'm not going to get 0:06:05.360 --> 0:06:07.800 overly concerned about that. But if you if you think 0:06:07.800 --> 0:06:10.440 about how much of this was tax driven, I think 0:06:10.440 --> 0:06:13.039 it's too soon to see those results. If you look 0:06:13.080 --> 0:06:17.960 at surveys of business leaders and ceo s, they say 0:06:18.440 --> 0:06:20.680 of them say they weren't planning to change their investment 0:06:20.720 --> 0:06:23.279 plans based on the tax I'll change. And as Pam 0:06:23.279 --> 0:06:24.839 and I were talking about before the show, right that 0:06:25.120 --> 0:06:27.839 this is something that business leaders take a long time 0:06:27.839 --> 0:06:30.320 to plan. It's not something you really can do on 0:06:30.360 --> 0:06:33.240 the fly. There's maybe a few investments, but basically this 0:06:33.279 --> 0:06:35.520 is a long term trend. Thank you very much for 0:06:35.520 --> 0:06:38.479 coming in and spending time with us. Constance Hunter, Chief 0:06:38.480 --> 0:06:43.360 Economist KPMG, and of course you can follow Constance Hunter 0:06:43.600 --> 0:06:47.640 on Twitter at Constance Hunter. We're looking at a sell 0:06:47.680 --> 0:06:50.599 off in stocks, the SMP five right now down one 0:06:50.720 --> 0:06:54.039 and three quarters of a percent. You're listening to Bloomberg 0:06:54.080 --> 0:07:07.680 Markets driving the action today and markets very much is 0:07:07.720 --> 0:07:10.840 the Amazon and Alphabet reports that came out overnight or 0:07:10.840 --> 0:07:15.080 after the bell yesterday basically giving a very negative tone 0:07:15.360 --> 0:07:19.960 even though the uh the actual earnings were okay. Joining 0:07:20.000 --> 0:07:22.760 us now, David Garretty, chief market strategist at laid Law 0:07:22.840 --> 0:07:25.480 and Company in Brooklyn, David, thank you so much for 0:07:25.560 --> 0:07:28.480 being here. I wanted just to ask you. Can you 0:07:28.520 --> 0:07:31.680 start by saying what was your impression of the earnings? 0:07:31.760 --> 0:07:34.800 Do you think that markets are misinterpreting them? The earnings 0:07:34.800 --> 0:07:38.000 themselves are fairly solid. However, if one looked at Amazon, 0:07:38.080 --> 0:07:41.000 there was a deceleration in terms of growth quarter to quarter, 0:07:41.760 --> 0:07:44.880 also Google showing some challenges in terms of their top 0:07:44.920 --> 0:07:48.200 line revenue growth. Obviously, the bigger thing here is the 0:07:48.240 --> 0:07:52.600 fact that even though interest rates have been going up, 0:07:52.840 --> 0:07:54.760 even though the market has been selling off, we hadn't 0:07:54.800 --> 0:07:58.480 seen analysts bring in their own expectations. And anytime there 0:07:58.560 --> 0:08:02.800 is a shortfall relative expectations, there has to be a reset. Obviously, 0:08:02.840 --> 0:08:06.000 analysts need to start bringing their numbers down. But as 0:08:06.000 --> 0:08:08.920 we also looked inside the results for both of these companies, 0:08:08.960 --> 0:08:11.720 Alphabet as well as Amazon, we saw that they're raising 0:08:11.720 --> 0:08:13.800 their spending levels, which is going to have an impact 0:08:13.800 --> 0:08:16.320 on near term profit margins, which is going to further 0:08:16.920 --> 0:08:21.760 serve to further reduce earnings expectations. So, from that standpoint, 0:08:21.760 --> 0:08:25.520 anytime there's a shortfall versus expectations, yes, one could say 0:08:25.760 --> 0:08:27.960 it's the fault of the street, but the fact of 0:08:27.960 --> 0:08:31.520 the matter is that these companies shares trade within something 0:08:31.520 --> 0:08:35.559 called the stock market that's populated by expectations, and if 0:08:35.559 --> 0:08:38.400 the company's performance is out of line with expectations, there 0:08:38.440 --> 0:08:41.600 has to be a reset on both sides. David Garritty, 0:08:41.640 --> 0:08:44.679 if you love the shares of Amazon at the end 0:08:44.760 --> 0:08:49.720 of September, you have lost about seventeen and a half percent. 0:08:50.800 --> 0:08:53.120 Is it time to buy Amazon? If you love it 0:08:53.640 --> 0:08:57.680 at two thousand and six dollars a share? Do you 0:08:57.760 --> 0:09:02.040 love it at six and thirty three share? Certainly, we're 0:09:02.040 --> 0:09:04.560 at a point in time during the year, going into 0:09:04.559 --> 0:09:07.280 the fourth quarter, with the year end holiday shopping season 0:09:07.280 --> 0:09:10.000 in front of us that historically has been the seasonally 0:09:10.040 --> 0:09:13.440 strongest quarter in terms of earnings and results for Amazon, 0:09:13.640 --> 0:09:17.080 going back historically, if one wanted to trade what one's 0:09:17.080 --> 0:09:20.960 own expectations might be as what that fourth quarter is, fine, 0:09:21.160 --> 0:09:23.040 this may not be a bad point in time to 0:09:23.080 --> 0:09:26.839 consider a short term trade. However, at the same time, 0:09:26.920 --> 0:09:30.200 offset that against the fact that we had a very solid, 0:09:30.240 --> 0:09:33.280 better than expected GDP growth print for the third quarter 0:09:33.320 --> 0:09:35.640 at three and a half percent, which obviously is going 0:09:35.679 --> 0:09:38.000 to leave the Federal Reserve in a position of raising 0:09:38.040 --> 0:09:42.280 interest rates going further into two thousand nineteen. Higher interest 0:09:42.360 --> 0:09:48.160 rates always mean greater valuation challenges for high pe valuation 0:09:48.280 --> 0:09:50.760 names such as an Amazon, especially as they don't pay 0:09:50.760 --> 0:09:52.960 a dividend and give you a total return. So if 0:09:52.960 --> 0:09:54.840 you want to have a trade around the fourth quarter results, 0:09:54.880 --> 0:09:56.720 but it's just a trade, it's not a long term 0:09:56.760 --> 0:09:59.079 buy in your opinion, I think until such time as 0:09:59.080 --> 0:10:02.679 we're out of the woods terms of the FED tightening cycle, um, 0:10:02.800 --> 0:10:04.800 these names are going to be a little bit challenged. 0:10:04.880 --> 0:10:10.080 You're certainly seeing reallocation by investors away from tech names 0:10:10.400 --> 0:10:14.679 towards more lower volatility, higher earning certainty names such as 0:10:14.720 --> 0:10:17.800 Staples in terms of its sector over the course of October. 0:10:17.920 --> 0:10:19.880 I like how you talked about spending, and I think 0:10:19.880 --> 0:10:22.719 this is important because not all spending is equal. What 0:10:22.880 --> 0:10:25.040 are they spending the money on and is it something 0:10:25.120 --> 0:10:28.600 that could give them growth leader on and keep them 0:10:28.920 --> 0:10:32.720 as being growth stocks. Certainly there continues to be investment 0:10:32.760 --> 0:10:35.000 on their part in terms of high ticket items such 0:10:35.000 --> 0:10:37.680 as data centers, which certainly give them the capacity for 0:10:37.760 --> 0:10:40.400 future growth. But as we know, looking at the results 0:10:40.400 --> 0:10:44.400 that came out of Microsoft earlier this week, Microsoft in 0:10:44.480 --> 0:10:48.240 terms of their online cloud services Azure, we're doing much 0:10:48.240 --> 0:10:50.520 better in growth terms than you saw either coming out 0:10:50.520 --> 0:10:52.680 of Amazon, who has been the leader in this category 0:10:52.960 --> 0:10:56.080 with their Amazon Web Services business, or with Google in 0:10:56.080 --> 0:10:59.560 this regard. So clearly you're seeing more competitive market. Um. 0:10:59.600 --> 0:11:02.000 I would also add maybe not so much for an Amazon, 0:11:02.080 --> 0:11:04.440 but I would say that relative to a Google, along 0:11:04.480 --> 0:11:06.960 with other social media names like a Facebook and a Twitter. 0:11:07.200 --> 0:11:09.400 You know, we're not only going up against the Federal 0:11:09.440 --> 0:11:13.800 Reserve tightening interest rates, but we're also facing greater regulatory scrutiny, 0:11:13.840 --> 0:11:16.640 which might intensify should the Democrats take the House of 0:11:16.679 --> 0:11:21.080 Representatives On November six. David Garritty taking a look at Apple. 0:11:21.240 --> 0:11:24.240 They report their results after the close on the first 0:11:24.480 --> 0:11:28.160 of November. The stock is up about twenty seven and 0:11:28.200 --> 0:11:31.560 a half percent so far this year. It pays a dividend. 0:11:31.880 --> 0:11:34.560 What are your thoughts on Apple? In terms of Apple, 0:11:34.600 --> 0:11:37.559 I mean, the company has demonstrated a policy of returning 0:11:37.600 --> 0:11:42.400 capital the shareholders, either through buybacks or through raising their dividend. 0:11:42.640 --> 0:11:46.200 Um we see the company's growth in their services business 0:11:46.960 --> 0:11:50.440 being a certainly an important driver for further gains in 0:11:50.559 --> 0:11:54.800 cash flow to sustain that kind of pattern of return generation. 0:11:55.200 --> 0:11:58.720 We do note, however, that smartphone volumes as a whole 0:11:58.840 --> 0:12:02.079 looking across the mark it, the growth there basically has 0:12:02.120 --> 0:12:05.640 come down to low single digits, a more competitive market. 0:12:05.880 --> 0:12:08.880 But we think if we look at Apple from evaluation standpoint, 0:12:09.080 --> 0:12:11.319 and we look at us a total return vehicle, we're 0:12:11.360 --> 0:12:13.600 far more comfortable owning an Apple than we are saying 0:12:13.600 --> 0:12:17.160 owning UM, an Amazon or a Facebook. Alright, So over 0:12:17.160 --> 0:12:18.840 the next two years, since you don't see this as 0:12:18.880 --> 0:12:21.920 a long term by if the FED does continue to 0:12:22.000 --> 0:12:25.000 raise rates, how much more do you think the fang 0:12:25.040 --> 0:12:28.440 stocks have to sell off before they've become attractive on 0:12:28.480 --> 0:12:30.880 a long term basis. Some of the work I've seen 0:12:30.920 --> 0:12:33.400 coming out elsewhere on the street have indicated that, you know, 0:12:33.480 --> 0:12:36.200 if we were to see an under performance by tech 0:12:36.280 --> 0:12:39.280 names versus the staples sector by maybe another three to 0:12:39.360 --> 0:12:42.120 five percent, that there might be what people would call 0:12:42.200 --> 0:12:44.960 sort of a near term bottom being put in. But 0:12:45.040 --> 0:12:47.040 we also have to consider that, you know, we've been 0:12:47.040 --> 0:12:49.400 operating here in a stock market since March of two 0:12:49.440 --> 0:12:53.120 thousand nine, where we've had a commendative monetary policy, not 0:12:53.240 --> 0:12:56.200 just in the US but globally, and all of this 0:12:56.320 --> 0:13:00.160 obviously has to be wound back, if you will, if 0:13:00.160 --> 0:13:03.520 we're going to position ourselves to address the possibility of 0:13:03.559 --> 0:13:06.400 a recession in two thousand twenty, which other companies such 0:13:06.400 --> 0:13:09.679 as a JP Morgan have started to put odds on 0:13:09.920 --> 0:13:11.960 that we're going to have a recession in eighteen months. 0:13:12.120 --> 0:13:15.320 If that happens, the monetary authorities have to have the 0:13:15.400 --> 0:13:18.600 capability to respond to that downturn, which means that they 0:13:18.600 --> 0:13:21.600 do need to unwind this easing that we saw so 0:13:21.679 --> 0:13:24.839 for earlier in this cycle. David Garty, I'm taking a 0:13:24.880 --> 0:13:28.679 look at Facebook. You mentioned Facebook as another stock where 0:13:29.000 --> 0:13:32.000 you're not necessarily that eager to add to position or 0:13:32.040 --> 0:13:35.720 even engage a new position. The stock has lost more 0:13:35.720 --> 0:13:40.280 than thirty percent of its value since July. Since mid July, 0:13:40.880 --> 0:13:44.120 you'd have to go back to June of last year 0:13:44.240 --> 0:13:46.760 to find a comparable price. Trading at a hundred and 0:13:46.800 --> 0:13:51.680 forty six dollars a share. Is Facebook on sale or 0:13:51.760 --> 0:13:55.240 is it just accurate more accurately priced I think Facebook 0:13:55.280 --> 0:13:59.679 is pricing in the greater regulatory burdens that they're dealing with. 0:13:59.760 --> 0:14:03.400 Clear we spoke earlier about congressional scrutiny here in the US. 0:14:03.480 --> 0:14:06.880 We have also previously on this air spoken about in 0:14:06.920 --> 0:14:11.520 the EU the imposition of the Global Data Privacy Regulations 0:14:11.600 --> 0:14:14.640 or g DPR, which took place in May. I'd make 0:14:14.679 --> 0:14:16.960 the argument here that until such time as we start 0:14:17.000 --> 0:14:20.360 to anniversary i e. Going into the second half of 0:14:20.400 --> 0:14:24.040 two thousand nineteen of GDP g DPR being put on 0:14:24.040 --> 0:14:26.400 the books, Facebook is going to be under a bit 0:14:26.400 --> 0:14:29.280 more pressure. So they're not just fighting the FED, but 0:14:29.320 --> 0:14:32.600 they're fighting regulators here at home and abroad. Before we 0:14:32.680 --> 0:14:35.360 let you go, I'm really curious on your views on Twitter, 0:14:35.560 --> 0:14:39.920 because Twitter is bucking this trend, reported better than expected 0:14:39.960 --> 0:14:42.680 earning is even with the decline in actual users due 0:14:42.680 --> 0:14:46.120 to their crackdown on bots and other things. Um, what 0:14:46.200 --> 0:14:49.720 do you think about Twitter going forward? Um? Twitter faces 0:14:49.760 --> 0:14:53.680 the same dynamic from a regulatory standpoint. Clearly, Um, you know, 0:14:53.880 --> 0:14:55.800 we would argue at the same time that you know, 0:14:56.200 --> 0:14:59.520 while they may be getting to profitability by shrinking their base. 0:15:00.360 --> 0:15:03.040 I've followed other industries in the past where shrinking one's 0:15:03.040 --> 0:15:06.240 way to profitability was not necessarily one's way to higher 0:15:06.320 --> 0:15:09.240 share price. So I think until we start to get 0:15:09.320 --> 0:15:12.560 better definition as to how it is that the social 0:15:12.560 --> 0:15:15.720 media names are going to be able to operate after 0:15:15.800 --> 0:15:20.400 these regulatory changes are put into effect, we probably sit 0:15:20.440 --> 0:15:22.640 back on the sidelines in terms of these stocks and 0:15:22.720 --> 0:15:26.160 let them find their own level. Well done, Thanks very 0:15:26.240 --> 0:15:29.040 much for being with us. David Garerty, chief market strategist 0:15:29.120 --> 0:15:33.200 for laid Law and Company. Congratulations on your new position. 0:15:33.320 --> 0:15:47.480 Much appreciated. We are broadcasting live from the Bloomberg Interactive 0:15:47.520 --> 0:15:50.720 Broker's studios just to reiterate this development. The US Justice 0:15:50.760 --> 0:15:53.560 Department said that one person is now in custody in 0:15:53.640 --> 0:15:56.760 connection with the mailing of suspected explosive devices that targeted 0:15:56.800 --> 0:16:00.520 high profile democrats. They are holding a news friends today 0:16:00.560 --> 0:16:03.720 at two thirty pm Eastern times, so we will bring 0:16:03.760 --> 0:16:06.760 you more when we get it. Right now, though, it 0:16:06.880 --> 0:16:10.080 is time to turn our attention to the semiconductor space, 0:16:10.160 --> 0:16:13.800 the chip sector that has been beaten up pretty broadly 0:16:13.800 --> 0:16:15.960 over the past few weeks. A non street of Austin 0:16:16.040 --> 0:16:17.600 joins us right now. A non street of Austin, a 0:16:17.680 --> 0:16:21.880 senior Semiconductor and Hardware analyst for Bloomberg Intelligence and on. 0:16:22.080 --> 0:16:25.640 It's actually a little bit challenging to get a consistent 0:16:25.840 --> 0:16:27.680 story when you look at the shares across the board, 0:16:27.680 --> 0:16:30.280 because Intel is doing great, but a m D is 0:16:30.320 --> 0:16:33.200 absolutely getting crushed along with broad common Qualcolm, what's going 0:16:33.240 --> 0:16:36.080 on here? Yeah, it's kind of hard to um sometimes 0:16:36.080 --> 0:16:38.480 separate the week from the shelf if you, if you may, 0:16:38.600 --> 0:16:41.640 but to schools of thought here, right, So it's all 0:16:41.760 --> 0:16:45.760 semi conductor cycle all the time. The semiconductor index has 0:16:45.800 --> 0:16:48.360 gone from a level of four hundred to four hundred 0:16:48.360 --> 0:16:51.600 over a period of five and a half years school thought. 0:16:51.720 --> 0:16:54.400 School of thought number one is that this was an 0:16:54.480 --> 0:16:58.640 unheralded extended up cycle, and we will pay the price 0:16:58.680 --> 0:17:01.920 on the downside and it will be an unnerralded extended 0:17:01.960 --> 0:17:05.560 down cycle, in which case this is time to abandon 0:17:05.640 --> 0:17:08.040 the chips for an extended period of time. School of 0:17:08.080 --> 0:17:11.119 start number two is that this is a substantially better 0:17:11.200 --> 0:17:15.920 industry with multiple demand drivers, more diversified, and as a result, 0:17:16.320 --> 0:17:20.400 you're going to have a shallower downturn, and semiconductors being 0:17:20.400 --> 0:17:24.280 the new industrials, you will have shallower up cycles. And 0:17:24.320 --> 0:17:27.720 shallower down cycles as has been the case, the smaller 0:17:27.760 --> 0:17:31.560 dips being more indicative of of the downturn. So UH 0:17:32.240 --> 0:17:37.240 semmy's have been beaten up pretty badly in the last month. UM. 0:17:37.280 --> 0:17:39.960 If you look at a m D and video down 0:17:40.720 --> 0:17:44.760 in video down, so they've been beaten up. But there's 0:17:44.800 --> 0:17:48.080 no question that down cycles underway. The question is how 0:17:48.160 --> 0:17:52.200 shallow or deep will it be? On does this reflect 0:17:52.280 --> 0:17:56.560 and market demand? So so Intel's UM. Intel has an 0:17:56.560 --> 0:18:00.240 opportunity to really change in the narrative here and then 0:18:00.280 --> 0:18:02.720 try to spend it such that PCs and servers are 0:18:03.080 --> 0:18:06.760 somewhat exempt from that that this is a vertical specific downturn. 0:18:07.520 --> 0:18:10.280 I'm not a big believer in that camp. Usually once 0:18:10.480 --> 0:18:16.120 UH the bug catches, it spreads all through the all 0:18:16.119 --> 0:18:20.040 through the sector, So no particular in market is usually immune. 0:18:20.359 --> 0:18:23.879 And it's also reflective of the fact that UM corporate 0:18:23.960 --> 0:18:26.320 I T spending has been on a boom. UM service 0:18:26.359 --> 0:18:30.399 spending has been is good, PCs uptick for the first 0:18:30.400 --> 0:18:33.119 time up to percent UH in several years. So all 0:18:33.160 --> 0:18:35.480 of that you can make a case for UM. But 0:18:35.640 --> 0:18:38.399 you can either say, Okay, it hasn't broken yet or 0:18:39.119 --> 0:18:41.240 it's actually been a little bit on the mend, and 0:18:41.320 --> 0:18:43.280 the other sectors have to catch up. I watched away 0:18:43.280 --> 0:18:46.480 in exactly sort of the potential scenarios that you initially 0:18:46.560 --> 0:18:49.080 laid out in particular, you know what do we have 0:18:49.160 --> 0:18:51.159 to see to know that this is going to be 0:18:51.280 --> 0:18:55.400 a protracted and deep decline in this entire industry at 0:18:55.400 --> 0:18:57.399 a time when we do get some disappointing We have 0:18:57.440 --> 0:19:00.280 gotten some disappointing earnings at a big tech and they're 0:19:00.320 --> 0:19:03.320 kind of a saturation point when it comes to certain 0:19:03.359 --> 0:19:06.520 technologies that really are are heavy in the chip industry. 0:19:06.720 --> 0:19:11.280 Absolutely look so UM semi conductors are sort of the 0:19:11.320 --> 0:19:12.919 tip of the spear, if you may. In order to 0:19:12.920 --> 0:19:15.760 see a protracted, extended downturn, there has to be a 0:19:15.760 --> 0:19:19.800 macro collapse, right UM, semi see. At first, you can 0:19:19.840 --> 0:19:22.200 make the case through tariffs. You can make the case 0:19:22.200 --> 0:19:26.360 through global GDP growth. UM, But I'm not in that 0:19:26.560 --> 0:19:32.080 camp UM, not being a macro sire, but also that UM, 0:19:32.119 --> 0:19:35.000 there are just too many irons in the fire. From 0:19:35.000 --> 0:19:38.080 our demand perspective. You have a third of the demand 0:19:38.119 --> 0:19:40.280 being the PC supply chain. You have a third of 0:19:40.320 --> 0:19:43.320 the semiconductor industry being the handset supply chain. But you 0:19:43.359 --> 0:19:47.360 have autos, you have industrials, you have um other subsectors 0:19:47.359 --> 0:19:50.480 that are perhaps not as big and and PCs are 0:19:50.480 --> 0:19:53.359 doing okay right now, so you can make the case, 0:19:53.560 --> 0:19:55.400 but autos are not, so a bunch of those other 0:19:55.640 --> 0:19:57.920 other parts are not. That's a that's a great point. 0:19:57.960 --> 0:20:02.240 Autos and industrials, however, are growing, but more due to 0:20:02.359 --> 0:20:06.520 content rather than gizmo growth. With PCs and handsets, gizmo 0:20:06.600 --> 0:20:10.479 growth was almost as important as stuff inside the gizmo. 0:20:10.520 --> 0:20:13.240 Semiconutters grow in two a way, two ways, right. Once 0:20:13.280 --> 0:20:16.199 you ship more handsets and PCs option A or the 0:20:16.280 --> 0:20:19.760 content within the handset and the PC expand. So when 0:20:19.880 --> 0:20:25.119 these particular devices grew, the stuff within the gizmo also 0:20:25.200 --> 0:20:27.960 grew versus. If you look at autos and industrials, these 0:20:27.960 --> 0:20:31.360 are pretty well established market, but stuff in the gizmo 0:20:31.520 --> 0:20:33.960 is growing. So if you look at content growth within 0:20:34.000 --> 0:20:37.320 a car up from two seven years ago to somewhere 0:20:37.359 --> 0:20:40.960 in the five plus range right now, depending on what 0:20:41.080 --> 0:20:44.600 subsectors you include in there. So industrials, the same thing 0:20:44.720 --> 0:20:47.960 IoT distributed, so you can make the case for an extended, 0:20:48.600 --> 0:20:52.760 extended up cycle. But these are smaller subsectors a third 0:20:52.760 --> 0:20:55.760 of the business, handsets a third of the business, pecs, 0:20:56.359 --> 0:21:00.640 um SO and and therein lies the ama of their 0:21:00.640 --> 0:21:03.399 two schools of thought with the cycle, Ana, can you 0:21:03.440 --> 0:21:06.920 speak to the memory chip demand issue? Yeah? So memory member, 0:21:06.920 --> 0:21:10.840 that's a great point um and memory is ubiquitous. It 0:21:10.880 --> 0:21:14.879 goes into everything, right. Memory density or memory capacity for 0:21:15.000 --> 0:21:19.560 device has been on a tear across devices. But there 0:21:19.600 --> 0:21:22.440 has been built up of over capacity in the industry 0:21:22.960 --> 0:21:26.119 and the question is is there enough absorption of that 0:21:26.240 --> 0:21:30.240 over capacity over a short period of time to get 0:21:30.320 --> 0:21:33.080 supply and demand back into balance. The big driver of 0:21:33.160 --> 0:21:37.719 that was the cloud data center market um and um 0:21:38.160 --> 0:21:40.480 UH and the SSD business, and there was a big 0:21:40.520 --> 0:21:44.200 move from flash from heart descrives to flash. So those 0:21:44.200 --> 0:21:47.040 are the big consumers, but prices collapsing the way they 0:21:47.040 --> 0:21:50.399 are given over supply. Will that extra demand be absorbed 0:21:50.760 --> 0:21:54.679 and how soon will be absorbed? So I'm just wondering it. 0:21:54.840 --> 0:21:59.399 Just to wrap up here, which companies are most exposed 0:21:59.440 --> 0:22:02.880 to the o an industrial space where the insides are 0:22:02.920 --> 0:22:07.560 expanding and maybe the gizmos aren't versus those that are 0:22:07.600 --> 0:22:11.920 more exposed to the PCs and phones and things where 0:22:12.280 --> 0:22:14.719 you know there's much less kind of room to expand. 0:22:14.800 --> 0:22:19.160 Absolutely so um n XP Semiconductors, which is UM which 0:22:19.280 --> 0:22:21.639 was just coming out of the broken M and a 0:22:21.720 --> 0:22:25.480 deal with Qualcom. Um is one of the leaders in 0:22:25.560 --> 0:22:29.680 auto market share. Um Texas Instruments has high auto market share, 0:22:29.760 --> 0:22:33.880 st micro Electronics and in Finian out of Germany. Well, 0:22:34.280 --> 0:22:37.760 thanks for being with us as always illuminating on on Trinivason, 0:22:38.000 --> 0:22:53.679 senior semiconductor and hardware analysts for Bloomberg in Intelligence. We 0:22:53.720 --> 0:22:57.600 are broadcasting live from the Bloomberg Interactive Broker's studios on 0:22:57.760 --> 0:23:02.520 this Friday. President Trump yesterday announced a drug pricing proposal, 0:23:02.760 --> 0:23:04.520 and here to talk a little bit about that is 0:23:04.560 --> 0:23:09.160 Max Sneathan, Biotech, farm and healthcare columnist for Bloomberg Opinion. Max, 0:23:09.280 --> 0:23:11.120