WEBVTT - Surveillance: U.S. to Consider Negative Rates Within 10 Years 0:00:00.040 --> 0:00:02.600 Who you put your trust in matters. Investors have put 0:00:02.680 --> 0:00:07.000 their trust and independent registered investment advisors to the two 0:00:07.000 --> 0:00:10.680 and four trillion dollars. Why Learn more at find your 0:00:10.760 --> 0:00:26.439 Independent Advisor dot com. Welcome to the Bloomberg Surveillance Podcast. 0:00:26.840 --> 0:00:30.560 I'm Tom Keene with David Gura. Daily we bring you 0:00:30.600 --> 0:00:35.640 insight from the best in economics, finance, investment, and international relations. 0:00:36.040 --> 0:00:40.640 Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot com, and 0:00:40.720 --> 0:00:47.560 of course, on the Bloomberg. Our first guest this morning's 0:00:47.560 --> 0:00:49.879 Dominate Constant. He's managing director at deutsch Bank Global head 0:00:49.880 --> 0:00:52.519 of Interest rates Research, and he joins us now in 0:00:52.560 --> 0:00:54.800 the studio. Good morning, great to see you. Good morning. 0:00:55.440 --> 0:00:57.040 Let me start with a broad question, and that is 0:00:57.080 --> 0:00:59.080 when when when you're looking at the curve, when you're 0:00:59.080 --> 0:01:01.440 looking at rates, how much is that forecast changed in 0:01:01.520 --> 0:01:03.800 light of say, what we heard from Mario Dragging last week, 0:01:03.880 --> 0:01:07.120 all of the chorus we've heard from from federal'serve policy 0:01:07.120 --> 0:01:09.440 makers as well. Has it changed much over these last 0:01:09.480 --> 0:01:13.480 few months? Yeah? Yeah, I mean we we were around 0:01:13.520 --> 0:01:16.720 the Brexit period, we were a very constructive on rates 0:01:16.720 --> 0:01:20.000 and we had a target of tens and the flatter 0:01:20.080 --> 0:01:23.960 Yeel curve, and basically we think low rates became too 0:01:24.040 --> 0:01:26.280 much of a sort of a bad thing from the 0:01:26.319 --> 0:01:29.000 central bank perspective, especially at the long end. They felt 0:01:29.040 --> 0:01:31.720 that the Yel curve is too flat, was creating problems, 0:01:31.800 --> 0:01:35.640 but in the entitlement industry, creating challenges for say banks, 0:01:35.640 --> 0:01:38.080 because they tend to like steeper Yeel curves. And so 0:01:38.120 --> 0:01:40.280 I think you've seen the sort of jaw boning exercise 0:01:40.280 --> 0:01:43.320 whereby they want to basically get her long rates up 0:01:43.319 --> 0:01:45.399 a little bit, and that's not because they want to 0:01:45.440 --> 0:01:48.480 tighten monster conditions per se, but they'd like a little 0:01:48.480 --> 0:01:51.320 bit of extra risk premium in there that can help 0:01:51.560 --> 0:01:56.680 perhaps entitened entitlement people like the the insurers. And there's 0:01:56.680 --> 0:01:59.880 also been maybe an element whereby the hunt for year 0:02:00.480 --> 0:02:03.800 whereby investors who might otherwise buy bonds end up being 0:02:03.800 --> 0:02:06.880 pushed into riskuer assets by those instead and maybe create 0:02:07.200 --> 0:02:11.160 some kind of overvaluation and those those asset classes that 0:02:11.280 --> 0:02:13.919 that's perhaps a concern. So I think, whether you agree 0:02:13.919 --> 0:02:16.000 with it or not, that's what the central bankers have 0:02:16.080 --> 0:02:18.200 been sort of your aiming at, and that the bj 0:02:18.200 --> 0:02:20.320 A targeted the tenure yield stop it going up all 0:02:20.360 --> 0:02:23.239 down the e CBS, you know, mumbling about taper, where 0:02:23.280 --> 0:02:26.320 not you really believe it. And obviously the feders pushing 0:02:26.360 --> 0:02:29.079 on with what they hope to do, to be able 0:02:29.120 --> 0:02:31.480 to do is raising rates in December. Looking at treasuries 0:02:31.480 --> 0:02:34.600 and specific is long and attractive to you right now 0:02:34.840 --> 0:02:37.960 at all? I think it depends on your horizon, and 0:02:38.000 --> 0:02:40.000 obviously you know your view. I mean my view is 0:02:40.400 --> 0:02:43.440 it's it's it's it's getting attractive. It's not quite there yet. 0:02:44.160 --> 0:02:47.640 I'd like to sort of basically by tenure treasuries, you know, 0:02:47.720 --> 0:02:51.240 above two percent, I think I can probably go there, um, 0:02:51.280 --> 0:02:52.880 but you're going to be buying it over two percent 0:02:52.960 --> 0:02:54.519 with a view it's going to come back down against 0:02:54.520 --> 0:02:56.040 around one and a half if not one in the 0:02:56.120 --> 0:02:58.880 quarter based on what we have as some sort of 0:02:58.880 --> 0:03:03.720 disappointing growth expectations, especially in the US over the next year. 0:03:04.760 --> 0:03:07.320 Who are the FED policy makers that you listened to 0:03:08.040 --> 0:03:10.200 most closely? Of course you listen to to Cheer Yelling 0:03:10.240 --> 0:03:13.720 and vice cheer Fisher, But of the others, who's saying 0:03:13.960 --> 0:03:16.359 stuff that's the most materially interesting to you? Well, I 0:03:16.400 --> 0:03:21.000 think what's interesting is obviously sort of not not necessarily 0:03:21.000 --> 0:03:24.880 anyone in particular, but more the sort of general sort 0:03:24.919 --> 0:03:30.000 of you know, consensus outside the sort of yelling Fisher equation. 0:03:30.040 --> 0:03:32.560 And so you see, for example, some of the Hawks 0:03:33.000 --> 0:03:35.600 who are speaking maybe at the beginning of last year 0:03:35.640 --> 0:03:38.240 you could happily ignore them. Then suddenly you see sort 0:03:38.280 --> 0:03:40.520 of some some more devilish members perhaps you know, like 0:03:40.600 --> 0:03:42.720 Rose and Grown or Evans sort of you know, moving 0:03:42.800 --> 0:03:45.839 towards some of those viewpoints. And then suddenly Dudley sort 0:03:45.840 --> 0:03:47.920 of you know, pops up again and says a tenure 0:03:47.960 --> 0:03:50.320 years or two late. So so you know, things like that, 0:03:50.640 --> 0:03:53.200 I think catch my attention. And and then you know 0:03:53.280 --> 0:03:55.680 that there's some pressure. You know, we we know, you know, 0:03:55.760 --> 0:03:57.680 yelling is obviously you know, very much on the sort 0:03:57.680 --> 0:04:00.600 of dovish side classically speaking, but you know, there's some 0:04:00.680 --> 0:04:02.880 sort of pressure. And I think it's like we kind 0:04:02.880 --> 0:04:05.040 of all agree, you know, we would like to see 0:04:05.160 --> 0:04:07.960 higher rates, but I think the idea is, you know, 0:04:08.000 --> 0:04:09.640 whether they have the guts to do it and that 0:04:09.760 --> 0:04:12.080 kind of uh, you know, it depends on what this 0:04:12.240 --> 0:04:15.160 sort of you know, significant you know, minorities that ends 0:04:15.200 --> 0:04:20.000 up dominic you're talking there about a more cautious view 0:04:20.600 --> 0:04:23.440 where interest rates will go lower for longer and everything 0:04:23.720 --> 0:04:27.799 honkering down GDP estimates and such. When we do the dots, 0:04:28.440 --> 0:04:30.800 if we're going to continue to the do the dots, 0:04:31.440 --> 0:04:34.440 what is the constant long term that they should be 0:04:34.480 --> 0:04:37.200 looking at? Is long term? March of two thousand and 0:04:37.240 --> 0:04:39.920 seventeen is a long term where it is right now? 0:04:40.320 --> 0:04:43.120 Or should they go out because of your view to 0:04:43.279 --> 0:04:48.080 two thousand and twenty and make a guestiment out there? Well, 0:04:48.120 --> 0:04:52.239 I mean I think uh, um, I think long term 0:04:52.400 --> 0:04:54.880 is well, I mean right now, you know, we're thinking 0:04:54.920 --> 0:04:56.839 long terms sort of around you. Obviously these sort of 0:04:57.000 --> 0:04:59.440 two or three years from now. I think the the 0:05:00.000 --> 0:05:02.359 issue that we have in in this sort of growth 0:05:02.360 --> 0:05:06.719 cycle is it's more of a stagnation rather than a recession. 0:05:06.800 --> 0:05:09.039 And what that means is that there's no sort of 0:05:09.120 --> 0:05:12.560 imminent sort of exogenous shock that's being applied to the 0:05:12.560 --> 0:05:15.679 economy that's suddenly gained a sort of turn this cycle. 0:05:16.160 --> 0:05:18.400 And uh and it's kind of like a slow bleed. 0:05:18.680 --> 0:05:20.719 But we see that, we we see the nature of 0:05:20.760 --> 0:05:23.200 the slow blead. That's the idea that you know, as 0:05:23.240 --> 0:05:25.440 you hit fun employment and you almost go beyond what 0:05:25.480 --> 0:05:28.360 we consider funemployment. There's no sort of natural response of 0:05:28.480 --> 0:05:30.640 higher wages and all that kind of stuff, or productivity 0:05:30.720 --> 0:05:34.000 kicking into at a higher level. And that means, you know, 0:05:34.040 --> 0:05:36.760 the long term really can be sort of out that 0:05:36.839 --> 0:05:40.440 sort of two, three, four, five years, But the probabilities 0:05:40.440 --> 0:05:44.480 as such that you you effectively will you know, there 0:05:44.480 --> 0:05:48.520 will be some some negative shocks somewhere in that time horizon, 0:05:48.560 --> 0:05:50.800 and that's where you know that they're done raising rates. 0:05:50.800 --> 0:05:54.440 Basically you stated earlier this morning, the idea that there 0:05:54.440 --> 0:05:59.200 would be negative rates for longer. Does that leak over 0:05:59.680 --> 0:06:02.880 to a currently United Kingdom that's saying no, no, no, 0:06:03.000 --> 0:06:07.040 will never do negative rates. Is it even imaginable that 0:06:07.320 --> 0:06:11.159 Yellen and her follow on will have to consider negative rates? 0:06:11.680 --> 0:06:15.360 I definitely think that the US will have to consider 0:06:15.680 --> 0:06:18.240 negative rates on a you know, on a five ten 0:06:18.360 --> 0:06:22.960 year view, just because once this cycle really is finished. Uh, 0:06:23.400 --> 0:06:26.880 the what's the choice? You're you're gonna cut rates a 0:06:26.880 --> 0:06:28.800 couple of times because that's you know, they won't have 0:06:28.880 --> 0:06:32.360 risen them that far, or you go back to these 0:06:32.440 --> 0:06:35.000 extraordinary measures on quantitive easing, which I think you know, 0:06:35.040 --> 0:06:37.120 have their own issues around them. So my guess is 0:06:37.160 --> 0:06:39.120 it's probably gonna be a combination on both. When the 0:06:39.160 --> 0:06:41.680 market will definitely think about negative rates. There are lots 0:06:41.680 --> 0:06:43.640 of legal issues for negative rates in the States that 0:06:43.760 --> 0:06:45.320 so those have to be addressed. But it's a different 0:06:45.320 --> 0:06:47.599 issue in terms of the market being onto perhaps its price, 0:06:48.120 --> 0:06:51.880 in terms of market expectations they could price them. Uh. 0:06:51.920 --> 0:06:54.840 The I think the UK is different because the UK 0:06:55.120 --> 0:06:58.200 is obviously can have an extremely weak currency. It's having 0:06:58.200 --> 0:07:02.280 a weak currency, it can import inflation quite readily on 0:07:02.360 --> 0:07:04.719 that basis, is something that the US, you know, you 0:07:04.839 --> 0:07:07.480 can't do. The US is a very large economy, it's 0:07:07.480 --> 0:07:10.040 a relative insula. We have a reserve currency, so by 0:07:10.040 --> 0:07:11.760 all means we can try and get our currency down 0:07:11.760 --> 0:07:13.320 at the expense of the rest of the world. But 0:07:13.360 --> 0:07:15.480 even then we're not going to import that much inflation 0:07:16.120 --> 0:07:18.320 because the service sector can hold it up. So I think, 0:07:18.360 --> 0:07:20.600 you know, they're that that's a difference. I mean, so 0:07:20.640 --> 0:07:23.240 the UK can perhaps avoid negative rates if they just 0:07:23.240 --> 0:07:25.800 claps their currency. And one of the arguments of Japan 0:07:25.840 --> 0:07:28.920 and the Eurozone is they've found it very hard to collapse, 0:07:29.080 --> 0:07:32.680 you know, their currency interesting catalytically, what would be more 0:07:32.800 --> 0:07:35.480 powerful here for rates something out of the Bank of 0:07:35.520 --> 0:07:37.960 Japan or the e c B changed in either of 0:07:38.040 --> 0:07:40.560 those banks. Well, I mean, we've actually had a little 0:07:40.600 --> 0:07:43.840 buzzword recently whereby we've been arguing that sort of Japan 0:07:43.960 --> 0:07:46.160 has has kind of women has become the marginal price 0:07:46.400 --> 0:07:48.880 of global assets. And they've done that because obviously they've 0:07:48.920 --> 0:07:51.800 been significant outflows out of Japan. I mean, they you know, 0:07:51.800 --> 0:07:54.960 they are a very big investor, but it's really through 0:07:55.800 --> 0:07:59.280 the j GB yield curve. Their yield curve absolutely collapsed 0:07:59.320 --> 0:08:03.360 earlier this year here on as interest rates came down, 0:08:03.800 --> 0:08:06.880 and that kind of forced a lot of money to 0:08:06.880 --> 0:08:09.640 come out of Japan into other bond markets. And it's 0:08:09.680 --> 0:08:11.440 all part and parcel of the constity of easy thing 0:08:11.440 --> 0:08:13.920 that they're doing, and also to some extent the negative 0:08:14.000 --> 0:08:17.160 rates that they've employed. Uh that works through something we 0:08:17.240 --> 0:08:19.920 call the cross currency basis that got very extreme, which 0:08:19.960 --> 0:08:22.280 is kind of the cost to the Japanese investor of 0:08:22.400 --> 0:08:25.840 hedging their overseas and purchases. So we've been monitoring that 0:08:25.920 --> 0:08:29.440 very carefully and you can sort of see the influence 0:08:29.440 --> 0:08:31.080 they have on yields. And that's why when we talk 0:08:31.120 --> 0:08:34.559 about risk premium going away in our markets. We can 0:08:34.559 --> 0:08:36.559 actually sort of directly link it back to what the 0:08:36.640 --> 0:08:39.400 Japanese investor base is doing. And I think you know, 0:08:39.440 --> 0:08:41.079 if I was are fed and you're sort of saying, well, 0:08:41.120 --> 0:08:43.440 you know, risk premium going away the markets isn't great 0:08:43.480 --> 0:08:45.760 because it may lead to financial fability issues. You know, 0:08:45.760 --> 0:08:47.599 maybe you want to reverse that a little bit. And 0:08:47.920 --> 0:08:49.880 imani not to get you in trouble with Mr Crying 0:08:49.960 --> 0:08:53.640 or compliance, but with your many many contexts over the 0:08:53.720 --> 0:08:56.520 year in London, what is the cranstant thought and the 0:08:56.640 --> 0:09:02.320 future of finance and Wall Street in London. Well, I mean, 0:09:02.679 --> 0:09:07.560 my guess is that the London financial sector will figure 0:09:07.600 --> 0:09:09.960 it out in the sense that you know, London has 0:09:09.960 --> 0:09:12.439 always figured it out, so that it won't be nearly 0:09:12.440 --> 0:09:15.600 as draconian as uh, you know, as people sort of 0:09:15.600 --> 0:09:19.040 perhaps fear. Um, I mean obviously right now. I mean 0:09:19.080 --> 0:09:21.960 that the whole concern around this sort of passporting is 0:09:21.960 --> 0:09:26.000 is a great concern and there are incentives clearly for 0:09:26.040 --> 0:09:29.320 the Europeans who uh you know, to take back certain 0:09:29.440 --> 0:09:32.240 banking functions and sort of in terms of clearing and 0:09:32.280 --> 0:09:35.280 things like that in the Eurozone. Um, but my my 0:09:35.360 --> 0:09:37.360 guess is that you know that there will be. You 0:09:37.400 --> 0:09:41.480 know that London is too, too richer a center for 0:09:41.600 --> 0:09:44.400 financial talent, and they have all the incentives to try 0:09:44.480 --> 0:09:50.000 and work around whatever restrictions their talent was schooled uncertain 0:09:50.200 --> 0:09:53.679 theories in stan Fisher is recently Economic Club of New 0:09:53.760 --> 0:09:56.640 York speech talking on the I S curve Back to 0:09:56.760 --> 0:09:59.280 Hicks thirty nine. It's a different world today. I guess 0:09:59.640 --> 0:10:04.040 are you you using the theories you learned or is 0:10:04.080 --> 0:10:06.360 it a new world for you as you think every 0:10:06.400 --> 0:10:10.200 day and trying to piece the system together. Well, we're 0:10:10.240 --> 0:10:12.760 sort of relying on the theories that we've learned. I mean, 0:10:12.760 --> 0:10:16.440 I I go back to uh Thatcher when she was 0:10:16.480 --> 0:10:19.800 this sort of great quote pro European She knew exactly 0:10:19.800 --> 0:10:23.440 what she was doing in terms of putting the London 0:10:23.480 --> 0:10:26.160 at the center of the financial world and all the 0:10:26.200 --> 0:10:28.560 benefits that that was going to bring with it. And 0:10:29.000 --> 0:10:31.040 you know, for all the sort of headline news around 0:10:31.080 --> 0:10:34.959 these negotiations, I mean, why would you know, why would 0:10:35.280 --> 0:10:38.559 London or the British wanted to shoot themselves in the foot. 0:10:38.559 --> 0:10:41.160 It just doesn't make makes sense. So I think there's 0:10:41.160 --> 0:10:44.560 a lot of posturing going on at the moment. But yeah, 0:10:44.640 --> 0:10:46.480 I mean I would be uh, you know, I'd be 0:10:46.520 --> 0:10:49.720 shocked if there was in London was no longer what 0:10:49.760 --> 0:10:53.360 it currently is. We talked a lot about banks thinking 0:10:53.400 --> 0:10:57.560 of moving headquarters or officers overseas. But among your friends 0:10:57.600 --> 0:11:00.199 and colleagues, is there a conversation about that about eaven 0:11:00.200 --> 0:11:02.560 in London because of the sentiment in the place. Is 0:11:02.600 --> 0:11:05.719 that changed it on since since the vote? Um? No, 0:11:05.800 --> 0:11:08.960 not not not so not so obviously. I mean to 0:11:09.000 --> 0:11:11.839 be honest, I think there's a lot of people sort 0:11:11.840 --> 0:11:14.000 of you know, still can't believe the outcome of vote. 0:11:14.240 --> 0:11:17.560 I remember London itself was overwhelmingly in favor, you know, 0:11:17.720 --> 0:11:22.000 of staying within the the European Union. So um, you know, 0:11:22.080 --> 0:11:25.080 I think obviously people there are people who are concerned 0:11:25.080 --> 0:11:27.360 that if they don't have a British passport, what does 0:11:27.400 --> 0:11:29.320 that mean? And you know there's definitely you know, some 0:11:29.320 --> 0:11:31.160 people are running off and making sure they're getting their 0:11:31.160 --> 0:11:33.640 British passports. I mean, like you hear that from sort 0:11:33.640 --> 0:11:36.600 of some colleagues. Um, But in general now I think 0:11:36.600 --> 0:11:40.000 there's you know, there's a there's there's still somewhat sort 0:11:40.000 --> 0:11:42.079 of disbelief that this is actually happening and this is 0:11:42.120 --> 0:11:46.200 why I think, Um, the the Tory government is trying 0:11:46.240 --> 0:11:49.280 to sort of insist that Brexit really means brexit, because 0:11:49.360 --> 0:11:51.559 it might be very easy for people to think, well, 0:11:51.600 --> 0:11:53.600 you know, maybe it doesn't actually mean that. Uh, And 0:11:53.679 --> 0:11:55.640 so that's why they're sort of having to approach this 0:11:55.720 --> 0:11:58.120 in a hard way. Um. So we'll see what happens 0:11:58.200 --> 0:12:00.920 next year when they find they decide if and when 0:12:00.920 --> 0:12:03.560 they finally decided to pull the trigger on the article. 0:12:04.000 --> 0:12:06.560 From that referendum to the election here in the States, 0:12:06.600 --> 0:12:08.720 how much is is the campaign how much is the 0:12:08.720 --> 0:12:13.200 election weighing on forecasting rates at this point? You mean 0:12:13.200 --> 0:12:16.920 the election in the US? Yeah, well, I think it 0:12:17.440 --> 0:12:20.560 it could have weighed much more, uh, and to something 0:12:20.679 --> 0:12:23.520 that perhaps it still does weigh. But if there was 0:12:23.559 --> 0:12:26.840 a sort of shake up in terms of the political 0:12:26.920 --> 0:12:29.640 sort of outlook in terms of gridlock. Um. So obviously, 0:12:29.720 --> 0:12:31.640 you know, there is a view that if there was 0:12:31.640 --> 0:12:34.480 a clean sweep, particularly by the Republicans, but perhaps by 0:12:34.480 --> 0:12:37.880 the Democrats, then maybe gridlock would end, and that could 0:12:37.960 --> 0:12:42.000 change your outlook. I think if there's ongoing gridlock, um, 0:12:42.520 --> 0:12:44.240 I think people are going to say more of the same, 0:12:44.600 --> 0:12:47.480 and unfortunately more of the same is from an economic 0:12:47.520 --> 0:12:50.840 perspective and certainly from a financial market perspective, is a 0:12:50.880 --> 0:12:53.640 bit disappointing because it's going to mean more financial oppression, 0:12:53.760 --> 0:12:58.520 low volatility, regardless of your views on the actual parties. 0:12:58.559 --> 0:13:01.680 I mean, we don't really want more the same. That's problem. Dominic, 0:13:01.800 --> 0:13:03.480 thank you so much, very generous of you to be 0:13:03.559 --> 0:13:05.800 with us for these hours this morning here at Bloomberg. 0:13:05.880 --> 0:13:10.720 He is with Deutsche Bank. Dominic Constant writing just terrific 0:13:10.760 --> 0:13:12.880 notes and the main theme I heard their folks as 0:13:12.920 --> 0:13:17.720 a real subdued view on rate structure forward, on where 0:13:17.760 --> 0:13:33.439 yields are going. Well. Apple reported earnings yesterday after the bell, 0:13:33.480 --> 0:13:35.520 and we're drawn to the forecast of sales for the 0:13:35.559 --> 0:13:37.880 next quarter, Apples saying that will be between seventy six 0:13:37.920 --> 0:13:41.200 billion and seventy eight billion. Analysts had expected seventy five 0:13:41.880 --> 0:13:44.400 point four billion from what we're doing. By Walter Pi Sick, 0:13:44.440 --> 0:13:46.680 he's an analyst with B T I G. Walter. Always 0:13:46.720 --> 0:13:49.440 great to speak with you. Thanks great to be back on. 0:13:49.840 --> 0:13:52.920 So the question going into this I think was woold 0:13:52.920 --> 0:13:56.080 Samsung's loss here all the trouble caused by the problems 0:13:56.080 --> 0:13:58.280 with the Galaxy Notes seven become Apple's gain and what 0:13:58.360 --> 0:14:01.280 do we learn from the port yesterday and in the 0:14:01.320 --> 0:14:05.760 conference calls about that? Yeah, and I think the answer 0:14:05.800 --> 0:14:07.680 is kind of And by the way, we also heard 0:14:07.720 --> 0:14:10.440 some feedback from some of the operators that reported before 0:14:10.520 --> 0:14:13.520 Apple did, and I think my initial view was, or 0:14:13.559 --> 0:14:15.960 I guess the question was, if someone was buying a 0:14:16.040 --> 0:14:18.800 high end Android phone, did they just stick within that 0:14:18.840 --> 0:14:21.440 ecosystem because that's what they were used to. And I 0:14:21.480 --> 0:14:23.560 think what we've been hearing is that that they have 0:14:24.000 --> 0:14:27.640 actually seen switchers, because there's not particularly on the larger 0:14:28.400 --> 0:14:31.000 the larger models that the seven plus versus the note 0:14:31.440 --> 0:14:33.280 that they were actually pulling these people in, which is 0:14:33.280 --> 0:14:35.240 actually really good news. If Apple can get them in 0:14:35.280 --> 0:14:38.000 their own ecosystem and the customers please with it, it 0:14:38.080 --> 0:14:40.280 becomes sticking on their end, and it's gonna be harder 0:14:40.320 --> 0:14:42.960 for Android whatever vendor wants to get that customer back 0:14:43.520 --> 0:14:45.480 to pull them back. So, whether it was the operators 0:14:45.520 --> 0:14:48.160 earlier in the week or what Apple was saying on 0:14:48.200 --> 0:14:50.760 their call um, it sounds that they are benefiting. Now. 0:14:51.040 --> 0:14:52.840 I just want to put one pause on all this 0:14:52.920 --> 0:14:56.000 is you can't get a seven plus right now right 0:14:56.240 --> 0:14:58.000 that the ship dates are not out until the end 0:14:58.000 --> 0:15:01.600 of the year, So so their own inability to to 0:15:01.760 --> 0:15:04.240 ramp up the volumes on the seven plus, maybe because 0:15:04.240 --> 0:15:07.600 they didn't expect this mix shift to happen um might 0:15:07.800 --> 0:15:10.080 limit how much that they can benefits. I think they 0:15:10.120 --> 0:15:12.600 really need to focus on getting those volumes up to 0:15:12.680 --> 0:15:15.240 grab you know, more and more of those um those 0:15:15.280 --> 0:15:18.800 Samsung customers that just don't have a product right now. 0:15:18.920 --> 0:15:21.080 Kind of Tom is waiting for his his seven Let 0:15:21.080 --> 0:15:23.600 me ask you all to about the way that Tim Cook. 0:15:23.920 --> 0:15:27.240 How Tim Cook's Apple keeps people in that ecosystem. It's 0:15:27.240 --> 0:15:29.480 through services, I imagined. And what color did we get 0:15:29.560 --> 0:15:32.720 yesterday about how Apple has been improving its services. Obviously 0:15:32.720 --> 0:15:36.640 there were problems with Apple Music and and uh it's 0:15:36.680 --> 0:15:39.480 it's other offerings. Has that improved? Have we seen that stabilize, 0:15:40.440 --> 0:15:43.040 that's been that's been fun like this? The new messaging 0:15:43.080 --> 0:15:48.000 is great. It had really lagged behind other third party applications. 0:15:48.200 --> 0:15:51.360 So that was, for one important because look, if you're 0:15:51.720 --> 0:15:53.800 texting all of your friends and it works well, you're 0:15:53.880 --> 0:15:55.760 less likely to leave if you need to stay on 0:15:55.800 --> 0:15:58.920 Apple Phone to do that. But even before things like that, 0:15:59.280 --> 0:16:02.200 the company for years has been focused on when you're 0:16:02.200 --> 0:16:04.920 near your computer or your iPad or things like that 0:16:04.920 --> 0:16:07.040 that you know, all these services kind of transfer. They 0:16:07.080 --> 0:16:09.520 do whatever they can to keep you in so that 0:16:09.600 --> 0:16:12.800 they get your upgrade um every two years or however 0:16:12.840 --> 0:16:15.880 long it ends up being. Are they getting that upgrade? 0:16:15.920 --> 0:16:18.640 What is the character of the upgrade? When you talk 0:16:18.720 --> 0:16:24.200 to Apple bears, do they actually believe that people won't upgrade, 0:16:24.240 --> 0:16:27.600 that they'll sit on the phone for extra six hours 0:16:27.680 --> 0:16:31.160 or six months. Those bears have have had their day, 0:16:31.200 --> 0:16:33.560 i think for the past year, because those upgrade rates 0:16:33.560 --> 0:16:36.680 were clearly extending if you looked at how the numbers were. 0:16:36.720 --> 0:16:40.200 But what's been surprising and frankly reflected on this rally 0:16:40.200 --> 0:16:42.760 in the stock you know, over the past couple of months, 0:16:43.280 --> 0:16:45.440 m has been that the upgrades have actually come in 0:16:45.480 --> 0:16:47.800 for this phone. I mean, everyone think about this months ago, right, 0:16:47.960 --> 0:16:49.920 Everyone's saying, oh, this is not really that great, We're 0:16:49.920 --> 0:16:52.320 gonna wait till next year. And now the operators are 0:16:52.320 --> 0:16:54.440 actually seeing it. So the operators that have now reported 0:16:54.440 --> 0:16:57.760 are talking about upgrade rates or phone sales that that 0:16:58.000 --> 0:17:01.160 should go up, and there's saying like, look, are we 0:17:01.200 --> 0:17:03.520 can't even tell you where the demands can end up 0:17:03.520 --> 0:17:06.359 being because we're still not getting in supply from Apple 0:17:06.400 --> 0:17:08.840 to to really fully judge this, Yeah, it's a terrible 0:17:08.880 --> 0:17:17.040 problem stock exactly. Walter free cash flow forty three, fifty 0:17:17.080 --> 0:17:20.480 seventy and then the modeling of Wall Street is for 0:17:20.520 --> 0:17:23.840 a diminishment of cash flow. Do you buy that or 0:17:23.840 --> 0:17:28.840 does the juggernaut continue? I mean the margins. Obviously, the 0:17:28.880 --> 0:17:31.680 concern was about fifty basis points. Nothing that's not something 0:17:31.720 --> 0:17:34.800 that's gonna crush their ability to degenerate free cash flow. 0:17:34.920 --> 0:17:37.720 Taxes were ticking up a little bit, but again marginally 0:17:37.800 --> 0:17:39.960 not something that's going to change the cash flow. The 0:17:40.040 --> 0:17:42.760 interesting thing was we were thinking that they were gonna 0:17:42.800 --> 0:17:45.679 buy ten billion dollars of stock back. I think they 0:17:45.720 --> 0:17:48.160 only bought about four um. So as a result, I'm 0:17:48.160 --> 0:17:51.280 sorry six so so four less than we expected. So 0:17:51.320 --> 0:17:55.399 the cash position went up to fifty billions. So the 0:17:55.560 --> 0:18:00.280 cash is actually rising um at a time when you know, 0:18:00.359 --> 0:18:02.560 Cook on the call last night again brings up, well, 0:18:02.600 --> 0:18:05.560 we're intensely interested in these things. So you have to 0:18:05.600 --> 0:18:09.160 wonder again, what are they doing with their cash? Dividend work? 0:18:09.240 --> 0:18:18.560 Maybe increase the dividend, maybe acquisitions, will have to say 0:18:20.200 --> 0:18:23.600 who you put your trust in matters. Investors have put 0:18:23.640 --> 0:18:27.560 their trust in independent registered investment advisors to the two 0:18:27.560 --> 0:18:30.639 and of four trillion dollars. Why they see their roles 0:18:30.680 --> 0:18:34.320 to serve, not sell. That's why Charles Schwab is committed 0:18:34.560 --> 0:18:39.480 to the success over seven thousand independent financial advisors who 0:18:39.560 --> 0:18:45.040 passionately dedicate themselves to helping people achieve their financial goals. 0:18:45.400 --> 0:18:57.119 Learn more and find your independent advisor dot com. David 0:18:57.200 --> 0:19:00.399 Cousten is a mathematician from Brown University. He has the 0:19:00.480 --> 0:19:04.919 joy as a strategist of actually doing securities analysis before 0:19:04.960 --> 0:19:07.520 he was a guru, which makes for a different language 0:19:07.840 --> 0:19:09.919 in different work. David thrilled to have you with us 0:19:09.960 --> 0:19:13.560 with Goldman Sex. Of course, I've been watching the earnings 0:19:13.600 --> 0:19:16.800 and the new news for me is next to no 0:19:17.040 --> 0:19:21.640 growth up top in every quarter, every company's manufacturing down 0:19:21.680 --> 0:19:25.040 the income statement. The money question for me for next 0:19:25.160 --> 0:19:29.760 year partial differentials, unit dynamics, price dynamics up at the 0:19:29.800 --> 0:19:31.600 revenue line. You've got to get down to E. But 0:19:31.960 --> 0:19:35.120 whatever margin you want to pick, is there enough wiggle 0:19:35.240 --> 0:19:38.960 room forward to keep that shell game going? Or they 0:19:38.960 --> 0:19:45.040 have they cost cut their way to maximum efficiency. Well, uh, 0:19:45.160 --> 0:19:48.199 with apologies to your pejorative question, I think there's uh, 0:19:48.440 --> 0:19:53.240 there's enough wiggle rum. Yes, the margins are likely to 0:19:53.280 --> 0:19:57.560 remain flat, and that's an important issue to think about 0:19:57.880 --> 0:20:01.440 that with the U. S economy growing at around two percent, 0:20:02.520 --> 0:20:05.920 that means the top line revenue growth, if we include 0:20:06.000 --> 0:20:08.840 some inflation here as well, you're looking at modest top 0:20:08.880 --> 0:20:12.000 line growth called that four percent, a little faster from overseas. 0:20:12.080 --> 0:20:15.000 So that's your revenue line growing in the four for 0:20:15.200 --> 0:20:20.000 perhaps five level broadly across the market, and margins are 0:20:20.040 --> 0:20:23.560 likely to have peaked either late this year or sometime 0:20:23.600 --> 0:20:27.399 in two thousand seventeen, depending on the individual sector of 0:20:27.440 --> 0:20:30.760 the market, but broadly speaking, markets margins have been flat 0:20:30.840 --> 0:20:35.240 for for about five years, and it's been technology margins. 0:20:35.240 --> 0:20:38.959 The technology margins have been the key driver of why 0:20:39.119 --> 0:20:44.000 overall margins have I looked at pepsicolon. I don't know, 0:20:44.200 --> 0:20:46.040 it's just I looked at that company and it really 0:20:46.040 --> 0:20:49.240 stuck out to me, this game of making the margin 0:20:49.359 --> 0:20:52.760 down below, given that there's next to no revenue, do 0:20:52.880 --> 0:20:56.720 they have the wiggle room forward to continue to manufacture 0:20:57.480 --> 0:21:00.919 decent operating income decent eb what over well from an 0:21:00.920 --> 0:21:03.080 earnings point of view, certainly buy backs has been a 0:21:03.119 --> 0:21:06.879 contributor to fast faster earnings growth. Your revenue growth growing 0:21:06.960 --> 0:21:10.119 very very modestly, and there's been some margin. Uh, whatever 0:21:10.160 --> 0:21:11.800 margins they have been able to eek out have been 0:21:11.960 --> 0:21:15.560 largely from buy backs and more technology spending to try 0:21:15.600 --> 0:21:19.280 to eke out singles and doubles basically has been very 0:21:19.320 --> 0:21:21.600 It's been a tough operating environment, and the market has 0:21:21.600 --> 0:21:25.679 reflected that how does real GDP growth affect the markets? 0:21:25.680 --> 0:21:28.480 I know you've been been modeling this. If that changes, 0:21:28.520 --> 0:21:30.800