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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jay Ley.

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Speaker 1: We bring you insight from the best in economics, finance, investment,

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Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com, and of course on the Bloomberg Nor

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Speaker 1: Rabini joins us now from New York University Student School

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Speaker 1: of Business and of course of great acclaim looking at crisis.

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Speaker 1: Professor Rebini, wonderful to have you back with us. You

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Speaker 1: wrote in February or January of the white Swans that

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Speaker 1: are out there stealing that phrase from nothing Talub as well,

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Speaker 1: where are the white Swans of two years from now? Well,

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Speaker 1: there are some medium term challenges that were facing right

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Speaker 1: in the world in which public and private debts are rising.

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Speaker 1: They're going to become even bigger given the response to

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Speaker 1: the crises. We have the risk of global pandemics becoming

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Speaker 1: our current global climate change. This Cold war between US

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Speaker 1: and China is getting worse, geopolitical risk arising. Serious political

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Speaker 1: uncertainty is about the US election, about the shape of

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Speaker 1: the recovery started like a free fall. Then for a

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Speaker 1: while people thought it would be a v This v

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Speaker 1: is becoming a you that you could become a w

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Speaker 1: if you don't find the vaccine, if you don't have

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Speaker 1: enough Lolaurial, I want to look forward given the assumptions

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Speaker 1: and certitudes that institutions have right now, the great model

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Speaker 1: Neil that we have is there's a bridge out there

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Speaker 1: and we should invest or act according to that bridge.

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Speaker 1: Do you believe in the bridge and can it get

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Speaker 1: us to two thousand twenty two. I worried because before

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Speaker 1: the crisis there was a massive leveraging of the corporate

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Speaker 1: sector in the United States, but also in many other

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Speaker 1: parts of the role, including emerging markets. And given the

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Speaker 1: COVID shock, most firms have to deleverage. The leverage means

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Speaker 1: to spend less, save more, and doing less capax because

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Speaker 1: there is a glass of capacity. Now, how you spend less.

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Speaker 1: Your main cost are labor costs, But your labor costs

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Speaker 1: are my labor income. So the de leveraging of the

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Speaker 1: corporate sector implies there will be much more sluggage labor income. First,

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Speaker 1: the workers are fired, and even when they're gonna start

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Speaker 1: to be hired, they're not gonna get full time jobs

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Speaker 1: with full wages and benefits. Will be more gig workers,

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Speaker 1: part time workers, our workers, contractors, free lancers. That means

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Speaker 1: a huge amount of uncertainty and risk. Aversion by the

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Speaker 1: household sector that is also highly indebted. So you're gonna

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Speaker 1: have also deleveraging by the household sector that they have

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Speaker 1: to spend less, save more, and do less residential investment,

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Speaker 1: and that the leveraging of the private sector implies at

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Speaker 1: best sluggish. You shape our covery and a tours from

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Speaker 1: not doing the writings them as of controlling the virus,

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Speaker 1: and we don't find the vaccine that you could become

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Speaker 1: even a double a double D procession. But no real

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Speaker 1: If you look at the markets, they're going up. So

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Speaker 1: you know you've you've basically you're saying that we're going

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Speaker 1: through ten years of misery. The market keeps on going

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Speaker 1: up because of central banks. So you know who's right.

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Speaker 1: Does the economy catch up with the market or the

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Speaker 1: does the market catch up with the economy. Well, as

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Speaker 1: you pointed out, you know we have zero policy rates,

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Speaker 1: if not negative. We have a long term interest rates

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Speaker 1: in the US at best at sixty basis points in

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Speaker 1: parts of the world zero if not negative. Central banks

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Speaker 1: are even buying high yield and I great bonds, so

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Speaker 1: those spreads are squeezed and you don't get much in

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Speaker 1: credit or fixed income, and therefore people are going into stocks,

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Speaker 1: but not because there's a very strong recovery of earnings.

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Speaker 1: I mean, you have yet five companies, the big tech,

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Speaker 1: within the five hundred of SMP that are doing well.

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Speaker 1: The rest of them are not doing well. So it's

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Speaker 1: all driven by further multiple expansion rather than a real recovery.

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Speaker 1: And what's good, by the way, for Wall Street is

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Speaker 1: bad for main Street because Wall Street represents what big firms,

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Speaker 1: big tech, and big banks. What's main street? Workers, households

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Speaker 1: and small and medium sized enterprises. We know that hundreds

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Speaker 1: of thousands soon enough of small shops, retailers and others

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Speaker 1: are going to go out of business while the market

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Speaker 1: share of big business and arise, and that's driving things

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Speaker 1: straight down. That creates tons of jobs in the SIME

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Speaker 1: and makes the big firms even bigger in terms of

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Speaker 1: market shares. And as I said, if the firms are

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Speaker 1: going to survive and drive and achieve earnings target by

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Speaker 1: slashing labor costs, your labor costs and my labor income,

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Speaker 1: my consumption, and eventually that slamp of consumption is going

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Speaker 1: to weaken earnings and profits down the line. So I

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Speaker 1: think that the market doesn't reflect the real economy. Mainstream

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Speaker 1: is struggling, straggling severely. We're also focusing a lot more

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Speaker 1: on health. We're also focusing a lot more on climate change.

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Speaker 1: Governments are doing that across the world. Doesn't mean that

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Speaker 1: the pandemic is actually ending our obsession with economic growth

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Speaker 1: to focus on other things. Well it might then the

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Speaker 1: short run, But now there is some clear evidence that

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Speaker 1: these zoonotic diseases that our transmission from animal to human

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Speaker 1: that are occurring much more frequently, where HIV stars, Mayor's

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Speaker 1: swine flu, bird flu ze CA now COVID nineteen soon

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Speaker 1: en after it might be even more virulent, is driven

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Speaker 1: by the destruction of ecosystem That implied that animals that

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Speaker 1: are wild that heavy these diseases are closed livestock and

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Speaker 1: closer to human So if we don't address the destruction

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Speaker 1: of the ecosystem, the global pandemics are going to become

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Speaker 1: more frequent and more severe. And this pandemic alone has

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Speaker 1: done more economic destruction than any economic and financial crisis

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Speaker 1: in the last seventy years. So thinking that we should

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Speaker 1: not worry about the environment. Doesn't make any sense. We

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Speaker 1: have the investing environment control because that's gonna be greating jobs.

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Speaker 1: Nor Robinia, I want you to take an old world

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Speaker 1: study of how America's struggling to do income replacement. It's

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Speaker 1: understood in Germany, it's understood in the continent, it's understood

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Speaker 1: in the United Kingdom. And America struggling so hard with aid,

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Speaker 1: with stimulus and with the ideas simply of replacing income.

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Speaker 1: Why is that. Well, Historically people were criticizing the European

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Speaker 1: labor markets for being a more rigid and not as

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Speaker 1: flexible as the US. But during the crisis, the European

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Speaker 1: systems is to have worked much better because instead of

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Speaker 1: indiscriminately firing people, there is a system where workers stay

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Speaker 1: on the job, they get at least sixty to seventy

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Speaker 1: of their income depending on the country, and the rest

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Speaker 1: of it is risk sharing between the firm and the government.

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Speaker 1: That's why the unemployment rate barely went up in Germany

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Speaker 1: or even in Italy, while in the US we've had

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Speaker 1: double digit unemployment rate and actually even worse considering underemployment

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Speaker 1: and so on. So I think that actually system where

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Speaker 1: there is more social collision implies that you don't have

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Speaker 1: the collapse of employment, the collapse of labor income. And

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Speaker 1: that's why the recovery of Europe and the Eurozone right

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Speaker 1: now maybe better than the one of the United States.

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Speaker 1: Of course, there's a dual labor market. There are people

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Speaker 1: that are informal workers who don't get the same kind

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Speaker 1: of benefits. And there's a risk that, of course if

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Speaker 1: there are cover is going to be anemic in Europe

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Speaker 1: with another wave, that there will be another wave of unemployment.

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Speaker 1: That's a serious risk. But that's more rigid labor market,

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Speaker 1: and this form of re sharing has implied actually they're

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Speaker 1: doing a major price like this, the European system of

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Speaker 1: greater social coession gives you better economic outcomes than the

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Speaker 1: one of the United States that is just wild West capitalism.

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Speaker 1: Does that mean that m M T will be here?

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Speaker 1: And again, what does that mean for you know, for assets? Well,

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Speaker 1: we are already effectively in m M T or helicopter

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Speaker 1: drop of money because we have massive budget deficity of

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Speaker 1: the order of ten percent in Europe. In the US

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Speaker 1: is going to be closer tow and we have central

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Speaker 1: banks that are effectively doing unlimited qui formally in the

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Speaker 1: case of the US or Japan, informally even in the

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Speaker 1: Eurozone and other parts of Europe. So what's the difference

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Speaker 1: between m m T and large monetized budget deficits? Only

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Speaker 1: two fig lives? In one case you buy the bonds

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Speaker 1: in the primary market if you do m empty. In

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Speaker 1: the other case, if you do qui, you buy in

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Speaker 1: the secondary a week later. To m emty is supposed

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Speaker 1: to be permanent, while que is supposed to be temporary.

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Speaker 1: But this temporary que is becoming permanent. Effectively, we are

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Speaker 1: in that world of and we are out of time.

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Speaker 1: Nor Robini, thank you so much. You look forward to

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Speaker 1: seeing you again. It's the real deal has become very

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Speaker 1: serious and that's a good way to bring in our

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Speaker 1: first guests. This is perfect for the morning on these

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Speaker 1: John Gallup joins from Credit Such. John, I want to

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Speaker 1: go right over to James Sweeney and the rest of

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Speaker 1: your fixed income team and economics team. What is the

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Speaker 1: real yield? Excuse me, what is the large negative real

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Speaker 1: yield mean for equity investors? Um, you know, it's it's interesting, Tom.

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Speaker 1: We've We've done a whole bunch of work on what

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Speaker 1: it means for stock prices, because I know that people

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Speaker 1: who are looking at gold and other assets are obsessed

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Speaker 1: with this. The market cares more about nominal interest rates

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Speaker 1: than real yield. They do care about this. This issue

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Speaker 1: of inflation and we are when we're talking to clients,

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Speaker 1: whether we have inflation or deflation on the back of

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Speaker 1: this crisis is a really big discussion point because it

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Speaker 1: sets the tone for what type of stocks are going

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Speaker 1: to win. But the but in terms of the direction

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Speaker 1: of the market, it's the general of it's the sixty

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Speaker 1: three basis points on the tenure matters more to stocks

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Speaker 1: than this negative one person you're talking about right there

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Speaker 1: is worth the watching of Bloomberg surveillance. Through all of

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Speaker 1: this surveillance thign right there, it's the nominal yield minus

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Speaker 1: inflation expectations and the residual of that is the real yield.

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Speaker 1: And what you're hearing from Gala do is look at

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Speaker 1: the nominal yield is the most important determinant. What does

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Speaker 1: it mean, John Galup for the big banks and for

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Speaker 1: banking in general, Well, you know banks don't do well

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Speaker 1: when there's no interest rates. And at sixty three basis

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Speaker 1: points on the ten year and you can pull up

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Speaker 1: on your Bloomberg on what a two year UM bond

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Speaker 1: yield is doing, which is a lot lower than that,

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Speaker 1: and banks can't be that profitable in that um wormans.

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Speaker 1: Why the US banks have done so poor and actually

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Speaker 1: worse than European banks is because the yields in the

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Speaker 1: United States have fallen meaningfully, but European yields were so

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Speaker 1: low going into this crisis they couldn't go any lower. UM.

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Speaker 1: So the damage to US banks has been much greater

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Speaker 1: on a relative basis than the banks than the damage

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Speaker 1: to European banks um. You know, as a result of

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Speaker 1: this crisis, which is really I think a surprise too many.

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Speaker 1: John gub something current this morning. An hour ago we

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Speaker 1: saw John Deere come out with a better view for

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Speaker 1: their Q three. Certainly a surprise to the market is

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Speaker 1: that a trend that we're going to see coming here

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Speaker 1: and that with the grimness and the gloom of a

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Speaker 1: pandemic markdown, actually companies could do better. You know. We

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Speaker 1: we saw in the second quarter that it was the

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Speaker 1: best quarter in history in terms of beats, how results

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Speaker 1: are coming in relative to expectations, and it was also

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Speaker 1: the single quarter where the market cared less than any other. Um.

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Speaker 1: The people are trying to figure out is where is

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Speaker 1: this thing going? And what happens to Q three earnings

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Speaker 1: In the middle of this, it's probably more noise. People

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Speaker 1: are really trying to figure out the kind of a

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Speaker 1: trend direction. Do we have a cure, What does it

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Speaker 1: do for rates? What does it do for inflation? As

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Speaker 1: you were talking about, which is really the key issue. Um.

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Speaker 1: But but the next quarter in terms of earnings, the

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Speaker 1: market really is actually shrugging its shoulders much more than

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Speaker 1: you would think. Okay, so Jonathan, let's go back to

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Speaker 1: in good morning from London and frenzy. But let's go

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Speaker 1: back to this inflation versus deflation. If we want to

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Speaker 1: see inflation, let's say, rampant inflation, where does it come from?

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Speaker 1: Is it central bank action? Is it stimulus? Or actually

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Speaker 1: is it's simply supply chains. If you move supply chains

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Speaker 1: and you move them back home, you know, partly because

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Speaker 1: of trade wars, but also because of COVID, doesn't just

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Speaker 1: mean that prices go automatically up. Well, it's a really

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Speaker 1: great question because recently we've had to pick up in

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Speaker 1: actual inflation and you're starting to see if you wanted

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Speaker 1: to go buy a bicycle or tennis racket or certain

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Speaker 1: things like that, that there may be shortages because everything

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Speaker 1: has been shut down and then reopened. And you're seeing

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Speaker 1: inflation right now for people who want to leave New

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Speaker 1: York City and buy an apartment and apartment but a

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Speaker 1: rent a home in the suburbs, that the prices are

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Speaker 1: up because there's no additional stock of homes to buy

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Speaker 1: or rent. And so you are seeing inflation now, but

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Speaker 1: it is not the kind that's going to freak the

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Speaker 1: market out, because this is really transitory. It's because of

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Speaker 1: um kind of the result of the crisis itself. The

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Speaker 1: real the real question, I think in terms of longer

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Speaker 1: term inflation, and that's really what what matters here is

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Speaker 1: are you going to see this as a systemic issue

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Speaker 1: because the Fed is printing money and that it's ultimately

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Speaker 1: going to be a monetary phenomenon that prices go up

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Speaker 1: broadly on a sustained basis. If that happens, then it's

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Speaker 1: going to affect asset prices if it's something that's a

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Speaker 1: near term shortage. For example, the price of lumber is up,

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Speaker 1: but that's not something that's a long term trend. That's

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Speaker 1: a that's really resulting from the current crisis. That's not

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Speaker 1: the thing that's that's going to make the market uncomfortable. UM.

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Speaker 1: But the real question if you have central banks everywhere

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Speaker 1: in the world printing money like crazy, then prices naturally

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Speaker 1: go up. And that's the thing that people are focused on.

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Speaker 1: But with a labor market that is, you know, with

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Speaker 1: fifteen million unemployed Americans, it's very hard to see right

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Speaker 1: now anything that looks like underlying inflation. Johnathan, you know,

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Speaker 1: there are two things that I learned in lockdown, and

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Speaker 1: that was actually, yes, bicycles rise and inflation. And there's

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Speaker 1: also a puppy shortage. I don't know whether you can

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Speaker 1: model that. I mean, Tom can actually you know, see

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Speaker 1: a three standard deviation in prices of puppies. How do

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Speaker 1: you protect yourself to do you buy inflation protection at

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Speaker 1: this moment in time? I don't. I don't think So

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Speaker 1: you're you're talking about what matters if you in the

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Speaker 1: inflation deflation argument. And I talked to Andrew Garth, wages

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Speaker 1: are global strategies about this all the time. If you

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Speaker 1: are if you think that you're going to have a

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Speaker 1: long term inflation problem because of all this any printing,

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Speaker 1: then value beats growth and non US assets to actually

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Speaker 1: beat US assets if you think that we're going to

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Speaker 1: have disinflation. And that's my view that ultimately all of

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Speaker 1: the damage that's being done here actually pushes inflation down. UM.

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Speaker 1: But if that's the case, then growth winds and tech

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Speaker 1: winds and large caps. So this this discussion is not

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Speaker 1: just an academic um issue. It is the single most

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Speaker 1: important issue for pension plans and hedge funds and fund

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Speaker 1: managers who want to figure out how do you play

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Speaker 1: this thing? Not over the meat but over the next

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Speaker 1: you know, one to three years. John Glup one final question.

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Speaker 1: I was thunderstruck and caustious. James Sweeney. The last time,

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Speaker 1: you're wonderful chief Economist was on with us. I've never

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Speaker 1: heard Sweeney so conscious, and that's confirmed today by the

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Speaker 1: statistics out of France as well. Are you investing based

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Speaker 1: on sweeney caution? First of all, we talk all the

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Speaker 1: you know, we talk all the time, and um, you know,

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Speaker 1: and we don't. People don't always agree on everything. Right now,

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Speaker 1: we're seeing the world the same way that the bounce

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Speaker 1: that we've had this v shape, bounce off the bottom

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Speaker 1: is going to start flattening out as we go into

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Speaker 1: the September October time frame, and so we believe you're

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Speaker 1: gonna see more data start to roll over. And we

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Speaker 1: saw that, for example with the jobs data UM yesterday

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Speaker 1: on the unemployment claims, it has really stopped going down

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Speaker 1: and it's the the improvement in the job situation has

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Speaker 1: kind of flattened out, and we think we're gonna see that.

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Speaker 1: And James is a big proponent of the idea of

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Speaker 1: industrial production that the industrial data, which bounds really hard,

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Speaker 1: big v off the bottom, that it's going to stop

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Speaker 1: improving on a relative change basis, and so he would

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Speaker 1: he would agree. He would actually, uh, I haven't spoken

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Speaker 1: to him. He'd probably look at the date out of

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Speaker 1: France and say directionally, that's not a big surprise. John

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Speaker 1: gob thank you for the briefing with Credit Sweet. Is

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Speaker 1: just wonderful to see that combined research of Mr grayth Right,

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Speaker 1: Mr Sweeney and Mr Agalab. We go to Lisian Saunders

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Speaker 1: of Charles Schwab her her experience at SQUAB is extraordinary

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Speaker 1: and Lisien, I want to go back to the moments

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Speaker 1: like with Lou rue Kaiser A few years ago where

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Speaker 1: there were big events were now into not a big

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Speaker 1: event but almost a weekly and indeed monthly numbness of

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Speaker 1: struggling news. How do you invest given a numbness? Yeah,

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Speaker 1: it is an extraordinary period of time. And I really

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Speaker 1: think and I would say this, I suppose in a

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Speaker 1: normal market environment, but investors have to remember that some

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Speaker 1: of the basics around UH rebalancing, broad diversification, I think

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Speaker 1: really come into play in this environment. I continually get

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Speaker 1: questions about whether to be in this market being given

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Speaker 1: high valuations or election uncertainty. Should I get out now?

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Speaker 1: And neither get in or get out? And I think

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Speaker 1: that's sort of the moxie of some of the newly

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Speaker 1: minted day traders. Is a long term investing strategy, and

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Speaker 1: I think in this environment, more frequent rebalancing driven by

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Speaker 1: volatility and what asset classes are doing. Letting your portfolio

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Speaker 1: tell you when it's time to do something keeps us

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Speaker 1: in gear by sort of forcing us to trim and

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Speaker 1: to strength and add into weakness, which is ultimately the

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Speaker 1: best path to long term success. Some of your research, Lisanna,

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Speaker 1: is about volume, about retail trades, about the confidences that

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Speaker 1: are out there measure for us, a pile of money

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Speaker 1: on the sidelines. How big is the mountain of cash? Well,

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Speaker 1: it really depends on what type of investor you're looking at,

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Speaker 1: and that's really extraordinary. If you look at the most

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Speaker 1: active investors, their equity exposure has gone well up, so

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Speaker 1: there's not a lot of cash there. If you look

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Speaker 1: at a more traditional investors and there was a recent

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Speaker 1: gallop pole, you can look at overall household exposure to

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Speaker 1: equities that's been coming down. So that's another unique part

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Speaker 1: of this market environment is you really have significant divergence

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Speaker 1: in terms of both behavioral and attitudinal measures of investor

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Speaker 1: sentiment and what they're positioning is So if you look

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Speaker 1: at the cohort of newer, younger, more active day traders,

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Speaker 1: their exposure is extraordinarily high. But if you look at

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Speaker 1: more seasoned investors, both on the retail side and the

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Speaker 1: institutional side, they've had a bit more skepticism about this

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Speaker 1: and are holding larger amounts of cash. So it really

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Speaker 1: is a unique environment where you have to break investors

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Speaker 1: into various cohorts, in some cases a functive h to

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Speaker 1: get a sense of where there's excess and where there's

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Speaker 1: still opportunity. But listen, where do you know volatility? More

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Speaker 1: volatility give, because just simply the number of infections are

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Speaker 1: rising because of COVID nineteen and it will be much

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Speaker 1: more difficult to read the economy. I think economic volatility

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Speaker 1: is absolutely a given. We've seen diminishing equity volatility as

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Speaker 1: measured by things like the VIX, but I think as

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Speaker 1: we move into the fall, that's likely to pick up,

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Speaker 1: even absent any news on the virus front. I think

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Speaker 1: election related volatility tends to pick up in the post

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Speaker 1: labor day environment, so I would certainly expect that to

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Speaker 1: be the case this time. But I think economic volatility

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Speaker 1: absolutely not just driven by number of cases. And there's

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Speaker 1: been a big focus on vaccines, and I think the

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Speaker 1: market would obviously be pleasantly surprised if we do get

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Speaker 1: near term news on a vaccine. But I think just

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Speaker 1: as important would be news on therapeutics, because we have

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Speaker 1: to remember that upon an announcement of a vaccine that's

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Speaker 1: ready for humans, that'll be all the follow on questions

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Speaker 1: on efficacy, availability, that percentage of people willing to take it.

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Speaker 1: So I don't think the head and we're looking for

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Speaker 1: on a vaccine answers all the questions that we have

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Speaker 1: now or will then las Angel We spend a lot

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Speaker 1: more time trying to figure out, you know, what companies

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Speaker 1: will go into liquidation, will go bankrupt and and is

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Speaker 1: this because of COVID nineteen or is it just an

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Speaker 1: acceleration of trend. Well, we're seeing heightened level of bankruptcy

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Speaker 1: akin to what we saw back in two thousand and nine,

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Speaker 1: but we also have FET facilities that have been able

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Speaker 1: to sort of stem that tied a little bit. I

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Speaker 1: still think it's a factor, particularly when we look at

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Speaker 1: the relationship between temporary unemployed and permanent job losses, and

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Speaker 1: those have been going effectively in the wrong direction. We've

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Speaker 1: seen a decline in temporary layoffs and a rise in

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Speaker 1: in permanent job losses, and I think that will continue

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Speaker 1: to be tied to bankruptcies filings now. For now, defaults

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Speaker 1: have been held at bay in large part due to

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Speaker 1: what the FETE has done. But I also think that

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Speaker 1: there might be less willingness on the part of some

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Speaker 1: small companies that are facing an existential threat to their

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Speaker 1: business to try to stay afloat via what the FET

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Speaker 1: has done or other means. So that may be what's

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Speaker 1: different in this environment versus last time. If you really

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Speaker 1: question your long term survivability, I think there are some

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Speaker 1: companies that are just throw in the towel right now.

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Speaker 1: Bloomberg Radio, Bloomberg Television, a simulcast for instance, ly Qua

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Speaker 1: and for Lisa Bryan wantson John Farrell. We welcome all

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Speaker 1: of you on this Friday, Lizzie, and I didn't know

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Speaker 1: this was going to be a theme of the week

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Speaker 1: on a Monday, but here it is, and that is

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Speaker 1: diversification or Peter Lynch's diversification, whatever it may be. Are

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Speaker 1: we over diversified in our retirement plans? Actually we we

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Speaker 1: think not. In fact, if we look at the lack

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Speaker 1: of rebalancing that's done, particularly US versus rest of world,

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Speaker 1: there is a significant bias within portfolios towards US equity

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Speaker 1: ex closure, largely because the lack of rebalancing in the performance.

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Speaker 1: And I think you know what tends to happen as

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Speaker 1: you move from one cycle into another cycle, you do

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Speaker 1: see tend to see a reversal in leadership. And we

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Speaker 1: do think there is an opportunity for non US to

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Speaker 1: provide some diversification, which hasn't been the case in the

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Speaker 1: last years, but interrupted. But this is really important. Are

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Speaker 1: you talking about European multinational Swiss, nest Lee's, etcetera. Siemens.

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Speaker 1: Are you talking about individual names or individual because I

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Speaker 1: understand what are you talking big cap? Are you talking

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Speaker 1: to em talking just developed international markets, emerging markets within

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Speaker 1: portfolios at the broad asset class level. Uh, not specific

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Speaker 1: to any country. I do still think large caps, both

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Speaker 1: in the United States and globally um will be in

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Speaker 1: the leadership position. I think the fundamental differential from a

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Speaker 1: percentage of zombie companies, debt to equity ratios, all the

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Speaker 1: quality factors that have been dominant in performance across asset

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Speaker 1: classes US and globally, across sectors. I think that quality

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Speaker 1: bias in fact will define leadership more than things like

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Speaker 1: sectors or even countries. Listen and the time that we

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Speaker 1: got left to you with your public service in the

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Speaker 1: Bush administration on fiscal policy as well, How troubled should

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Speaker 1: our listeners and viewers be over the size of these deficits,

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Speaker 1: the rapidity of which we've seen these trillion dollar deficits.

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Speaker 1: I think we should be troubled long term, we're all

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Speaker 1: m m tears. Now, I think if there's one area

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Speaker 1: for bipartisan support, it's for kicking the deficit and debt

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Speaker 1: can down the road. And there doesn't seem to be

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Speaker 1: much concerned about this now. I don't view this as

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Speaker 1: an as a debt bubble bursting accident at a moment

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Speaker 1: in time. I view this as a simmering crisis over

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Speaker 1: time because what's been shown, not just here in the

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Speaker 1: United States but anywhere around the globe, a high and

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Speaker 1: rising burden of that even if it doesn't cause a

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Speaker 1: moment in time crisis, it's an impediment to an economy

431
00:25:58,040 --> 00:26:00,200
Speaker 1: being able to grow at a robust pace. You know,

432
00:26:00,240 --> 00:26:03,720
Speaker 1: we all celebrated the longest economic expansion in history, the

433
00:26:03,760 --> 00:26:06,120
Speaker 1: most recent one, but it was also by far the weakest,

434
00:26:06,480 --> 00:26:08,679
Speaker 1: and I think one of the reasons for that is

435
00:26:08,720 --> 00:26:12,320
Speaker 1: the high debt burden and interest costs are swamping everything

436
00:26:12,320 --> 00:26:15,480
Speaker 1: else the government spends money on. And even in a

437
00:26:15,600 --> 00:26:19,240
Speaker 1: no rise interest rate environment, just increasing the debt at

438
00:26:19,280 --> 00:26:21,919
Speaker 1: the pace we are means that interest payments, even in

439
00:26:21,960 --> 00:26:26,400
Speaker 1: a flat yield environment, start to really swamp spending on

440
00:26:26,440 --> 00:26:29,119
Speaker 1: anything else. So I think it is absolutely a long

441
00:26:29,240 --> 00:26:31,520
Speaker 1: term problem, and I think the effect of it is

442
00:26:31,560 --> 00:26:34,080
Speaker 1: a slower pace of growth than would otherwise be possible.

443
00:26:34,200 --> 00:26:37,080
Speaker 1: Lizen Saunders, thank you so much, very valuable conversation this

444
00:26:37,119 --> 00:26:43,200
Speaker 1: morning with Charles Schwab. Of course, what is that, Jeneminster?

445
00:26:43,440 --> 00:26:46,320
Speaker 1: And all I can say is, years ago you would

446
00:26:46,359 --> 00:26:49,719
Speaker 1: attempt to steal Piper Jeffrey research because there was this

447
00:26:49,880 --> 00:26:54,080
Speaker 1: crazy guy at Piper Jeffrey. Within all the trials and

448
00:26:54,119 --> 00:26:58,000
Speaker 1: tribulations of Apple two thousand seven to two thousand eight,

449
00:26:58,240 --> 00:27:02,320
Speaker 1: from twenty eight down to twelve is per share, Munster up.

450
00:27:02,320 --> 00:27:06,000
Speaker 1: Paul started picking up Apple, it ballooned. It went from

451
00:27:06,040 --> 00:27:10,440
Speaker 1: a dollar fifty three a share to four dollars sixty

452
00:27:10,600 --> 00:27:14,480
Speaker 1: cents in two thousand four, and that has done better

453
00:27:14,520 --> 00:27:18,080
Speaker 1: than that recently, think thirty nine percent per year up

454
00:27:18,119 --> 00:27:20,880
Speaker 1: to the lofty two trillion level we're at now. We're

455
00:27:20,960 --> 00:27:24,320
Speaker 1: honored to have Jeane Munster with us. Jane, how do

456
00:27:24,400 --> 00:27:31,800
Speaker 1: you buy in a hold something like that? Tom? I

457
00:27:31,840 --> 00:27:35,239
Speaker 1: think it's about knowing where the world is going, And

458
00:27:35,359 --> 00:27:39,160
Speaker 1: ultimately this exceeded our wildest dreams when we just step

459
00:27:39,200 --> 00:27:41,320
Speaker 1: back and think about it over the context that we've

460
00:27:41,359 --> 00:27:45,440
Speaker 1: covered it, but in a two to five year window,

461
00:27:45,480 --> 00:27:49,760
Speaker 1: it has not exceeded. It actually has been more predictable

462
00:27:49,800 --> 00:27:53,600
Speaker 1: than we've seem at first glance. And ultimately we have

463
00:27:53,640 --> 00:27:55,960
Speaker 1: to ask herself the questions where is the world going?

464
00:27:56,760 --> 00:28:01,080
Speaker 1: And in each of Apple's chapters, they have been in front,

465
00:28:01,280 --> 00:28:05,879
Speaker 1: never first, but always in front with the best products

466
00:28:05,960 --> 00:28:09,000
Speaker 1: around where these themes are. And I think that that

467
00:28:09,240 --> 00:28:12,040
Speaker 1: ultimately is the question to ask about Apples. Are they

468
00:28:12,080 --> 00:28:14,639
Speaker 1: going to be positioned for what people want next? They

469
00:28:14,640 --> 00:28:17,879
Speaker 1: were positioned on Madison Avenue yesterday, folks. Good morning to

470
00:28:17,960 --> 00:28:20,200
Speaker 1: three guys and all the great people up there helping

471
00:28:20,200 --> 00:28:23,479
Speaker 1: me with breakfast after this swire at Bloomberg, and I

472
00:28:23,520 --> 00:28:28,000
Speaker 1: wandered down Jean the empty stores the empty I mean empty,

473
00:28:28,040 --> 00:28:31,919
Speaker 1: I mean stores in business that are empty, stores that

474
00:28:31,960 --> 00:28:35,480
Speaker 1: are closed and empty. And there's a line out the

475
00:28:35,520 --> 00:28:37,480
Speaker 1: Apple door I mean, and trust me, folks, it's the

476
00:28:37,560 --> 00:28:40,680
Speaker 1: only store with a line out the door, Jean monster,

477
00:28:40,760 --> 00:28:42,840
Speaker 1: How do they get to three trillion dollars? How does

478
00:28:42,880 --> 00:28:49,200
Speaker 1: Tim Cook continue this success? It's about capping into those

479
00:28:49,360 --> 00:28:53,360
Speaker 1: next massive themes. You know where we're going. This pandemic

480
00:28:53,400 --> 00:28:56,080
Speaker 1: has created a fracture. It is kind of the next

481
00:28:56,200 --> 00:28:59,920
Speaker 1: wave here. But to answer your question, there's three phases

482
00:29:00,040 --> 00:29:03,080
Speaker 1: to it. The first and five G. Five G is

483
00:29:03,080 --> 00:29:05,400
Speaker 1: going to be more significant than when people realize it's

484
00:29:05,440 --> 00:29:08,160
Speaker 1: gonna be a multi year upgrade cycle for iPhones. Typically

485
00:29:08,200 --> 00:29:10,840
Speaker 1: we see a one year upgrade cycle, but this is

486
00:29:10,840 --> 00:29:13,320
Speaker 1: gonna probably be a three year upgrade cycle. So that

487
00:29:13,360 --> 00:29:16,760
Speaker 1: means you're gonna have kind of high single digit, low

488
00:29:16,840 --> 00:29:19,440
Speaker 1: team growth of iPhone that's much higher than it's been

489
00:29:19,600 --> 00:29:22,120
Speaker 1: flattish over the last couple of years over the next

490
00:29:22,200 --> 00:29:24,560
Speaker 1: few years because of five G. That's one way that

491
00:29:24,600 --> 00:29:28,200
Speaker 1: it gets to that that three trailing mark. A second

492
00:29:28,240 --> 00:29:30,640
Speaker 1: is what they're doing around health and wellness. It's still

493
00:29:30,880 --> 00:29:35,640
Speaker 1: largely about the watch. It's underpenetrated. Less than ten of

494
00:29:35,720 --> 00:29:38,800
Speaker 1: iPhone owners own a watch, and so there's a growth opportunity.

495
00:29:38,840 --> 00:29:42,080
Speaker 1: But also to extend that they have patents around making

496
00:29:42,120 --> 00:29:44,880
Speaker 1: air pods more of a health and wellness product. Your

497
00:29:44,960 --> 00:29:48,400
Speaker 1: ear drum. The tends to be a great place for

498
00:29:48,480 --> 00:29:52,400
Speaker 1: picking up bilebacker markers like for example, blood pressure. That's

499
00:29:52,400 --> 00:29:55,840
Speaker 1: an example of how Apple can extreme existing products. And

500
00:29:55,880 --> 00:29:58,200
Speaker 1: then the last pieces around services, and I want to

501
00:29:58,440 --> 00:30:02,400
Speaker 1: emphasize this is they have an opportunity and our prediction

502
00:30:02,440 --> 00:30:04,560
Speaker 1: and belief is that they will create a bundle, a

503
00:30:04,600 --> 00:30:07,680
Speaker 1: three sixty bundle of hardware software. You simply pay Apple

504
00:30:08,200 --> 00:30:12,880
Speaker 1: once one month dollar or one monthly fee, and you

505
00:30:12,920 --> 00:30:16,480
Speaker 1: get your hardware upgraded at a certain basis, you get

506
00:30:16,560 --> 00:30:20,280
Speaker 1: software services. It's just a one stop shot. When are

507
00:30:20,320 --> 00:30:22,440
Speaker 1: we going to When are we going to see it?

508
00:30:22,440 --> 00:30:24,720
Speaker 1: Sounds like Apple Prime. When are we going to see

509
00:30:24,720 --> 00:30:28,840
Speaker 1: it a Apple Prime? Well said, I suspect it was

510
00:30:28,880 --> 00:30:31,360
Speaker 1: in the next three years. This October, we're going to

511
00:30:31,480 --> 00:30:36,200
Speaker 1: see their first bundling of their content. So you're gonna

512
00:30:36,320 --> 00:30:40,560
Speaker 1: see them bundling Apple Music with Apple TV, plessing for

513
00:30:40,680 --> 00:30:44,520
Speaker 1: their storage, their eye cloud storage, so they it's referred

514
00:30:44,520 --> 00:30:47,840
Speaker 1: to as the code name is Apple one. But that

515
00:30:48,000 --> 00:30:51,200
Speaker 1: is I think uh gonna be a leading indicator of

516
00:30:51,320 --> 00:30:54,120
Speaker 1: ultimately what only Apple can do, which is bring these

517
00:30:54,160 --> 00:30:57,720
Speaker 1: hardware and services together. Northern Company can combine this. That's

518
00:30:57,760 --> 00:31:01,000
Speaker 1: what consumers want. They just want to take the headache

519
00:31:01,040 --> 00:31:05,120
Speaker 1: of tech away from themselves and have a steady bill

520
00:31:05,160 --> 00:31:07,560
Speaker 1: to pay on a monthly basis. And I think that

521
00:31:07,560 --> 00:31:09,160
Speaker 1: in the next three years we're going to see that,

522
00:31:09,200 --> 00:31:11,920
Speaker 1: and I think that's gonna be have a material impact

523
00:31:11,920 --> 00:31:17,680
Speaker 1: in terms of how investors view Apple's revenue and earnings predictability. Ultimately,

524
00:31:17,720 --> 00:31:20,280
Speaker 1: I think that's going to garner a higher multiple. So

525
00:31:20,680 --> 00:31:23,160
Speaker 1: it's interesting, Gene. Right here, I'm wondering how all these

526
00:31:23,240 --> 00:31:26,800
Speaker 1: high priced hardware and software services that Apple is so

527
00:31:26,920 --> 00:31:30,000
Speaker 1: famous for will fare in a world where in the

528
00:31:30,080 --> 00:31:33,120
Speaker 1: US we have ten percent unemployment, we have a global recession.

529
00:31:33,760 --> 00:31:38,760
Speaker 1: At what point does their business feel the pain? The

530
00:31:38,800 --> 00:31:41,520
Speaker 1: point that they I mean, if this is sustained for

531
00:31:41,720 --> 00:31:45,120
Speaker 1: multiple years, Uh, they will feel the pain just like

532
00:31:45,160 --> 00:31:47,760
Speaker 1: everyone else. And the reason why they haven't felt the

533
00:31:47,800 --> 00:31:52,719
Speaker 1: pain is obviously because even with the pain of everything

534
00:31:52,760 --> 00:31:57,000
Speaker 1: you just described, we still need these devices. And essentially

535
00:31:57,160 --> 00:32:01,960
Speaker 1: the responsibility of tech has been shifted from business and

536
00:32:02,040 --> 00:32:05,200
Speaker 1: organizations on the consumers. And so even though they have

537
00:32:05,320 --> 00:32:07,480
Speaker 1: less dollars to spend, their spending it with their tech.

538
00:32:07,600 --> 00:32:09,760
Speaker 1: You know, Paul, I gotta interrupt here and just say,

539
00:32:09,920 --> 00:32:13,280
Speaker 1: rounded up Apples already up to two point one trillion.

540
00:32:14,120 --> 00:32:20,920
Speaker 1: Monsters blathering on exactly. So, Jean, how about the cash here?

541
00:32:21,000 --> 00:32:23,400
Speaker 1: I mean, you know, the cash just keeps, you know,

542
00:32:23,480 --> 00:32:25,640
Speaker 1: piling up here. They have sixty billion dollars in free

543
00:32:25,640 --> 00:32:28,680
Speaker 1: cash flow every year. Is there ever going to be

544
00:32:28,760 --> 00:32:31,200
Speaker 1: a I know, they buy back a lot of stock,

545
00:32:31,240 --> 00:32:35,200
Speaker 1: but what do they do with the cash? Probably most

546
00:32:35,240 --> 00:32:36,760
Speaker 1: of it's going to come back in the form of

547
00:32:36,760 --> 00:32:39,920
Speaker 1: buying back just like you said that the one X

548
00:32:39,960 --> 00:32:42,600
Speaker 1: factor in terms of getting to what they call net

549
00:32:42,600 --> 00:32:45,600
Speaker 1: cash neutral, which the bottom line takeaway there is there's

550
00:32:45,640 --> 00:32:49,200
Speaker 1: still this wave of cash coming towards investors with its

551
00:32:49,200 --> 00:32:53,120
Speaker 1: through buybacks. There may be some acquisition. Apple has never

552
00:32:53,120 --> 00:32:55,520
Speaker 1: done a big acquisition, but I think that they always

553
00:32:56,120 --> 00:32:59,920
Speaker 1: hold the right. The question is who should they acquire ultimately,

554
00:33:00,040 --> 00:33:04,040
Speaker 1: and uh, that becomes more confusing. They in hindsight they

555
00:33:04,040 --> 00:33:06,760
Speaker 1: probably should have acquired Tesla when it was fifty billion,

556
00:33:06,800 --> 00:33:09,160
Speaker 1: but that's in a different place today. But that's the

557
00:33:09,200 --> 00:33:11,880
Speaker 1: other uh, where they could be using the money. All right,

558
00:33:12,000 --> 00:33:14,200
Speaker 1: let's let's let's go there. Let's just talk Tesla here,

559
00:33:14,240 --> 00:33:17,800
Speaker 1: I mean again another stock on a just a parabolic rise. Here,

560
00:33:18,080 --> 00:33:22,760
Speaker 1: give us your latest thoughts here on Tesla. The question

561
00:33:22,920 --> 00:33:26,280
Speaker 1: is less about the chart and where it's come from

562
00:33:26,320 --> 00:33:29,040
Speaker 1: in the past year and elon Musk and his behavior

563
00:33:29,520 --> 00:33:31,760
Speaker 1: for us, It's more also about where is the world

564
00:33:31,840 --> 00:33:34,240
Speaker 1: going and ultimately where can they what can their position be?

565
00:33:34,720 --> 00:33:37,400
Speaker 1: And the world is going to electrification. It just simply

566
00:33:37,480 --> 00:33:41,120
Speaker 1: is a better way to move people around and also autonomy.

567
00:33:41,400 --> 00:33:43,720
Speaker 1: And when you think about that first part, the electric part,

568
00:33:44,000 --> 00:33:47,000
Speaker 1: Tesla has a lead. They have any percent market share

569
00:33:47,040 --> 00:33:49,160
Speaker 1: in the US and E vs about twenty five in

570
00:33:49,200 --> 00:33:52,360
Speaker 1: Europe and about ten in Asia. But the important part

571
00:33:52,440 --> 00:33:55,520
Speaker 1: here is that that lead is a sustainable lead. I

572
00:33:55,560 --> 00:33:57,880
Speaker 1: think that that is one of the I think areas

573
00:33:57,880 --> 00:33:59,920
Speaker 1: that we're in a different place. We view this small

574
00:34:00,080 --> 00:34:03,480
Speaker 1: a place that traditional carmakers are going to catch twenty two.

575
00:34:03,560 --> 00:34:06,040
Speaker 1: I think it will be difficult for them to ultimately

576
00:34:06,080 --> 00:34:08,720
Speaker 1: catch up for a number of reasons with we're Tesla's

577
00:34:08,719 --> 00:34:10,640
Speaker 1: at But if you kind of play this sport and

578
00:34:10,680 --> 00:34:13,239
Speaker 1: assume their market share does go down, but ultimately in

579
00:34:13,280 --> 00:34:16,640
Speaker 1: the US. But let's assume that they get market share

580
00:34:16,680 --> 00:34:20,600
Speaker 1: of electric cars globally in the next fifteen years. That's

581
00:34:20,640 --> 00:34:22,759
Speaker 1: twenty one million cars a year. They're doing about five

582
00:34:22,840 --> 00:34:26,840
Speaker 1: hundred thousand right now. That would be about seven hundred

583
00:34:26,880 --> 00:34:30,240
Speaker 1: and fifty billion in revenue, which implied that the current

584
00:34:30,400 --> 00:34:34,600
Speaker 1: evaluation of Tesla is still training at about point three

585
00:34:34,680 --> 00:34:38,120
Speaker 1: times revenue. Now Apple's training at six and a half

586
00:34:38,160 --> 00:34:41,040
Speaker 1: times revenue, and uh, I think that that is undervalued

587
00:34:41,080 --> 00:34:44,560
Speaker 1: Apple at six very different companies Apple and Tesla. But

588
00:34:44,640 --> 00:34:47,359
Speaker 1: the point is is that it's still room. But they

589
00:34:47,360 --> 00:34:50,000
Speaker 1: want me to test drive the Bentley ben taken this weekend,

590
00:34:50,080 --> 00:34:53,560
Speaker 1: and I mean there's hybrid cars. I mean, Gene, I

591
00:34:53,640 --> 00:34:56,440
Speaker 1: understand Tesla's out there, but am I right that they

592
00:34:56,480 --> 00:34:59,200
Speaker 1: have the market to themselves? And what's it gonna be

593
00:34:59,280 --> 00:35:04,799
Speaker 1: like in twelve four thirty six months? The challenge for

594
00:35:04,880 --> 00:35:07,440
Speaker 1: traditional auto to catch up, and this is something that

595
00:35:07,480 --> 00:35:11,719
Speaker 1: we UH closely study the challenges. It's not about just

596
00:35:11,800 --> 00:35:16,120
Speaker 1: introducing a car and saying, uh, here, we have a

597
00:35:16,160 --> 00:35:17,960
Speaker 1: great brand, We've been around for a long time, we

598
00:35:18,000 --> 00:35:21,400
Speaker 1: have a good style. There's some substance around the features

599
00:35:21,400 --> 00:35:23,960
Speaker 1: that consumers want, but one of the biggest ones is

600
00:35:24,520 --> 00:35:28,240
Speaker 1: range and price. Those that intersection between range and price,

601
00:35:28,880 --> 00:35:34,320
Speaker 1: and ultimately is that Tesla is about thirty less expensive

602
00:35:34,360 --> 00:35:38,200
Speaker 1: than traditional auto and for traditional auto to close that

603
00:35:38,520 --> 00:35:41,360
Speaker 1: most critical feature gap, and you need to tell the

604
00:35:41,400 --> 00:35:43,480
Speaker 1: cars at a discount, which is a problem for a

605
00:35:43,480 --> 00:35:46,000
Speaker 1: lot of their models because they tend to be leveraged

606
00:35:46,120 --> 00:35:50,759
Speaker 1: businesses and so UHS. There effectively is some economies of

607
00:35:50,800 --> 00:35:54,040
Speaker 1: scale that Tesla has captured on top of that, this

608
00:35:54,200 --> 00:35:56,479
Speaker 1: battery advantage that they have. We're gonna hear more about

609
00:35:56,480 --> 00:35:58,680
Speaker 1: it in September at their battery day, but that will

610
00:35:58,760 --> 00:36:04,000
Speaker 1: likely continue to lengthened. And so the best the lifeline

611
00:36:04,120 --> 00:36:06,440
Speaker 1: for the auto industry. And I'm not saying that Ford

612
00:36:06,520 --> 00:36:08,960
Speaker 1: and GM and Toyota are gonna be gone, but I

613
00:36:09,000 --> 00:36:10,799
Speaker 1: do believe one of those three are going to be

614
00:36:10,840 --> 00:36:14,280
Speaker 1: a fraction of their size in the next fifteen years.

615
00:36:14,719 --> 00:36:17,600
Speaker 1: But the one lifeline is will Tesla end up licensing

616
00:36:17,680 --> 00:36:20,960
Speaker 1: some of its battery and motor technology to Otto. Elon

617
00:36:21,040 --> 00:36:23,239
Speaker 1: Musk has recently hinted he would be open to that.

618
00:36:23,320 --> 00:36:25,040
Speaker 1: I think it's a bluff. I don't think he has

619
00:36:25,080 --> 00:36:29,360
Speaker 1: any desire to do that. Do they make money on

620
00:36:29,400 --> 00:36:36,200
Speaker 1: a car Tesla? Uh? Yes, they do. Uh. And the

621
00:36:36,239 --> 00:36:39,960
Speaker 1: reason why I even hesitate there, there's uh there's a

622
00:36:39,960 --> 00:36:43,680
Speaker 1: lot of noise around production or filling plants. But they

623
00:36:43,760 --> 00:36:46,880
Speaker 1: do make money and ultimately they can have a business

624
00:36:46,960 --> 00:36:51,239
Speaker 1: the margin their goals to have a margin. Gene, thank

625
00:36:51,280 --> 00:36:54,040
Speaker 1: you so much. Tell me when you find an entry

626
00:36:54,040 --> 00:36:57,680
Speaker 1: point on Apple. Gene Munster Loop Ventures in congratulations to

627
00:36:57,760 --> 00:37:02,920
Speaker 1: Gene Munch's Munster for sixteen years. Way out Front on Apple.

628
00:37:03,360 --> 00:37:07,560
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and

629
00:37:07,640 --> 00:37:12,960
Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast

630
00:37:13,000 --> 00:37:17,240
Speaker 1: platform you prefer. I'm on Twitter at Tom Keene before

631
00:37:17,239 --> 00:37:21,120
Speaker 1: the podcast. You can always catch us worldwide. I'm Bloomberg

632
00:37:21,200 --> 00:37:21,480
Speaker 1: Radio