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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, along

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Speaker 1: with Jonathan Ferrell and Lisa A. Brawmowitz Jailey. We bring

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Speaker 1: you insight from the best and economics, finance, investment, and

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

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Speaker 1: dot com, and of course on the Bloomberg terminal, Microsoft

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Speaker 1: in Alphabet, both reporting after the bell. We've been talking

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Speaker 1: about this throughout the day. It's about advertising, it's about

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Speaker 1: the consumer. Yes, it's also about the cloud. But John,

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Speaker 1: what happens to the index if big tech disappoints hasn't

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Speaker 1: been priced in? And that's what really is the big

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Speaker 1: question hanging over this week. We've got the perfect guest

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Speaker 1: for that, Judean Emmanuel in a studio here in New York,

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Speaker 1: a good friend of us, the chief equity and a

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Speaker 1: quantitive strategist at Evercore Race Si Judy and the big

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Speaker 1: tech players have pulled back on hiring intentions. Do you

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Speaker 1: expect some of that to show up in that guidance?

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Speaker 1: No doubt. And I think when you think about the

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Speaker 1: evolution of markets over the last couple of weeks, we've

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Speaker 1: actually gone from the pulling back from hiring to where

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Speaker 1: now Corporate America is announcing layoffs, automotive, social media. We're

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Speaker 1: gonna see a lot more of that, and that's really

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Speaker 1: why bond yields are back near multi month lows on

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Speaker 1: a daily basis. Julia Emmanuel, your morning note is the

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Speaker 1: most valuable three paragraphs I read. You quantify SMP earnings,

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Speaker 1: and you go through all the math. We don't need

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Speaker 1: to deal with that right now. What it means is

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Speaker 1: corporations are adjusting given ed Hyman's growth recession. E kind

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Speaker 1: of feel in the micro analysis you're acclaimed for. How

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Speaker 1: will corporations adjust over the next quarter. Well, they're they're

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Speaker 1: gonna have no choice because you know, you've got every

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Speaker 1: single thing coming at you. You've got the need to reshure,

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Speaker 1: the need to stock because your supply chains have been

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Speaker 1: broken and they're no longer dependable. But at the same time,

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Speaker 1: you've also got this fact that you know the world

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Speaker 1: is changing. Economic volatility is so much higher now than

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Speaker 1: it was the last thirty years, that all of these

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Speaker 1: factors are are really very different. I think what it

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Speaker 1: ends up meaning is that at the stock level, valuations

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Speaker 1: continue to ratchet lower. But again corporate America has always

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Speaker 1: found ways of you know, squeezing profit and figuring out

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Speaker 1: how to transform itself. We don't think it's different this time, Julian.

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Speaker 1: That's nice for companies that can actually do that. Yet

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Speaker 1: every stock analyst that we can do and I see

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Speaker 1: John laughing at anything, it's nice. Every stock analysts we

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Speaker 1: speak to is becoming a rate analyst and saying it's

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Speaker 1: all about the FED, whether the torpedo the overall economy

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Speaker 1: or not. And as much as the companies can adjust,

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Speaker 1: they cannot adjust in the face of vulcar. How much

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Speaker 1: does the fate of the SMP really depend entirely on

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Speaker 1: how far the FED has to go versus some of

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Speaker 1: these adjustments that each company can make. Well, it's really

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Speaker 1: at this point means a lot. Uh, We're we're at

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Speaker 1: a crossroads. If you look at it, the average recession

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Speaker 1: bearer market that loses for the average non recession bearer market.

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Speaker 1: You could argue we've already done that, But the fact

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Speaker 1: is is that we have not seen any indication other

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Speaker 1: than the FED is really concentrating on the single mandate

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Speaker 1: of the dual mandate, which is inflation, and from our

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Speaker 1: point of view, you've already started to see signs of

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Speaker 1: a turning down along with the economy weakening. And we

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Speaker 1: wonder whether, in a reverse logic of the last forty years,

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Speaker 1: the FED might step back and say, Okay, we have

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Speaker 1: more ammunition to hike if we need to later, knowing

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Speaker 1: that cutting rates next year is the single thing that

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Speaker 1: causes potential inflation expectations to become the anchored Judian. When

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Speaker 1: you sit around the type with that hyman and he's

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Speaker 1: expected bad news, do you sit there and think then

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Speaker 1: that math news is bad news for your market? Again?

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Speaker 1: That's what's uh really tricky about this current juncture because

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Speaker 1: you don't see the FED reacting to bad news because

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Speaker 1: inflation does not allow them right now to react to

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Speaker 1: bad news. We do think that looking at the next

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Speaker 1: couple of months, that dynamic could change. Julian, I want

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Speaker 1: to just clarify something that you said. A lot of

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Speaker 1: people think that if the FED doesn't go far now,

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Speaker 1: it's going to lead to inflation expectations becoming d anchored.

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Speaker 1: You just said the opposite that if the FED goes

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Speaker 1: too far now, pauses and then cuts rates, that's what's

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Speaker 1: going to cause inflation to become unanchored. How much pushback

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Speaker 1: do you get to that? Where do you get that

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Speaker 1: idea that goes back to the nineteen seventies something we

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Speaker 1: call the Burns blunder. If you look back the seventy five,

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Speaker 1: you had inflation really raging. You know, structural inflation arguably

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Speaker 1: somewhat different this time, and Chair Burns cut rates in

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Speaker 1: the middle of that surge to fight a recession, and

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Speaker 1: that caused literally another decade of inflation to become well anchored. Look,

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Speaker 1: part of the dynamic in markets is that we've all

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Speaker 1: been Pavlovian trained to expect stocks to rally when the

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Speaker 1: FED cuts rates. To the extent that we take that away,

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Speaker 1: you're actually doing a service and allowing to see the

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Speaker 1: fundamentals emerged. He was chief Marcus strut just at JP Morgan.

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Speaker 1: Do you remember that maybe d l J. I can't remember.

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Speaker 1: John pavlov was just outstanding. Jennia, Thank you, Jenny Emanuel

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Speaker 1: of Core High signed Sarah Malex Sages this morning, Chief

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Speaker 1: investment Officer of New Vene. Sarah, you have to readjust

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Speaker 1: and rewrite the market call for New van What what

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Speaker 1: category of readjustment are you thinking about right now? As

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Speaker 1: you see earnings and as you see the economic data

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Speaker 1: come in, we've been thinking that earnings could easily be

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Speaker 1: the next shoe to drop for the markets. If you

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Speaker 1: look at consensus estimates, they were up high single digits

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Speaker 1: coming into this quarter, and that's going to be the

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Speaker 1: issue going forward. You're seeing this with these companies. The

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Speaker 1: ones that have pricing power are going to be the

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Speaker 1: ones that when just talking about technology, they're dealing with

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Speaker 1: currency issues, macro issues, and potential estimate cuts and just

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Speaker 1: breaking down Alphabet and Microsoft, both of these companies have

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Speaker 1: outperformed the Tech index year to day. Um we think

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Speaker 1: Microsoft is more defensive. They have more of a resilient

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Speaker 1: commercial business and nice divid and deal with about one

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Speaker 1: percent to protect them. Alphabet likely runs into the same

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Speaker 1: ad related issues we saw with snapping. With Twitter, they've

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Speaker 1: investing investing heavily in their cloud and the and their

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Speaker 1: II business. This could hurt their margins. So within that world,

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Speaker 1: we think Microsoft probably puts a better numbers and outlook

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Speaker 1: than Alphabet does. Sarah, where does it leave an Amazon?

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Speaker 1: I mean, Amazon is a challenge. This is a company

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Speaker 1: that's been been making the right investments in the shorter

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Speaker 1: term they've taken so much control over their logistics business,

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Speaker 1: but they could easily run into that same retail problem

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Speaker 1: we're seeing with Walmart. The consumer is an issue because

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Speaker 1: they've been dipping into their savings in order to spend,

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Speaker 1: so the consumer is not as as resilient as they've

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Speaker 1: been in the past, the more sensitive to prices, and

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Speaker 1: we've seen that pretty rapid shift in spending from business services.

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Speaker 1: I think that could be an issue first Amazon in

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Speaker 1: the short term, but both Amazon and Alphabet are very

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Speaker 1: well positioned companies over the long run. So this is

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Speaker 1: just short term paying for a lot of these technology companies.

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Speaker 1: So given that you are seeing that, probably some of

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Speaker 1: the downward revisions are not being fully priced in. Where

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Speaker 1: do you see this earning seasons taking the SMP through

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Speaker 1: the end of this year. Given what we've seen so far,

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Speaker 1: it's interesting if you look at the prints for the

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Speaker 1: starning seasons overall, we're actually seeing moderate earnings be so

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Speaker 1: it looks like a good earning season on paper, it's

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Speaker 1: just the outlooks are murky and weighing all of that

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Speaker 1: together has to do and other things we're gonna see

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Speaker 1: this week, like GDP for example, that could come in

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Speaker 1: close to flat, it could easily come in negative. That

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Speaker 1: means we likely already arn our session. We're seeing cracks

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Speaker 1: and manufacturing data. Employment has been holding up. That that

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Speaker 1: tends to be a lagging indicator. All of us are

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Speaker 1: going to play into earning season and whether those estimates

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Speaker 1: can hold up going forward. We don't think that they can.

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Speaker 1: We think those estimates need to come down. That's the

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Speaker 1: one factor that really hasn't budged this year, while so

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Speaker 1: many other data points have deteriorated. I want to elaborate

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Speaker 1: a little bit more on something you said that we

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Speaker 1: probably already are in a recession. This is the political discussion,

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Speaker 1: is parsing the difference between the technical recession and a

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Speaker 1: real recession. How does this really shape your view your

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Speaker 1: belief that we're in a recession regardless of how you

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Speaker 1: define it, and that we may be climbing out of it,

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Speaker 1: but we're already there. Well, odds are we're either in

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Speaker 1: a mild recession, and we also feel like otherwise it's

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Speaker 1: going to be hard to skirt that recession. So then

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Speaker 1: we turn to market valuations in the conversation of what's

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Speaker 1: priced in here. I don't think everything is proceed to

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Speaker 1: these markets. We think the SMP likely stays in a

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Speaker 1: trading range of s and be thirty forty hundred until

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Speaker 1: something happens, and that is inflation breaks one way or another.

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Speaker 1: The good news is we are seeing it cooling or

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Speaker 1: the Fed pivots. There's expectations the Fed could pivot in

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Speaker 1: early three. That sounds optimistic to us. We're coming into

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Speaker 1: a seventy five basis point rate hike tomorrow. The interesting

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Speaker 1: thing out of the FOWC will what kind of guidance

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Speaker 1: do they give in terms of how far past neutral

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Speaker 1: they'll go and what a rate heights look like for

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Speaker 1: the rest of this year. Sea How do you think

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Speaker 1: we'd respond if the chairman acknowledge some of the weakness

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Speaker 1: in the economic data? Do you think I could get

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Speaker 1: problematic quickly? I think that would be mostly an expectation.

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Speaker 1: Seventy five basis points and the Fed admitting that economic

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Speaker 1: data is weakening and they'll stay data dependent would be

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Speaker 1: something I think the markets expect. What will be curious about, though,

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Speaker 1: is how much more are they going to tighten going forward?

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Speaker 1: How far past neutral that's going to be. The tea

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Speaker 1: leaves that everyone's reading to try to understand are they

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Speaker 1: becoming more hawkish or less hawkish? Sarah awesomeing to get

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Speaker 1: your view on things, particularly earn a little bit lighter

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Speaker 1: from Microsoft and Alphabet ceramatic. There of new than we're

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Speaker 1: gonna rib up the script down. We can do this

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Speaker 1: with french Hill to say he's a Republican from Arkansas.

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Speaker 1: Barely mentions his financial services life, his banking life. He

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Speaker 1: is hugely qualified and respected on Capitol Hill to talk

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Speaker 1: about our central bank, french Hill. One of the jewels

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Speaker 1: of Bloomberg is a guy named Craig Taurus. He's been

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Speaker 1: writing on the Federal Reserve for years and he sent

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Speaker 1: me a blistering note over when is there going to

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Speaker 1: be a transitory investigation? Let me cut to the chase.

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Speaker 1: Your Washington is transfixed with January six and there was

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Speaker 1: May one, two thousand nineteen where the word transitory was

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Speaker 1: launched by the chairman towards an inflation theory. Two Republicans

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Speaker 1: and Democrats have to investigate the path from transitor. Sorry,

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Speaker 1: I think so, Tom, and I don't disagree with that.

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Speaker 1: You know, a lot of the challenge that we have

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Speaker 1: now is that the Federal Reserves monetary policy is late.

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Speaker 1: In the face of the tremendous fiscal stimulus, they should

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Speaker 1: have begun shrinking the bound sheet in they should have

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Speaker 1: come off zero, And part of that was j Pal

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Speaker 1: and the Board agreeing in August to let inflation overshoot

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Speaker 1: their two percent targets, saying that they were not concerned

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Speaker 1: about it because for so many years they've been having

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Speaker 1: a hard time getting inflation to two percent. So I

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Speaker 1: think it deserves a thorough investigation. But I think we'll

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Speaker 1: find that the pandemic just jumbled the FED economic forecasts

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Speaker 1: and Congress's response. There has to be a respect for

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Speaker 1: the uncertainties of economics. Are we asking too much of

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Speaker 1: our institutions and particularly our central bank given the shock

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Speaker 1: of a once in a lifetime pandemic. Well, I think

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Speaker 1: that's that's conceivable, And I don't expect to take too

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Speaker 1: much pressure off the FED because I think a lot

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Speaker 1: of people Democrat and Republican, in the summer of the

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Speaker 1: fall of thought that we should stop buying a hundred

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Speaker 1: and twenty billion dollars a month to begin to taper

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Speaker 1: And we did not do that. In the face of

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Speaker 1: tremendous fiscal stimulus. Again from well, given the economic uncertainty

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Speaker 1: that we currently face, regardless of what previous policies were,

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Speaker 1: do you think that it's better for the FED to

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Speaker 1: air on being much more aggressive and curtailing the inflation now,

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Speaker 1: even if it causes unemployment to go up, even if

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Speaker 1: it causes people to lose their jobs, which a lot

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Speaker 1: of people say is necessary, a necessary evil to bring

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Speaker 1: inflation down. Well, Lisa, I think we should focus on

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Speaker 1: price price stability at the FED. I think that should

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Speaker 1: be their core mission. They shouldn't have let it get

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Speaker 1: out of hand, and so they have to focus on

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Speaker 1: price stability to return earned their good judgment and their reputation.

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Speaker 1: But Congress and the executive branch can be focusing on

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Speaker 1: the supply side, getting any barriers away from people going

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Speaker 1: back to work, unleashing American industry, not adding to regulatory

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Speaker 1: burden at this critical moment, not proposing to raise taxes.

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Speaker 1: Those are all things on the supply side that I

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Speaker 1: think would be helpful as we navigate this tough time.

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Speaker 1: As Tom has described, an uncertain time between recession and

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Speaker 1: stopping inflation. The Congressman having the supply chain. Fixes are

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Speaker 1: going to take time. That is something that we have

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Speaker 1: seen repeatedly, even with passing potential bills having to do

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Speaker 1: a semiconductors and bringing some of the production back to

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Speaker 1: the United States. What do you do about an unemployment

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Speaker 1: rate that is expected to rise, a labor market that

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Speaker 1: many people say has to weaken in the face of

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Speaker 1: inflation in order to get us back to where we

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Speaker 1: need to be well. I think that's inevitably the cost,

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Speaker 1: as Tom says, of making mistakes in the past. We've

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Speaker 1: seen this movie before. It's very tough to put inflation

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Speaker 1: back in the bottle and cut expectations. The fit has

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Speaker 1: that obligation to price stability because inflation is a thief.

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Speaker 1: Families are also hurt by five dollar plus gas and

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Speaker 1: the effects of inflation. You're seeing Walmart's announcements today. Why

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Speaker 1: is it down. It's because consumers are being crushed by inflation.

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Speaker 1: So don't forget. These are two sides of the economic charts,

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Speaker 1: and they're both unpleasant. French chill and want you to

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Speaker 1: speak to Arkansas right now and the rest of the world.

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Speaker 1: What do we not get about your Bentonville, Arkansas? What's

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Speaker 1: the number one thing Global Wall Street doesn't get about

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Speaker 1: the pixie dust of Bentonville, Arkansas. The Ozarks an amazing place,

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Speaker 1: great food, great water. They didn't have any roads, Tom,

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Speaker 1: they had no infrastructure. When Sam Walton created Walmart, when J. B.

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Speaker 1: Hunt created j B. Hunt, When Don Tyson the elder

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Speaker 1: started Tyson Foods, it was just a country town. And

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Speaker 1: so to me, it's about American ingenuity, American perseverance, not

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Speaker 1: taking no for an answer, and that continues now. Six

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Speaker 1: the years later, John, that was a Chamber of Commerce

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Speaker 1: announcement from Arkansas. I think that was the problem. Congressman,

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Speaker 1: thank you. I think cash flow, uh stability, good quality

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Speaker 1: companies when this is all over, are going to be

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Speaker 1: valued once again. Nelson Pelts truly one of the most

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Speaker 1: interesting people in finance. We don't see enough from him,

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Speaker 1: we don't hear enough from him, and we do so

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Speaker 1: with David Rubinstein, this is a really interesting and frankly,

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Speaker 1: folks important interview on shareholder activism. Nelson Peltz with Mr

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Speaker 1: Rubinstein tonight at nine PM as well. David, congratulations on

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Speaker 1: dragging him out for some clear conversation. What is the

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Speaker 1: Nelson Peltz model from ingersoll ran out to the present day.

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Speaker 1: His model is to study consume more oriented companies or

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Speaker 1: companies that have pretty good businesses that are maybe underperforming.

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Speaker 1: Maybe they're too complicated, they've lost their way a bit.

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Speaker 1: He buys stock in the company, approaches the CEO, says,

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Speaker 1: I'd like to you to make some changes. Maybe I'll

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Speaker 1: go on the board, and he tries to increase the

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Speaker 1: value of the stock without taking over the company. And

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Speaker 1: it's worked quite well for him through his firm called

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Speaker 1: try On Partners. And what's important, David and correct me

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Speaker 1: if I'm wrong. There's not a lot of yelling and screaming.

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Speaker 1: He does this in a in a measured way. Am

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Speaker 1: I right on that? Correct? In the early days of

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Speaker 1: activist investors, let's say in the eighties, they tech took

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Speaker 1: stock positions, and they were fairly loud about trying to

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Speaker 1: take over the company or making changes. Today it's it's

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Speaker 1: very quiet. He doesn't really do much publicity. For what

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Speaker 1: he wants. He tells the CEO, the CEO agrees to

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Speaker 1: do it, then they don't really have any publicity. If

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Speaker 1: the CEO does not, he may sometimes do a proxy fight,

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Speaker 1: and that can get noisy. At times, but he's prevailed

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Speaker 1: generally and he's made companies much more valuable. He has

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Speaker 1: a fantastic quote as he's speaking to you talking about

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Speaker 1: why he dropped out of Wharton, saying that the best

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Speaker 1: advice he ever heard of his sales up, expenses down.

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Speaker 1: My father told me that, and that's why I dropped

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Speaker 1: out of Wharton. I knew I didn't need to know

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Speaker 1: much more. That said, from the granular to the macro.

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Speaker 1: He does have a macro column Big Tech that the

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Speaker 1: dominance of those stocks does seem to be on the wayne.

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Speaker 1: What's behind that? Well, his view is that you did

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Speaker 1: okay in the stock market in the last number of

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Speaker 1: years if you're in one of twelve different stocks, you know,

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Speaker 1: Amazon or Apple or things like that. But the rest

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Speaker 1: of the buy out, the rest of the world wasn't

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Speaker 1: doing so well, and many of these companies lost their way.

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Speaker 1: And he did very uh successful proxy fights and for

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Speaker 1: example a Procter and Gamble or and he got on

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Speaker 1: the board of Heinz. He got on the board of

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Speaker 1: other companies like DuPont, and he's not a quite quite

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Speaker 1: a successful job of increasing the value of the company

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Speaker 1: without having to try to take it over and leverage

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Speaker 1: up the company. David, we often get lost in the

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Speaker 1: macro discussions here and the difficulties in gaming out what's

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Speaker 1: going to happen in six months, let alone two years.

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Speaker 1: From his perspective, and frankly from your perspective as well,

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Speaker 1: is there a very simple, not game, but business to

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Speaker 1: play taking a look at the nuts and bolts of

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Speaker 1: a business regardless of what happens, and making smart decisions

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Speaker 1: and being able to identify the companies that are doing that. Yes.

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Speaker 1: His view is you take a company that, say like

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Speaker 1: Proper and Gamble, which had so many different products and

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Speaker 1: in his view, lost its way, wasn't spending enough money

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Speaker 1: on marketing or other kinds of things. And he goes

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Speaker 1: in and prevent presents his position about what they should do,

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Speaker 1: and tries to do it relatively quietly, and it's effectively

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Speaker 1: done now. Interestingly, he doesn't have enough money to do

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Speaker 1: it all by himself, so he does have third party investors,

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Speaker 1: just like other private equity firms do or venture firms do,

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Speaker 1: and he early on used his own money, but that

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Speaker 1: was not enough to do the kind of companies is

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Speaker 1: interested in now, David, A question for you, that I

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Speaker 1: would ask of Mr Peltz, and that is, do we

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Speaker 1: underestimate within the back and forth of the financial media

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Speaker 1: and the recession uproar right now, all the different news

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Speaker 1: flow going on, do we underestimate how corporations adjust? Are you?

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Speaker 1: Would you suggest rather that right now visible corporations in

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Speaker 1: the news today Walmart and McDonald's are adjusting and adapting

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Speaker 1: to the cards dealt them. There's no doubt that large companies,

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Speaker 1: like large organizations of any type, move more slowly. They

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Speaker 1: have bureaucracies, and it's not easy to get something done.

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Speaker 1: It's not easy to get something done to federal government

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Speaker 1: or state governments or large companies. So sometimes these companies

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Speaker 1: are not ahead of the curve. In some cases, good

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Speaker 1: managers have them ahead of the curve. But it's not

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Speaker 1: easy to anticipate a recession or exactly what you're gonna do,

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Speaker 1: or lay people off well before it's apparent that they

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Speaker 1: have to be laid off. So I would say these

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Speaker 1: large companies are ones that probably have to be brought

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Speaker 1: in a bit by somebody like Nelson Pelts. Given the

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Speaker 1: fact that you're talking about layoffs, I should do want

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Speaker 1: to just bring you this headline. Shopify just confirmed or

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Speaker 1: report initially in the Wall Street Hurtle that they are

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Speaker 1: saying to cut ten percent of their staff. They're supposed

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Speaker 1: to leave by the end of the day. This is

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Speaker 1: a significant part of their workforce, given the fact that

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Speaker 1: they were building up and they weren't one of the

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Speaker 1: darlings over the past couple of years. From your experience, David,

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Speaker 1: how much is this going to be the theme of

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Speaker 1: the next six to twelve months of companies cutting back

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Speaker 1: after expanding rapidly, doing to do to shifting preferences post pandemic. Well,

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Speaker 1: I think they'll see a lot of that because some

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Speaker 1: companies staffed up anticipating we would have growth for a

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Speaker 1: longer period of time that we're likely to have it,

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Speaker 1: whether we go into a recession or not. There's no

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Speaker 1: doubt there's an economic slowdown ahead of us, and we've

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Speaker 1: already slowed down a bit. So I think some people

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Speaker 1: have probably overstaffed, and I think the tech companies are

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Speaker 1: probably pretty good examples of that. Did Mr Pelts talk

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Speaker 1: about Madison Square Garden, small piece of real estate in

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Speaker 1: the island of Manhattan. He's got a knotting interest in that,

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Speaker 1: doesn't he he does, and uh, we didn't really get

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Speaker 1: into that very much, but it's something that he's been

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Speaker 1: involved with as well. And you know, he's a person

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Speaker 1: that takes on a couple of companies at a time,

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Speaker 1: one major one at a time, and focuses on it.

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Speaker 1: And when he goes on the boards of these companies,

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Speaker 1: he's generally listened to because he's had a pretty good

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Speaker 1: track record. I would say this wasn't the case early on.

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Speaker 1: Early on, people didn't know what he was all about.

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Speaker 1: But now I think his his motors operandi is pretty

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Speaker 1: well known. David. Thank you for the generous time this morning.

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Speaker 1: I really can't say no, folks about this interview with

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Speaker 1: Nelson Pelts. Not all that visible Rubinstein in Pelts, Bloomberg

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Speaker 1: will look for that. This is the Bloomberg Surveillance Podcast.

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Speaker 1: Thanks for listening. Join us live weekdays from seven to

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Speaker 1: ten am Eastern on Bloomberg Radio and on Bloomberg Television

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Speaker 1: each day from six to nine am for insight from

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Speaker 1: the best in economics, finance, investment, and international relations. And

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Speaker 1: subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg

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Speaker 1: dot com, and of course on the terminal. I'm Tom

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Speaker 1: Keene and this is Bloomberg. What is the mean