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

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Speaker 1: Jay Lee. 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 I

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Speaker 1: want to bring in Cal Wineberg, high Frequency Economics chief economist,

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Speaker 1: and he joins us. Now, good day to you, Carl.

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Speaker 1: Let's start with that theme. Isn't the year of the

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Speaker 1: global synchronized slowdown? Hi, Good morning, Jonathan. It's kind of

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Speaker 1: interesting me being over here and you're being over there. Um,

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Speaker 1: we're looking at certainly slower growth in Europe. We're looking

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Speaker 1: at slower growth in Canada. We heard about that last night.

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Speaker 1: Japan is doing actually a little bit better. China's numbers

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Speaker 1: domestically disappointing the trade numbers, though people are taking this

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Speaker 1: one off number uh and projecting it into a slowdown.

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Speaker 1: China's exports and imports are actually growing between ten and

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Speaker 1: twenty percent faster than world trade. But that's the key theme, Jonathan.

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Speaker 1: Let's talk about world trade. World trade in the third

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Speaker 1: quarter slow to four point seven year over year growth

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Speaker 1: of exports and that's just unacceptably slow. It's consistent with

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Speaker 1: a slowing of the world economy, not a recession, but

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Speaker 1: a slowdown, and it's certainly troubling. Well, let's talk about

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Speaker 1: what's distorted and what is not. Quite clearly, last year

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Speaker 1: we saw some front loading ahead of expected tariffs. What

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Speaker 1: are we going to start to see some so called

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Speaker 1: clean data from China. Well, you're never going to see

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Speaker 1: clean data from China. You really want, you really want

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Speaker 1: to look at the six month, three month, and twelve

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Speaker 1: month moving averages when you look at exports and imports,

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Speaker 1: and they've been remarkably steady. China's imports, which is how

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Speaker 1: it really affects the rest of the world, up thirteen

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Speaker 1: and a fraction percent year over year for the last

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Speaker 1: five months. That's faster than world trade has been growing.

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Speaker 1: China has been adding to the rate of growth of

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Speaker 1: world trade, not subtracting from it on the export side,

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Speaker 1: between ten and twenty year over year growth of exports

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Speaker 1: all year. So China is not the problem. In fact

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Speaker 1: that the US and growing in terms of its exports

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Speaker 1: and imports also faster than world trade, and China one

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Speaker 1: has to be really worried about the rest of the

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Speaker 1: world where the slowdown must be substantial in order to

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Speaker 1: generate these kinds of slow numbers for the world as

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Speaker 1: a whole. Well, Euros and industrial production dates also came

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Speaker 1: out this morning, and that was pretty ugly as well.

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Speaker 1: I think the question for the US based investor at

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Speaker 1: the moment, Carl, is to what extent, to what degree

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Speaker 1: is the U S economy insulcted from everything that's happening

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Speaker 1: worldwide at the moment. What's the answer to that, cal Well,

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Speaker 1: the answer to that is that we're worried. Everybody from

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Speaker 1: Fed officials to Wall Street economists are taking a look

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Speaker 1: at the slowdown in the world economy and saying that's

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Speaker 1: a threat to uh A, U S economic growth into

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Speaker 1: world economic growth. So we're watching the slowdown in trade.

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Speaker 1: The slowdown in oil prices is kind of ominous because

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Speaker 1: it takes a big chunk of the world a part

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Speaker 1: of the of their produces oil and exports it and

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Speaker 1: reduces their export revenues, and that in the past has

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Speaker 1: been a negative for world trade and for world growth,

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Speaker 1: And of course a lot depends on how far it goes.

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Speaker 1: There are some people who are looking at the indicators

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Speaker 1: and saying, well, we should be looking for a bottom

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Speaker 1: in Europe, I personally don't see it in indices like

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Speaker 1: the European Economic Confidence Index, the IO index. Uh, you know,

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Speaker 1: we're not seeing any sign of the bottom yet. But

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Speaker 1: those indicries are at their current levels, pointing to a

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Speaker 1: slow down in growth, not to a recession. Really really

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Speaker 1: easy to paint a ugly picture of ugly global growth

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Speaker 1: on a morning like this morning, especially in futures come

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Speaker 1: again by round about twenty two points on the SMP

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Speaker 1: five hundred off the back of that, A little bit

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Speaker 1: more complex to identify where this shows up in the

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Speaker 1: U S economy, Carl. If you just take a real

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Speaker 1: time indicator of the health of the U. S economy

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Speaker 1: and look at initial jobless claims that's still hanging in

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Speaker 1: there around multi decade lows. If you had a dashboard

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Speaker 1: of economic data points for the US right now, Carl,

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Speaker 1: where would you be looking for this slow down worldwide

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Speaker 1: to show up domestic? Like? Yeah, My colleague Jim O'Sullivan

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Speaker 1: puzzles exactly this point in his recent edition of Daily

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Speaker 1: Notes on the United States. You know, at high Frequency Economics,

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Speaker 1: we're thinking that the US, the gloom about the U. S.

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Speaker 1: Economy is probably a bit overstated, which doesn't mean it's

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Speaker 1: not the vogue right now in the markets. But you

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Speaker 1: look at the I s M is still pointing to

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Speaker 1: very very healthy growth. You're looking at in weekly initial claims,

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Speaker 1: there's no real sign of a problem in those data. Um,

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Speaker 1: so the U. S. Economy seems to be moving along

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Speaker 1: perhaps better than expecting. The linkage to the world probably

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Speaker 1: isn't through trade as much as as itself, but rather

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Speaker 1: through the fact that so many US companies, most US

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Speaker 1: companies these days, including our own, do a lot of

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Speaker 1: our business overseas and generating a lot of our profits

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Speaker 1: from overseas, and that's where the tie into the equity

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Speaker 1: markets is, I believe about yearnings on the SMP five

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Speaker 1: coming from abroad, there's plenty of gloom out there this morning,

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Speaker 1: the data, plenty of gloom in the politics as well.

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Speaker 1: Our chief Brexit correspondent in the city of London this morning,

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Speaker 1: Good morning to him. The cade just extraordinary, the Prime

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Speaker 1: Minister I thought it was fascinating for those who we

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Speaker 1: carried it fully on our global audience on Bloomberg Television.

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Speaker 1: Really the Prime Minister John Up at Stoke on Trent

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Speaker 1: in your neck of the woods, seventy voting for Brexit,

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Speaker 1: to leave the EU, and she gave a very brave speech,

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Speaker 1: you know, given the seven pm vote scheduled for tomorrow night,

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Speaker 1: if the right audience tom because what is she trying

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Speaker 1: to say now that there's more chance of that being

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Speaker 1: no Brexit, the no deal, if this is impostable? Is

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Speaker 1: Wolf getting mancho said it was wonderful to have him

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Speaker 1: with us in the last hour. There's about five conversations

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Speaker 1: going on here right now in Karl Weinberg of high

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Speaker 1: frequency economics. You are expert at the conversational linking all

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Speaker 1: this to the actual growth of a nation, the growth

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Speaker 1: of the United Kingdom. Where is it, I mean, is

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Speaker 1: it on the edge of recession? Well, at this point,

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Speaker 1: there's not really a lot you can say about forecasting

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Speaker 1: the UK economy because there are so many balls in

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Speaker 1: the air. If there were no Brexit, if everything just

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Speaker 1: occurred in a straight line there were in all this uncertainty,

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Speaker 1: the UK economy still would probably be slowing down. We

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Speaker 1: look at the domestic indicators, you know, credit growth is slowing,

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Speaker 1: industrial production is down. Services doing a little bit better,

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Speaker 1: but not too great. Construction is doing okay, but a

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Speaker 1: lot of that might even be Brexit related. So um,

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Speaker 1: what we are in the housing market, of course is down.

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Speaker 1: So if everything, if nothing were to change, then the

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Speaker 1: economy would probably be slowing down at least possibly turning

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Speaker 1: a corner into recession. But then you add the uncertainty

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Speaker 1: of Brexit, which in our analysis is a stag inflation event.

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Speaker 1: It's going to generate a shortage of labor, which will

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Speaker 1: raise wages, cause inflation, and at the same time reduce

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Speaker 1: potential output in the UK. A herd Brexit means a

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Speaker 1: very very hard downturn with a good chunk of inflation

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Speaker 1: coming its way, possibly on the order of magnitude we

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Speaker 1: haven't seen before. And you know, I guess the magnitude

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Speaker 1: before is going to rely on this vote tomorrow night.

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Speaker 1: I mean, this is vote economically critical. I don't buy

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Speaker 1: that well. I think that it narrows the choices. If

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Speaker 1: this deal is rejected, then we're really down to two choices,

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Speaker 1: which is hard Brexit or no Brexit. I don't think

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Speaker 1: that europe will return to the table to negotiate a deal,

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Speaker 1: even in Parliament, a new deal, even if Parliament takes

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Speaker 1: control of the process, and Um, I'm not so sure

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Speaker 1: there's any politically attainable configuration within Parliament even if people

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Speaker 1: cross benches, which I doubt they will, to do anything else.

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Speaker 1: So I think it comes down to no Brexit, are

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Speaker 1: heard Brexit, and I don't really know where which one

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Speaker 1: of those two ways it's gonna get. Johnny, I'm fascinating

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Speaker 1: your thoughts because in reading the papers this morning at

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Speaker 1: my uh my breakfast at um McDonald's. Um, you know,

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Speaker 1: reading the newspapers this morning, the Telegraph approach is that

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Speaker 1: there can be a smoothness after the short uproar. John,

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Speaker 1: you have lived this in the United Kingdom. Camp the

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Speaker 1: United Kingdom solve its many trade dynamics in problems just

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Speaker 1: by working things out item by item, you would hope. So,

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Speaker 1: but how many items are there to work out? Eric

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Speaker 1: Nielsen made adamant there's there's there's uncountable trade agreements. It

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Speaker 1: would take it would take a long long time, and

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Speaker 1: for what I've seen so far, they've barely started. And

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Speaker 1: this is the problem. Tom. If there is a serious

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Speaker 1: conversation about no deal, then what kind of preparations have

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Speaker 1: been done at the government level, I'm not convinced that

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Speaker 1: enough has been done so fast we go into this

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Speaker 1: vote tomorrow. It's fascinating most people expected not to pass.

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Speaker 1: I start gonna find anyone that thinks it will pass.

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Speaker 1: And then the Prime Minister has three days to tell

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Speaker 1: us what the plan be is and she telled us

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Speaker 1: what over the last few months there is no plan

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Speaker 1: be tom right, Carol Weinberg, thank you so much. With

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Speaker 1: high frequency egos. Will the earning season here in the

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Speaker 1: United States do anything to boost confidence? And it begins

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Speaker 1: this quarter with City Group taken the spotlight, with fourth

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Speaker 1: quarter results due a little bit later, followed by JP

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Speaker 1: Morgan and at Wells Fargo coming up tomorrow. Joining us

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Speaker 1: to discuss is Fred Cannon, KPW Global Director of Research,

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Speaker 1: and he joined us here in New York. Good morning

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Speaker 1: to Fred, Good morning Joanes. So what are we looking

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Speaker 1: for from the big banks as they kick things off

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Speaker 1: a little bit later? We're looking at him to be

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Speaker 1: see if we can beat diminished expectations. I think it's

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Speaker 1: a little bit regrettable that cities the first half because

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Speaker 1: we're actually more cautious on City than JP Morgan and

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Speaker 1: Wells and generally JP Morgan and Wells come first, but

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Speaker 1: nonetheless it's really beating diminished expectations. So expectations in terms

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Speaker 1: of the earnings have come in, but the banks have

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Speaker 1: rallied into this as well, So it's kind of two

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Speaker 1: different things going into the numbers. Is this a low

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Speaker 1: bar or a high bar? What is it? It's a

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Speaker 1: low bar, no doubt. I mean, yes, they've rallied a

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Speaker 1: this year, but look at where they came from, move

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Speaker 1: pretty much last year, and remember coming into the third quarter,

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Speaker 1: I think there was the market was down so much.

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Speaker 1: There's a lot of expectations diminishing, both on earning estimates

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Speaker 1: as well as as performance. City warned early we do

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Speaker 1: expect capital markets to be soft. Fred, what's and I

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Speaker 1: give John Ferrell a ton of credit, folks for identifying

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Speaker 1: the weak bank performance earlier this year. I mean, the

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Speaker 1: depth of the bear market for JP Morgan was down

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Speaker 1: twenty two percentage Right now, I'm gonna call it a

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Speaker 1: negative off the summer two thousand and eighteen. Top What

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Speaker 1: metric is most important? Is it a book value, balance

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Speaker 1: sheet analysis or is it something on the income statement

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Speaker 1: that matters to Fred Cannon? What matters to me is

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Speaker 1: that we continue to see credit be solid, because that's

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Speaker 1: really what the market was signaling during the fourth quarter was, Hey,

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Speaker 1: we're worried about a recession. We're worried about the underwriting

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Speaker 1: and the credit because that's what really could destroy the

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Speaker 1: orward earning estimates. If credit remains solid, uh, and the

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Speaker 1: balance sheets are strong, and we get a little bit

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Speaker 1: of help like we expect from loan growth, we think

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Speaker 1: we'll be Okay. How much patience is there in the underperformers,

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Speaker 1: how much institutional Wall Street? We've been doing this for

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Speaker 1: ten years, You've got to get it going. I don't

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Speaker 1: mean Deutsche Bank, Commerce Bank. I mean in the US,

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Speaker 1: the US underperformers, where we're just saying, let's go. Is

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Speaker 1: that evident this time around? No, I don't think that

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Speaker 1: there's that much uh. You know what I would call

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Speaker 1: frustration with the with the big US banks and even

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Speaker 1: the underperformers. Clearly there's been frustration with Wells Fargo UM.

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Speaker 1: But as we look forward, we see a situation where

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Speaker 1: fundamentally these these institutions are making their cost to capital um.

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Speaker 1: With the exception of City, they're trading above tangible book value,

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Speaker 1: and they're cheap relative of the market with an earnings outlook.

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Speaker 1: That's that's okay. So I think that the traditional value

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Speaker 1: investors are getting very intrigued by these institutions today. So

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Speaker 1: let's spend a little bit more time at the single

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Speaker 1: name level and get away from the sector just for

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Speaker 1: a moment. Cities out in about forty minutes. You're not

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Speaker 1: that optimistic. A lot of people keep saying to me,

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Speaker 1: look at the cost story, look at the cost story

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Speaker 1: with City. What is it about the cost story is

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Speaker 1: City that we need to pay attention to when these

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Speaker 1: numbers drop, Well, I think that's gonna be take a

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Speaker 1: lot of parsing this time, because remember, with trading investment

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Speaker 1: banking down as much as we expect they are, and

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Speaker 1: they've already said they are, it's very hard to control

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Speaker 1: those costs for the quarter. Yeah, let me do to

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Speaker 1: rub But John, I think you nailed it. It's all

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Speaker 1: about the cost story, John Farrell. Do you see John Farrell,

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Speaker 1: and you're reading at all that anybody's talking about, Yeah,

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Speaker 1: that we gotta make revenue, we gotta make money story.

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Speaker 1: I think they are. But those revenue expectations have diminished

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Speaker 1: so much going into the end of twenty and that's

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Speaker 1: the problem, Fred, absolutely, and that's why it's hard to

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Speaker 1: control the cost. That said, what we're also looking for

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Speaker 1: is a read through to the rest of the industry,

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Speaker 1: and that is what's going on with loan growth, what's

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Speaker 1: going on in n ertist margins. What because we do

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Speaker 1: believe the large regionals and the small and MidCap banks

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Speaker 1: which were positive ongoming in this quarter, could actually outperform.

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Speaker 1: How many bodies will be shared? I'm gonna pick on

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Speaker 1: City Group two hundred and six thousand listed. I'm sure

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Speaker 1: it's less than that right now, but five years from now.

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Speaker 1: How big is a given two hundred thousand job bank.

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Speaker 1: It's uh, you know, it's up to a lot of things.

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Speaker 1: I mean, we'll ask value Act themselves. It's probably a

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Speaker 1: better group to ask right now, to be honest, but

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Speaker 1: given their position in it, but we have to think

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Speaker 1: it's should be probably five to small. What bank are

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Speaker 1: you gonna follow this week? What's a bell? Whether you

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Speaker 1: care about Fred Cannon, I care about the fundamentals at Wells.

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Speaker 1: It's the most domestic bank. We want to see how

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Speaker 1: that loan growth if they even though they're constrained, if

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Speaker 1: we saw some fundamental loan growth on the balance sheet,

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Speaker 1: and we want to see what that they're just margin does. Finally, credit,

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Speaker 1: is there any kind of sign that any credit problems

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Speaker 1: because that will hurt the industry a lot. Like Fred

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Speaker 1: Great to catch you out, friend, Canon KBW glob Will,

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Speaker 1: Director of Research. Let us focus, I guess on the

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Speaker 1: the Battle of Washington. We could look at London, we

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Speaker 1: could look at some of the fractious governments of Europe

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Speaker 1: and of course China. Always we do this with Leslie

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Speaker 1: Benjamurrai of Chatham House, who does so much of their

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Speaker 1: American coverage and with her work at Cambridge and at

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Speaker 1: Ellessee as well. Leslie, good morning to you. Uh. We

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Speaker 1: we spoke earlier in London about Washington and the dynamic

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Speaker 1: that we'll see today. We've got a clear dynamic for

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Speaker 1: Prime Minister May in Lynton, in In in England and

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Speaker 1: Westminster in the Commonwealth. What will we see as the

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Speaker 1: dynamic in Washington and the next forty eight hours. Well,

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Speaker 1: there's so much pressure right now on Congress, on the

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Speaker 1: Republicans and McConnell in particular, to come up with a

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Speaker 1: deal that that so that we can get this the

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Speaker 1: US government reopened as we fall over the weekend. The

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Speaker 1: polls are suggesting that the public is blaming the president,

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Speaker 1: and they're blaming the Republicans, not the Democrats. So I

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Speaker 1: think there's tremendous pressure to cut a deal, but it's

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Speaker 1: still unclear what that deal will be, other than perhaps

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Speaker 1: more money for boarding security and a bit of a

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Speaker 1: gift to the president. I mean, the summary of Brexit

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Speaker 1: is maybe they're going to kick us the can in

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Speaker 1: their own unique way down the road. Why can't Republicans

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Speaker 1: and Democrats kick the can your respective of the president

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Speaker 1: to get the government open and then deal with these

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Speaker 1: tangible border and wall issues. Well, you know, that's the

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Speaker 1: proposal that we're seeing right coming from Lindsay Graham, saying,

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Speaker 1: let's reopen the government and continue to negotiate on the wall,

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Speaker 1: try to get some money, and come back to that

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Speaker 1: in the next few weeks, because it really is, you know,

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Speaker 1: this is the longest shutdown that we've seen were in

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Speaker 1: the day twenty four it is. It is tremendously problematic.

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Speaker 1: But the Democrats are calling the Republicans tatask, and I

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Speaker 1: think this has become really a battle about who is

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Speaker 1: in charge in Washington that they're setting said, rolling a

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Speaker 1: line in the sand. Um, And it's really about you know,

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Speaker 1: whose authority will will continue to govern or will govern

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Speaker 1: going forward? Leslie, As you indicate the president seems to

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Speaker 1: be losing in the polls, is that tension point big

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Speaker 1: enough to get him to pull a one A t unlikely?

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Speaker 1: I mean the other you know, the other thing to

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Speaker 1: note is that in the past, what we've seen is

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Speaker 1: that presidents recover very quickly from shutdowns, that that sort

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Speaker 1: of very negative public reaction tends to disappear within a

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Speaker 1: couple of weeks. This is this could be different, Um,

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Speaker 1: depending of course on you know, how much longer it

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Speaker 1: goes on and how bad the optics are, because because

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Speaker 1: you know, what we're seeing is that there's there's really

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Speaker 1: no evidence to suggest that there's any kind of emergency,

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Speaker 1: there's any justification for for closing down the government on

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Speaker 1: the basis of you know, funding the wall in the

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Speaker 1: short term. So I think if if we don't see

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Speaker 1: some sort of resolution, this one might actually hurt the president.

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Speaker 1: But whether that's enough to get him to turn around, um, uh,

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Speaker 1: there's no sign right now that that's the case. So Leslie,

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Speaker 1: the idea that he is recovery right in the polls,

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Speaker 1: historically speaking, could play out once again for the president

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Speaker 1: of the United States, President Donald Trump is one thing.

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Speaker 1: The economic data is the same story. It's a similar story.

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Speaker 1: You get these shutdowns, there are hits to economic growth,

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Speaker 1: and then we make it up later on the year.

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Speaker 1: So for market participants, leslie at Leaves, I'm asking a

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Speaker 1: question they're familiar with. Why does this domestic political drama

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Speaker 1: matter to us? What does it matter? Well, it matters,

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Speaker 1: you know, if you if you think about the optics

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Speaker 1: for anybody who's looking at the United States right now,

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Speaker 1: you're talking about a government shutdown. That's that's a pretty

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Speaker 1: serious thing. Even if you think that in the moment,

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Speaker 1: you know, you might be okay financially, there's so much

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Speaker 1: uncertainty that that creates going forward, and it creates, you know,

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Speaker 1: it also raises a very significant question about what the

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Speaker 1: next weeks and months are going to look like on

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Speaker 1: pretty much anything, because what we're seeing right now is

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Speaker 1: a Congress that isn't working together. Okay, I, I I.

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Speaker 1: What you just said is brilliant And that's the great

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Speaker 1: fear of anybody of any political persuasions that the view

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Speaker 1: forward is going to be chairs just like this crazy

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Speaker 1: shutdown that we're in. If that's the case, is there

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Speaker 1: any desire to take away the enhanced executive powers which

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Speaker 1: I'm going to signal back then in Watergate, I haven't

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Speaker 1: heard that dialogue yet. Well that you know, first of all,

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Speaker 1: there is an immediate crisis. People need to get the

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Speaker 1: government open again. And then yeah, Congress is uh forever

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Speaker 1: going to be wrestling The Democrats are going to be

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Speaker 1: wrestling with how can they constrain the president? What mechanisms

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Speaker 1: do they have? But remember where you know, the Senate

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Speaker 1: is still controlled by the Republicans, and they're so far

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Speaker 1: the Republicans are by and large supporting the president. So

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Speaker 1: unless that changes, you know that the real possibility of

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Speaker 1: enacting tangible constraints on the on the president's power um

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Speaker 1: are are minimal. But as time goes by, And remember

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Speaker 1: even for the president, right, it's in his interest for

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Speaker 1: somebody to give him a win that he can take

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Speaker 1: and move forward, because this isn't in his interest. Okay,

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Speaker 1: that's well said. Do you do you see him actually

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Speaker 1: indicating that he's willing to do that? To find an

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Speaker 1: element or an item of wiggle room that allows him

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Speaker 1: to quote unquote take a win. Well, this is the

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Speaker 1: crazy part. Right at the moment, it really looks like

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Speaker 1: neither the President nor the Democrats have any interest in

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Speaker 1: putting anything positive on the table. Uh, you know, Linda

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Speaker 1: Graham is different, and that could actually lead to some

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Speaker 1: That could be the sign that there's going to be

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Speaker 1: some movement. It's going to have to come from the Republicans.

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Speaker 1: The President is not going to back down to the Democrats.

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Speaker 1: The Republicans, I think, are going to have to come

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Speaker 1: up with the plan that that allows the President to say,

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Speaker 1: I've got the money for Board of Security, there's a

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Speaker 1: bit of money here for the wall. Everybody sees that

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Speaker 1: this is important, you know, and we're going to keep

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Speaker 1: pushing on this. But that that's a very optimistic scenario

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Speaker 1: at the moment. You know, there's nothing to indicate that

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Speaker 1: the President's going in that direction. Well, Leslie, that's the

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Speaker 1: domestic story. Internationally, it looks like the President could get

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Speaker 1: a win, and he could get a win on trade.

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Speaker 1: I don't know what that wind looks like, Leslie, but

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Speaker 1: with the latest data out of China, looking at that,

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Speaker 1: it looks like the Chinese are having some problems, and

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Speaker 1: I just wonder whether that increases the chances of US

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Speaker 1: finally getting some kind of breakthrough with the US China

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Speaker 1: try dispute, Leslie, what do you think, Um? It does?

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Speaker 1: It does look like there is you know, the desire

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Speaker 1: and the part of the Chinese as well as on

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Speaker 1: part of China as well as the United States, to

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Speaker 1: to come to some sort of agreement. Um, whether that's

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Speaker 1: significant and substantial enough to really alter the nature of

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Speaker 1: that trading relationship, I'm skeptical, But whether it's substantial enough

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Speaker 1: for the president to gain to gain a victory. I

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Speaker 1: think that there is some some prospect for that. And

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Speaker 1: remember he's you know, he's got a lot of backing

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Speaker 1: across both sides of the isle. The United States are

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Speaker 1: taking this tough line at the same time, you know

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Speaker 1: that the U s economies had a few bobbles. What

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Speaker 1: what you suggested about China is exactly the case. And

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Speaker 1: so I think there's there's a good will and there's

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Speaker 1: an interest on both sides to have some sort of

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Speaker 1: progress on the front. You touched on something important, Leslie,

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Speaker 1: and I want to wrap things up that just a

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Speaker 1: final question do you see this as a multi generational

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Speaker 1: issue between the United States and China? Oh? Absolutely, But

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Speaker 1: I mean this is the key strategic relationship for certainly

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Speaker 1: the rest of my lifetime and and the next generations

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Speaker 1: and how it gets. You know, we're right at the

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Speaker 1: beginning of really rethinking and re negotiating that relationships. We're

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Speaker 1: going to be talking about it every week for a

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Speaker 1: very long time to come. Leslie Benjamuri, thank you so

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Speaker 1: much with Chatham House of great perspective today in London

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Speaker 1: on the challenges of Brexit and of course with her

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Speaker 1: full time effort of review of the United States of

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Speaker 1: America and shutdown in Washington. You know, Bloomberg Intelligence is

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Speaker 1: worth its weight in gold. And John Butler has put

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Speaker 1: together a story has done this with billion kim which

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Speaker 1: is just simply Apple, bull case, Apple, bear case. John

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Speaker 1: Butler joins us now our senior Apple analysts in charge

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Speaker 1: of concept product and heaven forbid, we'd actually talk about

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Speaker 1: the financial ratios. Who wins bulls and bears? John Butler,

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Speaker 1: I say, in the long run, the bulls wind um.

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Speaker 1: You know, Apple really is a premium brand. Here. Uh,

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Speaker 1: fast forward a year from now, they're going to be

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Speaker 1: up against easier comps. They'll have new iPhones out on

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Speaker 1: the market, and um, you know, frankly, it's tough to

429
00:22:36,440 --> 00:22:39,399
Speaker 1: predict politics, but I have to believe at some point

430
00:22:39,440 --> 00:22:43,440
Speaker 1: the China trade situation begins to get better, not worse.

431
00:22:43,760 --> 00:22:48,080
Speaker 1: In your granular analysis, folks, page after page after page,

432
00:22:48,119 --> 00:22:50,439
Speaker 1: let's stay with the bull case. What are the Bears

433
00:22:50,560 --> 00:22:55,719
Speaker 1: most misjudge. I think they misjudged the again, the power

434
00:22:55,760 --> 00:22:58,920
Speaker 1: of the brand here. You know, Apple has a lot

435
00:22:58,960 --> 00:23:01,720
Speaker 1: of cash to work with. They can expand the business

436
00:23:01,760 --> 00:23:05,760
Speaker 1: through acquisition if they choose to. If they don't. Again,

437
00:23:05,840 --> 00:23:10,280
Speaker 1: they can really drive the brand to expand the services business.

438
00:23:10,880 --> 00:23:14,480
Speaker 1: Other products accessories like the watch for instance, and air

439
00:23:14,560 --> 00:23:17,399
Speaker 1: pods have done quite well. I think there's more to

440
00:23:17,480 --> 00:23:20,080
Speaker 1: come on that front, and I think the Bears missed that.

441
00:23:20,440 --> 00:23:23,000
Speaker 1: I mean anecdotally. I must admit I'm seeing more watches

442
00:23:23,000 --> 00:23:25,320
Speaker 1: and more of the white things sticking out of people's ears.

443
00:23:25,840 --> 00:23:27,800
Speaker 1: And I saw a year ago to say it's my

444
00:23:27,920 --> 00:23:32,600
Speaker 1: scientific and it's my scientific analysis, John Butler. When we

445
00:23:32,640 --> 00:23:34,720
Speaker 1: look at this, it's always a risk. Well, they've got

446
00:23:34,720 --> 00:23:38,480
Speaker 1: a lot of money, and their financially engineering by diving

447
00:23:38,560 --> 00:23:41,560
Speaker 1: an increase and return of cash to share, buy back

448
00:23:41,640 --> 00:23:49,359
Speaker 1: to shareholders. State the case that Apple is not financial engineering, Well,

449
00:23:51,560 --> 00:23:54,320
Speaker 1: it's you know, every company to a degree does some

450
00:23:54,440 --> 00:23:57,320
Speaker 1: financial engineering. Again, they have a lot of cash they

451
00:23:57,320 --> 00:24:00,600
Speaker 1: can put to work. They are committed to buying back shares.

452
00:24:01,200 --> 00:24:05,159
Speaker 1: They've committed overall to returning capital the shareholders in that

453
00:24:05,240 --> 00:24:08,760
Speaker 1: boost the bottom line. But it's not organic growth in

454
00:24:08,800 --> 00:24:12,080
Speaker 1: the business, right. I think Apple's biggest problem right now

455
00:24:12,720 --> 00:24:15,600
Speaker 1: to sort of kick into the bear cases. They are

456
00:24:15,680 --> 00:24:19,480
Speaker 1: looking squarely at a mature market. This is the PC

457
00:24:19,720 --> 00:24:23,440
Speaker 1: market five years ago, and you know they need to

458
00:24:23,480 --> 00:24:29,320
Speaker 1: expand beyond that reliance they have on the iPhone. UM.

459
00:24:29,400 --> 00:24:32,720
Speaker 1: So you know there are other elements to the bearcase there.

460
00:24:32,760 --> 00:24:35,679
Speaker 1: But to me, that's sort of the main problem that

461
00:24:35,720 --> 00:24:39,080
Speaker 1: Apple has to deal with. On a partial differential basis,

462
00:24:39,160 --> 00:24:43,399
Speaker 1: haven't forbid I would say that they would cut the

463
00:24:43,480 --> 00:24:47,600
Speaker 1: cost of the fancy phones, bring down the monthly payment

464
00:24:47,760 --> 00:24:51,320
Speaker 1: of the fancy phones by extending out whatever. I mean.

465
00:24:51,720 --> 00:24:53,920
Speaker 1: They got room to move here to find out where

466
00:24:53,920 --> 00:24:57,360
Speaker 1: the market is, don't they they do. It's a great point, Tom,

467
00:24:57,440 --> 00:25:01,120
Speaker 1: Pricing really is a science. Uh I'm sorry, arn't as

468
00:25:01,160 --> 00:25:03,920
Speaker 1: much as science and you need to find that right

469
00:25:04,040 --> 00:25:09,359
Speaker 1: balance between maximum price and maximum volume, and um, I

470
00:25:09,400 --> 00:25:12,960
Speaker 1: think they're still trying to find that. This latest quarter

471
00:25:13,080 --> 00:25:15,399
Speaker 1: tells me they sort of hit a wall on on

472
00:25:15,560 --> 00:25:19,320
Speaker 1: price increases, you know, over the come on, I remember

473
00:25:19,359 --> 00:25:22,760
Speaker 1: Philip Morrison, a pack of cigarettes was eighty two cents

474
00:25:22,760 --> 00:25:24,600
Speaker 1: and one day it was a dollar twelve or whatever,

475
00:25:24,600 --> 00:25:27,640
Speaker 1: and they hit a wall. You haven't beautifully done ITEMT

476
00:25:28,280 --> 00:25:33,080
Speaker 1: iPhone price has hit a ceiling bear case. Well, there's

477
00:25:33,119 --> 00:25:36,399
Speaker 1: like six ways to fix that, right, there are many

478
00:25:36,400 --> 00:25:38,399
Speaker 1: ways to fix that. I think he hit on it

479
00:25:38,760 --> 00:25:42,800
Speaker 1: just a moment ago, which is expand the portfolio. You know,

480
00:25:42,920 --> 00:25:46,680
Speaker 1: maybe you could even come out with more expensive iPhones,

481
00:25:46,680 --> 00:25:50,080
Speaker 1: but at the lower end. Expand on the ten are

482
00:25:50,280 --> 00:25:53,359
Speaker 1: and take it maybe a little bit lower, or keep

483
00:25:53,400 --> 00:25:56,520
Speaker 1: the older ten hours on the market and dropped the

484
00:25:56,560 --> 00:25:59,600
Speaker 1: price by a hundred dollars. But I do think they

485
00:25:59,680 --> 00:26:03,520
Speaker 1: need overall to expand the market that the rim which

486
00:26:03,560 --> 00:26:06,639
Speaker 1: is the premium segment, and maybe even extend down to

487
00:26:07,840 --> 00:26:11,359
Speaker 1: the high end of that sort of those mid priced phones. Okay,

488
00:26:11,359 --> 00:26:13,199
Speaker 1: what's a tenor is that the x are This is

489
00:26:13,240 --> 00:26:16,240
Speaker 1: like a cheaper phone. It's pretty colors. It's selling to

490
00:26:16,320 --> 00:26:20,440
Speaker 1: who it's selling to, those people who want to step

491
00:26:20,520 --> 00:26:27,119
Speaker 1: up to facial recognition but can't quite afford it. Uh

492
00:26:27,600 --> 00:26:29,520
Speaker 1: tough to say. We'll know at the end of the

493
00:26:29,520 --> 00:26:32,800
Speaker 1: month when Apple reports. The reports out of the supplier

494
00:26:32,880 --> 00:26:35,800
Speaker 1: community would tell you that the n R at the

495
00:26:36,040 --> 00:26:39,240
Speaker 1: x are pardon me, has sort of fallen flat in

496
00:26:39,359 --> 00:26:42,960
Speaker 1: terms of demand. I'm not so sure on that. You know, okay,

497
00:26:42,960 --> 00:26:45,000
Speaker 1: but but this is critical, folks, and you know it

498
00:26:45,040 --> 00:26:47,479
Speaker 1: doesn't mean you're an Apple. We try to avoid the

499
00:26:47,480 --> 00:26:50,199
Speaker 1: fanboys stuff with Apple as much as we can. But

500
00:26:50,280 --> 00:26:54,879
Speaker 1: John Butler, if the XR is there cheaper phone, is

501
00:26:54,920 --> 00:26:57,520
Speaker 1: it that the kids, whether in China or the U

502
00:26:57,640 --> 00:27:00,800
Speaker 1: S or Indonesia wherever, they're gonna eight and pay up

503
00:27:00,800 --> 00:27:03,760
Speaker 1: for the fancy phone, or that the XR just can't

504
00:27:03,760 --> 00:27:06,879
Speaker 1: compete with the eight phones out there that are cheaper.

505
00:27:08,320 --> 00:27:10,440
Speaker 1: It's hard to say. Again, the jury is still out

506
00:27:10,480 --> 00:27:13,240
Speaker 1: on whether or not it's fallen flat. If it has

507
00:27:13,320 --> 00:27:17,280
Speaker 1: fallen flat, it's fallen flat like the five C did.

508
00:27:17,359 --> 00:27:19,960
Speaker 1: If you were exactly when it came out with a

509
00:27:20,160 --> 00:27:24,920
Speaker 1: variant on the high end phone, and people, I think

510
00:27:25,000 --> 00:27:28,119
Speaker 1: look at it and say, why don't I just wait

511
00:27:28,440 --> 00:27:31,040
Speaker 1: six months and by the higher end phone, was that

512
00:27:31,040 --> 00:27:33,280
Speaker 1: where we're gonna be? I mean the point here, that's

513
00:27:33,359 --> 00:27:36,080
Speaker 1: the risk of where we might be with this. And

514
00:27:36,119 --> 00:27:39,320
Speaker 1: again I you know, they haven't reported the quarter yet.

515
00:27:39,440 --> 00:27:42,360
Speaker 1: They've introduced Home, but we haven't really heard them way

516
00:27:42,440 --> 00:27:46,400
Speaker 1: in on how it's selling. We're only getting anecdotal evidence

517
00:27:46,440 --> 00:27:49,000
Speaker 1: from the supplier. This is way to Apple fan boy

518
00:27:49,040 --> 00:27:51,840
Speaker 1: talk for me. Let's bring in Paul Sweeney listening very

519
00:27:51,880 --> 00:27:54,400
Speaker 1: carefully to all my Apple Am I doing enough? Paul?

520
00:27:54,440 --> 00:27:58,199
Speaker 1: You are my enough fanboy to keep the conversation going absolutely.

521
00:27:58,240 --> 00:28:00,640
Speaker 1: I mean, you can never talk to much about Apple

522
00:28:00,640 --> 00:28:02,359
Speaker 1: when when I look at the Apple stock, John and

523
00:28:02,400 --> 00:28:05,760
Speaker 1: the story, you know, it's always been what's really driven

524
00:28:05,760 --> 00:28:07,640
Speaker 1: this stock, you know, really over the last ten years

525
00:28:07,640 --> 00:28:10,000
Speaker 1: has been new products, new products, new products, and as

526
00:28:10,000 --> 00:28:12,919
Speaker 1: you talked about, we're in a mature phone market, so

527
00:28:13,280 --> 00:28:16,120
Speaker 1: investors have been turning their attention to the services business.

528
00:28:16,400 --> 00:28:19,399
Speaker 1: Will that ever be a driver for this company and

529
00:28:19,520 --> 00:28:23,840
Speaker 1: this stock or will this stock always be a product story? No,

530
00:28:24,119 --> 00:28:31,160
Speaker 1: I I it's a great question. In fact, that's that's

531
00:28:31,240 --> 00:28:34,199
Speaker 1: the main question on this stock though right now, is

532
00:28:34,240 --> 00:28:38,080
Speaker 1: how quickly they can grow that services business to the

533
00:28:38,120 --> 00:28:41,200
Speaker 1: point where it picks up any slack in the iPhone business.

534
00:28:41,800 --> 00:28:44,400
Speaker 1: There's a great hue and cry out there now for

535
00:28:44,480 --> 00:28:48,120
Speaker 1: them to get more deeply into content. Paul, as you

536
00:28:48,200 --> 00:28:51,520
Speaker 1: well know from your work in the content world, that's

537
00:28:51,520 --> 00:28:54,560
Speaker 1: that can be lower margin, and I think that's Apple's

538
00:28:54,640 --> 00:28:57,640
Speaker 1: hesitation there. Okay, I'm looking at Google and I just

539
00:28:57,720 --> 00:29:00,440
Speaker 1: type this in folks, because I'm not a sophistical like

540
00:29:00,520 --> 00:29:04,760
Speaker 1: John Butler, Paul Sweeney. Is Spotify better than Apple Music?

541
00:29:05,280 --> 00:29:08,680
Speaker 1: I mean, the world's voting, they're saying Spotify is better.

542
00:29:09,120 --> 00:29:13,400
Speaker 1: How does Tim Cook and his crew make Apple Music

543
00:29:13,480 --> 00:29:18,000
Speaker 1: have that pixie dust that Spotify has? That is a

544
00:29:18,040 --> 00:29:21,720
Speaker 1: tough call. I actually personally think Spotify is a little

545
00:29:21,720 --> 00:29:25,480
Speaker 1: bit better than Apple. One one area where Apple is

546
00:29:25,520 --> 00:29:28,959
Speaker 1: a bit weak is in the AI end of things,

547
00:29:29,040 --> 00:29:33,600
Speaker 1: and the reason that's artificial intelligence, and that really fuels Siri,

548
00:29:34,320 --> 00:29:37,000
Speaker 1: and I think to get advances in Siri and then

549
00:29:37,040 --> 00:29:41,280
Speaker 1: advances in your services business like Apple Music, they need

550
00:29:41,280 --> 00:29:43,640
Speaker 1: to spy on their users a little bit more. An

551
00:29:43,680 --> 00:29:46,960
Speaker 1: Apple is huge on privacy, and I don't think they're

552
00:29:47,000 --> 00:29:49,240
Speaker 1: willing to do that. So I think it's a matter

553
00:29:49,320 --> 00:29:53,080
Speaker 1: of doing what they're doing right now. Which is leveraging

554
00:29:53,120 --> 00:29:56,680
Speaker 1: that great brand name and leveraging the installed base to

555
00:29:56,760 --> 00:29:59,680
Speaker 1: try and get people to try Apple Music and then

556
00:30:00,200 --> 00:30:07,840
Speaker 1: with it, John, I'm I disconnected, Sirie did Sorry? I disconnected, Sirialy.

557
00:30:08,680 --> 00:30:12,880
Speaker 1: I don't blame you, Tom. She's way way behind Google system.

558
00:30:13,120 --> 00:30:17,320
Speaker 1: She wouldn't talk to me. John Butler, thank you so

559
00:30:17,440 --> 00:30:20,560
Speaker 1: much an update on Apple, And you know, Paul Sweeney,

560
00:30:20,560 --> 00:30:22,640
Speaker 1: this all comes down to some of the parts analysis.

561
00:30:22,680 --> 00:30:25,680
Speaker 1: I haven't seen a good some of the parts on Apple.

562
00:30:25,840 --> 00:30:28,720
Speaker 1: But you know, the financial engineering thing that it's still

563
00:30:28,720 --> 00:30:32,080
Speaker 1: a cash flow juggernaut, isn't it. It's it's it's just

564
00:30:32,200 --> 00:30:34,360
Speaker 1: tremendous to cash flow that they're putting out year and in,

565
00:30:34,480 --> 00:30:36,479
Speaker 1: year out, and they continue to invest back in their

566
00:30:36,520 --> 00:30:39,280
Speaker 1: business across the board. It's not like they're hoarding the cash.

567
00:30:39,320 --> 00:30:42,000
Speaker 1: So when you're just for cash, you can make the

568
00:30:42,040 --> 00:30:44,880
Speaker 1: argument that's just cheap stock. You know the world's coming

569
00:30:44,920 --> 00:30:47,640
Speaker 1: to an end. Two hundred and sixty nine jillion dollars

570
00:30:48,120 --> 00:30:50,600
Speaker 1: a year ago and now it's only two d seven

571
00:30:50,640 --> 00:30:54,840
Speaker 1: can jillion laying around by Sweeney Enterprises or Twitter or

572
00:30:54,880 --> 00:30:58,560
Speaker 1: whatever they're gonna do as well. John Butler on Apple

573
00:31:00,040 --> 00:31:09,880
Speaker 1: y Thanks for listening to the Bloomberg Surveillance podcast. Subscribe

574
00:31:10,000 --> 00:31:14,840
Speaker 1: and listen to interviews on Apple Podcasts, SoundCloud, or whichever

575
00:31:15,000 --> 00:31:19,040
Speaker 1: podcast platform you prefer. I'm on Twitter at Tom Keene

576
00:31:19,520 --> 00:31:23,160
Speaker 1: before the podcast. You can always catch us worldwide. I'm

577
00:31:23,200 --> 00:31:24,080
Speaker 1: Bloomberg Radio