Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane
Speaker 1: Jay Lee. We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course, on the Bloomberg I
Speaker 1: want to bring in Cal Wineberg, high Frequency Economics chief economist,
Speaker 1: and he joins us. Now, good day to you, Carl.
Speaker 1: Let's start with that theme. Isn't the year of the
Speaker 1: global synchronized slowdown? Hi, Good morning, Jonathan. It's kind of
Speaker 1: interesting me being over here and you're being over there. Um,
Speaker 1: we're looking at certainly slower growth in Europe. We're looking
Speaker 1: at slower growth in Canada. We heard about that last night.
Speaker 1: Japan is doing actually a little bit better. China's numbers
Speaker 1: domestically disappointing the trade numbers, though people are taking this
Speaker 1: one off number uh and projecting it into a slowdown.
Speaker 1: China's exports and imports are actually growing between ten and
Speaker 1: twenty percent faster than world trade. But that's the key theme, Jonathan.
Speaker 1: Let's talk about world trade. World trade in the third
Speaker 1: quarter slow to four point seven year over year growth
Speaker 1: of exports and that's just unacceptably slow. It's consistent with
Speaker 1: a slowing of the world economy, not a recession, but
Speaker 1: a slowdown, and it's certainly troubling. Well, let's talk about
Speaker 1: what's distorted and what is not. Quite clearly, last year
Speaker 1: we saw some front loading ahead of expected tariffs. What
Speaker 1: are we going to start to see some so called
Speaker 1: clean data from China. Well, you're never going to see
Speaker 1: clean data from China. You really want, you really want
Speaker 1: to look at the six month, three month, and twelve
Speaker 1: month moving averages when you look at exports and imports,
Speaker 1: and they've been remarkably steady. China's imports, which is how
Speaker 1: it really affects the rest of the world, up thirteen
Speaker 1: and a fraction percent year over year for the last
Speaker 1: five months. That's faster than world trade has been growing.
Speaker 1: China has been adding to the rate of growth of
Speaker 1: world trade, not subtracting from it on the export side,
Speaker 1: between ten and twenty year over year growth of exports
Speaker 1: all year. So China is not the problem. In fact
Speaker 1: that the US and growing in terms of its exports
Speaker 1: and imports also faster than world trade, and China one
Speaker 1: has to be really worried about the rest of the
Speaker 1: world where the slowdown must be substantial in order to
Speaker 1: generate these kinds of slow numbers for the world as
Speaker 1: a whole. Well, Euros and industrial production dates also came
Speaker 1: out this morning, and that was pretty ugly as well.
Speaker 1: I think the question for the US based investor at
Speaker 1: the moment, Carl, is to what extent, to what degree
Speaker 1: is the U S economy insulcted from everything that's happening
Speaker 1: worldwide at the moment. What's the answer to that, cal Well,
Speaker 1: the answer to that is that we're worried. Everybody from
Speaker 1: Fed officials to Wall Street economists are taking a look
Speaker 1: at the slowdown in the world economy and saying that's
Speaker 1: a threat to uh A, U S economic growth into
Speaker 1: world economic growth. So we're watching the slowdown in trade.
Speaker 1: The slowdown in oil prices is kind of ominous because
Speaker 1: it takes a big chunk of the world a part
Speaker 1: of the of their produces oil and exports it and
Speaker 1: reduces their export revenues, and that in the past has
Speaker 1: been a negative for world trade and for world growth,
Speaker 1: And of course a lot depends on how far it goes.
Speaker 1: There are some people who are looking at the indicators
Speaker 1: and saying, well, we should be looking for a bottom
Speaker 1: in Europe, I personally don't see it in indices like
Speaker 1: the European Economic Confidence Index, the IO index. Uh, you know,
Speaker 1: we're not seeing any sign of the bottom yet. But
Speaker 1: those indicries are at their current levels, pointing to a
Speaker 1: slow down in growth, not to a recession. Really really
Speaker 1: easy to paint a ugly picture of ugly global growth
Speaker 1: on a morning like this morning, especially in futures come
Speaker 1: again by round about twenty two points on the SMP
Speaker 1: five hundred off the back of that, A little bit
Speaker 1: more complex to identify where this shows up in the
Speaker 1: U S economy, Carl. If you just take a real
Speaker 1: time indicator of the health of the U. S economy
Speaker 1: and look at initial jobless claims that's still hanging in
Speaker 1: there around multi decade lows. If you had a dashboard
Speaker 1: of economic data points for the US right now, Carl,
Speaker 1: where would you be looking for this slow down worldwide
Speaker 1: to show up domestic? Like? Yeah, My colleague Jim O'Sullivan
Speaker 1: puzzles exactly this point in his recent edition of Daily
Speaker 1: Notes on the United States. You know, at high Frequency Economics,
Speaker 1: we're thinking that the US, the gloom about the U. S.
Speaker 1: Economy is probably a bit overstated, which doesn't mean it's
Speaker 1: not the vogue right now in the markets. But you
Speaker 1: look at the I s M is still pointing to
Speaker 1: very very healthy growth. You're looking at in weekly initial claims,
Speaker 1: there's no real sign of a problem in those data. Um,
Speaker 1: so the U. S. Economy seems to be moving along
Speaker 1: perhaps better than expecting. The linkage to the world probably
Speaker 1: isn't through trade as much as as itself, but rather
Speaker 1: through the fact that so many US companies, most US
Speaker 1: companies these days, including our own, do a lot of
Speaker 1: our business overseas and generating a lot of our profits
Speaker 1: from overseas, and that's where the tie into the equity
Speaker 1: markets is, I believe about yearnings on the SMP five
Speaker 1: coming from abroad, there's plenty of gloom out there this morning,
Speaker 1: the data, plenty of gloom in the politics as well.
Speaker 1: Our chief Brexit correspondent in the city of London this morning,
Speaker 1: Good morning to him. The cade just extraordinary, the Prime
Speaker 1: Minister I thought it was fascinating for those who we
Speaker 1: carried it fully on our global audience on Bloomberg Television.
Speaker 1: Really the Prime Minister John Up at Stoke on Trent
Speaker 1: in your neck of the woods, seventy voting for Brexit,
Speaker 1: to leave the EU, and she gave a very brave speech,
Speaker 1: you know, given the seven pm vote scheduled for tomorrow night,
Speaker 1: if the right audience tom because what is she trying
Speaker 1: to say now that there's more chance of that being
Speaker 1: no Brexit, the no deal, if this is impostable? Is
Speaker 1: Wolf getting mancho said it was wonderful to have him
Speaker 1: with us in the last hour. There's about five conversations
Speaker 1: going on here right now in Karl Weinberg of high
Speaker 1: frequency economics. You are expert at the conversational linking all
Speaker 1: this to the actual growth of a nation, the growth
Speaker 1: of the United Kingdom. Where is it, I mean, is
Speaker 1: it on the edge of recession? Well, at this point,
Speaker 1: there's not really a lot you can say about forecasting
Speaker 1: the UK economy because there are so many balls in
Speaker 1: the air. If there were no Brexit, if everything just
Speaker 1: occurred in a straight line there were in all this uncertainty,
Speaker 1: the UK economy still would probably be slowing down. We
Speaker 1: look at the domestic indicators, you know, credit growth is slowing,
Speaker 1: industrial production is down. Services doing a little bit better,
Speaker 1: but not too great. Construction is doing okay, but a
Speaker 1: lot of that might even be Brexit related. So um,
Speaker 1: what we are in the housing market, of course is down.
Speaker 1: So if everything, if nothing were to change, then the
Speaker 1: economy would probably be slowing down at least possibly turning
Speaker 1: a corner into recession. But then you add the uncertainty
Speaker 1: of Brexit, which in our analysis is a stag inflation event.
Speaker 1: It's going to generate a shortage of labor, which will
Speaker 1: raise wages, cause inflation, and at the same time reduce
Speaker 1: potential output in the UK. A herd Brexit means a
Speaker 1: very very hard downturn with a good chunk of inflation
Speaker 1: coming its way, possibly on the order of magnitude we
Speaker 1: haven't seen before. And you know, I guess the magnitude
Speaker 1: before is going to rely on this vote tomorrow night.
Speaker 1: I mean, this is vote economically critical. I don't buy
Speaker 1: that well. I think that it narrows the choices. If
Speaker 1: this deal is rejected, then we're really down to two choices,
Speaker 1: which is hard Brexit or no Brexit. I don't think
Speaker 1: that europe will return to the table to negotiate a deal,
Speaker 1: even in Parliament, a new deal, even if Parliament takes
Speaker 1: control of the process, and Um, I'm not so sure
Speaker 1: there's any politically attainable configuration within Parliament even if people
Speaker 1: cross benches, which I doubt they will, to do anything else.
Speaker 1: So I think it comes down to no Brexit, are
Speaker 1: heard Brexit, and I don't really know where which one
Speaker 1: of those two ways it's gonna get. Johnny, I'm fascinating
Speaker 1: your thoughts because in reading the papers this morning at
Speaker 1: my uh my breakfast at um McDonald's. Um, you know,
Speaker 1: reading the newspapers this morning, the Telegraph approach is that
Speaker 1: there can be a smoothness after the short uproar. John,
Speaker 1: you have lived this in the United Kingdom. Camp the
Speaker 1: United Kingdom solve its many trade dynamics in problems just
Speaker 1: by working things out item by item, you would hope. So,
Speaker 1: but how many items are there to work out? Eric
Speaker 1: Nielsen made adamant there's there's there's uncountable trade agreements. It
Speaker 1: would take it would take a long long time, and
Speaker 1: for what I've seen so far, they've barely started. And
Speaker 1: this is the problem. Tom. If there is a serious
Speaker 1: conversation about no deal, then what kind of preparations have
Speaker 1: been done at the government level, I'm not convinced that
Speaker 1: enough has been done so fast we go into this
Speaker 1: vote tomorrow. It's fascinating most people expected not to pass.
Speaker 1: I start gonna find anyone that thinks it will pass.
Speaker 1: And then the Prime Minister has three days to tell
Speaker 1: us what the plan be is and she telled us
Speaker 1: what over the last few months there is no plan
Speaker 1: be tom right, Carol Weinberg, thank you so much. With
Speaker 1: high frequency egos. Will the earning season here in the
Speaker 1: United States do anything to boost confidence? And it begins
Speaker 1: this quarter with City Group taken the spotlight, with fourth
Speaker 1: quarter results due a little bit later, followed by JP
Speaker 1: Morgan and at Wells Fargo coming up tomorrow. Joining us
Speaker 1: to discuss is Fred Cannon, KPW Global Director of Research,
Speaker 1: and he joined us here in New York. Good morning
Speaker 1: to Fred, Good morning Joanes. So what are we looking
Speaker 1: for from the big banks as they kick things off
Speaker 1: a little bit later? We're looking at him to be
Speaker 1: see if we can beat diminished expectations. I think it's
Speaker 1: a little bit regrettable that cities the first half because
Speaker 1: we're actually more cautious on City than JP Morgan and
Speaker 1: Wells and generally JP Morgan and Wells come first, but
Speaker 1: nonetheless it's really beating diminished expectations. So expectations in terms
Speaker 1: of the earnings have come in, but the banks have
Speaker 1: rallied into this as well, So it's kind of two
Speaker 1: different things going into the numbers. Is this a low
Speaker 1: bar or a high bar? What is it? It's a
Speaker 1: low bar, no doubt. I mean, yes, they've rallied a
Speaker 1: this year, but look at where they came from, move
Speaker 1: pretty much last year, and remember coming into the third quarter,
Speaker 1: I think there was the market was down so much.
Speaker 1: There's a lot of expectations diminishing, both on earning estimates
Speaker 1: as well as as performance. City warned early we do
Speaker 1: expect capital markets to be soft. Fred, what's and I
Speaker 1: give John Ferrell a ton of credit, folks for identifying
Speaker 1: the weak bank performance earlier this year. I mean, the
Speaker 1: depth of the bear market for JP Morgan was down
Speaker 1: twenty two percentage Right now, I'm gonna call it a
Speaker 1: negative off the summer two thousand and eighteen. Top What
Speaker 1: metric is most important? Is it a book value, balance
Speaker 1: sheet analysis or is it something on the income statement
Speaker 1: that matters to Fred Cannon? What matters to me is
Speaker 1: that we continue to see credit be solid, because that's
Speaker 1: really what the market was signaling during the fourth quarter was, Hey,
Speaker 1: we're worried about a recession. We're worried about the underwriting
Speaker 1: and the credit because that's what really could destroy the
Speaker 1: orward earning estimates. If credit remains solid, uh, and the
Speaker 1: balance sheets are strong, and we get a little bit
Speaker 1: of help like we expect from loan growth, we think
Speaker 1: we'll be Okay. How much patience is there in the underperformers,
Speaker 1: how much institutional Wall Street? We've been doing this for
Speaker 1: ten years, You've got to get it going. I don't
Speaker 1: mean Deutsche Bank, Commerce Bank. I mean in the US,
Speaker 1: the US underperformers, where we're just saying, let's go. Is
Speaker 1: that evident this time around? No, I don't think that
Speaker 1: there's that much uh. You know what I would call
Speaker 1: frustration with the with the big US banks and even
Speaker 1: the underperformers. Clearly there's been frustration with Wells Fargo UM.
Speaker 1: But as we look forward, we see a situation where
Speaker 1: fundamentally these these institutions are making their cost to capital um.
Speaker 1: With the exception of City, they're trading above tangible book value,
Speaker 1: and they're cheap relative of the market with an earnings outlook.
Speaker 1: That's that's okay. So I think that the traditional value
Speaker 1: investors are getting very intrigued by these institutions today. So
Speaker 1: let's spend a little bit more time at the single
Speaker 1: name level and get away from the sector just for
Speaker 1: a moment. Cities out in about forty minutes. You're not
Speaker 1: that optimistic. A lot of people keep saying to me,
Speaker 1: look at the cost story, look at the cost story
Speaker 1: with City. What is it about the cost story is
Speaker 1: City that we need to pay attention to when these
Speaker 1: numbers drop, Well, I think that's gonna be take a
Speaker 1: lot of parsing this time, because remember, with trading investment
Speaker 1: banking down as much as we expect they are, and
Speaker 1: they've already said they are, it's very hard to control
Speaker 1: those costs for the quarter. Yeah, let me do to
Speaker 1: rub But John, I think you nailed it. It's all
Speaker 1: about the cost story, John Farrell. Do you see John Farrell,
Speaker 1: and you're reading at all that anybody's talking about, Yeah,
Speaker 1: that we gotta make revenue, we gotta make money story.
Speaker 1: I think they are. But those revenue expectations have diminished
Speaker 1: so much going into the end of twenty and that's
Speaker 1: the problem, Fred, absolutely, and that's why it's hard to
Speaker 1: control the cost. That said, what we're also looking for
Speaker 1: is a read through to the rest of the industry,
Speaker 1: and that is what's going on with loan growth, what's
Speaker 1: going on in n ertist margins. What because we do
Speaker 1: believe the large regionals and the small and MidCap banks
Speaker 1: which were positive ongoming in this quarter, could actually outperform.
Speaker 1: How many bodies will be shared? I'm gonna pick on
Speaker 1: City Group two hundred and six thousand listed. I'm sure
Speaker 1: it's less than that right now, but five years from now.
Speaker 1: How big is a given two hundred thousand job bank.
Speaker 1: It's uh, you know, it's up to a lot of things.
Speaker 1: I mean, we'll ask value Act themselves. It's probably a
Speaker 1: better group to ask right now, to be honest, but
Speaker 1: given their position in it, but we have to think
Speaker 1: it's should be probably five to small. What bank are
Speaker 1: you gonna follow this week? What's a bell? Whether you
Speaker 1: care about Fred Cannon, I care about the fundamentals at Wells.
Speaker 1: It's the most domestic bank. We want to see how
Speaker 1: that loan growth if they even though they're constrained, if
Speaker 1: we saw some fundamental loan growth on the balance sheet,
Speaker 1: and we want to see what that they're just margin does. Finally, credit,
Speaker 1: is there any kind of sign that any credit problems
Speaker 1: because that will hurt the industry a lot. Like Fred
Speaker 1: Great to catch you out, friend, Canon KBW glob Will,
Speaker 1: Director of Research. Let us focus, I guess on the
Speaker 1: the Battle of Washington. We could look at London, we
Speaker 1: could look at some of the fractious governments of Europe
Speaker 1: and of course China. Always we do this with Leslie
Speaker 1: Benjamurrai of Chatham House, who does so much of their
Speaker 1: American coverage and with her work at Cambridge and at
Speaker 1: Ellessee as well. Leslie, good morning to you. Uh. We
Speaker 1: we spoke earlier in London about Washington and the dynamic
Speaker 1: that we'll see today. We've got a clear dynamic for
Speaker 1: Prime Minister May in Lynton, in In in England and
Speaker 1: Westminster in the Commonwealth. What will we see as the
Speaker 1: dynamic in Washington and the next forty eight hours. Well,
Speaker 1: there's so much pressure right now on Congress, on the
Speaker 1: Republicans and McConnell in particular, to come up with a
Speaker 1: deal that that so that we can get this the
Speaker 1: US government reopened as we fall over the weekend. The
Speaker 1: polls are suggesting that the public is blaming the president,
Speaker 1: and they're blaming the Republicans, not the Democrats. So I
Speaker 1: think there's tremendous pressure to cut a deal, but it's
Speaker 1: still unclear what that deal will be, other than perhaps
Speaker 1: more money for boarding security and a bit of a
Speaker 1: gift to the president. I mean, the summary of Brexit
Speaker 1: is maybe they're going to kick us the can in
Speaker 1: their own unique way down the road. Why can't Republicans
Speaker 1: and Democrats kick the can your respective of the president
Speaker 1: to get the government open and then deal with these
Speaker 1: tangible border and wall issues. Well, you know, that's the
Speaker 1: proposal that we're seeing right coming from Lindsay Graham, saying,
Speaker 1: let's reopen the government and continue to negotiate on the wall,
Speaker 1: try to get some money, and come back to that
Speaker 1: in the next few weeks, because it really is, you know,
Speaker 1: this is the longest shutdown that we've seen were in
Speaker 1: the day twenty four it is. It is tremendously problematic.
Speaker 1: But the Democrats are calling the Republicans tatask, and I
Speaker 1: think this has become really a battle about who is
Speaker 1: in charge in Washington that they're setting said, rolling a
Speaker 1: line in the sand. Um, And it's really about you know,
Speaker 1: whose authority will will continue to govern or will govern
Speaker 1: going forward? Leslie, As you indicate the president seems to
Speaker 1: be losing in the polls, is that tension point big
Speaker 1: enough to get him to pull a one A t unlikely?
Speaker 1: I mean the other you know, the other thing to
Speaker 1: note is that in the past, what we've seen is
Speaker 1: that presidents recover very quickly from shutdowns, that that sort
Speaker 1: of very negative public reaction tends to disappear within a
Speaker 1: couple of weeks. This is this could be different, Um,
Speaker 1: depending of course on you know, how much longer it
Speaker 1: goes on and how bad the optics are, because because
Speaker 1: you know, what we're seeing is that there's there's really
Speaker 1: no evidence to suggest that there's any kind of emergency,
Speaker 1: there's any justification for for closing down the government on
Speaker 1: the basis of you know, funding the wall in the
Speaker 1: short term. So I think if if we don't see
Speaker 1: some sort of resolution, this one might actually hurt the president.
Speaker 1: But whether that's enough to get him to turn around, um, uh,
Speaker 1: there's no sign right now that that's the case. So Leslie,
Speaker 1: the idea that he is recovery right in the polls,
Speaker 1: historically speaking, could play out once again for the president
Speaker 1: of the United States, President Donald Trump is one thing.
Speaker 1: The economic data is the same story. It's a similar story.
Speaker 1: You get these shutdowns, there are hits to economic growth,
Speaker 1: and then we make it up later on the year.
Speaker 1: So for market participants, leslie at Leaves, I'm asking a
Speaker 1: question they're familiar with. Why does this domestic political drama
Speaker 1: matter to us? What does it matter? Well, it matters,
Speaker 1: you know, if you if you think about the optics
Speaker 1: for anybody who's looking at the United States right now,
Speaker 1: you're talking about a government shutdown. That's that's a pretty
Speaker 1: serious thing. Even if you think that in the moment,
Speaker 1: you know, you might be okay financially, there's so much
Speaker 1: uncertainty that that creates going forward, and it creates, you know,
Speaker 1: it also raises a very significant question about what the
Speaker 1: next weeks and months are going to look like on
Speaker 1: pretty much anything, because what we're seeing right now is
Speaker 1: a Congress that isn't working together. Okay, I, I I.
Speaker 1: What you just said is brilliant And that's the great
Speaker 1: fear of anybody of any political persuasions that the view
Speaker 1: forward is going to be chairs just like this crazy
Speaker 1: shutdown that we're in. If that's the case, is there
Speaker 1: any desire to take away the enhanced executive powers which
Speaker 1: I'm going to signal back then in Watergate, I haven't
Speaker 1: heard that dialogue yet. Well that you know, first of all,
Speaker 1: there is an immediate crisis. People need to get the
Speaker 1: government open again. And then yeah, Congress is uh forever
Speaker 1: going to be wrestling The Democrats are going to be
Speaker 1: wrestling with how can they constrain the president? What mechanisms
Speaker 1: do they have? But remember where you know, the Senate
Speaker 1: is still controlled by the Republicans, and they're so far
Speaker 1: the Republicans are by and large supporting the president. So
Speaker 1: unless that changes, you know that the real possibility of
Speaker 1: enacting tangible constraints on the on the president's power um
Speaker 1: are are minimal. But as time goes by, And remember
Speaker 1: even for the president, right, it's in his interest for
Speaker 1: somebody to give him a win that he can take
Speaker 1: and move forward, because this isn't in his interest. Okay,
Speaker 1: that's well said. Do you do you see him actually
Speaker 1: indicating that he's willing to do that? To find an
Speaker 1: element or an item of wiggle room that allows him
Speaker 1: to quote unquote take a win. Well, this is the
Speaker 1: crazy part. Right at the moment, it really looks like
Speaker 1: neither the President nor the Democrats have any interest in
Speaker 1: putting anything positive on the table. Uh, you know, Linda
Speaker 1: Graham is different, and that could actually lead to some
Speaker 1: That could be the sign that there's going to be
Speaker 1: some movement. It's going to have to come from the Republicans.
Speaker 1: The President is not going to back down to the Democrats.
Speaker 1: The Republicans, I think, are going to have to come
Speaker 1: up with the plan that that allows the President to say,
Speaker 1: I've got the money for Board of Security, there's a
Speaker 1: bit of money here for the wall. Everybody sees that
Speaker 1: this is important, you know, and we're going to keep
Speaker 1: pushing on this. But that that's a very optimistic scenario
Speaker 1: at the moment. You know, there's nothing to indicate that
Speaker 1: the President's going in that direction. Well, Leslie, that's the
Speaker 1: domestic story. Internationally, it looks like the President could get
Speaker 1: a win, and he could get a win on trade.
Speaker 1: I don't know what that wind looks like, Leslie, but
Speaker 1: with the latest data out of China, looking at that,
Speaker 1: it looks like the Chinese are having some problems, and
Speaker 1: I just wonder whether that increases the chances of US
Speaker 1: finally getting some kind of breakthrough with the US China
Speaker 1: try dispute, Leslie, what do you think, Um? It does?
Speaker 1: It does look like there is you know, the desire
Speaker 1: and the part of the Chinese as well as on
Speaker 1: part of China as well as the United States, to
Speaker 1: to come to some sort of agreement. Um, whether that's
Speaker 1: significant and substantial enough to really alter the nature of
Speaker 1: that trading relationship, I'm skeptical, But whether it's substantial enough
Speaker 1: for the president to gain to gain a victory. I
Speaker 1: think that there is some some prospect for that. And
Speaker 1: remember he's you know, he's got a lot of backing
Speaker 1: across both sides of the isle. The United States are
Speaker 1: taking this tough line at the same time, you know
Speaker 1: that the U s economies had a few bobbles. What
Speaker 1: what you suggested about China is exactly the case. And
Speaker 1: so I think there's there's a good will and there's
Speaker 1: an interest on both sides to have some sort of
Speaker 1: progress on the front. You touched on something important, Leslie,
Speaker 1: and I want to wrap things up that just a
Speaker 1: final question do you see this as a multi generational
Speaker 1: issue between the United States and China? Oh? Absolutely, But
Speaker 1: I mean this is the key strategic relationship for certainly
Speaker 1: the rest of my lifetime and and the next generations
Speaker 1: and how it gets. You know, we're right at the
Speaker 1: beginning of really rethinking and re negotiating that relationships. We're
Speaker 1: going to be talking about it every week for a
Speaker 1: very long time to come. Leslie Benjamuri, thank you so
Speaker 1: much with Chatham House of great perspective today in London
Speaker 1: on the challenges of Brexit and of course with her
Speaker 1: full time effort of review of the United States of
Speaker 1: America and shutdown in Washington. You know, Bloomberg Intelligence is
Speaker 1: worth its weight in gold. And John Butler has put
Speaker 1: together a story has done this with billion kim which
Speaker 1: is just simply Apple, bull case, Apple, bear case. John
Speaker 1: Butler joins us now our senior Apple analysts in charge
Speaker 1: of concept product and heaven forbid, we'd actually talk about
Speaker 1: the financial ratios. Who wins bulls and bears? John Butler,
Speaker 1: I say, in the long run, the bulls wind um.
Speaker 1: You know, Apple really is a premium brand. Here. Uh,
Speaker 1: fast forward a year from now, they're going to be
Speaker 1: up against easier comps. They'll have new iPhones out on
Speaker 1: the market, and um, you know, frankly, it's tough to
Speaker 1: predict politics, but I have to believe at some point
Speaker 1: the China trade situation begins to get better, not worse.
Speaker 1: In your granular analysis, folks, page after page after page,
Speaker 1: let's stay with the bull case. What are the Bears
Speaker 1: most misjudge. I think they misjudged the again, the power
Speaker 1: of the brand here. You know, Apple has a lot
Speaker 1: of cash to work with. They can expand the business
Speaker 1: through acquisition if they choose to. If they don't. Again,
Speaker 1: they can really drive the brand to expand the services business.
Speaker 1: Other products accessories like the watch for instance, and air
Speaker 1: pods have done quite well. I think there's more to
Speaker 1: come on that front, and I think the Bears missed that.
Speaker 1: I mean anecdotally. I must admit I'm seeing more watches
Speaker 1: and more of the white things sticking out of people's ears.
Speaker 1: And I saw a year ago to say it's my
Speaker 1: scientific and it's my scientific analysis, John Butler. When we
Speaker 1: look at this, it's always a risk. Well, they've got
Speaker 1: a lot of money, and their financially engineering by diving
Speaker 1: an increase and return of cash to share, buy back
Speaker 1: to shareholders. State the case that Apple is not financial engineering, Well,
Speaker 1: it's you know, every company to a degree does some
Speaker 1: financial engineering. Again, they have a lot of cash they
Speaker 1: can put to work. They are committed to buying back shares.
Speaker 1: They've committed overall to returning capital the shareholders in that
Speaker 1: boost the bottom line. But it's not organic growth in
Speaker 1: the business, right. I think Apple's biggest problem right now
Speaker 1: to sort of kick into the bear cases. They are
Speaker 1: looking squarely at a mature market. This is the PC
Speaker 1: market five years ago, and you know they need to
Speaker 1: expand beyond that reliance they have on the iPhone. UM.
Speaker 1: So you know there are other elements to the bearcase there.
Speaker 1: But to me, that's sort of the main problem that
Speaker 1: Apple has to deal with. On a partial differential basis,
Speaker 1: haven't forbid I would say that they would cut the
Speaker 1: cost of the fancy phones, bring down the monthly payment
Speaker 1: of the fancy phones by extending out whatever. I mean.
Speaker 1: They got room to move here to find out where
Speaker 1: the market is, don't they they do. It's a great point, Tom,
Speaker 1: Pricing really is a science. Uh I'm sorry, arn't as
Speaker 1: much as science and you need to find that right
Speaker 1: balance between maximum price and maximum volume, and um, I
Speaker 1: think they're still trying to find that. This latest quarter
Speaker 1: tells me they sort of hit a wall on on
Speaker 1: price increases, you know, over the come on, I remember
Speaker 1: Philip Morrison, a pack of cigarettes was eighty two cents
Speaker 1: and one day it was a dollar twelve or whatever,
Speaker 1: and they hit a wall. You haven't beautifully done ITEMT
Speaker 1: iPhone price has hit a ceiling bear case. Well, there's
Speaker 1: like six ways to fix that, right, there are many
Speaker 1: ways to fix that. I think he hit on it
Speaker 1: just a moment ago, which is expand the portfolio. You know,
Speaker 1: maybe you could even come out with more expensive iPhones,
Speaker 1: but at the lower end. Expand on the ten are
Speaker 1: and take it maybe a little bit lower, or keep
Speaker 1: the older ten hours on the market and dropped the
Speaker 1: price by a hundred dollars. But I do think they
Speaker 1: need overall to expand the market that the rim which
Speaker 1: is the premium segment, and maybe even extend down to
Speaker 1: the high end of that sort of those mid priced phones. Okay,
Speaker 1: what's a tenor is that the x are This is
Speaker 1: like a cheaper phone. It's pretty colors. It's selling to
Speaker 1: who it's selling to, those people who want to step
Speaker 1: up to facial recognition but can't quite afford it. Uh
Speaker 1: tough to say. We'll know at the end of the
Speaker 1: month when Apple reports. The reports out of the supplier
Speaker 1: community would tell you that the n R at the
Speaker 1: x are pardon me, has sort of fallen flat in
Speaker 1: terms of demand. I'm not so sure on that. You know, okay,
Speaker 1: but but this is critical, folks, and you know it
Speaker 1: doesn't mean you're an Apple. We try to avoid the
Speaker 1: fanboys stuff with Apple as much as we can. But
Speaker 1: John Butler, if the XR is there cheaper phone, is
Speaker 1: it that the kids, whether in China or the U
Speaker 1: S or Indonesia wherever, they're gonna eight and pay up
Speaker 1: for the fancy phone, or that the XR just can't
Speaker 1: compete with the eight phones out there that are cheaper.
Speaker 1: It's hard to say. Again, the jury is still out
Speaker 1: on whether or not it's fallen flat. If it has
Speaker 1: fallen flat, it's fallen flat like the five C did.
Speaker 1: If you were exactly when it came out with a
Speaker 1: variant on the high end phone, and people, I think
Speaker 1: look at it and say, why don't I just wait
Speaker 1: six months and by the higher end phone, was that
Speaker 1: where we're gonna be? I mean the point here, that's
Speaker 1: the risk of where we might be with this. And
Speaker 1: again I you know, they haven't reported the quarter yet.
Speaker 1: They've introduced Home, but we haven't really heard them way
Speaker 1: in on how it's selling. We're only getting anecdotal evidence
Speaker 1: from the supplier. This is way to Apple fan boy
Speaker 1: talk for me. Let's bring in Paul Sweeney listening very
Speaker 1: carefully to all my Apple Am I doing enough? Paul?
Speaker 1: You are my enough fanboy to keep the conversation going absolutely.
Speaker 1: I mean, you can never talk to much about Apple
Speaker 1: when when I look at the Apple stock, John and
Speaker 1: the story, you know, it's always been what's really driven
Speaker 1: this stock, you know, really over the last ten years
Speaker 1: has been new products, new products, new products, and as
Speaker 1: you talked about, we're in a mature phone market, so
Speaker 1: investors have been turning their attention to the services business.
Speaker 1: Will that ever be a driver for this company and
Speaker 1: this stock or will this stock always be a product story? No,
Speaker 1: I I it's a great question. In fact, that's that's
Speaker 1: the main question on this stock though right now, is
Speaker 1: how quickly they can grow that services business to the
Speaker 1: point where it picks up any slack in the iPhone business.
Speaker 1: There's a great hue and cry out there now for
Speaker 1: them to get more deeply into content. Paul, as you
Speaker 1: well know from your work in the content world, that's
Speaker 1: that can be lower margin, and I think that's Apple's
Speaker 1: hesitation there. Okay, I'm looking at Google and I just
Speaker 1: type this in folks, because I'm not a sophistical like
Speaker 1: John Butler, Paul Sweeney. Is Spotify better than Apple Music?
Speaker 1: I mean, the world's voting, they're saying Spotify is better.
Speaker 1: How does Tim Cook and his crew make Apple Music
Speaker 1: have that pixie dust that Spotify has? That is a
Speaker 1: tough call. I actually personally think Spotify is a little
Speaker 1: bit better than Apple. One one area where Apple is
Speaker 1: a bit weak is in the AI end of things,
Speaker 1: and the reason that's artificial intelligence, and that really fuels Siri,
Speaker 1: and I think to get advances in Siri and then
Speaker 1: advances in your services business like Apple Music, they need
Speaker 1: to spy on their users a little bit more. An
Speaker 1: Apple is huge on privacy, and I don't think they're
Speaker 1: willing to do that. So I think it's a matter
Speaker 1: of doing what they're doing right now. Which is leveraging
Speaker 1: that great brand name and leveraging the installed base to
Speaker 1: try and get people to try Apple Music and then
Speaker 1: with it, John, I'm I disconnected, Sirie did Sorry? I disconnected, Sirialy.
Speaker 1: I don't blame you, Tom. She's way way behind Google system.
Speaker 1: She wouldn't talk to me. John Butler, thank you so
Speaker 1: much an update on Apple, And you know, Paul Sweeney,
Speaker 1: this all comes down to some of the parts analysis.
Speaker 1: I haven't seen a good some of the parts on Apple.
Speaker 1: But you know, the financial engineering thing that it's still
Speaker 1: a cash flow juggernaut, isn't it. It's it's it's just
Speaker 1: tremendous to cash flow that they're putting out year and in,
Speaker 1: year out, and they continue to invest back in their
Speaker 1: business across the board. It's not like they're hoarding the cash.
Speaker 1: So when you're just for cash, you can make the
Speaker 1: argument that's just cheap stock. You know the world's coming
Speaker 1: to an end. Two hundred and sixty nine jillion dollars
Speaker 1: a year ago and now it's only two d seven
Speaker 1: can jillion laying around by Sweeney Enterprises or Twitter or
Speaker 1: whatever they're gonna do as well. John Butler on Apple
Speaker 1: y Thanks for listening to the Bloomberg Surveillance podcast. Subscribe
Speaker 1: and listen to interviews on Apple Podcasts, SoundCloud, or whichever
Speaker 1: podcast platform you prefer. I'm on Twitter at Tom Keene
Speaker 1: before the podcast. You can always catch us worldwide. I'm
Speaker 1: Bloomberg Radio