Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
Speaker 1: Along with my co host Lisa Bramowitz. Each day we
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Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. It's
Speaker 1: time to bring in Dave Wilson, Bloomberg Stocks columist and
Speaker 1: blogger at M live go on the Bloomberg. Remember to
Speaker 1: send Dave an email at d Wilson at Bloomberg dot net,
Speaker 1: sign up for his daily free email newsletter, and follow
Speaker 1: Dave on Twitter at the One Dave. Alright, the one, Dave.
Speaker 1: What are you looking at today? I was looking at
Speaker 1: cruise line operators. Yeah, it's a good day for transportation
Speaker 1: stocks in general. You can put the cruise lines together
Speaker 1: with the airlines and uh, I'm sure because of the
Speaker 1: United Continental reports exactly, I'm sure you were looking at
Speaker 1: Norwegian cruise lines. Uh. As far as focusing on that industry,
Speaker 1: they expect to raise their earnings forecast for this year,
Speaker 1: talking about booming demand in their main markets around the world.
Speaker 1: And that's saying something when you know there's so much
Speaker 1: of a focus on, you know, whether economies outside the
Speaker 1: US are doing as well or perhaps headed for some
Speaker 1: weakness and relative to the US. And yet you know
Speaker 1: you've got all these stocks moving up in Norwegian Cruise
Speaker 1: Lines has the second biggest game in the S and
Speaker 1: people I'm under now it's up more than eight percent.
Speaker 1: You know, but you know where the demand is coming
Speaker 1: from China? That would make sense. You know, you've got
Speaker 1: people who have more wealth, uh, that are more able
Speaker 1: to travel, and so it stands to reason that you'd
Speaker 1: be getting the demand from China. You know, United Continental,
Speaker 1: I mean they're talking about raising their earnings forecast for
Speaker 1: this year at a time when fuel prices are going
Speaker 1: up and we've seeing other companies cutting their projections. So
Speaker 1: you know that that's the positive surprise there. Uh. You know,
Speaker 1: you've got United up seven and a half percent, American
Speaker 1: Delta Southwest all higher. We should point out to that
Speaker 1: Royal Caribbean and Carnival are following Norwegian Cruise Lines leads.
Speaker 1: So those are a couple of areas that definitely get
Speaker 1: your attention to this market alright. One area that's getting
Speaker 1: my attention is the underperformance of tech stocks to the naztacs,
Speaker 1: certainly underperforming the SMP and down Jones. What's behind that, Well,
Speaker 1: it doesn't help matters that Alphabets down, you know, the
Speaker 1: owner of Google. This five billion dollar fine imposed by
Speaker 1: the European Union, I should point out though, I mean
Speaker 1: those two classes of shares that are in the SMP
Speaker 1: five hundred, the uh the voting class A, which is
Speaker 1: the ticker g O O G L, and the non
Speaker 1: voting class C, which is g O G they're only
Speaker 1: down about a quarter at this point. That exact what
Speaker 1: I was gonna say. I mean, this is the biggest
Speaker 1: fine ever of its hype. It certainly is a big headline.
Speaker 1: The reaction is to Minimus exactly. I mean, people anticipating
Speaker 1: that the EU was going to weigh in. That this
Speaker 1: has been playing out for some time, so it's not
Speaker 1: like it's snuck up on anyone. And just looking at
Speaker 1: you know, Alphabet's performance, I mean you see just in
Speaker 1: terms of how much they earn in a quarter. Yeah, well,
Speaker 1: I mean you're talking about nine billion dollars. They could
Speaker 1: pay it off with a month and a half worth
Speaker 1: of earnings. Let's get a little bit more insight on
Speaker 1: exactly what this fine was and why stock investors just
Speaker 1: really don't care share over a joint us. Now, she's
Speaker 1: a technology columnist with bloom Bloomberg Opinion. UM, we're talking
Speaker 1: about this five billion dollar fine by the European Union.
Speaker 1: Can you just give us why Google was fined this
Speaker 1: way and why shareholders are just shrugging it off? Sure? So, Basically,
Speaker 1: what the European regulators said was that Google has been
Speaker 1: illegally abusing its power over Android, which is the operating
Speaker 1: system that powers something like eight five percent of smartphones
Speaker 1: in the world. And the Europeans basically said Google um
Speaker 1: illegally compelled the companies that make devices that run Android software,
Speaker 1: so that would be companies like Samsung and hp C
Speaker 1: an LG that makes phones. Google compelled them to install
Speaker 1: other Google apps on those Android phones, including things like
Speaker 1: the Google Search app, the Chrome web browser. UM and
Speaker 1: the Europeans said that this was sort of an illegal
Speaker 1: abuse of Google's power over Android. And as for why
Speaker 1: UM investors don't care, look, as you guys said, this
Speaker 1: has been telegraphed for a long time. This investigation has
Speaker 1: been ongoing and it's a little bit hard to know
Speaker 1: exactly how this might crimp Google's revenue and profits that
Speaker 1: you know, we're now in a world where Google has
Speaker 1: become the de facto um you know, starting point for
Speaker 1: a lot of people on their phones, whether that's YouTube
Speaker 1: or the Chrome browser or Search. Certainly, and no matter
Speaker 1: what regulators do, the question is, um has will will
Speaker 1: the rule changes or will Google behavior changes do anything
Speaker 1: to change the status quo of Google's power in the
Speaker 1: smart home world. And you have to bear in mind too,
Speaker 1: we've seen this movie before. Go back a couple of decades,
Speaker 1: the EU regulators told Microsoft they had to break up
Speaker 1: in essence, the Internet Explore browser from the Windows operating system.
Speaker 1: It's the same thing, only it's playing out now with
Speaker 1: mobile phones and Microsoft seems to have survived just fine
Speaker 1: in the last couple of decades. And so here we are.
Speaker 1: It's the same situation you know that that Google's facing.
Speaker 1: And you know, at least we have a press the
Speaker 1: suggest that may not be the end of the world. Well, Shira,
Speaker 1: I just want to understand Android as the operating system.
Speaker 1: It's a Google product, right, is a Google product? Yes?
Speaker 1: So they don't make money directly from Android. But yes,
Speaker 1: it is a product that Google makes and distributes. They
Speaker 1: got two billion monthly active users. That's the largest installed
Speaker 1: base of any operating system, and that fits into the
Speaker 1: Google Play Store. So you've got what three million plus
Speaker 1: apps on the Play Store. What would be the technical
Speaker 1: consequences of separating Google from the actual operating system of
Speaker 1: mobile phones. Yes, fair question. Um, I think the most
Speaker 1: honest answer is we don't know exactly what will be
Speaker 1: the consequence of this you crackdown on Google and how
Speaker 1: Android operates. Um, what it could mean is in the future,
Speaker 1: if you buy an Android phone, whether it's a Samsung
Speaker 1: phone or an HBC phone or somebody else's phone, Um,
Speaker 1: maybe it won't have the Google Search app installed on
Speaker 1: it automatically. Maybe it won't have the Chrome web browser
Speaker 1: installed on it automatically. Right, And look, those kinds of
Speaker 1: default do matter. That is why companies make deals so
Speaker 1: their phones come pre installed with all those apps, because
Speaker 1: people tend to use whatever is already on their phone
Speaker 1: rather than seeking out those apps or internet services on
Speaker 1: their own. All Right, So you know, we started out
Speaker 1: talking about the under performance of NAZA of the Nasdaq index,
Speaker 1: and so it seems like it's pretty clear that this
Speaker 1: is a slap on the risk for Google with the fine,
Speaker 1: it's not going to materially alter their outlook. Netflix perhaps
Speaker 1: is in a different situation. You are seeing those shares
Speaker 1: continue declining today after yesterday's de clim which wasn't as
Speaker 1: bad as it could have been. And I guess I'm
Speaker 1: trying to figure out, is this sort of the moment
Speaker 1: of truth? Do you think shia for Netflix, just with
Speaker 1: respect to they actually start to face some challenges with
Speaker 1: their business model of raising money and then burning it.
Speaker 1: I think probably not yet. Um. Look, the thing about
Speaker 1: Netflix is it's pretty easy to argue that one quarter
Speaker 1: or even two quarters um of soft subscriber growth or
Speaker 1: subscriber numbers um is a blip that if you look
Speaker 1: at Netflix's track record over the long term, it is
Speaker 1: a pretty amazing story of a company that has managed
Speaker 1: to gain a huge number of users in a short
Speaker 1: period of time and for the most part, is still
Speaker 1: adding to its user base, even in a country like
Speaker 1: the United States where something like half of all households
Speaker 1: with internet access or Netflix subscribers. It's pretty impressive. Um.
Speaker 1: You know, but the thing about Netflix, right is that
Speaker 1: it's a self fulfilling prophecy that people's investors belief that
Speaker 1: Netflix will keep growing gives it the money both from
Speaker 1: the debt markets and exequity value, gives Netflix the money
Speaker 1: to keep spending on programming so that it can gain
Speaker 1: more users. And if one part of that virtuous circle
Speaker 1: starts to uh kind of collapse a little bit of
Speaker 1: people believe it might start to collapse, then the whole
Speaker 1: cycle doesn't work. Right. That is, investors believe, Okay, maybe
Speaker 1: Netflix isn't going to grow to the moon, or at
Speaker 1: least to have to grow as quickly as we thought
Speaker 1: in terms of subscriber numbers. Maybe they're less willing to
Speaker 1: um loan money to Netflix to fund its programming costs.
Speaker 1: And if that's the case, then maybe Netflix can't spend
Speaker 1: as much as it has been, and then maybe it
Speaker 1: doesn't get as many subscribers as people thought, and then
Speaker 1: the whole thing starts to come unraveled. So we don't
Speaker 1: know the impact. It's only one quarter, but remember that
Speaker 1: Netflix basically live or dies based based on the kind
Speaker 1: of faith of investors, and that faith could be tested. Now, sure,
Speaker 1: Netflix has what a hundred and thirty million subscribers paying
Speaker 1: every month. Correct, that's a lot of cash flow, isn't it. Well,
Speaker 1: it's a lot of cash flow in theory, but if
Speaker 1: you look at Netflix's cash flow, it's negative to the
Speaker 1: tune of several billion dollars a year um and they've
Speaker 1: said that the free cash flow is going to be
Speaker 1: negative three to four billion dollars this year. And the
Speaker 1: reason for that is, Yeah, there's a lot of customers
Speaker 1: coming in the door paying their bills every month, but
Speaker 1: there's even more money going out the door for Netflix
Speaker 1: to pay for Oranges, the new Black and Stranger things
Speaker 1: than all the other literally hundreds of new shows and
Speaker 1: movies that it airs on a yearly basis. So it's
Speaker 1: spending more than it's it's taking in. I think they're
Speaker 1: supposed to be about seven hundred programs on Netflix Original programming. Dave,
Speaker 1: you're shaking your head. The shares and Netflix are down
Speaker 1: about nine That's a lot to watch, no question. Yeah,
Speaker 1: Netflix shares it back to where they were a little
Speaker 1: more than a month ago. So we mean, yeah, you
Speaker 1: saw the reaction. Uh, late Monday, early yesterday, stock bounced
Speaker 1: back close with a loss of a little more than
Speaker 1: five percent after falling as much as four percent. Yeah,
Speaker 1: it's lower today, but two thirds of repersent at the moment,
Speaker 1: so it's not like things are falling apart, at least
Speaker 1: in the eyes of investors when they look at Netflix. Yeah.
Speaker 1: Netflix shares now trading about three hundred and seventy five
Speaker 1: dollars a share. Thanks very much. Sara over Day Bloomberg Opinion,
Speaker 1: a columnist all Things Technology. We encourage you to follow
Speaker 1: her on Twitter at Shara over Day and to read
Speaker 1: all of her opinion columns at Bloomberg dot com slash Opinions.
Speaker 1: I want to bring an Ira Jersey, Chief US Interest
Speaker 1: rate strategist for Bloomberg Intelligence. Ira, Yesterday's Q and A session,
Speaker 1: in my opinion, didn't really guild much. It was a
Speaker 1: lot of grand standing on the part of politicians, and
Speaker 1: there wasn't much with respect to monetary policy. What are
Speaker 1: you expecting from today? Yeah, so I think the Senate
Speaker 1: you tend to get higher brow questions, and you do
Speaker 1: in the House of Representatives, you'll still get a little
Speaker 1: bit of grandstanding, and certainly some members um trying to
Speaker 1: trying to goad Chair Powell into coming to their point
Speaker 1: with their point of view. So things like things like growth,
Speaker 1: why the FEDS growth forecast or what they are m
Speaker 1: I'm sure we'll be asked about the balance sheet. We'll
Speaker 1: be looking with that, and I wouldn't be surprised at all.
Speaker 1: And something that I'll be looking and listening for is
Speaker 1: any comments about how concerned about the shape of the
Speaker 1: yield curve that the FED is. That's been brought up
Speaker 1: in almost re every time we look at the minutes.
Speaker 1: That seems to be one of the highlights that that
Speaker 1: some members are really concerned about about the shape of
Speaker 1: the curve. But but Fitcher Powell actually got asked that
Speaker 1: yesterday and he didn't seem overly concerned. He also did indicate,
Speaker 1: uh that for now they're going to continue with their
Speaker 1: gradual rate hikes. For the market took this as it's
Speaker 1: still all guns blazing, Uh, let's go because to your
Speaker 1: yields and made a new high yesterday, although they are
Speaker 1: off the high that we saw yesterday. Yeah, So so
Speaker 1: you know, some of the some of the reaction I
Speaker 1: think about the curve is people are concerned that if
Speaker 1: the if the FED hikes faster than the market currently expects,
Speaker 1: that's really the real risk to the curve at this
Speaker 1: point because it's it's well known that that or at
Speaker 1: least the markets pricing that that said, it's gonna hike,
Speaker 1: you know, three more times or so before the end
Speaker 1: of next year. Um. So so things about the curve
Speaker 1: that that we're gonna I'll be listening for that might
Speaker 1: be different than yesterday. Are you know, when the curve
Speaker 1: gets to zero, are you going to stop? Or how
Speaker 1: many more hikes are there going to be? Uh, we
Speaker 1: don't know. You're still see slacking the economy, so maybe
Speaker 1: why are you still talking about the s gradule hiking
Speaker 1: like all of those things are um, any change in
Speaker 1: tune with what we're gonna be looking for. Now that
Speaker 1: being said, I think Terry Powell has done a great
Speaker 1: job staying on message, sticking exactly to where, um, where
Speaker 1: he was at the last press conference in June, as
Speaker 1: well as what we've seen in the minutes and and
Speaker 1: the statements since he became chair. Um. You know, he
Speaker 1: tends to be not quite as verbose as Cherry Yellen was,
Speaker 1: and I think that that's maybe part of his legal
Speaker 1: background where uh, you know, he doesn't want to give
Speaker 1: away too much at at these at these hearings, but
Speaker 1: at the same time, he also needs to answer the
Speaker 1: questions that are asked as him. So I think things
Speaker 1: like about the growth trajectory and and maybe a little
Speaker 1: bit more on the labor side of things that he
Speaker 1: was asked about yesterday before the House of Representatives, the
Speaker 1: head of the committee talked about how the economy is performing.
Speaker 1: Do you think that that is a way to support
Speaker 1: the policy sees of the Federal Reserve And as much
Speaker 1: as they have sort of telegraphed these rate increases, yeah,
Speaker 1: you know, I think that when when we talk about
Speaker 1: the rate increases and the pace of rate increases, I
Speaker 1: think one of the things that that I think members
Speaker 1: of Congress don't want. They don't want the Federal Reserve
Speaker 1: to kind of derail the economy, and especially now at
Speaker 1: a time when you're talking about midterm elections coming up
Speaker 1: in just a few months. Um, you know, you're gonna
Speaker 1: have Republicans in particular who seem to be a little
Speaker 1: bit on the back foot when it comes to um
Speaker 1: some elections, particularly in the Senate, that they're um, they're
Speaker 1: likely to ask him, you know, to to stay slow
Speaker 1: and yeah, you know, you've just had some members of
Speaker 1: the House of Representatives also saying like, hey, you you
Speaker 1: know you shouldn't we we want high interest rates because
Speaker 1: we have a lot of savers and retirees, but at
Speaker 1: the same time, we don't want the economy to falter.
Speaker 1: So I think he'll be asked about some policies as well. UM,
Speaker 1: So we'll be asked about things like, you know, what
Speaker 1: are the tax increases or the tax the tax decreases
Speaker 1: and the additional federal spending. What does that do to growth?
Speaker 1: And you know, they'll try and highlight their their kind
Speaker 1: of campaign pledge on the on the Republican side, I
Speaker 1: think on the Democratic side, they're going to highlight the
Speaker 1: risks of those policies and and want Jay Powell to
Speaker 1: say something. You know this. You know, the thing with
Speaker 1: testimony these days, particularly the last couple of years, is
Speaker 1: that UM people do try and have been trying to
Speaker 1: get whether it was his Chairman Nankee, Chair Yell and
Speaker 1: now Chair Powell, to kind of take a stand on
Speaker 1: their side of the issue. So there's some sound bite
Speaker 1: that they can use, um, you know, for for their
Speaker 1: own political gain. Well, as I was mentioning Jeb Henseling,
Speaker 1: he's the committee chairman. He also maintenance. His opening remarks
Speaker 1: a little bit of comments having to do with the
Speaker 1: FEDS balance sheet and the draw down of the Fed's
Speaker 1: balance sheet. Do you think that's going to be a focus. Yeah,
Speaker 1: I think he'll he'll he'll be asked about that. You know,
Speaker 1: you know that the chair always is. I think on
Speaker 1: the Republican side in particular, they think that the Fed's
Speaker 1: balance sheet is far too big. They I think some
Speaker 1: of them is a lack of understanding of exactly, um,
Speaker 1: you know, what the FEDS balance sheet is and how
Speaker 1: it's been used. Um. But but it's also an important
Speaker 1: question because the FED could, like, like one of the
Speaker 1: things that the Federal Reserve could potentially do, it's in
Speaker 1: their tool kit. I don't think that they'll do it.
Speaker 1: I think that they don't want to do. It would
Speaker 1: be to sell some assets that are on their portfolio.
Speaker 1: So for example, if they want to keep on hiking
Speaker 1: interest rates but they want to steep in the curve,
Speaker 1: one of the things that they can talk about doing
Speaker 1: would be to be selling these uh, you know, twenty
Speaker 1: year and twenty five year securities that they own, and
Speaker 1: they own about three dred billion of them, so if
Speaker 1: they were to stort to sell some of them, you'd
Speaker 1: probably see a significant increase in yields in the back
Speaker 1: end of the curve. I think that the Fed doesn't
Speaker 1: want to do that because they see it as disrupting
Speaker 1: the market more than than the way that they're letting
Speaker 1: their balance sheet roll off right now. Um So, I
Speaker 1: think all of those things have to be taken into
Speaker 1: um be taken into account. I think j. Powell will
Speaker 1: probably talk about that that you know that their balance
Speaker 1: sheet is unwinding and orderly fashion right now? All right?
Speaker 1: You know it's It strikes me as we await the
Speaker 1: Q and a portion of this event withdrawal testifying in
Speaker 1: front of Congress, it is striking that we're getting more
Speaker 1: data out of the US, particularly housing data this morning
Speaker 1: showing the US new home groundbreaking and permits fell in June,
Speaker 1: so the slowest pace in nine months. This is being
Speaker 1: taken as another sign of a greater slow down in
Speaker 1: the housing market the people expected. People are attributing this
Speaker 1: to higher mortgage rates as well as just the higher
Speaker 1: cost of goods and labor. And I'm wondering, you know this,
Speaker 1: this has to at least weigh a little bit on
Speaker 1: the federal reserve right now, given the fact that you're
Speaker 1: not seeing expectations of longer term growth increase. In fact,
Speaker 1: they're coming down the more the Fed hikes. I mean,
Speaker 1: how has he responded to that? Is it just a
Speaker 1: labor market discussion? You know, Well, we're seeing good employment
Speaker 1: numbers now, so let's just keep on keeping on. Well,
Speaker 1: I think he'll use that as an excuse. This is
Speaker 1: why they need to go gradually, because there are some
Speaker 1: fragilities potentially in the economy, and you know, things like
Speaker 1: housing could be on on the front foot. And certainly
Speaker 1: housing starts is important for or you know, some some
Speaker 1: economic numbers like like GDP for example, because it's uh,
Speaker 1: it's housing stares and completions, not existing home sales that
Speaker 1: go in. And that's the component of GDP UM you know.
Speaker 1: And and and it is true that you've seen some
Speaker 1: somewhat of a slowdown as you've gotten over to about
Speaker 1: four percent. UH, that the commitment rate for thirty year
Speaker 1: mortgages is above four percent now, which you haven't seen
Speaker 1: in over a decade UM. And I think that's something
Speaker 1: that that is on the back of um of a
Speaker 1: lot of UH of a lot of FED members minds
Speaker 1: is you know, if if we continue to hike, will
Speaker 1: that push up interest rates significantly more? You know, one
Speaker 1: of the reasons why you have mortgage rates where they
Speaker 1: are is not as much from the interest rate hikes
Speaker 1: as it is from the runoff of the portfolio, because
Speaker 1: you've seen spread slide in mortgage backed securities. Interesting, I
Speaker 1: guess all. Another sort of statistics that I think could
Speaker 1: come up is that real wages haven't increased it all
Speaker 1: over the past year once, including inflation. And I'm wondering
Speaker 1: he had He did talk a bit about that yesterday,
Speaker 1: but you know, do you think that he could be
Speaker 1: pressed more on that? Is there something more that he
Speaker 1: could kind of offer up that would be compelling to you? Yeah, well,
Speaker 1: there's not. There's not a lot that I think what
Speaker 1: he would say to a question about that is that
Speaker 1: there's not much that the Federal Reserve can do other
Speaker 1: than keeping monetary policy reasonably accommodative, which they think that
Speaker 1: they still are um or um at least some members do.
Speaker 1: And uh. And because of that, it has to be
Speaker 1: things like fiscal policy or some kind of um uh,
Speaker 1: you know, government action as opposed to federal reserve action
Speaker 1: that would potentially raise raise income. So um no, I'm
Speaker 1: sure he'll be asked about trade, right, So some people
Speaker 1: will say, particularly on the Republican side, will likely say that,
Speaker 1: you know, these trade barriers should increase wages in some
Speaker 1: sectors that have been held down because of globalization. Um.
Speaker 1: I think that, you know, Chair Powell will probably come
Speaker 1: down on kind of a pretty neutral stance on on
Speaker 1: that if he's asked about, you know, the wage implications
Speaker 1: of of any particularly any potential um reduction or increase
Speaker 1: in trade barriers, and he'll he'll say that like it's dangerous,
Speaker 1: it's a dangerous game. And he did come down, you know,
Speaker 1: reasonably hard against trade barriers last year or yesterday rather
Speaker 1: and I think that that's something that will probably come
Speaker 1: up as well. Thank you very much. Ira Jersey is
Speaker 1: our chief US interest rate strategist for Bloomberg Intelligence. Thanks
Speaker 1: for listening to the Bloomberg P and L podcast. You
Speaker 1: can subscribe and listen to interviews at Apple Podcasts, SoundCloud,
Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm
Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa Abramo.
Speaker 1: It's one before the podcast. You can always catch us
Speaker 1: worldwide on Bloomberg Radio