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Speaker 2: Under an hour. Here, we're going to get First Republic earnings,
Speaker 2: and that's going to really put a spotlight on deposit flows,
Speaker 2: funding cost expectations. We're seeing that shares are rallying ahead
Speaker 2: of earnings, so here to discuss that. We've got a
Speaker 2: great guest, Anton Schultz. He's president and chief investment officer
Speaker 2: of Mending Capital Advisors, and he joins us on zoom
Speaker 2: from Florida. Thank you so much for making time to
Speaker 2: chat with us on all things First Republic ahead of
Speaker 2: these earnings. I know that you invest in both big
Speaker 2: and small banks. You've got a really great broader outlook
Speaker 2: for the entire industry. How would you categorize the health
Speaker 2: of regional banks specifically?
Speaker 3: Though right now the.
Speaker 4: Health is actually very strong. The stocks don't tell you that,
Speaker 4: but really even the statistics that we all get about
Speaker 4: deposit flows are kind of misleading in terms of where
Speaker 4: they've gone and how they've gone. All of us have
Speaker 4: expected deposits to shrink in the industry. It's really simple.
Speaker 4: I mean, twenty twenty comes around. You know, the US
Speaker 4: government prints a ton of money, sends it out to
Speaker 4: corporations and individuals, they put it in the bank and
Speaker 4: they've been whittling it down over the last you know,
Speaker 4: year plus, and that's fully expected. The run on the
Speaker 4: banks not expected, and it was very specific to a
Speaker 4: few institutions, and that money scattered right that money left,
Speaker 4: you know, some of the left First Republic clearly left
Speaker 4: Silicon Valley, you know, definitely Signature as well. So that money,
Speaker 4: you know, just first went to some of the bigger
Speaker 4: institutions spread around the industry. But you would still expect
Speaker 4: the industry to experience outflows as people take down their deposits.
Speaker 4: You know, one of the regional banks I talked to said, well,
Speaker 4: our average consumer deposit went from thirteen thousand a person
Speaker 4: in nine thousand. That's not a fearful thing. It's just
Speaker 4: people spending the money that they got from the government.
Speaker 5: So anton, of course, deposits in focus after the belt
Speaker 5: to day the First Republic. But look, something that's really
Speaker 5: sticking with me is what Jamie Diamond said of JP
Speaker 5: Morgan last week. I believe and you guys said, look,
Speaker 5: by the end of the year, a lot of these
Speaker 5: deposit flows they're going to shake out, they're going to normalize.
Speaker 5: For a company like First Republic that's really dealing with
Speaker 5: a confidence issue, what do we take away from.
Speaker 4: That, Well, I mean, at the end of the day,
Speaker 4: the confidence issue was certainly helped by the largest banks
Speaker 4: putting thirty billion dollars deposits in. Certainly, I would think
Speaker 4: the regulators and the large banks nobody wants to see
Speaker 4: First Public fail. I'm a customer, right, I love them.
Speaker 4: They're great service. But at the end of the day,
Speaker 4: deposits matter, and the deposits matter versus how you've built
Speaker 4: your asset book. Right, what are you have in your
Speaker 4: asset book? Do you have a lot of bonds well
Speaker 4: that you know, kind of undid Silicon Valley people looked
Speaker 4: at the mismatch and ran and in this case, they
Speaker 4: had a lot of fixed right long term mortgages. And
Speaker 4: when you match that against higher short term interest rates,
Speaker 4: that's a tough match. And when you undermine confidence, then
Speaker 4: that those deposits ran a lot of the venture capital
Speaker 4: mining ran really fast, and that's you know, what companies
Speaker 4: had in common, or you know, clearly Silicon Valley had
Speaker 4: the largest concentration. First Republic would have been would have
Speaker 4: been next in terms of dollar amounts, in terms of
Speaker 4: you know, the regionals, and then pack Western Western Alliance.
Speaker 4: Western Alliance really startings last week. I mean, you know
Speaker 4: that was that was quite a pleasant surprise to people
Speaker 4: who owned it. Still down a lot, but up substantially
Speaker 4: from its lows.
Speaker 2: Yeah, So do you anticipate getting another upside surprise heading
Speaker 2: into the clothes today with First Republic?
Speaker 4: I mean it's absolutely you know, binary the way the
Speaker 4: stock reacts, but I certainly think that confidence has been
Speaker 4: restored without thirty billion dollars of inflow, and clearly they've
Speaker 4: been reaching out to customers and finding ways to diversify deposits.
Speaker 4: There are all sorts of programs out there that help
Speaker 4: diversy deposits. So of course, what also is important is
Speaker 4: everybody talks about two undred fifty thousand. Well, if you
Speaker 4: have an account with your spouse, or if you have
Speaker 4: account with your spouse, your two children, but it's two
Speaker 4: fifty of persons, So that's a million dollars right there.
Speaker 4: So you know, clearly, I think some of that money
Speaker 4: is going to come back. I think some of the
Speaker 4: confidence will be back. We want to resolve that company,
Speaker 4: so it's a very good company. But yeah, the outcome
Speaker 4: is going to be binary. My thirty four percent short interest,
Speaker 4: So clearly you can have a very large move in
Speaker 4: that stock.
Speaker 5: Anton get a little nerdy with me here if you will.
Speaker 5: When we're looking at price to book ratios for some
Speaker 5: of these regional banks, what is so striking to me
Speaker 5: is that they have fallen far below that key one level.
Speaker 5: And for our non stock audience around the world, when
Speaker 5: it falls below one, it is kind of this glaring
Speaker 5: buy signal, and it has been for a lot of
Speaker 5: these companies. Why is it not it is a no
Speaker 5: brainer to share buybacks for a lot of these regional banks.
Speaker 5: You're worried about a confidence issue, you're worried about your
Speaker 5: stock losing all this kind of value.
Speaker 3: Why not deploy that cash?
Speaker 4: Well, I mean, that's a brilliant observation. You get high
Speaker 4: honor marks for me being nerdy. I might, but if
Speaker 4: you really think about it, you know what the swings
Speaker 4: of this business, if you really think about it. You're
Speaker 4: absolutely right, all right, you're supposed to be buying regional
Speaker 4: banks below book value, and why are they not buying stockback?
Speaker 4: Some are right, but I think at the end of
Speaker 4: the day, people want to have confidence of strong capital ratios,
Speaker 4: lots of liquidity, and I think the industry is going
Speaker 4: to be a second half of the year buyback story,
Speaker 4: right as capital bills, as some of those bond portfolios
Speaker 4: start to you know, a cree back into value of
Speaker 4: book value in capital, you know, as rates potentially fall again,
Speaker 4: as we had potentially of mild recession. And by the way,
Speaker 4: regional banks can really outperform in a mild recession. Everybody
Speaker 4: goes back to two thousand and seven and eight, which
Speaker 4: is a you know, once in a century kind of
Speaker 4: timing period. I don't think we have the bad products.
Speaker 4: I don't think we have the irresponsible lens. I don't
Speaker 4: think we have the same capital ratios for the industry,
Speaker 4: and so I think it's a really good time. I
Speaker 4: also think we have a lot of latent m and
Speaker 4: A that will happen. Right, if you're a bank CEO
Speaker 4: and you're in your late fifties early sixties, you've been
Speaker 4: through two thousand and eight, You've been through twenty fifteen,
Speaker 4: you know Stockston Act. Well, then you've been through twenty
Speaker 4: twenty and twenty two. Boy, when you have a chance
Speaker 4: to sell your bank, you're going to And by the way,
Speaker 4: the gap from a MidCat bank and small cat banks
Speaker 4: is about four you know, handles in terms of pe
Speaker 4: ratios getting nerdy here. So that means the larger bank
Speaker 4: can buy the smaller one in a very creative manner
Speaker 4: and pay a forty percent premium immediately.
Speaker 5: I mean, and that's exactly what we're potentially expecting from
Speaker 5: First Republic as we talk about just how much kind
Speaker 5: of liquidity and a lifeline that we've gotten from GP Morgan,
Speaker 5: from Bank of America and others, and how much further
Speaker 5: they're willing to go.
Speaker 3: So that's simply something that we're.
Speaker 5: Going to be watching after the bell Anton. From your perspective, though,
Speaker 5: when we talk about exposure for some of these community
Speaker 5: banks and regional banks, talk to us a little bit
Speaker 5: about crypto exposure. That was at the heart of the
Speaker 5: issue with signature with SBB as well. Your take on
Speaker 5: whether we were let's say, ten years too early on
Speaker 5: that exposure you know, I.
Speaker 4: Think I'm disappointed that we didn't have a chance to
Speaker 4: sort of regulate and make things like like crypto or
Speaker 4: stable coins sort of a safe part of the marketplace
Speaker 4: because those deposits. Again, if you combine that with you know,
Speaker 4: the crypto and the venture together, Signature's case really twenty
Speaker 4: five percent deposits of you know, crypto and certainly similar
Speaker 4: Mountain venture. You know that money can go really quickly, right,
Speaker 4: you lose that confidence, you know, click the mouse, and
Speaker 4: by the way, that's a risk with FED now, the
Speaker 4: money can move really quickly on FED. Now, if you
Speaker 4: really think about going back to the financial crisis, you know,
Speaker 4: first Union or Wacoba failed, you know, was handed basically
Speaker 4: to Wells Fargo. They had sixteen billion run out over
Speaker 4: a week. I believe Silicon Valley had one hundred billion
Speaker 4: of demands on that Friday it failed. So you know,
Speaker 4: that ability to click the my house and move that money.
Speaker 4: So yeah, I would have loved to see crypto reregulated.
Speaker 4: I would love to see it part of the banking
Speaker 4: system in a regulated way. And look, deposits are obviously key,
Speaker 4: and that's important. And then you add up, you know
Speaker 4: another another factor is cannabis banking, you know? Is that legal?
Speaker 1: Right?
Speaker 4: There's a lot of cash people have, you know, their
Speaker 4: money in safes and things like that. So if you
Speaker 4: think about where that money is and where it should be,
Speaker 4: it should be in the banking system, it should be regular.
Speaker 2: Sure. Hey, we've got about forty five seconds left, So
Speaker 2: I do want to get to some names because our
Speaker 2: audience loves to hear some investment advice from the smart
Speaker 2: folks like you that we bring on the air. Talk
Speaker 2: to me about some of your top holdings and maybe
Speaker 2: some of your more unique ones. You've got a New
Speaker 2: York community bank down the list here. Talk to me
Speaker 2: about what's looking good to you right now?
Speaker 4: Perfect, well, you just let it off with with my
Speaker 4: one of my near term favorites. And look, I've loved
Speaker 4: in your community for a long time, non management for decades. Literally.
Speaker 4: I like the fact they got those signature deposits right.
Speaker 4: It definitely selves some positiveshoes for him. They're one of
Speaker 4: the top mortgage lenders in the country. That's not a
Speaker 4: great place to be now, but when rates come down,
Speaker 4: that's going to be a really great place to be.
Speaker 4: And I really think they're concentrating on improving their branch system.
Speaker 4: You know, the CEO of Tom Kagemi was the CFO
Speaker 4: for a long time. He's only had a you know,
Speaker 4: a couple of years as CEO, and I think he's
Speaker 4: really remaking that big. So I love the big dividend yield.
Speaker 4: I think that's important. So I'll give you to others
Speaker 4: with big dividend yields. First, Interstate FIBK. It's one of
Speaker 4: my top top positions as well. And I'll give you
Speaker 4: another one that's in the middle of a merger of
Speaker 4: you know, PFS Providence Financial right across the river from youre,
Speaker 4: New Jersey, and again big dividend yield. They've got a
Speaker 4: pending merger to close. They have some very big index
Speaker 4: activity has to happen when that merger closes, which again
Speaker 4: is another sort of technical reason to own it. But
Speaker 4: I really like management, knowing them a long time as well,
Speaker 4: so I like getting a big dividend and waiting for
Speaker 4: you know, these prices to recover.
Speaker 5: Anton Shoo's president and chief and best an officer over
Speaker 5: at Mendon Capital Advisors joining us on the line from Florida.
Speaker 5: We thank you as always.
Speaker 1: You're listening to the Bloomberg Business Week podcast. Catch us
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Speaker 2: The SMP's basically been in one hundred point range going
Speaker 2: back to March here. So the big question as we
Speaker 2: get earnings from the likes of First Republic again down
Speaker 2: by about seven percent in the close here off of
Speaker 2: those earnings, but will continued earnings We've got about one
Speaker 2: hundred and seventy companies reporting this week. Will that change
Speaker 2: the needle as we move forward here? We're only about
Speaker 2: a fifth of the way through this earnings season. So
Speaker 2: joining us to discuss is Bloomberg Intelligence is Gina Martin Adams.
Speaker 2: She joins us on zoom from New Jersey. Gina, thank
Speaker 2: you so much for being here. What are your expectations?
Speaker 2: Are we going to continue to see beating estimates, beating
Speaker 2: estimates headlines over and over again?
Speaker 6: Well, thank you for having me into delight to be here.
Speaker 6: And certainly this is a critical earning season on a
Speaker 6: number of fronts. We tend to see companies beat earnings,
Speaker 6: so it's important to keep that perspective. On average, even
Speaker 6: in the worst of earning seasons, at least sixty five
Speaker 6: percent of S and P five hundred companies beat estimates.
Speaker 6: We're looking at seventy five percent so far, so it's
Speaker 6: been an above average earning season so far. But really
Speaker 6: we've only gotten financials and a few companies from other
Speaker 6: sectors thus far. If the analyst consensus is correct, earnings
Speaker 6: are now on pace to fall about seven percent year
Speaker 6: over year. The expectation at the start of the season
Speaker 6: was eight percent. That includes all of the analysts downgrades
Speaker 6: that are continuing for the non financial sectors. So so far,
Speaker 6: so good for earning season. I do think tech in particular,
Speaker 6: the megacap stocks in the S and P five hundred
Speaker 6: that are tech or tech adjacent are going to be
Speaker 6: the most critical reporters, not just because of the biggest stocks,
Speaker 6: but also because generally they're training at the largest premium,
Speaker 6: so they have the biggest hurdles to overcome Gina.
Speaker 5: It's interesting when you look at kind of the historical
Speaker 5: pattern that tech has performed at because in some ways
Speaker 5: in this last tightening cycle, every time rates go higher,
Speaker 5: there's an expectation of rates going higher, tech are the
Speaker 5: first ones.
Speaker 3: That get hit.
Speaker 5: But then if you go back to the twenty sixteen
Speaker 5: tightening cycle, tech outperformed in line with those rate hikes.
Speaker 3: I could argue both ways for recessions too.
Speaker 5: You've seen recessions where tech has been the go to
Speaker 5: and recessions where tech is the first to get hit.
Speaker 3: What happens this time around?
Speaker 6: Yeah, I think this is an excellent point. One key
Speaker 6: difference between this cycle and twenty sixteen is in twenty
Speaker 6: sixteen tech stacks in the S and P five hundred,
Speaker 6: we're not trading at a premium to the rest of
Speaker 6: the SMP, so that would argue that there might be
Speaker 6: a bit more risk in tech STAPs. Another key difference
Speaker 6: between the current period of earnings recession and that of
Speaker 6: twenty twenty is in the twenty twenty recession, recall tech
Speaker 6: earnings we're growing at an exponentially stronger pace than the
Speaker 6: rest of the S and P five hundred. They were
Speaker 6: still in business, not shut down, and actually experiencing accelerated
Speaker 6: demand because of the uniqueness of the pandemic cycle. So
Speaker 6: I think that this is something of a mix. Right now,
Speaker 6: tech is trading at a very premium valuation to the
Speaker 6: rest of the S and P five hundred about fifty
Speaker 6: percent above the rest of the S and P five
Speaker 6: hundred in fact, but also experiencing an earnings downdraft about
Speaker 6: double the index, particularly when when you remove those key
Speaker 6: buybacks from the tech sector, net income is falling more
Speaker 6: than more like twenty percent for the tech space and
Speaker 6: the S and P five hundred. So right now you've
Speaker 6: got a really tough climate. Now, Naturally, historical precedence is
Speaker 6: not necessarily perfectly relevant for any given cycle. There are
Speaker 6: unique characteristics of this cycle. Investors are more and more
Speaker 6: beholden to the tech space as the results of sort
Speaker 6: of hiding there throughout the pandemic and really not releasing
Speaker 6: their grasp on those tech stocks over the last couple
Speaker 6: of years, despite the fundamental evidence that suggests that this
Speaker 6: space is ruggling somewhat. So I think that this is
Speaker 6: a really unique spit in unique time point in time
Speaker 6: for tech. We can get some historical evidence to suggest
Speaker 6: that the combination of valuations and really suppressed earnings should
Speaker 6: not be great for tech. That said, interest rates play
Speaker 6: a role too, and there are a lot of moving
Speaker 6: parts to consider. For investing in this segment.
Speaker 2: So, Gina, before we move away from tech, I want
Speaker 2: to ask one final question on this. Micron and Seagate
Speaker 2: not doing so great with their earnings, is that a
Speaker 2: key indicator of what we might continue to see throughout
Speaker 2: the rest of the week.
Speaker 4: Yeah.
Speaker 6: Well, typically semiconductors are a leading indicator for the technology sector,
Speaker 6: so anything happening in this semiconductor space is likely to
Speaker 6: feed through to technology over the future quarters. They're the
Speaker 6: leading edge of the cycle. So what happens in semiconductors
Speaker 6: now maybe a harbinger of conditions emerging for the rest
Speaker 6: of the tech space going for I actually think though
Speaker 6: in the end because Apple, I almost merged Apple and
Speaker 6: Microsoft there. But because Apple and Microsoft are such a
Speaker 6: huge market caab portion of the tech space, they also
Speaker 6: really dominate earnings trends and their priced at premium levels
Speaker 6: relative to the index. These two will matter most without
Speaker 6: a doubt or current sentiment toward tech because they're just
Speaker 6: so large and they have dominated price trends for the sector.
Speaker 6: They're also very important to driving price trends for the
Speaker 6: S and P five hundred as a whole. But I
Speaker 6: don't want to ignore the rest of the indicators. I
Speaker 6: definitely think semiconductors' prices have performed very well, hinting to
Speaker 6: an emerging improvement in earnings trends for that segment. We
Speaker 6: want to pay attention to that pretty closely as an
Speaker 6: indicator for the broader sector. But really what matters from
Speaker 6: a sentiment perspective right now is can Apple and Microsoft
Speaker 6: continue to hold up sentiment toward their stocks which are
Speaker 6: definitely premium priced, and earn a are not particularly strong
Speaker 6: to support those premium prices.
Speaker 5: Well, talk to us then a little bit about kind
Speaker 5: of the valuations here, because it just feels like if
Speaker 5: you are and we've heard this time and time again
Speaker 5: when it comes to growth stocks and not necessarily your alphabet's,
Speaker 5: your metas, but even going back to the fifties or
Speaker 5: the sixties, kind of these growth stocks that were Walmart, IBM,
Speaker 5: Disney at the time, that in a decelerating macro environment,
Speaker 5: you lean towards the growthiest parts of the market because
Speaker 5: value as the alternative is not the way to go.
Speaker 3: If a recession is coming down.
Speaker 5: And I'm just thinking aloud here, teach me gena as
Speaker 5: a recession is kind of coming down, that just means
Speaker 5: a direct drop in things like CAPEC spending or infrastructure
Speaker 5: and things like that. So naturally you go in the
Speaker 5: opposite direction to the growthy names. Why aren't we seeing
Speaker 5: a bigger push towards the growthy names if everyone's convinced
Speaker 5: a recession is just around the corner.
Speaker 6: Yeah, I think it's a matter of a couple of things.
Speaker 6: Critie I would say, first, it's a function of inflation.
Speaker 6: You know, this has been a really unique cycle over
Speaker 6: the last year. All of the earnings weakness has really
Speaker 6: been accounted for by price trends and inflationary conditions that
Speaker 6: really suppressed margin growth. We did see some volume sales
Speaker 6: deceleration certainly amplify those margin struggles for companies, but that
Speaker 6: margin struggle was found in the part of growth companies
Speaker 6: much more than that for value companies, And as a
Speaker 6: matter of fact, many value companies actually exhibit a degree
Speaker 6: of pricing power over the last year. The second thing
Speaker 6: I think it is about sequence. I mean, frankly, everybody's
Speaker 6: talking about and still debating economic recession, but earnings are
Speaker 6: in recession, and they've been in recession for a year now.
Speaker 6: So we are about to post our fourth consecutive quarter
Speaker 6: of x Entergy earnings declines on a year ago basis
Speaker 6: for the S and P five hundred. While everyone debates
Speaker 6: economic recession, earnings recession maybe hitting its worst of it,
Speaker 6: it's worst point already and is projected to the earning
Speaker 6: stream is projected by analysts to start to recover in
Speaker 6: the second half of twenty twenty three and into twenty
Speaker 6: twenty four. That sequence makes a really big difference. Where
Speaker 6: is the earnings recovery going to come from? While the
Speaker 6: analyst consensus actually thinks that the stronger earnings areas of
Speaker 6: the market are a bit more value centric this time around.
Speaker 6: A lot of it is the classification of who's a
Speaker 6: value stock versus who's a growth stock. But when much
Speaker 6: of your value segment is in financials as well as
Speaker 6: some industrials, some consumer discretionary stocks, and these are the
Speaker 6: stocks expected to lead that earnings recovery that can really
Speaker 6: matter to the sequencing.
Speaker 5: I'm investing, Gina thirty seconds. When to put you on
Speaker 5: the spot here you mentioned margins. What's more important in
Speaker 5: this earning season? Top line or bottom line growth?
Speaker 6: Oh? I think bottom line is almost always more important. Creaty,
Speaker 6: the only thing the top line really matters for are
Speaker 6: those growth stocks because they do have longer duration cash
Speaker 6: flows and investors want to see some persistence in that
Speaker 6: growth outlook emerge for those companies. But margins are always
Speaker 6: most meaningful, So I'll pick bottom line bottom line.
Speaker 5: It is the top line growth I think coming handy
Speaker 5: when we're trying to price in whether the consumer is
Speaker 5: still spending. Gina Martin Adams, the chief equity strategist over
Speaker 5: at Bloomberg Intelligence, answering every question that we're throwing at
Speaker 5: her and staying after hours for us.
Speaker 3: We thank you as always.
Speaker 1: You're listening to the Bloomberg Business Week podcast. Catch us
Speaker 1: live weekday afternoons from three to six Easter on Bloomberg Radio,
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Speaker 1: Just say Alexa, play Bloomberg eleven thirty, Maddie.
Speaker 5: One of these stocks that we have not talked about
Speaker 5: in today's trading session is this company called C three.
Speaker 5: It is an AI company. The ticker is literally AI
Speaker 5: and we know AI.
Speaker 3: Is all the rage.
Speaker 2: Yeah. We actually we had the CEO of C three
Speaker 2: AI on the show while ago a couple of weeks ago,
Speaker 2: and it was a great conversation. It was right after
Speaker 2: some very big news for the company. He talked a
Speaker 2: lot about the health of the company, staying intact, and
Speaker 2: it's part of the bigger discussion that we can't get
Speaker 2: away from Business Week Radio here about the future of AI,
Speaker 2: specifically with regards to chat GPT. It feels like any
Speaker 2: company with AI in the name right now is taken off.
Speaker 5: Yeah, and an enormous story. And in today's session you
Speaker 5: had AI drop the ticker AI. I should say, not
Speaker 5: AI generally, but C three shares drop some eleven percent off,
Speaker 5: just an analyst downgrade saying, look, this is an AI
Speaker 5: story that has gone too far, too fast, and it's
Speaker 5: something that took a lot of the kind of momentum
Speaker 5: out of the stock and out of perhaps the secret
Speaker 5: at least from a market perspective.
Speaker 3: But let's talk about someone.
Speaker 5: Who's in the nitty gritty of the AI story, Maddie.
Speaker 5: I want to bring in Ashley Still, senior vice president
Speaker 5: of Creative and Digital Media over at Adobe. She joins
Speaker 5: us from San Jose, California. We think he has always
Speaker 5: actually for making the time to talk to us a
Speaker 5: little bit about AI, simplify it for our audience and
Speaker 5: for myself, by the way, who is not super familiar with.
Speaker 3: What AI actually entails. What is Adobe's vision for AI?
Speaker 6: Sure?
Speaker 7: So first you know, Adobe, our mission overall is to
Speaker 7: enable everyone, whether you're professional or just someone who wants
Speaker 7: to post compelling content to social media, to bring your
Speaker 7: creative vision into life. And our vision for AI is
Speaker 7: to help people do that, to put even more power
Speaker 7: in the hands of creators. I mean, we have award
Speaker 7: winning filmmakers that use our video tools, and then we
Speaker 7: have students and entrepreneurs and solopreneurs that use Adobe Express,
Speaker 7: which is our application to just make quick, easy, fun content.
Speaker 7: All of that can become more powerful, more fun, more
Speaker 7: intuitive through AI.
Speaker 2: So talk to me about the video editing capabilities specific
Speaker 2: I'm on our social team here at Bloomberg, so I
Speaker 2: spend a lot of my time editing text on screen
Speaker 2: videos and I would be thrilled to outsource that to
Speaker 2: your AI.
Speaker 7: Absolutely. Yes, Not all of us are destined for OSCAR
Speaker 7: winning filmmaking, so there's so many ways that we can
Speaker 7: again accelerate video editing. There's a big National Association of
Speaker 7: Broadcasters show last week where we launched a new feature
Speaker 7: called text based Editing, where you can literally edit video
Speaker 7: by copying and pasting text through the transcript. So all
Speaker 7: of us, I think, can copy and paste text as
Speaker 7: a way to get started. But that was really just
Speaker 7: the beginning of our vision. We introduced a new service
Speaker 7: called Adobe Firefly, which is Adobe's family of Creative Generative Models,
Speaker 7: which is the same family of approach of AI's Chat GPT,
Speaker 7: but focused on images, and we will extend that to video.
Speaker 7: And some of the things that we showed through that
Speaker 7: vision were things like changing the time of day of
Speaker 7: a video, so you might have a video that you
Speaker 7: shot in the morning but you wanted to be sunset
Speaker 7: and being able to do that automatically, or looking for
Speaker 7: sound that goes along well with the video that you're editing. Right,
Speaker 7: often you're not just editing a video, you're adding sound.
Speaker 7: You're adding elements and being able to automatically create sound
Speaker 7: effects that go really well with that video content. And
Speaker 7: of course a lot of times people are finding b
Speaker 7: roll and other assets to incorporate into video, and we
Speaker 7: believe Jenny I can help do that too. So there's
Speaker 7: a lot of ways you don't have to just create
Speaker 7: the video by typing text completely, but there are a
Speaker 7: lot of ways video can be easier.
Speaker 2: Yeah. No, and it's funny that you made the joke
Speaker 2: about we're not all destined for oscars, but it does
Speaker 2: feel like we're moving more and more towards you know,
Speaker 2: the TikTokers, the Instagram influencers of the world being the
Speaker 2: people at the forefront of the content creation conversation because
Speaker 2: of the reach that they have on those platforms. And
Speaker 2: our own analysts say that Adobe creative growth could top
Speaker 2: fourteen percent just due to the explosion of social content.
Speaker 2: So I wonder, Ashley, if you can give me some
Speaker 2: insights into kind of to what extent this move is
Speaker 2: related to that explosion of social media content creation. Is
Speaker 2: this a play to get those content creators using creative
Speaker 2: cloud products more specifically as they create their content.
Speaker 7: Absolutely, you know, the demand for content is growing exponentially,
Speaker 7: and it's growing in two vectors. I would say first
Speaker 7: is more people are creating content, and certainly social media
Speaker 7: is driving a lot of that, and of course we
Speaker 7: want all of those content creators to use and love
Speaker 7: and find value you in Adobe tools. This second vector
Speaker 7: is large companies are creating more content than ever. And
Speaker 7: of course these companies have enterprises have always had creative
Speaker 7: departments and have been creating content, but it's growing exponentially,
Speaker 7: and so large companies also need more tools and services
Speaker 7: to help them scale their content, not just through adding
Speaker 7: people or agencies, but through technology. And so we see
Speaker 7: this as an opportunity to both expand our business to
Speaker 7: new people, but also provide more value to the customers
Speaker 7: that we already have.
Speaker 5: And what does that mean then for the competitive landscape here?
Speaker 5: I mean, we have a lot of the big tech
Speaker 5: names that from a market's perspective, we love to look
Speaker 5: at the meta story, the Alphabet story, the Microsoft story,
Speaker 5: But just how much of corporate America can really engage
Speaker 5: on the AI front?
Speaker 1: Oh?
Speaker 7: You know, I think if technology companies do it right,
Speaker 7: their existing products and services will just get better. Right,
Speaker 7: It's and and so the responsibility I think we feel
Speaker 7: at Adobe is to productize AI in a way that's
Speaker 7: useful and an adoptable for our customers, and of course
Speaker 7: to find ways to make it accessible to new customers
Speaker 7: as well.
Speaker 2: And on that customer discussion, do you see this as
Speaker 2: more of a B to B play something where you'll
Speaker 2: be selling the technology to big newsrooms like the one
Speaker 2: that we're in, or do you see it as individual consumers?
Speaker 2: Just about thirty seconds here.
Speaker 7: Both absolutely both. So again I mentioned Adobe Express. It's
Speaker 7: a free web based tool to create content and social
Speaker 7: media posts. We will absolutely introduce AI powered features into
Speaker 7: Adobe Express. Any consumer that has access to a browser
Speaker 7: can use Adobe Express, and then we clearly their opportunities
Speaker 7: to introduce enterprise products as well.
Speaker 5: Ashley Still the senior vice president of Creative and Digital
Speaker 5: Media over at Adobe, joining us from San Jose, California.
Speaker 3: She is in the heart of it.
Speaker 5: She's in the heart of the California story and of
Speaker 5: course the tech story. Brodley, I mean, Maddie. AI is
Speaker 5: taking over and I mean, who knows is this a
Speaker 5: story for five years?
Speaker 3: Ten years? One year?
Speaker 2: Yeah, I mean I always think about this. We don't
Speaker 2: even know what the top tech companies are going to
Speaker 2: be in the next year, because I mean AI, it's
Speaker 2: just coming in hot.
Speaker 8: Brother Marc.
Speaker 3: A journal Now about you?
Speaker 5: Let me drive?
Speaker 2: Oh no, no, no, no, DG honey, please how do the
Speaker 2: driving gravels?
Speaker 8: Let's mate, I want to try it. It's a good
Speaker 8: question time.
Speaker 1: This is the drive to the Globe.
Speaker 4: Dons me. I think, well, bun.
Speaker 1: Ja don on Bloomberg Radio.
Speaker 3: I gotta say, I am loving this music. This is
Speaker 3: this is fun.
Speaker 2: Just wait until at four am, any baby, won't You're
Speaker 2: one more time gets stuck in your head and it's
Speaker 2: on a loop and you're thinking about this show in
Speaker 2: your dreams.
Speaker 5: Yeah, it's great looking forward to that tonight as a
Speaker 5: perfect precursor to the earnings where we're going to get tomorrow.
Speaker 1: Folks.
Speaker 5: It's kind of a cautious day in the markets, but
Speaker 5: I got to say hold on tight, because in about
Speaker 5: twenty four hours, everything's gonna change. We're gonna get a
Speaker 5: ton of earning Zeta, a ton of economic data. The
Speaker 5: question is how do you play it. Let's bring in
Speaker 5: our next guest here. John LaForce joins us. He's a
Speaker 5: head of real asset strategy over at the Wells Fargo
Speaker 5: Investment Institute.
Speaker 3: He joins us on the line from Sarah Soda, Florida.
Speaker 5: John, A pleasure to have you. I hope that song
Speaker 5: doesn't get stuck in your head in twenty four hours.
Speaker 5: Talk to us about the trade here.
Speaker 3: What are you watching, h.
Speaker 8: We're really watching the safety trade more than anything. So
Speaker 8: what we've done recently that you don't see a lot
Speaker 8: out of Wall Street now is we've gotten very defensive.
Speaker 8: With an S and P at forty two hundred, we
Speaker 8: think your upside's cat. So we're starting to shift money
Speaker 8: from many risk assets, so stocks, more into the fixed
Speaker 8: income side, and particularly the short term fixed income that
Speaker 8: one to three years. So that's kind of what we're
Speaker 8: focused on at this point. The risk asset that frankly
Speaker 8: we do believe is okay or commodities. They're more in
Speaker 8: a super cycle ball and this is just the pause
Speaker 8: before prices go.
Speaker 2: Higher, before we get to commodities. I want to talk
Speaker 2: to you about risks specifically with regards to tech. To
Speaker 2: what extent do you see tech as being risk on
Speaker 2: and potentially overvalued right now?
Speaker 8: Yeah, as big as they are of a waiting in
Speaker 8: the S and P five hundred, it definitely matters. But
Speaker 8: when you get defensive. The one thing that's very clear
Speaker 8: in the data, when you get defensive with equities, you
Speaker 8: want growth, and you still have that out of tech.
Speaker 8: There are very few areas that can grow. Energy maybe
Speaker 8: the second that can grow at that level, but what
Speaker 8: histories suggest is when you try to get defensive with stock,
Speaker 8: it's really smart to go towards growth. So even if
Speaker 8: they are a little overvalued, still think you're going to
Speaker 8: see money put there.
Speaker 3: Does that feel defensive to you though?
Speaker 5: I mean, when we're looking, I'm stealing Madison Mill's question
Speaker 5: just to be completely.
Speaker 3: Clear, well butrased.
Speaker 5: You know, it's interesting you're seeing that's not defensive, and
Speaker 5: yet tech has actually outperformed, and yet you're seeing these
Speaker 5: cross assid moves that are pretty similar commodities, bonds, even
Speaker 5: the dollar hatch funds the most along the green back
Speaker 5: and quite some time here. So why not be defensive
Speaker 5: if you're talking about inflation and recession?
Speaker 3: Why not?
Speaker 6: Yeah?
Speaker 8: Yeah, So it doesn't have to be defensive. Doesn't have
Speaker 8: to be to be clear, it doesn't have to be
Speaker 8: utilities and healthcare and that kind of defensiveness. We're in
Speaker 8: a market that's trying to find a way forward, but
Speaker 8: you have a FED that still wants to raise rate.
Speaker 8: You have a lot of this economic data is showing
Speaker 8: slow down globally here and also in the rest of
Speaker 8: the West, in Europe, so it's trying to find its
Speaker 8: way through and while it's doing that. I don't think
Speaker 8: we have to get super defensive with equities that would
Speaker 8: be that utilities, healthcare of staples. I think what you
Speaker 8: really are looking for is just be prepared that the
Speaker 8: upside is kind of capped and so while you are
Speaker 8: sitting here waiting, growth is one of those areas. That's
Speaker 8: why we do like tech, we do like energy. Those
Speaker 8: are the two plays that, frankly, we believe have the
Speaker 8: most upside when it comes to earning.
Speaker 5: So what changes that, What brings a little bit of
Speaker 5: momentum into this market?
Speaker 8: Oh, you probably have to have the FED just stop
Speaker 8: raising rates. So essentially, what you if you look out
Speaker 8: into the future, frankly, what history shows is the S
Speaker 8: and P doesn't bottom until an average six months after
Speaker 8: the first FED rate cut, we're still hiking. So that's
Speaker 8: kind of that. What we're looking for is we really
Speaker 8: need to turn that corner where the Fed's looking at
Speaker 8: actually cutting rates, and then we'll probably get more constructive
Speaker 8: on the S and P.
Speaker 2: Yeah, that makes a lot of sense. I guess since
Speaker 2: you brought it up, I do have to just get
Speaker 2: your Bloomberg take on the Fed's terminal rate. When you
Speaker 2: think they're gonna pause, and when you think they're.
Speaker 3: Going to start to pivot.
Speaker 8: Yeah, we don't have a specific date for that pause
Speaker 8: or pivot. We do believe that the next two meetings
Speaker 8: we will see two more twenty five basis point hikes.
Speaker 8: Then we think you'll get the pause. So I guess
Speaker 8: technically you could say the pause might be this summer
Speaker 8: after those two if they're so data dependent though, if
Speaker 8: we don't want to get too far ahead of ourselves,
Speaker 8: but we are anticipating a recession later this year, so
Speaker 8: we believe that will make them pause, and then we
Speaker 8: might be into cut mode. Come you know, the beginning
Speaker 8: of twenty twenty four, maybe this time next year.
Speaker 5: Well, I gotta say that you have to then look
Speaker 5: at the commodity market, the bond market as well. If
Speaker 5: you're forecasting into twenty twenty four, is all that priced
Speaker 5: into the market a ten year yield to three fifty one?
Speaker 8: I know, nuts, huh. I love to say no, But
Speaker 8: markets are pretty forward looking, so possibly, But yeah, that's
Speaker 8: a really really tough call because markets are pretty good
Speaker 8: at anticipating what the heck is going on. But we'd
Speaker 8: expect that long end to eventually move up. So we
Speaker 8: are inverted on the curve today, which shows or flash's
Speaker 8: recession coming. But by this time next year, we believe
Speaker 8: we're going to be back in that speaking, We've.
Speaker 5: Been inverted for like two years now, though I'm almost
Speaker 5: like twos tens at negative sixty three base points to
Speaker 5: be fair to your credit.
Speaker 3: Look, we're not as inverted as we were.
Speaker 5: We hit almost I think one hundred and fifty basis
Speaker 5: points of negative inversion on the twos tens, but look
Speaker 5: inverted for a while. A lot of folks are saying
Speaker 5: this gauge is quite broken. But to me, I think
Speaker 5: what's scary is a two year old at four thirteen.
Speaker 5: It's the bond volatility that I'm more worried about because
Speaker 5: a month two months ago, we were hitting five percent,
Speaker 5: getting really close to that terminal rate. What is driving
Speaker 5: this bond market inflation or recession? Thirty seconds both, but
Speaker 5: I got.
Speaker 3: To pick one man.
Speaker 8: Inflation is not coming down fast enough. I think that's
Speaker 8: what's driving it is. Everyone's anticipating this move from our
Speaker 8: five to six percent level now to we need to
Speaker 8: get to where the FED is at two and we're
Speaker 8: just not getting there. We're getting these intermittent type readings
Speaker 8: that are like, oh, we we're going to get there eventually,
Speaker 8: and markets just don't have much patience so they kind
Speaker 8: of want it now. So it's both. I would say
Speaker 8: they are frustrated with inflation's not coming down fast enough.
Speaker 8: And then two, most of these economic numbers we see
Speaker 8: clearly show slowing end of this year. So I think
Speaker 8: it's both. I think it's inflation frustration and then its
Speaker 8: recession right around the corner.
Speaker 3: Man, it's like having your cake and eating into.
Speaker 5: John LaForge, head of Real Act Strategy over at the
Speaker 5: Wells Fargo Investment Institute, joining us on the line from Sarasota, Florida.
Speaker 3: We thank you as always.
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