WEBVTT - Under Armour Sinks as Tariffs, Sputtering Sales Hit Outlook 0:00:02.720 --> 0:00:10.600 Bloomberg Audio Studios, podcasts, radio news. You're listening to the 0:00:10.600 --> 0:00:14.560 Bloomberg Intelligence podcast. Catch us live weekdays at ten am 0:00:14.640 --> 0:00:18.560 Eastern on Applecarplay and Android Auto with the Bloomberg Business App. 0:00:18.640 --> 0:00:21.920 Listen on demand wherever you get your podcasts, or watch 0:00:21.960 --> 0:00:23.120 us live on YouTube. 0:00:23.600 --> 0:00:26.320 Back to earnings under Armour shares. Let's take a look. 0:00:26.320 --> 0:00:30.320 They are down eighteen percent. They forecast worse than expected 0:00:30.360 --> 0:00:32.720 sales and profit for the current quarter. Here to break 0:00:32.760 --> 0:00:34.920 it all down for us, as Poohim Goyle, senior US 0:00:34.960 --> 0:00:39.120 e commerce and retail analysts at Bloomberg Intelligence poon em 0:00:39.159 --> 0:00:42.680 thanks for coming out this morning. So weren't they just 0:00:42.760 --> 0:00:44.760 I'm confused because it wasn't under Armour just starting to 0:00:45.080 --> 0:00:46.519 make this turnaround planned. 0:00:47.680 --> 0:00:50.879 Yeah, you know what, We've seen under Armour make several 0:00:50.960 --> 0:00:54.360 attempts at a turnaround in the last decade. So this 0:00:54.440 --> 0:00:57.520 is another attempt. And they do have the right pillars 0:00:57.560 --> 0:01:00.520 in place, you know, focusing on brand equity, forocusing on 0:01:00.560 --> 0:01:04.560 full price sales. The issue is that the macro's not cooperating. 0:01:04.920 --> 0:01:08.520 We have one hundred million dollar impact on their costs 0:01:08.560 --> 0:01:11.920 from tariffs that they're expecting. We're seeing that they want 0:01:11.959 --> 0:01:15.720 to push full price in an environment where promotions are 0:01:15.720 --> 0:01:20.040 picking up, so that's going to cost them sales net net. Basically, 0:01:20.080 --> 0:01:22.039 that means that sales are going to be down mid 0:01:22.080 --> 0:01:25.160 to high single digits in the next fiscal quarter, and 0:01:25.240 --> 0:01:28.920 North America, which is a clear key region for them, 0:01:29.240 --> 0:01:32.640 could be down low double digits. So the turnaround isn't 0:01:32.720 --> 0:01:35.560 shaping up like we expected, and I just think it 0:01:35.600 --> 0:01:37.160 needs a lot more time right now. 0:01:37.600 --> 0:01:39.680 That is actually what caught my eye to the weak 0:01:39.720 --> 0:01:42.640 North America outlook. I think they're forecasting a fourteen percent 0:01:42.680 --> 0:01:46.080 to sixteen percent drop in North America sales, which is massive. 0:01:46.160 --> 0:01:48.720 So what then, is your view of under Armour's strategy, 0:01:48.800 --> 0:01:52.120 especially compared to its peers like Nike or Adidas or 0:01:52.160 --> 0:01:54.120 Adidas depending on who you're speaking with. 0:01:55.160 --> 0:01:57.920 Yeah, so I think each of them are pursuing the 0:01:57.960 --> 0:02:01.000 strategy in a similar way in that they're focusing on 0:02:01.040 --> 0:02:03.760 the profitable channels to drive growth. So when you look 0:02:03.760 --> 0:02:06.040 at Adidas, you know they've been doing really well for 0:02:06.080 --> 0:02:09.240 the last few years, and it's in part by their 0:02:09.280 --> 0:02:12.560 effort to really push innovation and product to the consumer 0:02:12.919 --> 0:02:16.160 in the right channels, and really they've done a great 0:02:16.240 --> 0:02:19.640 job When it comes to Nike, they're clearly in turnaround mode. 0:02:20.160 --> 0:02:23.240 They are moving forward with their turnaround. We are starting 0:02:23.240 --> 0:02:26.880 to see signs of you know, things getting better, especially 0:02:26.919 --> 0:02:30.240 on their new products. That said, Nike hasn't reported yet. 0:02:30.240 --> 0:02:33.520 And Nike too has exposure to Vietnam when it comes 0:02:33.560 --> 0:02:36.840 to their production, so they will to be under pressure. 0:02:36.919 --> 0:02:39.160 But we don't think that promotions go away completely. 0:02:39.200 --> 0:02:39.320 Right. 0:02:39.400 --> 0:02:42.200 Nike is liquidating a lot of inventory throats direct channel 0:02:42.400 --> 0:02:45.079 and the promotions are very high. So when you think 0:02:45.120 --> 0:02:48.480 about the customer, they're going to see Nike being discounted 0:02:48.560 --> 0:02:52.160 aggressively because they're trying to liquidate inventory, and then you 0:02:52.200 --> 0:02:55.000 see under Armour going at full price what our customer 0:02:55.080 --> 0:02:58.160 is going to buy, right, it just means that under 0:02:58.240 --> 0:03:00.720 Armour isn't going to be able to delay over the 0:03:00.760 --> 0:03:04.040 growth that they're expecting to because of the current promotional environment. 0:03:04.440 --> 0:03:06.440 So with that said, I mean, the CEO was talking 0:03:06.600 --> 0:03:09.520 and said that they want to focus on strengthening the brand, 0:03:09.520 --> 0:03:12.320 positioning right premium products. They came out with this U 0:03:12.360 --> 0:03:16.120 a halo footwear you know line, is that the answer 0:03:16.160 --> 0:03:16.919 for them? 0:03:17.680 --> 0:03:20.840 The answer is, in part, yes, you need to have 0:03:20.919 --> 0:03:22.560 you know what he talked about on the call, which 0:03:22.560 --> 0:03:24.080 I think every brand needs to do, is they need 0:03:24.120 --> 0:03:26.720 to have a good, better, best positioning within their product lineup. 0:03:26.960 --> 0:03:29.720 So yes, you can go ahead and introduce premium product, 0:03:29.919 --> 0:03:33.359 but remember under Armour isn't really viewed as a premium 0:03:33.360 --> 0:03:36.120 brand like Nike is, right, So you're trying to change 0:03:36.160 --> 0:03:39.160 customer perception here, and that doesn't happen overnight, so it'll 0:03:39.160 --> 0:03:42.800 take time. I think the value chained that under Our 0:03:42.840 --> 0:03:45.520 plays and is still very very important to their brand 0:03:45.960 --> 0:03:48.720 and their ability to keep prices low there is going 0:03:48.760 --> 0:03:51.280 to be critical. It'll be nice to see what they 0:03:51.280 --> 0:03:53.120 do on the premium side, but I don't think they 0:03:53.120 --> 0:03:56.200 can hang their hat on that for a turnaround just yet. 0:03:57.080 --> 0:03:59.440 All right, you said it all. Under Armour share still 0:03:59.560 --> 0:04:02.760 down nineteen percent. That's Punam Gooyle, senior US e Commerce 0:04:02.760 --> 0:04:06.320 and retail analysts Over at Bloomberg Intelligence. 0:04:08.120 --> 0:04:11.800 You're listening to the Bloomberg Intelligence podcast. Catch us live 0:04:11.880 --> 0:04:15.240 weekdays at ten am Eastern on Applecarplay and Android Auto 0:04:15.360 --> 0:04:18.440 with the Bloomberg Business app. Listen on demand wherever you 0:04:18.480 --> 0:04:21.960 get your podcasts, or watch us live on YouTube. 0:04:21.920 --> 0:04:24.680 And welcome back to Bloomberg Intelligence. I'm Lisa Matteo sitting 0:04:24.720 --> 0:04:28.719 alongside Isabelle Lee. Paul Sweeney has the day off. All right, 0:04:28.760 --> 0:04:31.480 we're going to get back to earnings. Wendy's cut their 0:04:31.520 --> 0:04:34.359 full year sales guidance. They posted a bigger than expected 0:04:34.400 --> 0:04:38.680 quarterly decline. So what is going on at the burger chain. Well, 0:04:38.839 --> 0:04:41.800 let's bring in Michael Hallin. He's Bloomberg Intelligence senior restaurant 0:04:41.880 --> 0:04:46.560 and food service analysts joining us live from Princeton. Mike's 0:04:46.600 --> 0:04:49.839 thanks for coming in. What can you tell us about Wendy's. 0:04:49.839 --> 0:04:53.360 What was the big sticking point for them? 0:04:53.600 --> 0:04:58.400 Oh, listen, the previous management team through a lot of 0:04:58.480 --> 0:05:03.000 promotions at the wall and none of them are really stuck. 0:05:03.120 --> 0:05:07.479 So you know, the danger of you know, promoting a 0:05:07.480 --> 0:05:10.760 lot of different products is twofold. 0:05:10.279 --> 0:05:10.440 You know. 0:05:10.680 --> 0:05:14.320 Number one, it makes the operations suffer, right, So it's 0:05:14.360 --> 0:05:17.160 it's harder to execute in the kitchens, it's harder to 0:05:17.240 --> 0:05:20.080 execute at the front of the house. Speed of service 0:05:20.160 --> 0:05:23.039 ends up slipping, you know, quality of the food could 0:05:23.160 --> 0:05:26.360 suffer because it's it's not served hot, right, and then 0:05:26.440 --> 0:05:30.120 marketing so consumers get confused, right, Like what we saw 0:05:30.120 --> 0:05:33.280 at McDonald's was run two promotions over the quarter, right, 0:05:33.400 --> 0:05:37.880 Wendy's ran a handful. So when you're putting what do 0:05:37.920 --> 0:05:39.400 you put the marketing dollars behind? 0:05:39.480 --> 0:05:39.640 Right? 0:05:39.680 --> 0:05:41.760 But if you start promoting something for a couple of 0:05:41.760 --> 0:05:45.719 weeks and then switch your message, people don't really know 0:05:45.839 --> 0:05:48.200 why they're coming to your store, don't have a good 0:05:48.240 --> 0:05:50.719 reason to come to your stores. And so that's why 0:05:50.760 --> 0:05:53.599 we saw this massive underperformance in the second quarter, about 0:05:53.600 --> 0:05:56.880 four hundred basis points versus the rest of quick service restaurants. 0:05:57.279 --> 0:05:59.760 And what is your take on when they's decision to 0:05:59.800 --> 0:06:02.799 cut it's twenty twenty five EPs outlook below the prior 0:06:02.920 --> 0:06:07.200 range and analyst expectation. Is it more structural weakness like 0:06:07.240 --> 0:06:09.760 consumer trends or is it really more one off pressures 0:06:09.839 --> 0:06:12.320 and how long do you think those issues might last? 0:06:13.360 --> 0:06:15.400 So this is one off pressures. I mean you saw 0:06:15.480 --> 0:06:18.760 McDonald's outperform the market by two hundred basis points, right, 0:06:18.800 --> 0:06:24.159 and so this is primarily self inflicted. You know, restaurant 0:06:24.200 --> 0:06:28.240 consumers are spending money. They're more discerning, however, right, and 0:06:28.279 --> 0:06:31.800 so the chains that are providing a good, consistent experience, 0:06:31.880 --> 0:06:34.239 good value for the money, that's where people are spending 0:06:34.240 --> 0:06:35.800 their money. They don't want to go out and spend 0:06:35.880 --> 0:06:38.279 a lot of money and have a bad night, a 0:06:38.360 --> 0:06:41.080 bad lunch, a bad dinner, whatever it is, right, And 0:06:41.160 --> 0:06:44.840 so that's why we're seeing this huge bifurcation and there's 0:06:44.880 --> 0:06:49.360 a widening gap between winners and losers. And so for Wendys, 0:06:49.720 --> 0:06:52.400 when you have bad operations, right, and when you have 0:06:52.520 --> 0:06:57.800 bad service, it takes time to regain that customer trust. So, 0:06:58.200 --> 0:07:00.839 you know, they got it to pretty terrible SAMSAR sales 0:07:00.880 --> 0:07:02.920 here in the US for the rest of the year. 0:07:03.520 --> 0:07:06.560 They were down five to six percent in July, which 0:07:06.600 --> 0:07:11.840 is a horrific number, you know, way underperforming. The street, 0:07:11.880 --> 0:07:14.240 which is over was just about a one and a 0:07:14.280 --> 0:07:18.160 half percent increase. So this is going to take time to. 0:07:18.120 --> 0:07:21.640 Fix now, Mike. One of the things you mentioned these promotions, right, 0:07:21.640 --> 0:07:25.440 but Wendy's has also done things like expanded their operating hours. 0:07:25.480 --> 0:07:25.600 Right. 0:07:25.640 --> 0:07:30.280 They're making this push for breakfast late night business. I'm 0:07:30.280 --> 0:07:33.160 guessing that's not working. I don't think breakfast when I 0:07:33.200 --> 0:07:34.000 think Wendy's. 0:07:34.200 --> 0:07:38.320 I don't know, Well, this breakfast has been an issue 0:07:38.440 --> 0:07:41.680 for years now since they debuted it right there, and 0:07:41.720 --> 0:07:44.920 they debuted breakfast into it, you know, at a time 0:07:44.960 --> 0:07:47.480 when breakfast sales have been slipping, and they're slipping even 0:07:47.600 --> 0:07:50.720 more this year because it's just an easy meal to skip. 0:07:50.760 --> 0:07:53.640 You can grab a bagel and a coffee and easily 0:07:53.680 --> 0:07:58.520 make it to lunch, right, And so they've been trying 0:07:58.600 --> 0:08:01.400 to gain steam in this daypart, and so they've been 0:08:01.480 --> 0:08:05.080 actually spending corporate dollars in addition to the franchise e 0:08:05.200 --> 0:08:08.240 dollars to try to expand that day part at a 0:08:08.280 --> 0:08:11.160 time when people are pulling back at breakfast and it's 0:08:11.160 --> 0:08:13.480 been a disaster for their lunch and their dinner business. 0:08:14.080 --> 0:08:17.320 And Wendy has also reduced his dividends significantly, and it's 0:08:17.360 --> 0:08:19.920 CEO is also stepping down. So how do you think 0:08:20.080 --> 0:08:24.239 these capital allocation and leadership changes might affect the strategy 0:08:24.360 --> 0:08:24.960 moving forward? 0:08:26.560 --> 0:08:29.880 Yeah, Kirk Tanner basically lit this thing on fire and 0:08:29.960 --> 0:08:33.000 ran for the exits. It's you know, he made a 0:08:33.040 --> 0:08:37.280 lot of management switches, moved a lot of people around 0:08:37.360 --> 0:08:40.920 the organization, fired people, brought new people in, you know, 0:08:41.200 --> 0:08:44.520 and then left right before things fell apart. Right, And 0:08:44.559 --> 0:08:47.360 now they have an interim CEO who said the right 0:08:47.400 --> 0:08:50.439 things on the call, right, But he comes from ups 0:08:50.559 --> 0:08:53.200 and he's only been in the restaurant industry since December, right, 0:08:53.280 --> 0:08:56.320 so there's definitely a void at the top. We would 0:08:56.400 --> 0:09:00.720 love to see them find a good, strong restaurant operator 0:09:00.720 --> 0:09:03.600 slash marketer to run this business going forward. 0:09:04.120 --> 0:09:06.080 So what's the winning formula for them? What do they 0:09:06.080 --> 0:09:06.440 have to do? 0:09:06.520 --> 0:09:06.760 Is it? 0:09:06.840 --> 0:09:09.559 Is it more promotions and more collaborations. 0:09:11.120 --> 0:09:14.120 No, there's too many of those, So they're going to 0:09:14.160 --> 0:09:15.880 cut They're going to cut back on them and get 0:09:15.920 --> 0:09:19.720 the operations right right. And once you get the operations right, 0:09:19.800 --> 0:09:22.520 meaning people go and they have a good experience, speed 0:09:22.559 --> 0:09:26.440 of service is on point right, the food gets to 0:09:26.480 --> 0:09:29.920 you hot right, you have a good, enjoyable experience. Once 0:09:30.000 --> 0:09:33.480 they get that stuff nailed, then they can start pushing 0:09:33.520 --> 0:09:35.440 on the marketing right, because you don't want people to 0:09:35.440 --> 0:09:38.160 come back to your restaurants and then have another bad experience. 0:09:38.760 --> 0:09:41.280 Then you're really going to be up the creek without 0:09:41.280 --> 0:09:43.920 a paddle, right, And so that that's what it's going 0:09:43.960 --> 0:09:46.479 to be about. It's going to be about nailing the operations. 0:09:46.920 --> 0:09:49.600 Then once they're confident in that, then they can start 0:09:49.640 --> 0:09:56.120 pressing more, do some more collaborations, whatever, institute more menu items, 0:09:56.120 --> 0:09:57.720 and that's what management talked about on the call, they 0:09:57.720 --> 0:09:59.360 said they're going to push a lot of the initiatives 0:09:59.400 --> 0:10:02.280 they had original only planned for the second half into 0:10:02.280 --> 0:10:04.680 twenty twenty six. But you know, it was a crazy call. 0:10:04.720 --> 0:10:06.520 I mean they were talking about how a lot of 0:10:06.559 --> 0:10:10.000 these initiatives they were just basically pushing out with very 0:10:10.040 --> 0:10:13.000 little testing, which is not how you run a restaurant business. 0:10:13.200 --> 0:10:16.360 It's not I remember that Taki's collapse. They just didn't 0:10:16.520 --> 0:10:19.240 work out. Thank you Michael Hammon for joining us, the 0:10:19.280 --> 0:10:23.559 Bloomberg Intelligence senior Restaurant and food service analyst. 0:10:25.040 --> 0:10:28.720 You're listening to the Bloomberg Intelligence podcast. Catch us live 0:10:28.800 --> 0:10:32.199 weekdays at ten am Eastern on Applecarplay and Android Auto 0:10:32.280 --> 0:10:35.360 with the Bloomberg Business app, Listen on demand wherever you 0:10:35.400 --> 0:10:38.400 get your podcasts, or watch us live on YouTube. 0:10:39.040 --> 0:10:41.520 There has been a ton of stories in tech and 0:10:41.600 --> 0:10:43.839 the news flow is continuing. I want to start with 0:10:43.880 --> 0:10:46.320 this first one, Meta picking up Pimko blue out for 0:10:46.320 --> 0:10:49.200 a twenty nine billion dollar data center deal. So here 0:10:49.200 --> 0:10:51.560 to talk more about it, Man Deep Sink, Bloomberg Intelligence 0:10:51.640 --> 0:10:54.720 senior Tech industry analysts, Mandy, thanks for joining us. So 0:10:54.920 --> 0:10:57.960 twenty nine billion dollar data center deal. I mean that's 0:10:58.000 --> 0:10:58.719 that's pretty big. 0:10:58.800 --> 0:11:02.160 No, it's only if you don't look at their twenty 0:11:02.200 --> 0:11:04.920 twenty six CAPEX number, which could be north of one 0:11:04.960 --> 0:11:09.600 hundred billion. So look, the numbers are getting bigger and 0:11:09.640 --> 0:11:13.040 bigger in the world of AI infrastructure. And for a 0:11:13.080 --> 0:11:17.360 company like Meta, which was spending maybe thirty billion dollars 0:11:17.400 --> 0:11:21.559 in capex every year and has tripled its capex probably 0:11:21.559 --> 0:11:26.680 two one hundred plus next year, they need some external 0:11:26.720 --> 0:11:29.760 help when it comes to you know, procuring the land, 0:11:30.440 --> 0:11:33.400 getting power twenty four to seven. I mean, at the 0:11:33.480 --> 0:11:37.199 end of the day, Meta is an application company that 0:11:37.480 --> 0:11:40.640 you know does ads, and they're trying to get in 0:11:40.760 --> 0:11:44.520 their own chips as well, but that's not their core competency. 0:11:44.600 --> 0:11:47.720 So it makes sense that you know, they're partnering with 0:11:48.880 --> 0:11:53.920 these large players on the infrastructure side because it will 0:11:53.960 --> 0:11:56.160 turn out to be a supercycle, and you know, the 0:11:56.160 --> 0:12:02.240 more partners they have in terms of these AI infrastructure buildouts, 0:12:02.280 --> 0:12:04.320 I think it will help them in the long term. 0:12:05.120 --> 0:12:08.400 But is this kind of public private financial structure common 0:12:08.440 --> 0:12:11.560 for large tech infrastructures like Meta? Are they pushing into 0:12:11.640 --> 0:12:13.960 new ground and what are the benefits of using debt 0:12:14.040 --> 0:12:14.760 versus equity? 0:12:15.360 --> 0:12:19.280 Well, I mean now with one hundred billion dollar CAPEX, 0:12:19.600 --> 0:12:23.280 it's more than their free cash flow every year. So 0:12:23.400 --> 0:12:26.440 up until now, you know, we were in that thirty 0:12:26.440 --> 0:12:30.640 to sixty billion dollar range. Metas annual free cash flow 0:12:31.000 --> 0:12:35.000 is around seventy billions. So from that perspective, they could 0:12:35.000 --> 0:12:38.280 afford to fund it on their own, I mean, because 0:12:38.360 --> 0:12:42.240 the scale keeps getting bigger and bigger every year. And look, 0:12:42.480 --> 0:12:45.440 others may have the same problem. Microsoft has also talked 0:12:45.440 --> 0:12:49.200 about one hundred and twenty billion dollars run rate probably 0:12:49.240 --> 0:12:53.920 in twenty twenty six as well. So external financing will 0:12:53.920 --> 0:12:57.680 come into play because, as I said, these companies have 0:12:57.720 --> 0:13:03.800 the lllms, they have the data, the algorithm, the applications, 0:13:04.240 --> 0:13:07.079 but they don't have the expertise in terms of procuring 0:13:07.160 --> 0:13:10.000 power twenty four to seven, and you need a lot 0:13:10.080 --> 0:13:14.679 more power when it comes to AI scale that everyone 0:13:14.760 --> 0:13:17.440 is imagining, you know, twelve months from now, twenty four 0:13:17.480 --> 0:13:22.480 months from now. So from that perspective, also external expertise 0:13:22.559 --> 0:13:26.760 in terms of procuring land, setting up large clusters, how 0:13:26.800 --> 0:13:29.520 to power them, it does make sense that they have 0:13:29.760 --> 0:13:31.280 a private partnership there. 0:13:31.320 --> 0:13:33.800 Now, I always hear you're talking about capex, that's so 0:13:33.920 --> 0:13:36.280 much je, But when are we going to rese that 0:13:36.320 --> 0:13:38.240 point where peop are going to start saying, you know what, 0:13:38.600 --> 0:13:41.119 where's my return on investment? Like, I see you're spending 0:13:41.240 --> 0:13:43.600 you know this much? But when are people going to 0:13:43.600 --> 0:13:45.439 start to turn the question a little bit? 0:13:45.800 --> 0:13:49.360 So I mean, look at how far open ai and 0:13:49.520 --> 0:13:52.520 Nthropic have come. Right, So we know with open ai 0:13:53.000 --> 0:13:56.040 they are at a twelve billion dollar and we'll run 0:13:56.160 --> 0:13:59.120 rate now revenue run rate, and Thropic has five x. 0:13:59.520 --> 0:14:01.439 It went from one billion at the start of the 0:14:01.520 --> 0:14:05.400 year to five billion dollar rund rate. Look at Microsoft's 0:14:05.600 --> 0:14:09.000 cloud growth number. They went to thirty nine percent growth 0:14:09.000 --> 0:14:14.000 in Azure, seventeen percent left from AI. So look, you're 0:14:14.000 --> 0:14:17.120 not going to see a very clear distinction between what 0:14:17.480 --> 0:14:21.840 is the AI contribution. In the case of Microsoft, it's 0:14:21.960 --> 0:14:26.880 very clear. But for Meta, they talked about their ads 0:14:26.920 --> 0:14:29.960 getting better, and when you look at the growth rates, 0:14:30.040 --> 0:14:32.600 Meta grew twenty two percent in the quarter. Compare that 0:14:32.640 --> 0:14:37.480 to Snapchat four percent Pinterest and these are companies that 0:14:37.560 --> 0:14:40.960 are fifty times smaller in scale than Meta. So the 0:14:41.040 --> 0:14:45.200 fact that Meta is growing that fast, they're sort of 0:14:46.040 --> 0:14:49.560 proving to everyone that, look, there is an advantage to 0:14:49.800 --> 0:14:53.960 owning the infrastructure to investment in AI. And even though 0:14:54.240 --> 0:14:57.160 the model is not similar to a Microsoft where they 0:14:57.160 --> 0:15:00.520 are renting the cloud capacity and it's an old reredictable 0:15:00.560 --> 0:15:03.880 revenue stream meta, I think has a higher bar to 0:15:03.960 --> 0:15:09.520 prove in terms of your ROI question. But clearly, I 0:15:09.560 --> 0:15:12.280 think the fact that they did so well this earnings 0:15:13.000 --> 0:15:15.000 they already have an upper hand when it comes to 0:15:15.040 --> 0:15:16.000 digital ads. 0:15:16.400 --> 0:15:18.040 What about when it comes to soft Bank and the 0:15:18.080 --> 0:15:21.480 Stargate AI push. What's significance of soft Bank buying the 0:15:21.520 --> 0:15:24.800 fox Con plant in Ohio and can you talk about 0:15:24.960 --> 0:15:26.960 their bigger ambitions for AI? 0:15:27.320 --> 0:15:31.600 I mean soft Bank also has a big announcement from 0:15:31.640 --> 0:15:33.760 earlier in the year, you know, five hundred billion up 0:15:33.800 --> 0:15:37.080 to five hundred billion dollars in investment. So all these 0:15:37.080 --> 0:15:40.240 companies have to figure out how is it that they're 0:15:40.240 --> 0:15:42.440 going to deploy the money. So in the case of 0:15:43.160 --> 0:15:47.000 soft Bank, I mean, they either partner with TSMC or 0:15:47.240 --> 0:15:51.160 fox Con because they don't assemble their own chips. They 0:15:51.200 --> 0:15:55.160 don't do, you know, semiconductor manufacturing, So partnering makes a 0:15:55.160 --> 0:15:58.200 ton of sense here in the United States. And that's 0:15:58.240 --> 0:16:01.120 where that five hundred billion dollar number you can show 0:16:01.200 --> 0:16:03.720 that this is how much I deployed this year, and 0:16:05.240 --> 0:16:07.600 it kind of shows your roadmap for the following years 0:16:07.600 --> 0:16:10.680 as well, because now that you're investing in one facility, 0:16:11.000 --> 0:16:14.040 chances are you'll probably add to that next year and 0:16:14.120 --> 0:16:14.480 so on. 0:16:15.040 --> 0:16:17.400 All right, man deep Sing, Always a pleasure. Glad to 0:16:17.400 --> 0:16:19.400 have you here in the studio. Bloomberg Intelligence, senior tech 0:16:19.400 --> 0:16:22.560 industry analyst on the latest tech announcement. 0:16:24.400 --> 0:16:28.080 You're listening to the Bloomberg Intelligence Podcast. Catch us live 0:16:28.160 --> 0:16:31.280 weekdays at ten am Eastern on Apple, Cocklay and Android 0:16:31.280 --> 0:16:34.600 Auto with the Bloomberg Business App. Listen on demand wherever 0:16:34.640 --> 0:16:37.760 you get your podcasts, or watch us live on YouTube. 0:16:38.120 --> 0:16:40.600 All eyes have been on the Central Bank and interest rates, right, 0:16:40.680 --> 0:16:43.000 but there's a new book out. It's taking a look 0:16:43.040 --> 0:16:46.680 into how decisions behind the fit, the ECB, etc. They're 0:16:46.800 --> 0:16:51.600 constrained by the natural rate of interest. So what exactly 0:16:51.800 --> 0:16:53.160 is this? What we're going to do is go to 0:16:53.200 --> 0:16:57.040 the expert. Is Tom Orlick, Bloomberg Economists chief ecomomist joins 0:16:57.080 --> 0:17:00.400 us from DC. Thanks for joining us, tom So. The 0:17:00.440 --> 0:17:02.880 book is called The Price of Money, A Guide to 0:17:02.920 --> 0:17:06.400 the past, present and future of the rate Natural rate 0:17:06.440 --> 0:17:08.879 of Interest. I got to start by asking you, what 0:17:09.040 --> 0:17:11.399 exactly is this, this natural rate of interest? 0:17:12.600 --> 0:17:16.080 So thanks for having me on, Lisa. So the natural 0:17:16.240 --> 0:17:20.080 rate of interest, it's kind of a won key concept, right, 0:17:20.880 --> 0:17:24.199 but if you're an investor in the treasury market, if 0:17:24.200 --> 0:17:26.679 you're an investor in the equity market, if you're an 0:17:26.720 --> 0:17:31.399 investor in the real estate market, it's pretty important. The 0:17:31.520 --> 0:17:34.320 natural rate of interest is the rate of interest which 0:17:34.440 --> 0:17:39.040 balances the supply of saving and the demand for investment 0:17:39.520 --> 0:17:42.720 in the economy. And for a long time, from the 0:17:42.800 --> 0:17:47.280 nineteen eighties through the twenty tens, it was falling, right. 0:17:47.560 --> 0:17:51.960 That's why Larry Summers was talking about secular stagnation. That's 0:17:52.000 --> 0:17:55.480 why the US Treasury was borrowing at such low rates 0:17:55.920 --> 0:17:59.600 for much of the last decade. The big argument that 0:17:59.640 --> 0:18:03.240 we make in our book, a book with essays by 0:18:03.280 --> 0:18:08.920 my colleagues at Bloomberg Economics, edited by Stephanie Flanders, Jamie Rush, 0:18:08.960 --> 0:18:12.160 and myself, The big argument we make is that the 0:18:12.160 --> 0:18:16.119 forces that were dragging interest rates down for much of 0:18:16.160 --> 0:18:20.200 the last four decades have now reversed, and we now 0:18:20.280 --> 0:18:23.160 have gone from a world where there's too much saving, 0:18:23.680 --> 0:18:27.399 not enough investment, and so low interest rates to a 0:18:27.480 --> 0:18:32.000 world where there's not enough saving, too much investment, and 0:18:32.040 --> 0:18:35.000 so the US Treasury and everybody else is going to 0:18:35.040 --> 0:18:37.000 be paying much more to borrow. 0:18:37.800 --> 0:18:41.359 So what are the big forces among demographics, technology, and 0:18:41.440 --> 0:18:45.160 geopolitics that you think will drive the natural rate higher 0:18:45.200 --> 0:18:46.920 in the coming decade. 0:18:47.440 --> 0:18:50.240 So it's a great question, Isabelle. So let's think about 0:18:50.640 --> 0:18:54.600 what was dragging interest rates down. So first of all, 0:18:54.960 --> 0:18:58.960 you had too much saving. The baby boomers were working 0:18:59.080 --> 0:19:04.480 and saving money for their retirement. China, Saudi Arabia, other 0:19:04.520 --> 0:19:09.080 petro states were pumping their savings into the US treasury market. 0:19:10.040 --> 0:19:13.560 And then on the investment side, well, governments had their 0:19:13.560 --> 0:19:19.320 debt under control, government deficits were low, and growth was weak, 0:19:19.480 --> 0:19:22.920 which meant the private sector didn't have a huge incentive 0:19:22.960 --> 0:19:25.919 to invest. So for a long time, from the nineteen 0:19:25.960 --> 0:19:29.600 eighties to the twenty tens, the pattern was too much saving, 0:19:30.000 --> 0:19:35.120 not enough investment, and falling interest rates. In the last decade, 0:19:35.200 --> 0:19:38.439 all of those trends have started to reverse. The baby 0:19:38.440 --> 0:19:42.560 boomers have retired, so they're not adding to their pensions, 0:19:42.560 --> 0:19:47.439 they're spending their pensions down. China, Saudi Arabia, they're not 0:19:47.520 --> 0:19:51.679 putting any money in the US treasury market anymore, and 0:19:51.880 --> 0:19:57.320 US treasury borrowing has exploded. President Trump inherited a deficit 0:19:57.720 --> 0:20:00.800 of six point four percent of GDP in twenty four 0:20:01.640 --> 0:20:06.080 and with his One Big Beautiful Bill, threatens to send 0:20:06.119 --> 0:20:10.840 that deficit higher. So the pattern is shifted from too 0:20:10.880 --> 0:20:16.040 much saving, not enough investment, and falling interest rates to 0:20:16.200 --> 0:20:20.679 not enough saving, too much investment and rising interest rates. 0:20:21.560 --> 0:20:24.720 Donald Trump wants a new FED chair to cut the 0:20:24.760 --> 0:20:28.520 short term policy rate. Even if he does that, we 0:20:28.640 --> 0:20:31.800 think these big structural forces are going to keep longer 0:20:31.880 --> 0:20:35.159 term borrowing costs elevated in the years ahead. 0:20:35.359 --> 0:20:37.440 Yeah, and you mentioned that, So your book suggests that 0:20:37.520 --> 0:20:39.480 it's not going to be that simple to just, you know, 0:20:39.560 --> 0:20:40.720 get a new FED chair. 0:20:40.840 --> 0:20:45.119 Correct, Yeah, that's right. So there's there's so much excitement 0:20:45.160 --> 0:20:47.560 around the question of who the next FED chair is 0:20:47.600 --> 0:20:52.720 going to be. Yesterday we had Stephen Myron, the head 0:20:52.760 --> 0:20:56.280 of the Counsel of Economic Advisors, nominated to the FED Board. 0:20:57.080 --> 0:21:01.200 There's talk that perhaps Kevin Hassett, the head of the NEEC, 0:21:01.800 --> 0:21:05.520 perhaps Kevin Walsh, former member of the FMC, could be 0:21:05.560 --> 0:21:09.119 the new FED chair. And the market is betting that 0:21:09.160 --> 0:21:11.959 whoever it is is going to move the dial and 0:21:12.000 --> 0:21:16.640 start delivering a lower FED policy rate. But guess what, 0:21:17.400 --> 0:21:21.840 it's not the FED which has the determining force on 0:21:21.880 --> 0:21:25.040 the cost of borrowing across the US economy. It's actually 0:21:25.320 --> 0:21:30.080 those bigger dynamics, the balance between saving and investment. And 0:21:30.119 --> 0:21:32.080 the big argument we make in our book is that 0:21:32.080 --> 0:21:35.200 that balance has shifted, and so it doesn't matter who 0:21:35.200 --> 0:21:37.760 the FED chair is, borrowing costs are going to be 0:21:37.800 --> 0:21:38.760 structurally higher. 0:21:39.320 --> 0:21:41.239 And you mentioned this earlier that if the cost of 0:21:41.240 --> 0:21:45.760 money keep rising, what then should governments, businesses, and individuals 0:21:45.960 --> 0:21:48.200 do differently to maybe adapt. 0:21:50.080 --> 0:21:54.440 So let's think about what impact very low borrowing costs 0:21:54.440 --> 0:21:59.720 have had in past decades. So first for governments, when 0:21:59.760 --> 0:22:03.439 borrowing is cheap, then governments can keep on piling on 0:22:03.520 --> 0:22:09.639 debt and it's still sustainable. Think about equity market investors 0:22:10.000 --> 0:22:13.359 or property market investors. If you've put money to work 0:22:13.400 --> 0:22:15.919 in the US stock market or in US real estate 0:22:16.200 --> 0:22:19.400 pretty much anytime over the last four decades, you've made 0:22:19.480 --> 0:22:22.280 quite a lot of money. And part of the reason 0:22:22.320 --> 0:22:25.280 for that is that interest rates have been low, So 0:22:25.320 --> 0:22:29.040