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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Kane. Always

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Speaker 1: with Michael McKee. Daily we bring you insight from the

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Speaker 1: best in economics, finance, investment, and international relations. Find Bloomberg

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Speaker 1: Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of course

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Speaker 1: on the Bloomberg. It is a wonderful day to catch

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Speaker 1: up with Brian. You should really be in the stock market,

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Speaker 1: bell Ski because as everybody was slices, slicing, slitting their wrists,

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Speaker 1: the world's gonna end X number of months ago, you

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Speaker 1: were going up. Maybe not take us back to your

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Speaker 1: conviction of three or six months ago that these corporations

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Speaker 1: would continue to generate free cash flow. What was the

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Speaker 1: belief then? All good morning time. I think you know,

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Speaker 1: the third week of January, you had such binary negativities

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Speaker 1: respect to contagion, contagion and people who are making these

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Speaker 1: claims with absolutely no analytical substance. And what we've seen

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Speaker 1: is that the markets have come back, and I think

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Speaker 1: as of late uh now we have the situation on

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Speaker 1: a very near term basis where you have things like

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Speaker 1: utilities and telecom and reads hitting new highs while the

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Speaker 1: stock market in America at Leasta's hitting new highs and

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Speaker 1: something's got to give their tom So I think at

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Speaker 1: the end of the day we may see a little

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Speaker 1: bit of a reprieve as we see rotation. But you know, again,

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Speaker 1: if you take a look at three to five year

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Speaker 1: period or even shorter term twelve eighteen months, the stock

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Speaker 1: market is heading higher. I use as a proxy toothpaste

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Speaker 1: because we all need it, we all use it, and

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Speaker 1: the cold Gate pe is twenty six or twenty five.

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Speaker 1: Who's keeping track? Okay, So that's the price divided by

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Speaker 1: the earnings. Do you have an underlying belief that the

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Speaker 1: denominator helps out and then earnings come on away from

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Speaker 1: the single digit or negative gloom yep? Great question. First off,

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Speaker 1: on consumer staples in particular, which Colgate is a member of.

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Speaker 1: You know, Staples has been the most stable earner in

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Speaker 1: the s and we think Staples is a fantastic theme

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Speaker 1: heading into the fall for certain reasons, because remember a

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Speaker 1: third week in September we start having these debates, and

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Speaker 1: I think people are gonna sit at home in front

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Speaker 1: of the boob to watching debates. So you want to

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Speaker 1: own some consumer staples with respect in the market overall

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Speaker 1: time I think the biggest call of all over the

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Speaker 1: next few years is that is that earnings of revenue

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Speaker 1: girls coming back. The multiple is going to be flattening,

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Speaker 1: if not going down. That's the big call, and nobody

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Speaker 1: believes it because we've been so barish on margins peaking

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Speaker 1: and yields continue to head lower. I mean, people are

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Speaker 1: not believing that, they're not they're not believing it. But

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Speaker 1: like the last ten years, cold Gate just to pick

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Speaker 1: on them again, per year total return, everyone out there,

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Speaker 1: whether it's in New York or your Minneapolis worldwide is

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Speaker 1: in a single digit mindset on assets. Brian Bowski's world

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Speaker 1: isn't a single digit world. It isn't. And I think

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Speaker 1: at the end of the day, you know a full disclosure.

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Speaker 1: We run a mutual fund for Canadian investors and we

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Speaker 1: own coal Gate. And part of the reason why we

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Speaker 1: owned cold Gate is that people forgotten that we have

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Speaker 1: awesome companies in America and Canada. We've been so worried

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Speaker 1: and excited to buy these sexy companies in China and

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Speaker 1: emerging markets in Europe. Why not come back and buy

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Speaker 1: the good, old fashioned toothpaste company because it's been working.

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Speaker 1: They overpriced after the run. No, because if you go

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Speaker 1: back to the nineties, because again part of my premises

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Speaker 1: that I think we're heading back into an active investing

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Speaker 1: environment eighties and nineties stockpicking. If you look at the

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Speaker 1: multiples back in the nineties, were not there yet in

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Speaker 1: consumer staples, are not there in coal Gate number one,

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Speaker 1: number two. If you take a look at all conditions

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Speaker 1: of the financial statements, cash flow, balance sheet, earnings, these

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Speaker 1: companies are still relatively attractive and on an absolute basis

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Speaker 1: attractive as well. I want to get in here, Apple,

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Speaker 1: I was thunderstruck overnight on social media, in the printed

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Speaker 1: newspapers and in the cell side reports. The absolute massive

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Speaker 1: dichotomy of relatively gloomy articles versus relatively optimistic reports from

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Speaker 1: your securities industry. Why is that separation there? First of all,

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Speaker 1: your your producers have to find thunderstruck by E c DC.

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Speaker 1: That could be your theme the rest of the day

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Speaker 1: with expect Apple. But um, here's the here's the issue.

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Speaker 1: The as I like to say, the fourteen year old

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Speaker 1: portfolio managers that have replaced some of us with gray

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Speaker 1: and receding gray hair and receding hairlines have been using

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Speaker 1: Apple as a as a reduction redemption tool in their

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Speaker 1: portfolios because Apple and technology are the largest sector in

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Speaker 1: the world. So they've been not watching the stock on

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Speaker 1: a fundamental basis and looking at it as an index stock.

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Speaker 1: And that's the problem with equity investing, because we're so

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Speaker 1: worried about being wrong, we don't want to be right,

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Speaker 1: and so we want to hug the index. And what

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Speaker 1: happens is when you start to see redemptions they'd be

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Speaker 1: using Apple. They is this. They missed this because of

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Speaker 1: the inbred negativity in our business. And it's a it's

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Speaker 1: a secular problem from a psychological basis. On the institutional side,

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Speaker 1: that's why wealth management and private clients are actually outperforming

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Speaker 1: institutional accouncil last four or five years on a quarterly basis.

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Speaker 1: And you know, granted it's uneven free cash flow, but

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Speaker 1: the cash build of the beast with all they're doing here,

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Speaker 1: the numbers, folks, these are quarters. I usually quote annual,

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Speaker 1: but these are quarters two oh three, two oh seven

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Speaker 1: to sixteen, two thirty two. They have they have a

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Speaker 1: quarter of a trillion dollars laying around. Is that good

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Speaker 1: corporate stewardship? Well, listen, I think this whole market is

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Speaker 1: gonna be driven by the way to think about this

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Speaker 1: is the redistribution of cash. We talk a lot in

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Speaker 1: our country about the redistribution of well, think about the

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Speaker 1: redistribution of cash. And it seems to me like with

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Speaker 1: that amount of cash flow, nobody believes that Apple can

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Speaker 1: can do that and continue to grow. And you think

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Speaker 1: it's going to continue to grow the earnings and grow

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Speaker 1: the dividend and and be that continued cash cow. I mean,

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Speaker 1: I look at this, folks, that we've been comparing and

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Speaker 1: contrasting Colgate with Apple. Let me do the math here.

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Speaker 1: I'm going to go to the Bloomberg terminal where we

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Speaker 1: have a calculator on board because we're live on air.

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Speaker 1: I'm gonna round up ugly. So this is not exact

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Speaker 1: Apple's trading at the value of Colgate. Explain that that's

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Speaker 1: it's mind boggling to bail Colgate overpriced or is Apple underpriced? Uh?

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Speaker 1: Probably it could be a portion of both, because people

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Speaker 1: have been um clamoring into the consumer stage space for

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Speaker 1: perceived safety, right, and then this overall just negativity regarding

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Speaker 1: technology overall, but more specifically Apple. So it's a combination

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Speaker 1: of boult okay. But in folks, to work through that math,

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Speaker 1: a P of eleven you could argue about where that

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Speaker 1: number is divided by the P E of is how

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Speaker 1: you get to But the issue there, the issue there

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Speaker 1: is that what do you believe the earnings? The earnings

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Speaker 1: and apple or too low and and and maybe the

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Speaker 1: earnings and excuse me because cf A results were out yesterday.

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Speaker 1: Belsky and I are disaggregating the ratio, which is what

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Speaker 1: nobody does. They quote these ratios like Gospel and Brian,

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Speaker 1: you and I know alla DuPont ratios. You have to

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Speaker 1: disaggregate down to the dynamics and partial derivatives of price

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Speaker 1: and earnings. The newer internet denominator awesome. Which one are

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Speaker 1: you focused on? I'm like you, I'm focused on the

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Speaker 1: denomin absolutely positively. And I think nobody believes the denominator

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Speaker 1: is gonna go okay, And that's the key. Let's work

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Speaker 1: up the income statement from in the P and the

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Speaker 1: E the E go up. The income statement to revenue.

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Speaker 1: Revenue is made up of units and price and the

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Speaker 1: real fear of apple. Not to say you're an Apple expert,

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Speaker 1: but the real fear is price erosion. And yet we

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Speaker 1: really didn't see that in the gross margin, so we

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Speaker 1: didn't see that. And remember too that you know saturation

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Speaker 1: ray it's in other markets aside from the US are

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Speaker 1: pretty low. I mean, uh, we're still seeing a lot

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Speaker 1: more Samsung phones in China, for instance. And we're not

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Speaker 1: going to run the company and buy the company because

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Speaker 1: of China. We're gonna buy the company because it is

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Speaker 1: a dynamic, elite cash cow and that's why we're gonna

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Speaker 1: So the organic revenue growth on Coca Cola, tell me

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Speaker 1: about Industrial America g E. The U t X earnings yesterday,

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Speaker 1: it's not a nominal g D piece or isn't. They're

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Speaker 1: doing better than that. They're doing better. And you know,

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Speaker 1: from our perspective, the domestic side of the industrial space

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Speaker 1: in America that from the sector has been growing the

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Speaker 1: best and the most consistently. GE in particular has kind

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Speaker 1: of repositioned themselves to focus more on the industrial side

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Speaker 1: of things. Ut X has done a good job. Lockeed

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Speaker 1: Martin has done a good job. So we're not talking

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Speaker 1: about stocks that are that are needing international growth tom

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Speaker 1: to continue to go higher with respect of their fund

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Speaker 1: amomental We've been talking about Apple. We've been talking about

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Speaker 1: your optimism. I want to talk about how no one

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Speaker 1: all remembers what a bear market is or a correction.

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Speaker 1: Can you imagine, Brian, the media sweat if we were

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Speaker 1: to go down ten point three percent oversay a six

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Speaker 1: week period, four week period. I think they love it,

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Speaker 1: because you know, the media in particular, of course, not

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Speaker 1: the great people here at Bloomberg. UH love to be

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Speaker 1: the fearmongers. Uh. And as long as they're going to

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Speaker 1: continue to doubt this bull market, the better I think.

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Speaker 1: You know, the more that we hear um positivity, so

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Speaker 1: to speak, with respect to the market, the more you

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Speaker 1: have to worry. So I would take the contrarian side

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Speaker 1: of them. So the more they sing the markets praises

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Speaker 1: and start to believe their own you know what, I think,

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Speaker 1: the more likely do we see a nice correction. And

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Speaker 1: it'd be awesome to see a ten percent correction again.

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Speaker 1: In honor of all the people who passed the c

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Speaker 1: f A yesterday, for those of you that did not

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Speaker 1: pass the c f A, John Tucker like a pass rate.

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Speaker 1: It was like you and algebra and ninth grade. Let

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Speaker 1: me rephrases, folks, this cef A exam is like a

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Speaker 1: British exam. You don't fail, it's just that you didn't pass.

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Speaker 1: And is Brian, as you know, you endure this, you

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Speaker 1: can take it. You take it again, and it's not

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Speaker 1: for those of you on global walls you're going, oh

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Speaker 1: my god, she flunked. It's okay, Papa, take the summer off.

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Speaker 1: Take a deep breath. Way. I think we could take

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Speaker 1: it back in the old days when we used to

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Speaker 1: take it. You can take it twice now and three times.

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Speaker 1: Or I know someone who took seven years to get

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Speaker 1: through it and with a good morning Candice, hope you're

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Speaker 1: doing well, Brian Belski. The mathematics of when you and

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Speaker 1: I went through this torture led to an eighteen percent

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Speaker 1: general generalization as an equity bear market with all of

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Speaker 1: our distortions in our new finance structure. Is there a

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Speaker 1: different new bear market? Is it not negative eighteen percent?

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Speaker 1: Is it negative fourteen? Negative nine? Is our new Do

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Speaker 1: we have a new definition? Yeah? Well, you know, I

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Speaker 1: think I think any kind of downside, whether or it's

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Speaker 1: five day percent or twelve percent or whatever. I think

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Speaker 1: we we've become too consumed with with being able to measure.

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Speaker 1: I mean, let's be very clear, nobody absolutely sells at

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Speaker 1: the peak, and nobody absolutely sells at the at the

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Speaker 1: trough or buys at the trough. So a lot of

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Speaker 1: that analysis, I think is great to look at, but

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Speaker 1: to try to absolutely positively call and diagnose a correction,

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Speaker 1: you know, the easiest and best thing to always say

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Speaker 1: is you never know when a correction comes until at

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Speaker 1: least expected. Everyone is looking for Brexit to make it.

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Speaker 1: We were very, very steadfast when when we saw the

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Speaker 1: weakness caused by the Brexit that Friday, we said bye bye, bye,

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Speaker 1: bye bye to create your shopping list. So we still

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Speaker 1: think this is a by the dip type market until

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Speaker 1: proven otherwise. And I think at the end of the day,

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Speaker 1: when we see longer term and version of the yield curve,

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Speaker 1: that will be your signal to get out. And we're

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Speaker 1: are several months, if not quarters away from that. After

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Speaker 1: the CEO is that listen to us, and we thank

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Speaker 1: all of you for giving us some of your valuable

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Speaker 1: time every morning. Share buy backs rap is you're buying

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Speaker 1: at the top of the market. Shares are richly priced.

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Speaker 1: You should not be buying back stock now, but yet

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Speaker 1: it's part of the culture. I mean, the CEO would

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Speaker 1: be fired if he didn't buy backs. You remember, CEOs

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Speaker 1: and CFOs are getting paid for the stock to go

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Speaker 1: up period and should miss mersall Meyer deserver compensation. Come on, No,

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Speaker 1: I'm not gonna talk about that, but okay, thank you

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Speaker 1: for trying to trap me. But think about this. Interest

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Speaker 1: rates are still at decade lows, so of course they're

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Speaker 1: gonna buy back stock. We need to see a significant

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Speaker 1: move in yield and and and the Fed notes in

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Speaker 1: terms of yields heading higher before the secular trying to

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Speaker 1: buying back stock ends debt on the books. Ellen Zetner

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Speaker 1: Morgan Stanley was talking about debt being a little rich

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Speaker 1: ge Granted there's still some financial noise the debt Apple

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Speaker 1: twelve debt. It's dirt cheap. Every CFO has to go

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Speaker 1: out and issue debt, right they do. And at the

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Speaker 1: I mean take a look at leverage ratios as well.

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Speaker 1: I mean back in a long time ago, when I

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Speaker 1: got in the business seven years ago, we did a

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Speaker 1: lot of work, uh in analysis on debt dequity ratios

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Speaker 1: and and for all intents and purposes, when you take

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Speaker 1: a look at the five companies aggurate. You don't have

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Speaker 1: any debt equity ratios with respect to US stocks. And

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Speaker 1: I think at the end of the day, as you

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Speaker 1: have these low interest rates, you're going to see continue

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Speaker 1: borrowing out on the curb to buy backstock. Period. They're

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Speaker 1: just gonna do it. And and you mean not that

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Speaker 1: you got to perpetuity, but you go out and you

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Speaker 1: grab a coupon, say thank you. Does M and A

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Speaker 1: help support the Brian Bellski Optimus if it's got to

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Speaker 1: because they can't capture and we saw it with Coca Cola,

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Speaker 1: this organic revenue growth. Nobody gets paid. It has to

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Speaker 1: do that. And at the at the end of the day,

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Speaker 1: you know bull market's end when M and A is

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Speaker 1: peaking and M and A is involved with it. With

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Speaker 1: the M and A portion is when you see the

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Speaker 1: majority of it come from stock, that's when you have

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Speaker 1: to worry. The biggest deals that we're seeing and then

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Speaker 1: and then the majority of deals overall, we're seeing more

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Speaker 1: cash and that's a very very good thing. When you

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Speaker 1: see like we saw, we've seen the majority of deals

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Speaker 1: being done with stock, that's when you worry. What would

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Speaker 1: Robert Farrell say? I mean, you know, he he invented

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Speaker 1: so much of the idea of strategy. Marylynch years ago. Well,

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Speaker 1: there's so many distortions out there now. It's not a

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Speaker 1: it's certainly not a normal time, is it really isn't

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Speaker 1: you know? And we had the great pleasure of working

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Speaker 1: at Meryll for a number of years. And and in fact,

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Speaker 1: my good friend, uh in former colleague, David Rosenberg and

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Speaker 1: I did a special meeting with clients yesterday. I talked

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Speaker 1: with him weekly. I just need to get my fix.

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Speaker 1: I need my rosy fix. Anyway, we had a great

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Speaker 1: fortune to talk to some of our best clients at

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Speaker 1: the BEMO yesterday for lunch. And I think Bob Farrell,

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Speaker 1: I know Bob Ferrell came up several times. And one

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Speaker 1: of the things that we talked about is it's never

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Speaker 1: different this time. Uh And and when we try to

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Speaker 1: think of about and define stocks that it's different this time.

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Speaker 1: I think you have to kind of be you have

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Speaker 1: to be very very careful. Brian Bollski, thank you so much.

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Speaker 1: Femote Capital Markets with your dose of equity optimism. Michael

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Speaker 1: McKee is Senior Vice Presidents Surveillance Live or Dead Meeting.

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Speaker 1: He's in Washington, Mike, or you went a live or

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Speaker 1: dead radio studio with our wonderful new headquarters. We are

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Speaker 1: in a live radio studio, wonderful trip down in the

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Speaker 1: surveillance Gulf stream. It's from morning in Washington. It's a

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Speaker 1: great day to do nothing. Janet and company will get in,

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Speaker 1: get out, probably not have a lot of influence on anybody.

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Speaker 1: We could talk about doing nothing for four hours of

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Speaker 1: Jeffrey Rosenberger Black Rocket's one of those days, Jeff where

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Speaker 1: you almost paused within the strategy derby. And let me

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Speaker 1: start with a really broad question, almost philosophical. Is there

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Speaker 1: a theory operational right now? Is there something in yours

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Speaker 1: or my textbooks, Michael's textbooks that we're basing all this

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Speaker 1: off of. Yes, there there is, and and it's it's

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Speaker 1: a bit of of the traditional theory in terms of

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Speaker 1: stimulus measures, in terms of real interest rate levels. But

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Speaker 1: but the theory is being pressed up against the conventional limits.

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Speaker 1: And so the extension of unconventional monetary policy. What we're

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Speaker 1: gonna talk about maybe a little bit later today, tonight, tomorrow, uh,

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Speaker 1: the b O J and what its response is going

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Speaker 1: to be. There very much on the front ends of

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Speaker 1: how you extend traditional monetary policy stimulus in a zero

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Speaker 1: interest rate environment, and so the theory is still the same.

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Speaker 1: You're trying to provide stimulus, You're trying to get real

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Speaker 1: interest rates lower by boosting inflation in the real economy.

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Speaker 1: It's just now your tool kit for boosting inflation is

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Speaker 1: is very untraditional. So quantitative easing, fiscal monetary policy coordination.

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Speaker 1: If we agree that this is reflation, is there any

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Speaker 1: proof the institution could reflate an economy? So there's um

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Speaker 1: not a lot of proof at this stage of the game.

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Speaker 1: There there's a lot of theory about what monetary policy

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Speaker 1: can do in a fiat currency system. So when we

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Speaker 1: talk about this idea of helicopter money, it goes back

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Speaker 1: to Milton Friedman making a statement around why in a

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Speaker 1: fiat currency system you shouldn't have the threats of deflation

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Speaker 1: because at the end of the day, the monetary authorities

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Speaker 1: can simply rain the money down from a helicopter. What

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Speaker 1: we're discovering in the in the real world. To get

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Speaker 1: to your questions, we've never really had that experiment in

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Speaker 1: theory put into practice, and what we might be seeing

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Speaker 1: maybe not this week, maybe not this month, but we

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Speaker 1: might eventually get to in the case of Japan and

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Speaker 1: depending on outcomes and the rest of the developed market

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Speaker 1: world is trying to put this theory of helicopter money

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Speaker 1: monetary policy, financing fiscal policy, so expansionary fiscal policy. That

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Speaker 1: was the news item today in terms of the fiscal

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Speaker 1: policy announced by ABE. Now the question is does that

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Speaker 1: get explicitly financed by the bo j Did they try

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Speaker 1: to make this coordinated so that you try to break

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Speaker 1: the psychology around the indebtedness. There's a lot of details

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Speaker 1: around what makes helicopter money work, but one of the

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Speaker 1: things that's key to it is that you have to

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Speaker 1: believe that the expansion of government purchases will be financed

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Speaker 1: by the central bank, and that financing will always remain outstanding.

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Speaker 1: You'll never have to pay it back. The expansion of

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Speaker 1: money in the system becomes permanent, so that inflation psychology

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Speaker 1: starts to kick in, so that you can create inflation

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Speaker 1: in the real world. Jeff, I want to expand on

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Speaker 1: Carnegie Mellon and your work there within their master's program

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Speaker 1: and a guy named Stephen Shrieve st who is he

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Speaker 1: like the force the founder of it all. Yeah, basically well,

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Speaker 1: Steve Shreever around Um wrote, uh, some of the most

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Speaker 1: important background mathematic, mathematical basis and theory for derivative finance.

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Speaker 1: Put it on a on a solid mathematical foundation, and

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Speaker 1: then and then found it a program at Carnigim element

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Speaker 1: I tend to called computational finance, which was really at

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Speaker 1: the end of the eighties early nineties, the flowering of

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Speaker 1: derivative finance on Wall Street. It's where we were flowered

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Speaker 1: shirts and big white dies. The heart of this matter

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Speaker 1: is the Bell curve, the Gaussian distribution. Does Janet Yellen

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Speaker 1: stand Fisher and others? Are they still working under the

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Speaker 1: assumption of a core belief in the mathematics underpinning their economics?

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Speaker 1: Do they believe in Brownie in motion and other esoteric

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Speaker 1: things all hinged upon that probability distribution? We all know so.

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Speaker 1: So the probability distribution is one piece of a toolkit

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Speaker 1: that finance people. Derivative is more on the finance side.

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Speaker 1: What we talked about when we talk about the FED

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Speaker 1: and what the FED looks at is more about on

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Speaker 1: the economic side. But what's key here is that Janet

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Speaker 1: Yellen and today's FED is is highly model driven in

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Speaker 1: sense that they're very much wedded to the economic models.

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Speaker 1: Of the specific economic model that the FED uses is

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Speaker 1: called the Furbess model. The Furbess model is a is

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Speaker 1: not a derivative Brandy emotion model. It is a statistical

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Speaker 1: econometric model. It looks at data, It looks at historical data,

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Speaker 1: historical relationships, economic relationships, and fits those relationships to the

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Speaker 1: data to try to make predictions. Brilliantly stated, and Michael McKee,

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Speaker 1: to go over to you in Washington, I would suggest

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Speaker 1: that they take those econometric data and then they set

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Speaker 1: up the probability of certain outcomes and all that's been

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Speaker 1: shattered in the last seven years. Well, the comes haven't

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Speaker 1: been as they thought they were. And to go back

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Speaker 1: to what you were talking about in terms of, you know,

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Speaker 1: the the ultimate theory and helicopter money and all that,

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Speaker 1: the one fly in the ointment, there is the other

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Speaker 1: theory called liquidity trap. The money is reigning down, but

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Speaker 1: people seem to be hoarding it rather than spending it.

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Speaker 1: And if they don't spend, and this is what we're

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Speaker 1: seeing in Japan, you get stagnation and deflation. That's right,

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Speaker 1: And and part of what's difficult about these these model

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Speaker 1: approaches is that you're in a region of the point

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Speaker 1: in the economy or in the region in terms of

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Speaker 1: financial market conditions with regards to the zero bound, where

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Speaker 1: where a lot of the experience and how the economy

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Speaker 1: behaves may not follow the historical experience. And you don't

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Speaker 1: have great historical experience at these levels to to fit

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Speaker 1: your models and have good expectations or good beliefs that

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Speaker 1: the models will work at these levels low levels of

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Speaker 1: inflation and threats of of of deflation UH and and

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Speaker 1: that's what's really challenging. No. One really important point here

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Speaker 1: to make is is no policymaker is entirely wedded mechanistically

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Speaker 1: to their models and to the output. These are tools

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Speaker 1: that help to inform policymaking. What's interesting about particular eras

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Speaker 1: of of FED stewardship is just what degree of reliance

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Speaker 1: do they put on these models. Janney Ellen has has

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Speaker 1: had more reliance more UH has been more wedded to

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Speaker 1: the model output. Is as opposed to say a green span,

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Speaker 1: where there was where there was much more judgment applied

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Speaker 1: to the conduct of monetary policy. But in any era,

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Speaker 1: there's a balance between how much can you rely on

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Speaker 1: data and models and and how much do you rely

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Speaker 1: on judgment. Unfortunately, here in this environment, judgment becomes a

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Speaker 1: much more important part because we don't know exactly how

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Speaker 1: the economy is going to respond at at levels again

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Speaker 1: of inflation and interest rates where we have no experience. Well,

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Speaker 1: here's the question that a lot of people are asking

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Speaker 1: in terms of monetary policy, and it's kind of the

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Speaker 1: key question for you on a trading desk is when

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Speaker 1: do you admit the models don't work and try something else. Well,

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Speaker 1: it's it's getting to that point in the sense that

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Speaker 1: we we've long had this environment of unconventional monetary policy,

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Speaker 1: so to the extent that the models work best. When

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Speaker 1: we're talking about being able to look at inputs like

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Speaker 1: interest rates and real interest rates and nominal interest rates

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Speaker 1: where you don't have the issues around the zero bound,

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Speaker 1: you've already gotten to that point. Now you have shadow

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Speaker 1: interest rate models that help you to deal with what

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Speaker 1: what the zero bound doesn't tell you what the effective

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Speaker 1: negative nominal rate is. We now have experiments in actual

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Speaker 1: negative nominal interest rates, and we have a big roaring

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Speaker 1: debate about how low could nominal negative interest rates go.

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Speaker 1: And one of the things we see is is particularly

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Speaker 1: we saw this in the implementation of negative interest rates

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Speaker 1: again by the b o J on January twenty nine,

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Speaker 1: is that there were a lot of unexpected outcomes because

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Speaker 1: again we're experimenting with policies where we don't know all

429
00:24:14,440 --> 00:24:16,959
Speaker 1: of the costs in the benefits. But does Robert Schiller

430
00:24:17,040 --> 00:24:19,720
Speaker 1: jump into this, Sir Gary Becker or Taylor or Chicago,

431
00:24:20,080 --> 00:24:23,840
Speaker 1: do you have to not push aside but a men,

432
00:24:24,119 --> 00:24:28,160
Speaker 1: our certitude of our models because of the behavior world

433
00:24:28,160 --> 00:24:32,600
Speaker 1: taching negative rates and what negative rates do behaviorally on

434
00:24:32,720 --> 00:24:35,560
Speaker 1: a system. Well, that's that's exactly the point in and

435
00:24:35,600 --> 00:24:39,239
Speaker 1: again we saw it in the negative rate announcement. I mean,

436
00:24:39,400 --> 00:24:42,119
Speaker 1: this is a little experiment for these for these theories

437
00:24:42,160 --> 00:24:46,080
Speaker 1: where we've never really seen a central bank be as

438
00:24:46,119 --> 00:24:50,160
Speaker 1: aggressive with negative interest rates combined with quantitative vising as

439
00:24:50,200 --> 00:24:51,800
Speaker 1: with the case in the Bank of Japan. And we

440
00:24:51,880 --> 00:24:54,800
Speaker 1: had expectations in the Bank of Japan had expectations for

441
00:24:54,920 --> 00:24:57,000
Speaker 1: what would happen, and what they expected to happen with

442
00:24:57,400 --> 00:25:00,520
Speaker 1: was that the currency would weaken, the stock market would strengthen,

443
00:25:00,840 --> 00:25:03,080
Speaker 1: longer term interest rates would fall, and all those things

444
00:25:03,160 --> 00:25:06,400
Speaker 1: happen for about twenty minutes and then they unwound. Now,

445
00:25:06,440 --> 00:25:09,320
Speaker 1: the longer term interest rates didn't, but the currency and

446
00:25:09,359 --> 00:25:12,000
Speaker 1: the equity market reaction unwounded. And and there's a lot

447
00:25:12,040 --> 00:25:14,879
Speaker 1: of debate about why that is, and there's a debate

448
00:25:15,040 --> 00:25:17,520
Speaker 1: within the financial markets, debate within the policy circle. But

449
00:25:17,760 --> 00:25:23,720
Speaker 1: one explanations for for why the result was highly unanticipated

450
00:25:23,760 --> 00:25:26,440
Speaker 1: was because there are these other aspects of central bank

451
00:25:26,520 --> 00:25:29,639
Speaker 1: policy at the negative interests with negative interest rates, and

452
00:25:29,680 --> 00:25:33,120
Speaker 1: that's the confidence channel, the signaling effect, and if you

453
00:25:33,240 --> 00:25:37,760
Speaker 1: resort to much more surprising negative rates, then perhaps you're

454
00:25:37,800 --> 00:25:42,000
Speaker 1: signaling that your policy is more further exhausted than what

455
00:25:42,080 --> 00:25:45,560
Speaker 1: the market was expecting, and that led to a negative

456
00:25:45,600 --> 00:25:48,800
Speaker 1: confidence shock. That's that's one way potentially of explaining the outcome.

457
00:25:48,840 --> 00:25:50,600
Speaker 1: But the point here is that when you're when you're

458
00:25:50,640 --> 00:25:53,800
Speaker 1: dealing with not simply having a conversation as we might

459
00:25:53,840 --> 00:25:56,440
Speaker 1: have had a generation ago, that Okay, are they gonna

460
00:25:56,440 --> 00:25:58,560
Speaker 1: cut twenty five? Are they going to cut fifty? And

461
00:25:58,760 --> 00:26:00,959
Speaker 1: you know the real rate is going from two percent

462
00:26:01,040 --> 00:26:02,880
Speaker 1: to one and a half percent, we have a good

463
00:26:02,920 --> 00:26:05,879
Speaker 1: sense of what a falling real interest rate means in

464
00:26:05,920 --> 00:26:09,200
Speaker 1: the real economy. Here we have a lot less certainty

465
00:26:09,280 --> 00:26:13,520
Speaker 1: around what these policies will do and how financial markets

466
00:26:13,520 --> 00:26:17,000
Speaker 1: in the economy responds to them. Does the FED have

467
00:26:17,040 --> 00:26:21,360
Speaker 1: a credibility problem in explaining that to people and how

468
00:26:21,359 --> 00:26:23,560
Speaker 1: do they address that today? If they do, they do,

469
00:26:23,680 --> 00:26:28,520
Speaker 1: the FED has to worry about the confidence channel and

470
00:26:28,560 --> 00:26:32,000
Speaker 1: the signaling effect. Right now, the FED is at a

471
00:26:32,119 --> 00:26:34,119
Speaker 1: different point. You know, we're talking about the b o J.

472
00:26:34,280 --> 00:26:36,080
Speaker 1: We're talking about the news this morning in terms of

473
00:26:36,080 --> 00:26:40,840
Speaker 1: the expansion of fiscal policy support because their economy requires that.

474
00:26:40,880 --> 00:26:43,560
Speaker 1: The conversation this afternoon is going to be much more

475
00:26:43,600 --> 00:26:46,359
Speaker 1: about what the Fed's communicating in terms of how do

476
00:26:46,440 --> 00:26:50,160
Speaker 1: they try to move away from this era of unconventional

477
00:26:50,200 --> 00:26:52,840
Speaker 1: policy and get us back to Normalization's going to be

478
00:26:52,880 --> 00:26:55,640
Speaker 1: conveyed this afternoon. I think that we're going to see

479
00:26:55,680 --> 00:26:59,280
Speaker 1: the FED upgrade the assessment of the economy. The economy

480
00:26:59,280 --> 00:27:01,840
Speaker 1: in the US cases has done a little bit better,

481
00:27:01,880 --> 00:27:06,200
Speaker 1: and so they'll reflect that. We'll also talk potentially we'll

482
00:27:06,240 --> 00:27:08,840
Speaker 1: see this or not, But over the course of the speeches,

483
00:27:09,520 --> 00:27:12,080
Speaker 1: what the FED is communicating is that we've survived the

484
00:27:12,359 --> 00:27:16,320
Speaker 1: external shock of Brexit and and with those two things,

485
00:27:16,320 --> 00:27:19,199
Speaker 1: Brexit not being as negative and the economy in the

486
00:27:19,280 --> 00:27:22,000
Speaker 1: US looking a little bit more resilient, the conversation is

487
00:27:22,040 --> 00:27:25,640
Speaker 1: going to steer back towards normalization, and as we're talking

488
00:27:25,640 --> 00:27:28,359
Speaker 1: about more normalization than the FED avoids this b O

489
00:27:28,480 --> 00:27:32,640
Speaker 1: J problem of how do you deal with more unconventional policy.

490
00:27:33,400 --> 00:27:36,360
Speaker 1: This was fun. Jeffrey, Jeffrey Rosenberg, thank you so much

491
00:27:36,359 --> 00:27:51,680
Speaker 1: for black Rock. Tom Borcelli has to figure this all

492
00:27:51,720 --> 00:27:55,040
Speaker 1: out for RBC Capital Markets. He's their chief US economist.

493
00:27:55,119 --> 00:27:58,560
Speaker 1: That Tom durable goods orders to the extent that they

494
00:27:58,560 --> 00:28:01,040
Speaker 1: tell us anything, I suppose are a little bit of

495
00:28:01,040 --> 00:28:03,080
Speaker 1: good news for this quarter because for the first time

496
00:28:03,480 --> 00:28:07,000
Speaker 1: in three months, the capital goods orders are higher and

497
00:28:07,080 --> 00:28:10,040
Speaker 1: that goes into g d p H. The rest of

498
00:28:10,080 --> 00:28:13,199
Speaker 1: it is it looks like typical volatility. Yeah, you know.

499
00:28:13,280 --> 00:28:14,600
Speaker 1: The one thing I would say, though, is if you

500
00:28:14,600 --> 00:28:17,399
Speaker 1: look at the shipment's numbers, which is really what's going

501
00:28:17,440 --> 00:28:19,479
Speaker 1: to get baked into the current quarter, that was actually

502
00:28:19,520 --> 00:28:22,960
Speaker 1: down um again, core shipments was down like four tents.

503
00:28:23,000 --> 00:28:25,399
Speaker 1: So yeah, all orders were a little bit better, and

504
00:28:25,440 --> 00:28:27,639
Speaker 1: that's sort of a nice thing for the out quarter,

505
00:28:28,359 --> 00:28:31,200
Speaker 1: but in the current quarter you're still looking at we weaknesses.

506
00:28:31,240 --> 00:28:33,800
Speaker 1: So for US net net. This really confirms that you're

507
00:28:33,840 --> 00:28:36,639
Speaker 1: you're looking at what will want up being the second

508
00:28:36,680 --> 00:28:40,360
Speaker 1: straight or actually the third straight decline quarterly declining capex

509
00:28:40,480 --> 00:28:42,680
Speaker 1: and we have baked in a one percent to cline

510
00:28:42,680 --> 00:28:46,240
Speaker 1: for the free quarter in total. Um, you are focused

511
00:28:46,280 --> 00:28:49,240
Speaker 1: on labor and you've done a great job Tom of

512
00:28:50,080 --> 00:28:53,640
Speaker 1: doing the dynamics of labor in wage dynamics. What is

513
00:28:53,680 --> 00:28:56,960
Speaker 1: the wage picture that chare yelling looks at today? Yeah,

514
00:28:57,000 --> 00:28:59,080
Speaker 1: I mean, look, I think as you know, we sort

515
00:28:59,080 --> 00:29:00,880
Speaker 1: of gear up for for episode is going to have

516
00:29:01,000 --> 00:29:04,080
Speaker 1: to say and do today. I don't think there's any

517
00:29:04,160 --> 00:29:06,360
Speaker 1: question that they're going to have to change their assessment

518
00:29:06,560 --> 00:29:10,400
Speaker 1: of the labor backdrop again, as I think is widely

519
00:29:10,440 --> 00:29:13,240
Speaker 1: appreciated that the third really dinged their assessment in the

520
00:29:13,320 --> 00:29:16,240
Speaker 1: last go around. Uh you know, basically saying job gains

521
00:29:16,240 --> 00:29:19,280
Speaker 1: have diminished, which for the FED is uh, you know,

522
00:29:19,400 --> 00:29:22,120
Speaker 1: sort of colorful language that's gonna have to be totally

523
00:29:22,160 --> 00:29:26,480
Speaker 1: unwound now in the wake of last month's uh Parrell Report,

524
00:29:27,000 --> 00:29:29,920
Speaker 1: which showed that the previous months Paril report really was

525
00:29:29,960 --> 00:29:32,280
Speaker 1: an aberition. So yeah, I think they're going to have

526
00:29:32,360 --> 00:29:34,480
Speaker 1: to turn a bit more positive in that regard the

527
00:29:34,520 --> 00:29:37,840
Speaker 1: wage profile. Uh toma, as you alluded to, it certainly

528
00:29:37,840 --> 00:29:41,720
Speaker 1: remains very constructive overall. And again how do we define

529
00:29:41,760 --> 00:29:45,360
Speaker 1: constructive enough to basically continue to drive consumer spending to

530
00:29:45,440 --> 00:29:48,120
Speaker 1: about a two percent clip. But but again overall net

531
00:29:48,160 --> 00:29:52,040
Speaker 1: net that the labor backdrop remains in a okay shapes. Well,

532
00:29:52,200 --> 00:29:55,360
Speaker 1: the question before the committee today is really, you know,

533
00:29:55,480 --> 00:29:57,840
Speaker 1: with the economic numbers for the most part coming in

534
00:29:57,880 --> 00:30:01,120
Speaker 1: better than expected in jobs up in June, how fast

535
00:30:01,160 --> 00:30:04,760
Speaker 1: does that move the inflation needle? Do you have any

536
00:30:04,800 --> 00:30:07,600
Speaker 1: any intention that is going to go faster? So what

537
00:30:07,640 --> 00:30:09,480
Speaker 1: I would saying, I don't think that it moves the

538
00:30:09,920 --> 00:30:12,800
Speaker 1: sort of the key metrics with that the said looks

539
00:30:12,800 --> 00:30:15,760
Speaker 1: at right, So, uh you know, headline inflation is certainly

540
00:30:15,760 --> 00:30:19,040
Speaker 1: going to remain compressed. That that's obviously an energy story.

541
00:30:19,280 --> 00:30:21,640
Speaker 1: Core measures of inflation have actually had been a tiny

542
00:30:21,680 --> 00:30:24,240
Speaker 1: bit on the perky side, and I stress a tiny

543
00:30:24,240 --> 00:30:26,720
Speaker 1: bit on the perkey side. Uh. You know, we expect

544
00:30:26,760 --> 00:30:29,200
Speaker 1: that will continue to drift towards two percent by by

545
00:30:29,240 --> 00:30:31,400
Speaker 1: the end of the year. Uh. You know, one measure

546
00:30:31,440 --> 00:30:33,520
Speaker 1: of inflation that we'd love to look at, um that

547
00:30:33,520 --> 00:30:36,320
Speaker 1: that's definitely an off the beaten halfway of thinking about

548
00:30:36,600 --> 00:30:41,640
Speaker 1: inflation is core services inflation. UM, Core services inflation we

549
00:30:41,640 --> 00:30:43,840
Speaker 1: we liked, which, by the way, six of the weight

550
00:30:43,880 --> 00:30:45,760
Speaker 1: of inflation. We'd like to look at that because that

551
00:30:45,840 --> 00:30:48,920
Speaker 1: really gives you a really solid sense for UH, you know,

552
00:30:49,000 --> 00:30:56,080
Speaker 1: sort of us UM, you know, internal underlying demands uh

553
00:30:56,120 --> 00:30:57,600
Speaker 1: in the United States. I mean, I think most people

554
00:30:57,640 --> 00:31:01,200
Speaker 1: appreciate we are a service dominated a economy. So what's

555
00:31:01,200 --> 00:31:04,080
Speaker 1: happening in in the core services space I think is

556
00:31:04,080 --> 00:31:08,080
Speaker 1: particularly important. And what we see there is that that metric, again,

557
00:31:08,960 --> 00:31:13,320
Speaker 1: the weight of inflation is running at three. So there

558
00:31:13,400 --> 00:31:15,960
Speaker 1: is inflation out there if you sort of know where

559
00:31:16,000 --> 00:31:17,640
Speaker 1: to look forward. But that's not something that Feed is

560
00:31:17,680 --> 00:31:19,760
Speaker 1: paying attention to, right I mean that they're looking at

561
00:31:19,760 --> 00:31:21,600
Speaker 1: sort of the headline metrics, and we think that those

562
00:31:21,640 --> 00:31:24,040
Speaker 1: will remain decotically on the song and the chart. And

563
00:31:24,040 --> 00:31:26,760
Speaker 1: I'll feature this on Bloomberg Television tomorrow Fox. I'm gonna

564
00:31:26,800 --> 00:31:29,719
Speaker 1: put it out on Bloomberg Radio Plus right now. But

565
00:31:29,720 --> 00:31:31,920
Speaker 1: but tom this is the heart of the matter. The

566
00:31:32,080 --> 00:31:35,720
Speaker 1: many guests we interview who say the FED has all

567
00:31:35,800 --> 00:31:38,880
Speaker 1: the time in the world, they should not raise etcetera.

568
00:31:39,040 --> 00:31:40,840
Speaker 1: And then we've got a guy like you, who's fair

569
00:31:40,880 --> 00:31:43,400
Speaker 1: and balanced. And we've got other people saying, what are

570
00:31:43,400 --> 00:31:47,440
Speaker 1: they waiting for? With undo hysterics, that course services metric

571
00:31:48,000 --> 00:31:51,720
Speaker 1: that all of us are living is centered tendency back

572
00:31:51,800 --> 00:31:56,400
Speaker 1: fifteen years? What are they waiting for? Yeah, I mean

573
00:31:56,520 --> 00:31:58,719
Speaker 1: Tom and you again, You and I talked about this

574
00:31:59,040 --> 00:32:01,480
Speaker 1: many many times. Uh, that that has been our stance.

575
00:32:01,800 --> 00:32:03,120
Speaker 1: You know, if if it was up to us, FED

576
00:32:03,160 --> 00:32:05,840
Speaker 1: funds would be materially higher than they are right now. Right,

577
00:32:05,880 --> 00:32:09,440
Speaker 1: the process probably should have started at least a year ago.

578
00:32:09,840 --> 00:32:11,360
Speaker 1: You know, you should already have a one handle on

579
00:32:11,480 --> 00:32:14,680
Speaker 1: on set funds. We we we would argue, now that's

580
00:32:14,720 --> 00:32:17,000
Speaker 1: in sort of the you know, sort of the old

581
00:32:17,040 --> 00:32:19,800
Speaker 1: way of thinking. Um this and again this is an

582
00:32:19,800 --> 00:32:21,959
Speaker 1: idea that we've written about many times. Now. This is

583
00:32:21,960 --> 00:32:26,240
Speaker 1: not your your classic dual mandate FED, right, you know,

584
00:32:26,240 --> 00:32:29,600
Speaker 1: where inflation are are really the sort of the primary

585
00:32:29,680 --> 00:32:33,160
Speaker 1: drivers of of what they're going to do or not

586
00:32:33,240 --> 00:32:36,720
Speaker 1: do with the policy rate. Instead, this is you know,

587
00:32:36,760 --> 00:32:40,120
Speaker 1: we would submit a triple mandate SEED where the third

588
00:32:40,160 --> 00:32:43,920
Speaker 1: mandate our global developments, and that is really doing most

589
00:32:43,720 --> 00:32:45,880
Speaker 1: of the driving at this point. And so as a result,

590
00:32:46,480 --> 00:32:49,720
Speaker 1: while we think from a fundamental perspective set funds should

591
00:32:49,760 --> 00:32:52,640
Speaker 1: be higher. The practical application of this is if the

592
00:32:52,680 --> 00:32:56,280
Speaker 1: FED is indeed worried about global development and and and

593
00:32:56,680 --> 00:32:59,320
Speaker 1: don't get me wrong, there are certainly things to worry about,

594
00:32:59,600 --> 00:33:01,959
Speaker 1: But if that's going to be their their their primary focused,

595
00:33:02,000 --> 00:33:05,240
Speaker 1: then we can get remains compressed for the foreseeable future

596
00:33:05,320 --> 00:33:07,840
Speaker 1: comper selly with this. RBC Capital Markets a few more

597
00:33:07,880 --> 00:33:12,480
Speaker 1: minutes within this morning. We mentioned durable goods earlier, uh, Tom,

598
00:33:12,520 --> 00:33:15,720
Speaker 1: which goes over to investment. It's a smaller part of

599
00:33:15,720 --> 00:33:20,120
Speaker 1: our economy, but the books tell us it's the it's

600
00:33:20,120 --> 00:33:24,400
Speaker 1: the marginal change. It's the thing that makes cycles happen.

601
00:33:24,800 --> 00:33:30,040
Speaker 1: Where's the vector of investment right now? Yeah, it's rather unfortunate. Uh,

602
00:33:30,200 --> 00:33:34,320
Speaker 1: the last few quarters we've really seen UM actually flat

603
00:33:34,320 --> 00:33:37,760
Speaker 1: out declines from a top X perspective. You know, we

604
00:33:38,040 --> 00:33:40,600
Speaker 1: do think once you get beyond this quarter, you know,

605
00:33:40,600 --> 00:33:43,200
Speaker 1: things we'll we'll sort of bounce from here. But we're

606
00:33:43,200 --> 00:33:45,760
Speaker 1: talking about an extremely marginal bounce. You know, we're just

607
00:33:46,080 --> 00:33:49,560
Speaker 1: looking for a few percentage points from a camp X

608
00:33:49,600 --> 00:33:52,160
Speaker 1: perspective over the second half of a year. So if

609
00:33:52,160 --> 00:33:54,280
Speaker 1: you think about it in terms of it's it's add

610
00:33:54,320 --> 00:33:57,120
Speaker 1: from a growth perspective, even if for a right uh

611
00:33:57,200 --> 00:34:00,440
Speaker 1: and you do get those uh sort of a three

612
00:34:00,480 --> 00:34:03,440
Speaker 1: percent gain in the second half, so the full year

613
00:34:03,520 --> 00:34:08,160
Speaker 1: CAPEX would actually be uh net neutral from a GDP perspective.

614
00:34:08,239 --> 00:34:10,640
Speaker 1: So we're not really looking for much in the way

615
00:34:10,680 --> 00:34:12,560
Speaker 1: of CAPEX. I mean, if you want to hang your

616
00:34:12,600 --> 00:34:15,080
Speaker 1: hat on something positive, you know, you can look at

617
00:34:15,080 --> 00:34:17,879
Speaker 1: I some new orders. Uh you know, it's it's been

618
00:34:17,920 --> 00:34:20,920
Speaker 1: performing pretty well. We obviously went through a soft patch

619
00:34:21,520 --> 00:34:24,200
Speaker 1: in the early part of the year even sort of

620
00:34:24,200 --> 00:34:27,040
Speaker 1: into the end of last year. Since that point, though,

621
00:34:27,040 --> 00:34:31,560
Speaker 1: it's really been hovering in in pretty expansionary territory. So

622
00:34:31,640 --> 00:34:33,719
Speaker 1: it does suggest that we're right to think you're going

623
00:34:33,760 --> 00:34:36,840
Speaker 1: to see some acceleration in in H two. But the

624
00:34:36,880 --> 00:34:39,200
Speaker 1: reality is it's this is not a sector that you

625
00:34:39,239 --> 00:34:42,239
Speaker 1: can actually expect to see much in the way of

626
00:34:42,800 --> 00:34:44,880
Speaker 1: bang for the book. We think it's going to remain

627
00:34:45,040 --> 00:34:48,360
Speaker 1: pretty suppressed. We get t DP on Friday and we

628
00:34:48,440 --> 00:34:51,600
Speaker 1: get revisions for the past three years. Last year, growth

629
00:34:51,719 --> 00:34:55,160
Speaker 1: for the preceding three years revised down a little bit.

630
00:34:55,360 --> 00:34:57,840
Speaker 1: How bad is the seasonal problem and how much of

631
00:34:57,840 --> 00:35:01,200
Speaker 1: what may be going on with CAPEX is is and

632
00:35:01,200 --> 00:35:04,960
Speaker 1: and the ups and downs of growth in this economy

633
00:35:04,960 --> 00:35:07,680
Speaker 1: have related to that. I don't think anyone should debute

634
00:35:07,680 --> 00:35:10,160
Speaker 1: themselves at this point, right, I mean, most people have

635
00:35:10,239 --> 00:35:13,360
Speaker 1: acknowledged that there is some seasonal adjustment problem, particularly in

636
00:35:13,360 --> 00:35:15,680
Speaker 1: the first quarter of the year. You know, Q one

637
00:35:15,800 --> 00:35:20,800
Speaker 1: was one percent UH. This year has been exceedingly weak

638
00:35:21,040 --> 00:35:23,640
Speaker 1: really every single first quarter for the last several years,

639
00:35:23,840 --> 00:35:27,319
Speaker 1: So there is some seasonal adjustment problem. Um. But but

640
00:35:27,360 --> 00:35:29,480
Speaker 1: again that at that point, and by the way that

641
00:35:29,560 --> 00:35:31,799
Speaker 1: the set has acknowledged this, the B E A, which

642
00:35:31,840 --> 00:35:33,759
Speaker 1: are the folks that pull that report together, they have

643
00:35:33,840 --> 00:35:36,880
Speaker 1: acknowledged this. But the best way we think to really

644
00:35:36,960 --> 00:35:41,280
Speaker 1: understand what the trajectory is from an underlying economic perspective

645
00:35:41,320 --> 00:35:44,520
Speaker 1: is to simply look at consumer spending UM and consumer spending,

646
00:35:44,560 --> 00:35:47,319
Speaker 1: particularly with regard to the fundamentals that we highlighted in

647
00:35:47,360 --> 00:35:50,319
Speaker 1: the first segment, right, Wages remain, you know, fairly constructive.

648
00:35:50,560 --> 00:35:53,440
Speaker 1: Job growth we think will continue to push ahead, although

649
00:35:53,480 --> 00:35:57,799
Speaker 1: certainly gains are slowing there. Generally speaking, UM, fundamentals in

650
00:35:57,800 --> 00:36:01,160
Speaker 1: the consumer stags remain pretty sounds So if it's true,

651
00:36:01,480 --> 00:36:03,360
Speaker 1: UM that that's a fair way of thinking about it,

652
00:36:03,400 --> 00:36:05,120
Speaker 1: and we certainly think it is. Since the consumer makes

653
00:36:05,160 --> 00:36:08,359
Speaker 1: up about output. Uh, then you know you're looking at

654
00:36:08,440 --> 00:36:10,400
Speaker 1: a two to two and a half percent economy. And

655
00:36:10,400 --> 00:36:12,680
Speaker 1: and by the way, um, and Tom knows as well,

656
00:36:12,960 --> 00:36:14,879
Speaker 1: I've been talking to him about this for years now

657
00:36:14,960 --> 00:36:16,880
Speaker 1: that that's pretty much what we've been saying for a

658
00:36:16,920 --> 00:36:19,600
Speaker 1: really long time now. So nothing has changed with regard

659
00:36:19,680 --> 00:36:23,920
Speaker 1: to overall US economic fundamentals. UM, I would I would

660
00:36:23,960 --> 00:36:26,959
Speaker 1: caution um that in the years to calm, growth rates

661
00:36:27,000 --> 00:36:29,520
Speaker 1: are absolutely going to be slowing down. And that's the

662
00:36:29,560 --> 00:36:31,759
Speaker 1: demographic problem, which you know, we probably don't have enough

663
00:36:31,800 --> 00:36:33,680
Speaker 1: time to talk about at that point. The fact we don't.

664
00:36:33,800 --> 00:36:35,480
Speaker 1: We have one more question. We gotta let you go

665
00:36:35,520 --> 00:36:40,319
Speaker 1: to your RBC Capital Day. I'm sorry, it's too America's

666
00:36:40,520 --> 00:36:43,440
Speaker 1: is all we're talking about, Tom Percelli is cherry yelling

667
00:36:44,000 --> 00:36:47,879
Speaker 1: has to manage a bank for the politics of two

668
00:36:47,880 --> 00:36:52,560
Speaker 1: America's rather than what the aggregate good numbers say. Yeah,

669
00:36:52,600 --> 00:36:55,000
Speaker 1: and you know, if that's true, that's a really unfortunate

670
00:36:55,120 --> 00:36:58,440
Speaker 1: set of circumstances for for the set up. Look, Bernacki

671
00:36:58,560 --> 00:37:00,840
Speaker 1: was pretty clear in this right. He basically saying that

672
00:37:00,960 --> 00:37:03,600
Speaker 1: one of the reasons why the set and I'm paraphrasing here,

673
00:37:03,640 --> 00:37:05,440
Speaker 1: of course, but he basically so one of the reasons

674
00:37:05,440 --> 00:37:08,480
Speaker 1: why we're keeping rates so low is basically because fiscal

675
00:37:08,480 --> 00:37:11,360
Speaker 1: policy is offline UM. And and I do think the

676
00:37:11,400 --> 00:37:14,239
Speaker 1: band is absolutely something that has weighed on this set,

677
00:37:14,320 --> 00:37:16,480
Speaker 1: and that's been true for for a number of years now.

678
00:37:17,080 --> 00:37:19,680
Speaker 1: And I think that's just one of the unfortunate set

679
00:37:19,719 --> 00:37:22,920
Speaker 1: of circumstances, uh that that you can sort of pinpoint

680
00:37:22,920 --> 00:37:25,439
Speaker 1: coming out of Washington. Tom, Thank you so much, Tom

681
00:37:25,440 --> 00:37:40,400
Speaker 1: for sally with capital. Marcus Walter Pisk joins us Michael B.

682
00:37:40,520 --> 00:37:44,720
Speaker 1: T i G on Apple Walter, I have never seen

683
00:37:46,000 --> 00:37:50,880
Speaker 1: the disparity between media articles and sell side like I

684
00:37:50,920 --> 00:37:55,000
Speaker 1: saw yesterday afternoon and into the morning on Apple Inc.

685
00:37:55,320 --> 00:37:58,680
Speaker 1: I believe it used to be called Apple Computer. The

686
00:37:58,880 --> 00:38:04,239
Speaker 1: articles are not woe is Me, but paragraph after paragraph

687
00:38:04,440 --> 00:38:08,440
Speaker 1: of dynamics that cause great concern, and most of the

688
00:38:08,480 --> 00:38:10,720
Speaker 1: cell side is saying, shut up and buy the shares.

689
00:38:10,920 --> 00:38:14,000
Speaker 1: Why is that the disparity exists? I mean, let that

690
00:38:14,080 --> 00:38:17,160
Speaker 1: disparity happen in prior quarters, when you know they were

691
00:38:17,200 --> 00:38:21,440
Speaker 1: growing um and putting up good overall growth and everyone

692
00:38:21,440 --> 00:38:23,200
Speaker 1: in the press would say, oh, these things are great.

693
00:38:23,200 --> 00:38:25,080
Speaker 1: But it's you know, as you know, the markets about

694
00:38:25,120 --> 00:38:28,360
Speaker 1: forward looking and and whether the company was heading into

695
00:38:28,960 --> 00:38:31,600
Speaker 1: a decline in earnings or revenue or growth. And I

696
00:38:31,640 --> 00:38:35,800
Speaker 1: think the issue now is you have a difficult June

697
00:38:35,840 --> 00:38:39,439
Speaker 1: quarter behind UM, you have clarity on the September chord

698
00:38:39,520 --> 00:38:42,800
Speaker 1: based quarter based on the guide, so you can stop

699
00:38:42,880 --> 00:38:46,600
Speaker 1: worrying about these kind of trough quarters UM and start

700
00:38:46,680 --> 00:38:49,520
Speaker 1: thinking about some of the products that could return the

701
00:38:49,520 --> 00:38:51,400
Speaker 1: company to growth. And that's what's going to make the

702
00:38:51,400 --> 00:38:53,960
Speaker 1: stock no matter how much it's up today, what's really

703
00:38:53,960 --> 00:38:56,680
Speaker 1: going to make the stock work or not work going

704
00:38:56,760 --> 00:38:58,880
Speaker 1: forward is if they can return to growth in that

705
00:38:58,920 --> 00:39:02,160
Speaker 1: December quarter. That's largely driven by what this new product

706
00:39:02,200 --> 00:39:05,279
Speaker 1: is gonna look like and what other products they can

707
00:39:05,320 --> 00:39:08,239
Speaker 1: come up with with this massive, ar massive R and

708
00:39:08,280 --> 00:39:11,520
Speaker 1: D budget, right, I mean, they're spending ten billion dollars

709
00:39:11,520 --> 00:39:14,680
Speaker 1: a year now, that's a that's a double UM from

710
00:39:14,680 --> 00:39:16,719
Speaker 1: what they were spending only three years ago. It's six

711
00:39:16,760 --> 00:39:20,400
Speaker 1: percent of the revenue, a new a new record level

712
00:39:20,440 --> 00:39:23,480
Speaker 1: of R and D investment. So you would hope that

713
00:39:23,480 --> 00:39:26,160
Speaker 1: if they're spending that amount of money, UM, they've got

714
00:39:26,160 --> 00:39:29,440
Speaker 1: some other products that UM that they haven't yet announced

715
00:39:29,520 --> 00:39:32,839
Speaker 1: or launched that should hit the help with revenue. Well,

716
00:39:32,840 --> 00:39:35,080
Speaker 1: that's what everybody keeps expecting, though they've been saying that

717
00:39:35,200 --> 00:39:38,040
Speaker 1: for years and years, and analysts have been expecting something

718
00:39:38,080 --> 00:39:40,160
Speaker 1: for years and years, and other than the Apple Watch,

719
00:39:40,239 --> 00:39:44,080
Speaker 1: we haven't gotten anything. Is there any any reason to

720
00:39:44,080 --> 00:39:47,839
Speaker 1: believe that any new product is coming soon? I think

721
00:39:47,880 --> 00:39:49,920
Speaker 1: you're right to be skeptical, which is why the stock

722
00:39:49,960 --> 00:39:52,960
Speaker 1: has been down and where the valuation is where it is.

723
00:39:53,040 --> 00:39:55,880
Speaker 1: And you're right. I mean, the one new product undercooked

724
00:39:55,880 --> 00:39:58,160
Speaker 1: it that's come out is a watch, and even though

725
00:39:58,160 --> 00:40:00,880
Speaker 1: it did generate or has been generating millions of revenue

726
00:40:00,880 --> 00:40:04,600
Speaker 1: and profit, UM, it's perceived as a disappointment. But UM

727
00:40:05,080 --> 00:40:09,239
Speaker 1: again that came even before UM the the R and

728
00:40:09,320 --> 00:40:11,600
Speaker 1: D ramped up to these levels. So and there's a

729
00:40:11,600 --> 00:40:13,799
Speaker 1: lot of pain points that exist in our life, right,

730
00:40:13,840 --> 00:40:16,040
Speaker 1: I mean the car and some of the technology that's

731
00:40:16,040 --> 00:40:18,200
Speaker 1: in the cars is kind of dated relative to what

732
00:40:18,239 --> 00:40:20,759
Speaker 1: we carry around in our hands every day. UM, your

733
00:40:20,800 --> 00:40:22,799
Speaker 1: living room, as far as these set top boxes, which

734
00:40:22,800 --> 00:40:25,040
Speaker 1: are terrible, As far as discovery and how and how

735
00:40:25,080 --> 00:40:27,600
Speaker 1: as Rich Greenfield will talk about, people are changing and

736
00:40:27,600 --> 00:40:30,719
Speaker 1: how they how they view UM, I view content. So

737
00:40:30,719 --> 00:40:34,600
Speaker 1: there's plenty of opportunities, there's lots of investment, and now

738
00:40:34,600 --> 00:40:36,759
Speaker 1: we just have to wait for something to actually get

739
00:40:36,800 --> 00:40:39,759
Speaker 1: delivered to us. Well raise an interesting point when you

740
00:40:39,760 --> 00:40:42,759
Speaker 1: talk about the cars, and it gets to the psychology

741
00:40:42,800 --> 00:40:45,080
Speaker 1: of investing in Apple. This has been a stock people

742
00:40:45,160 --> 00:40:48,760
Speaker 1: invest in quarter to quarter and based on the sales

743
00:40:49,800 --> 00:40:53,839
Speaker 1: reports for the various products, particularly the iPhone, do you

744
00:40:53,920 --> 00:40:58,640
Speaker 1: start thinking about Apple as a long term value investment

745
00:40:58,719 --> 00:41:02,160
Speaker 1: that you just buy and hold because you expect in

746
00:41:02,160 --> 00:41:03,839
Speaker 1: a couple of years they're going to have some sort

747
00:41:03,840 --> 00:41:06,239
Speaker 1: of automotive product that will blow the doors off to

748
00:41:06,800 --> 00:41:10,600
Speaker 1: That makes the metaphor absolutely not. I mean, you know,

749
00:41:10,640 --> 00:41:14,200
Speaker 1: I've lived through Motorola, I've lived through Nokia, I've lived

750
00:41:14,200 --> 00:41:17,480
Speaker 1: through Loose and I mean there's no long term and

751
00:41:17,560 --> 00:41:21,440
Speaker 1: tech right. Things change, different companies emerge. They're in a

752
00:41:21,560 --> 00:41:24,320
Speaker 1: very strong position as far as not only the brand

753
00:41:24,320 --> 00:41:26,640
Speaker 1: but the products that they're delivering in the market. They're spending,

754
00:41:27,200 --> 00:41:29,800
Speaker 1: but it's a it's a fair point that you're making,

755
00:41:29,840 --> 00:41:33,000
Speaker 1: which is they has to have to actually deliver something

756
00:41:33,040 --> 00:41:34,880
Speaker 1: into the market. So what we have today with the

757
00:41:34,920 --> 00:41:38,240
Speaker 1: stock up whatever percentage is going to be up is okay,

758
00:41:38,280 --> 00:41:41,640
Speaker 1: we feel we have more time. Right, this quarter was okay,

759
00:41:41,719 --> 00:41:43,759
Speaker 1: we don't have to panic yet. Next quarter of the

760
00:41:43,760 --> 00:41:46,759
Speaker 1: guidance looks like it's okay. You know, maybe that the

761
00:41:46,800 --> 00:41:50,480
Speaker 1: iPhone seven, based on upgrade rates can give us some

762
00:41:50,680 --> 00:41:53,640
Speaker 1: minimal level of growth. So the company has effectively bought

763
00:41:53,680 --> 00:41:56,960
Speaker 1: time with investors to put that ten billion a year

764
00:41:57,000 --> 00:41:59,880
Speaker 1: of of R and D investment um to could use

765
00:41:59,880 --> 00:42:02,080
Speaker 1: to deliver projects in the market. But again, look, I

766
00:42:02,120 --> 00:42:04,560
Speaker 1: remember back in the nineties, Loocent would talk about spending

767
00:42:04,560 --> 00:42:06,480
Speaker 1: one percent other R and D on these lead projects,

768
00:42:06,480 --> 00:42:09,000
Speaker 1: and and they would try and come with products in

769
00:42:09,040 --> 00:42:13,080
Speaker 1: the market that that never ultimately resonated with their their customers.

770
00:42:13,080 --> 00:42:15,200
Speaker 1: So it's certainly a risk, but one that I think

771
00:42:15,280 --> 00:42:18,080
Speaker 1: is is discounted in the stock today. Yeah, I look

772
00:42:18,160 --> 00:42:23,080
Speaker 1: Walter Apple and the evaluation, and I go back to

773
00:42:23,400 --> 00:42:25,920
Speaker 1: I just have to go back to use of cash.

774
00:42:26,280 --> 00:42:29,120
Speaker 1: Is this a company still in transition to a blue

775
00:42:29,160 --> 00:42:32,800
Speaker 1: chip ethos or is it just the fortunate tech company

776
00:42:32,880 --> 00:42:36,560
Speaker 1: with a quarter of a trillion dollars of cash laying around.

777
00:42:37,880 --> 00:42:44,200
Speaker 1: It's been a you know whatever eight year fortune. I guess, right,

778
00:42:44,320 --> 00:42:47,279
Speaker 1: And look the gross margins on this thing are phenomenal

779
00:42:47,320 --> 00:42:51,360
Speaker 1: and they appeal to wealthy consumers around the world. This

780
00:42:51,440 --> 00:42:53,560
Speaker 1: is not a broad market product if there was a

781
00:42:53,640 --> 00:42:55,920
Speaker 1: change to put the gross margins at risk. But you

782
00:42:55,960 --> 00:42:59,160
Speaker 1: basically have people that can afford iPhones and how often

783
00:42:59,160 --> 00:43:01,319
Speaker 1: they're gonna upgrade them. That's going to sustain this free

784
00:43:01,320 --> 00:43:04,520
Speaker 1: cash flow. Now they're spending They spent ten billion dollars

785
00:43:04,520 --> 00:43:06,239
Speaker 1: on a Sherry purchase during the courter that was up

786
00:43:06,239 --> 00:43:09,759
Speaker 1: from seven last quarter. So there that's helping with with

787
00:43:09,840 --> 00:43:12,560
Speaker 1: to deliver earnings growth, which would help valuation. But it's

788
00:43:12,560 --> 00:43:14,640
Speaker 1: not like they're not looking for other areas of growth.

789
00:43:14,680 --> 00:43:17,319
Speaker 1: Like I said, they're also spending ten billion per year

790
00:43:17,880 --> 00:43:20,120
Speaker 1: on R and D. Now some would argue that they

791
00:43:20,160 --> 00:43:22,840
Speaker 1: should be more aggressive in acquisitions and that can help

792
00:43:22,560 --> 00:43:26,239
Speaker 1: to launch them um into new product categories. They do

793
00:43:26,320 --> 00:43:29,000
Speaker 1: a couple of quarters. They're they're relatively small, you know,

794
00:43:29,080 --> 00:43:30,960
Speaker 1: so that could be a different area where they use

795
00:43:31,040 --> 00:43:34,439
Speaker 1: that large cash balance um that they have to make

796
00:43:34,520 --> 00:43:39,840
Speaker 1: one of these acquisitions. Wait, we wait, Walter. Thank you

797
00:43:39,880 --> 00:43:44,279
Speaker 1: so much, Walter P with bt I G. Thanks for

798
00:43:44,360 --> 00:43:48,719
Speaker 1: listening to the Bloomberg Surveillance Podcast. Subscribe and listen to

799
00:43:48,840 --> 00:43:54,000
Speaker 1: interviews on iTunes, SoundCloud, or whichever podcast platform you prefer.

800
00:43:54,600 --> 00:43:59,120
Speaker 1: I'm on Twitter at Tom Keane, Michael McKee is at Economy.

801
00:43:59,200 --> 00:44:02,440
Speaker 1: Before the pod casts, you can always catch us worldwide.

802
00:44:02,800 --> 00:44:11,160
Speaker 1: I'm Bloomberg Radio h