Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jay Ley.
Speaker 1: We bring you insight from the best in economics, finance, investment,
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Speaker 1: risk joining us here in New York's to take us
Speaker 1: research chief economists, Good Morney to It's on Good Morning.
Speaker 1: Can we begin with the headline out of Germany? Why
Speaker 1: do we have to wait for the crisis? Why do
Speaker 1: we have to wait for the recession for them to
Speaker 1: loosen the past race? Oh, it's an excellent, excellent question,
Speaker 1: and so the answer is we shouldn't have to, but
Speaker 1: there have been political reasons in the past that have
Speaker 1: meant we have not been preemptive globally. So I think
Speaker 1: the issue here is now you have the Bundesbank and
Speaker 1: others saying we may be getting to some sort of
Speaker 1: racist doesn't have to be as bad as the last crisis.
Speaker 1: But that's what I think is being used to justify
Speaker 1: that this time could be different. There's enough intellectual support,
Speaker 1: there's enough academic support for some sort of spending fiscal
Speaker 1: policy is clearly the right answer in a world where
Speaker 1: monetary policy looks exhausted. And I'd say if you look
Speaker 1: at the amount of negative yielding debt in the world,
Speaker 1: monetary policy is looking exhausted. Yeah, looking at the German
Speaker 1: tenual negative point six three and nine percent, So we've
Speaker 1: seen that for a long period of time, don I mean?
Speaker 1: So if I'm Germany, am I to what extent am
Speaker 1: I discounting a hard brexit at this point, because it
Speaker 1: seems like some of the rhetor are coming out of
Speaker 1: the UK is that is still very much on the table. Yeah,
Speaker 1: and certainly that has to be part of any contingency plan.
Speaker 1: So if you're thinking about what could cause a crisis
Speaker 1: that's just a few months away here, Even if it's
Speaker 1: not the hard breaks that you're seeing a slowdown in
Speaker 1: the economy that's been affected by some of the uncertainty
Speaker 1: created by it, and that's impacted investment, and that's filtered
Speaker 1: through to the European economy. So hard or not, I
Speaker 1: think you're discounting some of those drags, whether they're coming
Speaker 1: from the UK side or the China side, which is
Speaker 1: a whole other story. The mood of the markets is
Speaker 1: better this morning, but overwhelmingly, i'd say over the last
Speaker 1: couple of months, investors, economists desperately looking searching for a
Speaker 1: policy anchor. We have had a policy anchor throughout this
Speaker 1: whole expansion over the last ten years, whether it was
Speaker 1: the federal reserve, whether it was China and it's spending
Speaker 1: in a stimulus package, or whether it was the tax
Speaker 1: cuts of a couple of years ago. Where does that
Speaker 1: policy anchor come from now, because quite clearly Chairman Powell
Speaker 1: is struggling to be that guy, struggling to distinguish what
Speaker 1: that policy actually is. Yeah, so that's an important point
Speaker 1: that markets like normal distributions, they're like a central tendency
Speaker 1: with tail outcomes there aren't all that likely. And in
Speaker 1: the world today we have some things that look not normal.
Speaker 1: Whether it's Brexit where you could have a variety of
Speaker 1: tail outcomes, whether it's what's going on in Hong Kong
Speaker 1: where there could be tail outcomes that are quite different.
Speaker 1: It's hard to find what the central tendency is, and
Speaker 1: unfortunately it may come back to central banks at least
Speaker 1: in the near term. Fiscal policy can be an important tool,
Speaker 1: but it's going to take time. Even in the German case,
Speaker 1: monetary policy has to be the anchor, and that's the
Speaker 1: worry right now for a lot of paoples to whether
Speaker 1: that can actually work. The thing that Jackson home is
Speaker 1: Friday the challenges of monetary policy, the current dynamic globally,
Speaker 1: the issues we have in this global economy, that is
Speaker 1: the ultimate challenge for monety policy. Can they really address
Speaker 1: it with monetary policy? So maybe we have to define
Speaker 1: what we mean by work here, and so I do
Speaker 1: think monetary policy could take care of an inverted yield curve.
Speaker 1: I think that is within the control of monetary policy.
Speaker 1: Are we going to cut interest rates and have lower
Speaker 1: interest rates spur investment? That's much less clear. It's not
Speaker 1: clear that the problem there is the interest rate. It's
Speaker 1: the amount of uncertainty that's inhibiting CEOs and CFOs from
Speaker 1: making some of the decisions they would otherwise make. So
Speaker 1: I think monetary policy has a role. I think monetary
Speaker 1: policy in particular with an inverted yield curve that's starting
Speaker 1: to come out of that position on the assumption that
Speaker 1: monetary policy could work, has a role, but monterrey policy
Speaker 1: can't do it all. So don I mean coming out
Speaker 1: of or going into Jackson Hole on Friday. What time
Speaker 1: of language do you think we're gonna get from Chairman Pal.
Speaker 1: I think most of market participants are thinking about the
Speaker 1: next meeting will be basis points, perhaps fifty basis points,
Speaker 1: given some of the uncertainty that we've seen just in
Speaker 1: the last couple of weeks. I guess in the market place,
Speaker 1: what kind of language and body language more important do
Speaker 1: you think we're gonna get from Chairman Pal? So I
Speaker 1: think the market would love to see something that would,
Speaker 1: uh make a fifty basis point cut the right answer,
Speaker 1: But I don't think we're gonna get that. I don't
Speaker 1: think the FED wants to guide towards a fifty basis
Speaker 1: point cut here. That's an emergency move and we don't
Speaker 1: have the financial crisis right now that would justify that
Speaker 1: maybe in the future, but not right now. So I
Speaker 1: think they want to be vigilant, but I don't think
Speaker 1: the language is going to be a whatever it takes
Speaker 1: type of outcome here. Outside of Chairman how we haven't
Speaker 1: heard very much from the governors and the board around him.
Speaker 1: Don do you think there is a disagreement on the
Speaker 1: f WEBC that has been covering up over the last
Speaker 1: couple of weeks, we haven't heard much from the key
Speaker 1: players at the Federal Reserve. What do you think the
Speaker 1: reason is for that? So there has been disagreement, and
Speaker 1: we had two descents on the last vote. Usually the
Speaker 1: disagreement happens within the regions, So the regional Fed presidents
Speaker 1: who could say, in my district things look one way
Speaker 1: or another, would come in, fly in for the meeting
Speaker 1: and vote a certain way, maybe descent on. We got
Speaker 1: that from the Boston Fed President Eric rosen Gren, who
Speaker 1: incidentally will be speaking of Bloomberg later on the southfternoon,
Speaker 1: but carry on, dump plays right, Yeah, So that happens
Speaker 1: from time to time. Often the vote is unanimous, but
Speaker 1: not always, and so one or two descents is something
Speaker 1: that happens. But those descents usually come from the regional
Speaker 1: Fed folks, the group that all sit next to each
Speaker 1: other in Washington, d C. The Board of Governors very
Speaker 1: rarely descent and I think it's because the talk over
Speaker 1: some of their differences being in the same physical location.
Speaker 1: I do think that that matters and that lets the
Speaker 1: chair guide uh the committee. So I do think there
Speaker 1: is some uncertainty depending on whether you look at the
Speaker 1: economic indicators, the typical numbers like jobs and consumer spending,
Speaker 1: or whether you look at financial market indicators like the
Speaker 1: Yel curve, and that tension I think is what's driving
Speaker 1: some of this disagreement. So, Tom, where do you stand
Speaker 1: in terms of outlook for a recession in the next
Speaker 1: twelve to eighteen months in the US? Because is John
Speaker 1: let Off the show? I mean, you know, we look
Speaker 1: look at Europe weaker maybe perhaps then expected, China slowing.
Speaker 1: How do you kind of view the U s economy
Speaker 1: going into so with the Oel curve inverted, we thought
Speaker 1: of it like you're holding your breath. You could do
Speaker 1: this for a little while, and so you inverted curve,
Speaker 1: especially when we look at the three months to ten
Speaker 1: year versus the two year to ten year is telling
Speaker 1: us that there needs to be some policy action. The
Speaker 1: Fed should cut interest rates. But if they cut interest rates,
Speaker 1: we don't have to have a recession. So the fact
Speaker 1: that we're holding our breath here means we could come
Speaker 1: up for air. That's a higher chance over session. That's
Speaker 1: a little more dangerous than average. But I don't think
Speaker 1: recession is the base case, given that the consumer still
Speaker 1: looks to be in good Chiape. They don't great to
Speaker 1: catch up with you, Don Rismuller, their strategous research chief
Speaker 1: economists have a key week for the Federal Reserve. According
Speaker 1: to two people with direct knowledge of the matter, the
Speaker 1: German government is getting ready to act to shore up
Speaker 1: the economy by preparing a fiscal stimulus package that could
Speaker 1: be triggered by drum roll a deep recession, Class fistess
Speaker 1: and joining us now pantheon macroeconomics chief Eurozone economist. Class
Speaker 1: always love to get your insight. Why why why do
Speaker 1: we have to wait for a deep recession to do
Speaker 1: fiscal stimulus in Germany? Yeah, that's that's it is very German.
Speaker 1: I do think that what's happening now though, is that
Speaker 1: we're seeing kind of a sequence by which it's very
Speaker 1: like that Germany is in a texical recession. We don't
Speaker 1: know yet, but it's very like that's going to happen.
Speaker 1: And now then what we're seeing is is UM. It's
Speaker 1: slow movement towards UM, towards fiscal stimulus. I mean, the
Speaker 1: answer to your question is simply that the things that
Speaker 1: normally trigger fiscal stimulus in sort of a normal uh,
Speaker 1: sort of a normal economic context is the labor market.
Speaker 1: The labor market is like a ndicator. So if Germany
Speaker 1: is now in a technical recession and where growth has
Speaker 1: been slowing for since from the last for the last
Speaker 1: six and nine months, I mean, it takes it takes
Speaker 1: a while before the labor market starts to starts show
Speaker 1: show showing the fact of that. And this is exactly
Speaker 1: what we're probably going to see in the next six
Speaker 1: or twelve months. So that's when you'll see the fiscal
Speaker 1: stimulus kick in. But just to get the dates, I mean,
Speaker 1: what we're hearing here now is going to affect the
Speaker 1: two thousand and twenty budgets probably right, this is pretty
Speaker 1: much as quick as they can do it. I think so,
Speaker 1: class I agree with you, and I think many people
Speaker 1: were the optics of this are encouraging. The fact that
Speaker 1: the German government is even having the conversation is encouraging
Speaker 1: and perhaps build some optimism. But let's just be a
Speaker 1: little bit clear on what do you think this is
Speaker 1: contingent on at the moment? Are reporting and suggesting it
Speaker 1: will be triggered by deep recession? Are you saying it
Speaker 1: could be triggered by something a whole lot less severe
Speaker 1: than that. Yeah, I mean I don't I mean, I
Speaker 1: don't put a lot of emphasis on on this that
Speaker 1: atteitive deep recession. I mean, fact that matter is Germany
Speaker 1: has had zero growth into the middle of last year.
Speaker 1: It's probably the technical recession. Now we don't really know.
Speaker 1: The labor market is already starting to suffer a little
Speaker 1: bit and probably will suffer more going forward, and that
Speaker 1: will probably enough for Germany to do something. But just
Speaker 1: to put some numbers on this, one number that's been
Speaker 1: bandied around is the sort of billions or sixty of stimulus.
Speaker 1: We don't really know what that's supposed to do, but
Speaker 1: that's super sanity t P, which would mean that Germany
Speaker 1: would go from from a surplus to balanced by right. So,
Speaker 1: I mean, the numbers we've seen so far is still
Speaker 1: fairly modest in terms of sort of where we are now.
Speaker 1: So class just give us a sense some background of
Speaker 1: kind of what's been happening in the German economy over
Speaker 1: the last eighteen months in terms of manufacturing and the consumer.
Speaker 1: What's kind of tilting the German government to think about
Speaker 1: this type of stimulus. Well, but then then this is
Speaker 1: one of the issues for the German government because the
Speaker 1: domestic economy has actually held up all right, which is
Speaker 1: to say, the consumer has has been doing okay. The
Speaker 1: construction sector up until very recently has been doing okay,
Speaker 1: although I think that's rolling over now. But it's been
Speaker 1: all manufacturing and net experts and in some sense, if
Speaker 1: you are an expert oriented economy, and Germany is probably
Speaker 1: the world's most export oriented economy, and you get a
Speaker 1: hit to the expert for um and to to external
Speaker 1: demand while you're at full employment um and and so
Speaker 1: you so the government's ability to to come out quickly
Speaker 1: with with a fiscal stimulus program to to counteract that
Speaker 1: is not um um is limited a little bit. Also,
Speaker 1: if you look at a sort of economic orthodopcy in
Speaker 1: Germany is that you know, this is why a lot
Speaker 1: of German politicians have been telling as well, you know,
Speaker 1: there's not much we can do. We just have to
Speaker 1: write this out. Although again to to to this conversation
Speaker 1: we're having here, I do think that's changing. But yeah,
Speaker 1: net exports manufacturing are the two areas where Germany has
Speaker 1: really suffered in the last six and nine months. Solus.
Speaker 1: It just give us a sense of that fifty five
Speaker 1: billion dollar number two extent that that's somewhat accurate, just
Speaker 1: gives a sense of what you think that could do
Speaker 1: to the economy over the next couple of years, how
Speaker 1: helpful it could be, how stimulative it could be. Yeah,
Speaker 1: So the fifty five billion number that's banding around, I
Speaker 1: have to assume that's that's going to be sort of
Speaker 1: a standard changing stop gap in terms of sort of
Speaker 1: tax cards, things that that work immediately, right, because I
Speaker 1: think there are two stories here. There are things that
Speaker 1: Germany can do in the short run that that would
Speaker 1: work very quickly in terms of getting growth up um
Speaker 1: sort of that tax cards for the for the lows
Speaker 1: middle in come, perhaps an increase in social chance. Also,
Speaker 1: remember Germany has very strong automatic stabilizes that kicking if
Speaker 1: job job jobless clam starts to increase it, that will
Speaker 1: also shield the German economy a little bit. But that's
Speaker 1: not what we're really talking about. If you look at
Speaker 1: the story in general of the idea, is that Germany
Speaker 1: is supposed to, you know, do this multi year infrastructure
Speaker 1: spending in in its in its auto bonds or whatever.
Speaker 1: It's it's it's it's broadbands or like climate change or
Speaker 1: more defense. I mean, that's great, but I mean you're
Speaker 1: not gonna see me or any other years on FOECAST
Speaker 1: has moved the needle on on our economic forecast. Is
Speaker 1: that because that takes I mean that takes a long
Speaker 1: time to come through. So there are kind of two
Speaker 1: stories here. And one thing I'll say is obviously that
Speaker 1: the bund market is really trading this now, which I
Speaker 1: think is really fascinating in some sense given where budd
Speaker 1: deals are now. I think, you know, more fiscal talk
Speaker 1: can really unsettled that market. But you know, markets will
Speaker 1: be disappointed with whatever Germany does because markets now expect
Speaker 1: a lot. I think in terms of want a lot,
Speaker 1: there's a there's a normative narrative here that Germany really
Speaker 1: to do a lot, and I think that, well, it
Speaker 1: might be difficult for them to to to fulfill those expectations.
Speaker 1: Class we've got to talk about how you define success
Speaker 1: as well. Morgan Stanleys Russia's Shama running in the New
Speaker 1: York Times over the weekend a really interesting article about
Speaker 1: some of the challenges the global economy faces, including Germany,
Speaker 1: an economy a country that faces a shrinking labor force
Speaker 1: and Russia. Schama running the following the forty six countries
Speaker 1: around the world, including major pass like Japan, Russia, and
Speaker 1: China now have shrinking populations. And with that in mind,
Speaker 1: class whether we can just look at GDP figures, inflation
Speaker 1: figures and decide whether a country is failing or succeeding,
Speaker 1: whether we need to redefine the metrics that we use
Speaker 1: to define success and failure. Claus, does that resonate with you, No, hope,
Speaker 1: So I mean preach. I mean that this is this
Speaker 1: is the main story for me, and I think that
Speaker 1: there are kind of to two elements of this story.
Speaker 1: One is that that that element of the story, which
Speaker 1: I think is completely turned in in the Eurozone now,
Speaker 1: train growth is probably in the structural in a structural
Speaker 1: decline because the working age population is not it's not
Speaker 1: rising anymore. But you still have a central bank that
Speaker 1: is to shooing the same inflation targeted as it was
Speaker 1: ten fifteen years ago. This is the same thing in Japan.
Speaker 1: They're not reaching it, so therefore they reach for net
Speaker 1: more and more, negative interest rates more and more. QUI
Speaker 1: creates a lot of access liquidity flows out into the
Speaker 1: global economy and and and and that you know, and
Speaker 1: then now you have politicians in the US, especially Trump,
Speaker 1: you are very grumpy about trade death certain and trading balances.
Speaker 1: And oddly enough, we are now moving towards a situation
Speaker 1: where it seems like we're more likely to double down, right,
Speaker 1: We're more likely to double down with even more steams,
Speaker 1: even more fiscal stimulus or monitor steams in order to
Speaker 1: try to counterbalance this store. And I just think that,
Speaker 1: you know, I so I agree with that sentiment. I mean,
Speaker 1: it's not it's not going to be it's not clear
Speaker 1: to me where that you know, nominal growth of whatever
Speaker 1: we wanted to be five to six percent in the
Speaker 1: Euros I'm just going to come from. I mean, I
Speaker 1: don't see it anywhere, no matter what we do. And
Speaker 1: and so maybe that that's that's that's a that's a
Speaker 1: tricky world for markets to navigate. But I think the
Speaker 1: main story is that so far we're much more likely
Speaker 1: to get more stimulus than less stimulus, both fishal and monetary,
Speaker 1: because that's kind of like where we're where we're going.
Speaker 1: And Sharma is making that argument as well, that potentially
Speaker 1: this just leads to more fruitless stimulus campaigns in class.
Speaker 1: I guess my final question for you is how many
Speaker 1: more fruitless stimulus campaigns do we need to have to
Speaker 1: get some of these central banks to look away from
Speaker 1: dated metrics for whether they're succeeding or failing. Well, quite
Speaker 1: a lot, I mean, I think, so look at the HV.
Speaker 1: We're having a change of gardener. Obviously a drug is
Speaker 1: out and Madame mcgard is coming. I mean, we don't
Speaker 1: really know what she thinks about the different different things,
Speaker 1: but it's much more likely I think that we're going
Speaker 1: to get more of the same than less um and
Speaker 1: and all. Let me put it like this, if we're
Speaker 1: going to get less I mean, bond markets are sitting
Speaker 1: duck here, and then this is you know, in some
Speaker 1: sense markets have already made made up their mind and
Speaker 1: at the moment posting are following their lead. So you know,
Speaker 1: I think you know most the same line. He class,
Speaker 1: great to catch you with. This conversation will continue, and
Speaker 1: if we get more of the same, I imagine some
Speaker 1: of these arguments are going nowhere. Pantheon macro economists, chief
Speaker 1: Eurozone economists joining us from the UK. There so much
Speaker 1: to look forward to through the week, all of it
Speaker 1: really centered around the Federal Reserve and the US economy
Speaker 1: joining us to weigh in. Lanta rain FS Investments Chief
Speaker 1: US Economists, Good morning, chi Laura. Just walk me through
Speaker 1: what you're looking for this week. The minutes are really
Speaker 1: going to be the focus, and I think news from
Speaker 1: the rest of the developed world. We've had news overnight
Speaker 1: that Germany is considering a stimulus package. I think that
Speaker 1: we have to keep in mind the last several large
Speaker 1: moves that we've had in the US have come from
Speaker 1: down u S data point that we're really focused on
Speaker 1: this idea of a global slowdown, global market moves, and
Speaker 1: really pessimism in the global bond market. So, Lauren, let's
Speaker 1: focusing on Jackson Hole this week. Obviously, as you mentioned,
Speaker 1: the minutes will be critically important. What kind of tone
Speaker 1: do you think we're going to get from the Fed,
Speaker 1: in from Chairman Pal You know, I think it's going
Speaker 1: to be a tone that takes us back to a
Speaker 1: time before we had the tenure at close to one
Speaker 1: and a half percent, at the time when there was
Speaker 1: a lot less cohesion on the set about what the
Speaker 1: next great move should be. Remember, we had two dissenters
Speaker 1: at that meeting. In favor of not changing rates. So
Speaker 1: surely there will be a much more active discussion at
Speaker 1: that FOM meeting, with some participants thinking that the economy,
Speaker 1: domestic economy was strong enough to not move rates at all.
Speaker 1: I think what we're going to look at is a
Speaker 1: really um you know, this difference between reacting to the
Speaker 1: fundamentals of the US economy versus a lot of the
Speaker 1: concern that we're seeing to financial markets and volatility coming
Speaker 1: from abroad. On Friday, the headline the topic the theme
Speaker 1: of this year's Jackson host Symposium the challenges of Monetary policy.
Speaker 1: And I just wonder, Laura, whether that is the ultimate
Speaker 1: challenge of monetary policy right now, that these central banks
Speaker 1: don't really have the tools to address some of the
Speaker 1: economic challenges we have globally, and front and center that
Speaker 1: challenge being trade. I completely agree with you. I think
Speaker 1: I've long said that monetary policy gets both too much
Speaker 1: credit and too much blame. The reality is that some
Speaker 1: of the big problems these economies are having, like slowing
Speaker 1: labor force growth, low productivity, even the trade tensions that
Speaker 1: we're seeing rock equity market. The said can only really
Speaker 1: put a band aid on what is a very big,
Speaker 1: larger psychological break um, and the tools that they have
Speaker 1: simply are not going to be able to ease a
Speaker 1: lot of the bigger problems that we have. Really, the
Speaker 1: big concern is that over the long run, we're making
Speaker 1: a policy mistake by expandinging valuable ammunition with FED RAID
Speaker 1: cuts when really they're not going to impact what is
Speaker 1: causing the larger volatility and financial discomfort. So, Lara, do
Speaker 1: you expect I mean, you know, I think there's a
Speaker 1: growing concern that the U S E. Commuquad has generally
Speaker 1: been slowing obviously but generally very strong, certainly relative to
Speaker 1: what we're seeing in Europe, for example, or even a
Speaker 1: slowing growth in China. What odds do you kind of
Speaker 1: put it at a US recession in next twelve of
Speaker 1: the eighteen months. I am still in the camp that
Speaker 1: expects the US economy to slow potentially to uncomfortably low levels,
Speaker 1: but to avoid a recession, we may get one quarter
Speaker 1: of negative growth somewhere in the middle of but I
Speaker 1: think we're still looking at full your growth this year
Speaker 1: of two percent and next year maybe more like one percent.
Speaker 1: I think to get a recession, we're going to need
Speaker 1: a real event to happen. But you know, you can't
Speaker 1: fight gravity with the rest of the world slowing. And
Speaker 1: I don't know what the ark of Europe so down
Speaker 1: will be, but certainly the headlines and the data are
Speaker 1: looking worse than many of us had expected. So it's
Speaker 1: hard to fight that. Gravity is going to impact the
Speaker 1: US economy, and particularly these large caps stocks are going
Speaker 1: to be impacted because they're prong tens of purpose as international.
Speaker 1: So Laura, for the chairman this way, you at checks
Speaker 1: in Hole that speech on Friday, what do you think
Speaker 1: the challenge the objective should be for him going into
Speaker 1: this weekend. I mean, he is in a tough spot
Speaker 1: because markets have clearly priced and aggressive said rate cuts.
Speaker 1: After the f MC meeting, he worked hard to really
Speaker 1: limit market expectations and walk those back. I think we're
Speaker 1: going to need to see if he sticks to his
Speaker 1: mid cycle adjustment language, which would imply one, they need
Speaker 1: two more rate cuts this year, or if he's really
Speaker 1: on board with the fact that the US is now
Speaker 1: in danger of slipping into a recession, which would imply
Speaker 1: a much more radical rate cut trajectory and larger real quickly.
Speaker 1: What is your I know it's back and forth, back
Speaker 1: and forth, back and forth. Your sense on kind of
Speaker 1: trade and how this plays out over the you know,
Speaker 1: next several months, or is this something that's gonna be
Speaker 1: a post election I think this is really you know,
Speaker 1: we are now in this ground war for the long haul.
Speaker 1: I think you know, there were deep divisions UM going
Speaker 1: into any kind of negotiations, and we may get a
Speaker 1: short term sort of trade deal announced almost like a
Speaker 1: like a mission accomplished, not the aerograph character UM, but
Speaker 1: I was a lasting, enduring trade agreement I think is
Speaker 1: quite far away at this point. Laura, great to catch
Speaker 1: out with you to get your thoughts in another key
Speaker 1: week for the global economy. Laura Rein, the FS Investments
Speaker 1: Chief US Economists, Going back to this story with Apple.
Speaker 1: Apple CEO Tim Cook had dinner apparently Friday night with
Speaker 1: President Trump at the President's Golf Club in New Jersey.
Speaker 1: I don't see it reported that they played golf. But
Speaker 1: what they did do is talk trade. They talked tariffs,
Speaker 1: and I think Mr Cook was clearly trying to make
Speaker 1: the argument that tariffs are not good for Apple and
Speaker 1: certainly put them at a competitive disadvantage against some of
Speaker 1: their competitors, including Samsung Electronics. So to dig a little
Speaker 1: bit deeper about what this could mean for Apple, we
Speaker 1: turned to Rob Schiff and Rob covers all Things Technology
Speaker 1: for Bloomberg Intelligence on the credit side. Rob, thanks so
Speaker 1: much for joining us here on a Bloomberg Interactor broker studio.
Speaker 1: First of all, just give us a sense from you know,
Speaker 1: from the business perspective, you're looking at the balance sheet
Speaker 1: and the P and L. How much do these tariffs
Speaker 1: if they go full effect, Well, they have a big
Speaker 1: impact on Apple. Thanks Paul. You know, the reality is
Speaker 1: from a bondholder's perspective, it almost doesn't make a difference.
Speaker 1: From a stockholder's perspective though, it makes a huge difference
Speaker 1: in terms of growth rate and trajectory. What Trump is
Speaker 1: clearly trying to do is get stocks to stay up high,
Speaker 1: and there's no better way to do it than to
Speaker 1: try to prop up Apple. So if there's a concept
Speaker 1: that you're going to have lower towerfs on Apple and
Speaker 1: product costs are going to be lower, Christmas is going
Speaker 1: to be booming for the company and helped rise the
Speaker 1: entire the hot entire market. I think when you think
Speaker 1: about it from a bottled perspective. As you know, I'm
Speaker 1: a credit guy. It's almost Christmas every day because Apple
Speaker 1: just continues to generate massive amounts of free cash flow.
Speaker 1: So regardless of what the tariff situation is, um we
Speaker 1: we don't see much risk to Apple's massive cash flow.
Speaker 1: I think when you're projecting out revenues from quarter to quarter,
Speaker 1: you're gonna have significant ebbs and flows. And quite frankly,
Speaker 1: the equity market consistently has just gotten Apples growth traject
Speaker 1: story in the near term wrong. And you see that
Speaker 1: by by big balances in volatility of its stock price.
Speaker 1: When you start looking over an extended period of time,
Speaker 1: let's just say twelve eighteen, twenty four months, I think
Speaker 1: there's less questions about longer term growth rates of Apple,
Speaker 1: and we can sort of wash through short term teriff issues.
Speaker 1: So when you take a look at the balance sheet here,
Speaker 1: I'm looking on the Bloomberg terminal here, and I see
Speaker 1: as of June about a hundred eight billion dollars of
Speaker 1: total debt. That's a big number. But then I look
Speaker 1: up a little bit higher on the balance sheet and
Speaker 1: in the cash I see two billion dollars of cash.
Speaker 1: And you mentioned that I'm also looking on the terminal
Speaker 1: here about sixty billion dollars of free cash flow for Apple.
Speaker 1: So with that kind of free cash flow, why does
Speaker 1: Apple even go to the debt market. Well, they haven't
Speaker 1: since post tax repatriation changes. They haven't funded UM, nor
Speaker 1: of some of the other big tech players as well.
Speaker 1: You know, Microsoft hasn't been in the market, Amazon hasn't
Speaker 1: been in the market, Cisco hasn't been in the market. UM.
Speaker 1: The concept of bringing stuck cash back from international coffers
Speaker 1: is no longer an issue. So what you're seeing our
Speaker 1: companies trending towards lower absolute debt balances. The problem that
Speaker 1: that Apple has is that they generate so much cash
Speaker 1: every single quarter it's hard to meet their goal. Their
Speaker 1: goal is to get to a cash neutral position. As
Speaker 1: you just said, their cash position right now still over
Speaker 1: two is well over a hundred billion more than what
Speaker 1: their debt position is. So if every quarter they're pumping
Speaker 1: in an incremental fifteen billion dollars of free cash, how
Speaker 1: do they get there? They just re up their buyback
Speaker 1: program in May to another hundred billion dollars. You know,
Speaker 1: our sense is that it's going to take multiple years
Speaker 1: for Apple to get to a cash neutribe position. You know,
Speaker 1: you could get there a bit quicker if you use
Speaker 1: your cash to pay down debt as well, and they've
Speaker 1: been doing that. You can see their total debt balances
Speaker 1: have shrunk almost twenty billion dollars over the last couple
Speaker 1: of years, and I think that will will happen, but
Speaker 1: I don't see them coming back to the debt market
Speaker 1: quite frankly, unlike other tech players, there's no M and
Speaker 1: A for them. Uh, there's just I think there's a
Speaker 1: big media company which people speculate about Listen. We'd love
Speaker 1: to see it because it would be more interesting, but
Speaker 1: I just don't see that happening. I think they have
Speaker 1: enough organic growth potential um that they don't need to
Speaker 1: spend their money buying it. There's a lot of other
Speaker 1: companies that need to do that, like a broad Com
Speaker 1: or an ibm um or maybe even UH an Oracle
Speaker 1: eventually an Intel, but I don't see that for For
Speaker 1: Apple again, it's it's Christmas every single day exactly. Keep
Speaker 1: getting so much. I think they're gonna meaningfully increase this
Speaker 1: buyback program, though over the next two years, a hundred
Speaker 1: billion dollars might grow to a hundred fifty around eighteen
Speaker 1: months out. Because for these tech companies between when they
Speaker 1: threat these huge numbers like a hundred billion dollar buyback,
Speaker 1: that a that that is a big number, certainly, and
Speaker 1: it does reduce the flow, But they also are issuing
Speaker 1: stock all the time, stock based compensation, which is a
Speaker 1: big part of the compensation structure in Silicon Valley. So
Speaker 1: a lot of the buy back is just kind of
Speaker 1: off setting the new stock coming onto the marketplace. Is
Speaker 1: Apple actually reducing a share count? So the answers, yes,
Speaker 1: but it's relative to cash flows, it's still somewhat meaningless.
Speaker 1: So there's um there's a lot of stock to buy
Speaker 1: back just to keep the company neutral in terms of
Speaker 1: shares outstanding. They're buying back massively in excess of what
Speaker 1: compensation issues are UM. So I don't really think that's
Speaker 1: the worry. UM. Again, from an equity holders perspective, you
Speaker 1: get stuck in a name like this because there really
Speaker 1: is no financial engineering that's going to change the story significantly.
Speaker 1: There's no large transaction. You almost can't buy back enough stock,
Speaker 1: and it really does boil down much more to fundamentals.
Speaker 1: When it comes to the credit side. I think it
Speaker 1: becomes a little bit of a yawner. These names trade
Speaker 1: super tight and are likely to continue to trade super tight.
Speaker 1: The advantage with an Apple, though, is relative to a
Speaker 1: Google or an Amazon, is when you have a hundred
Speaker 1: billion dollars of dead outstanding relative to someone else with
Speaker 1: or four billion, you're gonna get incremental spread for that
Speaker 1: because technicals are going to be meaningfully weaker. So you
Speaker 1: could buy Apple bonds ten wide to some of their
Speaker 1: tech peers that are lower rated, with less cash, lower
Speaker 1: cash flow trajectories, and still get incremental yield you don't. Luckily,
Speaker 1: rates have really helped everybody this year. So when you
Speaker 1: think about a name like Apple that trades fift or
Speaker 1: sixty over a ten year curve, you think would be
Speaker 1: near impossible to get double digit returns, And in fact,
Speaker 1: across the Apple curve you're seeing ten eleven, twelve percent
Speaker 1: returns a year to date. That's going to be tougher
Speaker 1: as we head into next year, where rates are not
Speaker 1: going to be your friend. So from an Apple perspective, obviously,
Speaker 1: the key question is, you know, as they can they
Speaker 1: successfully pivot away from being really dependent upon the phone
Speaker 1: two more of building up their services business and and
Speaker 1: having that be the growth driver. I mean, kind of
Speaker 1: how do you feel like that's going to play out
Speaker 1: for the company. Well, I think that's that's already playing out.
Speaker 1: The ability to on an absolute basis to grow handsets
Speaker 1: on a on a global perspective becomes somewhat limiting. It
Speaker 1: becomes the law of large numbers. One everyone has a
Speaker 1: phone to everybody believes that the incremental upgrade of a
Speaker 1: new phone is not that much. More So, the way
Speaker 1: that you squeeze more dollars out of anyone is to
Speaker 1: put more services layered on top of that phone. And
Speaker 1: they're doing a fantastic job services across the board for
Speaker 1: them continue to grow. And I think ultimately, you know,
Speaker 1: we're not going to think about Apple as a phone company.
Speaker 1: We're going to think about it much more as an
Speaker 1: application services based company with a broad wet ray of hardware.
Speaker 1: So the phone gets them in the door into everybody's house, car, business,
Speaker 1: and now all the things that we're seeing layered on
Speaker 1: top are really going to be the drivers of growth
Speaker 1: in the future. Tariffs are going to have a smaller
Speaker 1: and smaller impact on that as you start worrying less
Speaker 1: about hardware generating the majority of your revenues and you
Speaker 1: shift ultimately in a few years to all these services
Speaker 1: driving the majority, and that kind of scenario that you
Speaker 1: just laid out, kind of a slower growth, but a
Speaker 1: predictable growth is great for bond holders and maybe not
Speaker 1: so much for equity holders. Just looking at the stock
Speaker 1: kind of flat on a trailing twelve month basis, So
Speaker 1: equity investors kind of looking for that longer term growth story.
Speaker 1: Whereas as you say, it's every day is Christmas for
Speaker 1: an Apple creditor, Rob Shift, and thanks so much for
Speaker 1: joining us. Rob covers all things technology for Bloomberg Intelligence.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
Speaker 1: listen to interviews on Apple podcasts, so Cloud, or whichever
Speaker 1: podcast platform you prefer. I'm on Twitter at Tom Keene
Speaker 1: before the podcast. You can always catch us worldwide. I'm
Speaker 1: Bloomberg Radio.