Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller. Every business day, we bring
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
Speaker 1: at Bloomberg dot com slash podcast. Man Deep sings here.
Speaker 1: He's a senior analyst covers all things technology for Bloomberg Intelligence.
Speaker 1: And there's a lot to get to. Let's first go
Speaker 1: to Intel. I'm looking at I NTC Equity Go and
Speaker 1: then I hit the f A function for financial analysis.
Speaker 1: I got revenue going from seventy five billion last year
Speaker 1: to sixty five billion this year. I got free cash
Speaker 1: along going from ten billion last year to negative three
Speaker 1: point four billion this year. What's going on with Intel?
Speaker 1: I thought this was the steady eddie of all technology stocks. No,
Speaker 1: I mean, look at the management changes they've had over
Speaker 1: the years. They brought back Pat gould Singer, and the
Speaker 1: reason was Intel has been behind both in terms of
Speaker 1: chip manufacturing as well as chip designed. Remember there were
Speaker 1: the vertically integrated players. Moore's law was really all about law,
Speaker 1: which is like every something every year gets I mean
Speaker 1: basically the transit. You can pack more transistors in a
Speaker 1: chip because of Moore's law, and that Moore's law paces declining.
Speaker 1: But that should affect everyone. The problem with Intel is
Speaker 1: it's really trailed on the process, not technology, the geometries
Speaker 1: that enable more transistors to fit in that chip. And
Speaker 1: that's where t SMC has really hive on semiconductors. So
Speaker 1: Apple and Video, A, m D, all the fabless chip makers,
Speaker 1: they give their designs to t SMC. T SMC makes
Speaker 1: them and that is why they're doing so well in
Speaker 1: terms of market share. Until on the other hand, is
Speaker 1: losing its relevance in CPUs because of processed note as well.
Speaker 1: As you know the nature of computing is changing now
Speaker 1: we keep talking about more and more AI. AI is
Speaker 1: done is done not just using CPUs but also GPUs
Speaker 1: and other types of custom chips. So lots of job cuts.
Speaker 1: Who cuts jobs in Silicon Valley? Well, it's inevitable here everybody, Yes, everybody.
Speaker 1: I think you make a great point, Matt. You will
Speaker 1: see that with big tech across the board, and Intel
Speaker 1: more so, because clearly something is not working in terms
Speaker 1: of you know, their designs as well as manufacturing. And
Speaker 1: even though they bought a company Tower Semi, that was
Speaker 1: a recent acquisition to you know, scale up on the
Speaker 1: foundry side, I think they have a lot of inefficiencies
Speaker 1: in just how the companies run. So I wouldn't be
Speaker 1: surprised if you see ten to fifteen percent in fixed
Speaker 1: cost custs and we estimate that to be you know,
Speaker 1: around two to three billion just in cost. I think
Speaker 1: one of the things that's hard for us man deep
Speaker 1: wrap our heads around is over the last couple of years, um,
Speaker 1: no one could sell enough products to match demand because
Speaker 1: nobody had chips. And it didn't matter what segment you
Speaker 1: were in. If you're talking about cars, mobile phones, refrigeration, eiders,
Speaker 1: you didn't have enough chips, so you couldn't meet demand.
Speaker 1: Demand was so high and your uh, your your production
Speaker 1: was too low because you couldn't access these things. Now,
Speaker 1: this year I look at the Socks Philadelphia Semiconductor Index.
Speaker 1: These guys who were the most in demand product like
Speaker 1: in the world for last two years, every single one
Speaker 1: of them is down. There's not one of the thirty
Speaker 1: semiconductor manufacturers on the Philadelphia Index that's had a game
Speaker 1: for the year. Why, Well, because this is a cyclical sector.
Speaker 1: You you go and you know this time is no different.
Speaker 1: But it's like it turned on a dime. It was
Speaker 1: boom and then bands and that's where I think you
Speaker 1: have to go segment by segments. So Qualcom really is
Speaker 1: big on the mobile chips side. Apple does their own chips,
Speaker 1: but on the PC side it's Intel. On the AI
Speaker 1: side it's in video, and then m D to an
Speaker 1: extent as well. You know, they have diversified both on
Speaker 1: the server side as well as the client PCs and gaming.
Speaker 1: So clearly all of those names. Who I'm just saying,
Speaker 1: who are the winner? Intels down year to date, and
Speaker 1: videos down sixty one percent year to date, a m
Speaker 1: D is down sixty year to date. Who one are
Speaker 1: the winners here? Who's up? Well? Long term, you know
Speaker 1: there will be more demand for AI and machine learning,
Speaker 1: these kind of workloads, and that's why and videos still
Speaker 1: trades at a premium to a m D and everyone
Speaker 1: else in the group because they have the highest share
Speaker 1: over there. So if you go by that token, the
Speaker 1: market is already rewarding in video with a horror multiple.
Speaker 1: But clearly expectations are coming down because we are in
Speaker 1: that blood situation that I mentioned. Our former colleague on
Speaker 1: Entrini Bouston, he taught me, like they won when I
Speaker 1: was asking about Semis, this is a this is a
Speaker 1: this is not a place for you know, the pain
Speaker 1: of heart, because these things move big, and they move
Speaker 1: in these big cycles, and you've got to be in
Speaker 1: front of the cycle. You're gonna get crushed. Look at
Speaker 1: memory yep, you know, down just because of the blood situation.
Speaker 1: It's a commodity at the end of the day, all right,
Speaker 1: So real quick on Intel, finish up Intel. It's a
Speaker 1: big name, you know, a hundred billion dollar market cap.
Speaker 1: It's got a five point eight percent dividende. I like that,
Speaker 1: but that's is that at risk here when I look
Speaker 1: at a company with negative free cash flow? Absolutely, and
Speaker 1: I think the fact that they're talking about cutting costs,
Speaker 1: I mean and and obviously they were a beneficiary of
Speaker 1: the chip sacked. They are getting those government subsidies. If
Speaker 1: they continue with the dividend, I think there will be
Speaker 1: questions asked around why they are going out with such
Speaker 1: a big you know, uh cost cuts. So clearly I
Speaker 1: do expect, you know, given the negative free cash flow.
Speaker 1: And it's not as if you know, when Sammy's come back,
Speaker 1: which again, Sammy's a cyclical things will come back. But
Speaker 1: then Intel's problems are more than you know, the cyclical
Speaker 1: nature of this semi cycle that we are witnessing their position. Yes,
Speaker 1: so the dividend is at risk. I mean that's the
Speaker 1: scariest part. I mean, think about like original Silicon Valley companies.
Speaker 1: You think into else Santa Clara, California, UM, some of
Speaker 1: the you know in the garage kind of thing, but
Speaker 1: you know, as Mandeep suggests, you know, in the very
Speaker 1: beteen garage, a spotless garage with zero particles per million exactly.
Speaker 1: Sing Senior Annals covering technology for Bloomberg Intelligence, joining us
Speaker 1: Live and our Bloomberg Intelligence studio. He does not mail
Speaker 1: it in, he comes in. We appreciate that. Well, we
Speaker 1: got earnings kicking off in Earnest Friday when the banks
Speaker 1: kick us off here, and we'll have it for the
Speaker 1: next few weeks. But it really just feels like the
Speaker 1: this market is really focused on one thing and one
Speaker 1: thing only, and that is the photo reserve. How high
Speaker 1: will the FED take rates and how quickly will they
Speaker 1: do that. Let's have a little roundtable discussion on that.
Speaker 1: We bring in Vince Signarolla, global macro strategist with Bloomberg
Speaker 1: News and and along chief US economists with Bloomberg Economics,
Speaker 1: and let's start with you. You had and your economics
Speaker 1: team had a really bold call, I'm gonna say a
Speaker 1: couple of months ago, and you said that you think
Speaker 1: the Fed funds rate might go up to his high
Speaker 1: is five when I think the consensus is probably somewhere
Speaker 1: in a three three plus range. It kind of feels
Speaker 1: like you're on the right side of that trade. Here.
Speaker 1: What is your call about how high or how aggressive
Speaker 1: this Federal reserve will be? Right? So, Um, the reason
Speaker 1: why we thought the terminal rate would be five percent,
Speaker 1: so the Fed will have to rate raise rates to
Speaker 1: five percent around in late spring next year. The reason
Speaker 1: is because we think that the Fed is very concerned
Speaker 1: about a potential wage price spiral. Um. And in their
Speaker 1: reaction function there they are basically assuming a natural rate
Speaker 1: of unemployment or some people call it nehru uh to
Speaker 1: to be four point four percent rather than the you know,
Speaker 1: before the pandemic it's around four percent and and um,
Speaker 1: so if you make that assumption, then five percent would
Speaker 1: be the optimal monetary policy. So that's why we arrived
Speaker 1: at that number. And I do see risk that they
Speaker 1: could have they might have to go higher than that. Um,
Speaker 1: if the neighbor really is more more around the ballpark
Speaker 1: of five, as Larry Summers is suggesting. All right, Vince,
Speaker 1: you've had access to Anna's research for months. Where did
Speaker 1: you get it wrong? Where did I get it wrong?
Speaker 1: I don't think I got it wrong. Didn't you think
Speaker 1: the Fed was going to turn around and and start
Speaker 1: to cut? I mean, shouldn't we be at a point
Speaker 1: where they are done now? I think the Fed may
Speaker 1: have one more in them, but I think that that's
Speaker 1: about the last one they're going to have in them. Um,
Speaker 1: we're closing in on a potential recession. The numbers don't
Speaker 1: look good. Uh. Today's price PPI numbers were really mixed.
Speaker 1: And the market right now is actually trading off the
Speaker 1: yield of tenure guilts, not really trading off us inflation.
Speaker 1: When UK ten you're guilts at a two thousand eight high. Uh,
Speaker 1: this market tanks and I think people looked at that
Speaker 1: and thought, oh, well, we're reacting to the PPI numbers.
Speaker 1: That is not the case. Now we're see down in
Speaker 1: the S and P and the green and that's because
Speaker 1: UK ten, your guilts are off twelve basis points from
Speaker 1: their eves. It's it's about financial conditions and the risk
Speaker 1: that is what's wearing financial markets right now. And if
Speaker 1: the Fed wood raised to five percent, I think they
Speaker 1: would crush financial conditions and close an all out jailbreak
Speaker 1: on risk. And I don't see how they could would
Speaker 1: would be able to stay in higher rates in that scenario.
Speaker 1: I mean this this started with Balley. Frankly, what I
Speaker 1: would say were your responsible comments yesterday by basically saying
Speaker 1: to pension funds, you've got three days before we close
Speaker 1: the door on you. But they've known that for weeks. Yeah,
Speaker 1: But I mean, you know, the hope in these financial
Speaker 1: markets is that they will always give them more time
Speaker 1: if the situation persists. But you've got to have some spine,
Speaker 1: right as a central banker, You've got to have some backbone.
Speaker 1: You can't let the markets wag you around all day long.
Speaker 1: I mean, in the in the last fifteen years, when
Speaker 1: have they had it? No. I think that's the precisely
Speaker 1: what J Powell is trying to reinstate here. Um, they're
Speaker 1: gonna raise rates until they break inflation and break the
Speaker 1: idea that there's a FED put and if you're on
Speaker 1: the wrong side of that trade, it's gonna hurt. I
Speaker 1: think they're gonna break a lot of other things before
Speaker 1: they break inflation, very likely coming from it seems like
Speaker 1: they know that as well. That's that's part of the trade. Well,
Speaker 1: I don't see how that's a FED mandate that they
Speaker 1: need to break everything just to get inflation down where
Speaker 1: it's most of the inflation is food and energy, and
Speaker 1: it's out of their control. I don't see how razy
Speaker 1: weights is going to lower the price of gasoline or
Speaker 1: lower the price of groceries. I mean, what how you
Speaker 1: know Volker did the same thing and he's he's hailed
Speaker 1: as a hero these days. Completely completely. He broke a lot,
Speaker 1: went over, you know, the country went crazy. People were
Speaker 1: throwing bricks through the window the Federal Reserve. He still
Speaker 1: did it, and he won. This is not the seventies,
Speaker 1: trust me. Um. What led to the inflation of nineteen
Speaker 1: seventies was part Mr Burns. Every time, every time a
Speaker 1: component of the CPI would go up, he would remove
Speaker 1: it from the CPI, so the CPI number would re
Speaker 1: maintain it's I would argue that this is a difference
Speaker 1: between PC and CPR, when when Greenspan removed food and
Speaker 1: energy and by moving over the core PC instead of CPR,
Speaker 1: he did exactly the same thing. He took out the
Speaker 1: components that that are essentially what are driving inflation right now,
Speaker 1: and may things look to him for a long time
Speaker 1: today if they could so, Anna, Anna, do you share
Speaker 1: the concern that this FED may go too far? Well,
Speaker 1: you know, I'm actually on the side that I think
Speaker 1: Powell and and his colleagues might lose their nerves and
Speaker 1: could possibly decide to to cut late in three or
Speaker 1: four if the recession is deep. Keep in mind that
Speaker 1: during Bulker's era, Bulker did a change the monetary policy
Speaker 1: operation to allow um you know, instead of discretionary um
Speaker 1: UM FED funds right targeting, he moved to reserve targeting.
Speaker 1: So actually he took that really uh that that that
Speaker 1: that decision of raising rates to off his hand. It's
Speaker 1: not his doing, he can claim to the politicians and
Speaker 1: you know main stream back then, it's not not our
Speaker 1: fault because we we didn't raise it to this automatic,
Speaker 1: you know, algorithm working in the background, whereas today Powell
Speaker 1: has to make the decision whether they have to keep raising.
Speaker 1: And if you look at the dot plot in September,
Speaker 1: you can see that in four there's actually a dispersion
Speaker 1: of views among the f O m C members as
Speaker 1: to how much to cut so and and in their
Speaker 1: projections they only have unemployment rate at worse to you know,
Speaker 1: four point four to four point six percent. So I
Speaker 1: think that if unemployment rate turns out to rise to
Speaker 1: like five or five point five, they might lose their nerve. Okay,
Speaker 1: we'll have to see. It's a we'll see if they
Speaker 1: can keep their nerve. There, great stuff, great round table
Speaker 1: of Insignarella, global macro strategist with Bloomberg News and An Alan,
Speaker 1: chief US Economists with Bloomberg Economics. Matt, we've got a
Speaker 1: special guest in the student. Yes we saw, I saw
Speaker 1: you run over there. Yeah, into the TV studio and
Speaker 1: grab him and bring him in here for ray. Well,
Speaker 1: this guy you heard Chief market Economists UM or chief
Speaker 1: economists at banks. Gary Shilling was the first one. He
Speaker 1: started that. If I'm not incorrect, UM after what after Stanford? No,
Speaker 1: I I worked for Santral New Jersey first that was
Speaker 1: now uh standard, and then went to Merrill Lynch. Okay, so,
Speaker 1: but it was Merrill Lynch, Pierce Fenner and Smith. That's
Speaker 1: he did it back before? Is that right? Okay? Carling's
Speaker 1: first being and then Smith because wyn Smith was short
Speaker 1: of the modern farmer of the firm. In any case, Um,
Speaker 1: fast forward to the Great Financial Crisis, and you were
Speaker 1: one of the big bears, one of the few people,
Speaker 1: um warning as we were also sighted and buying five houses,
Speaker 1: fully levered up and I thought the prices would never
Speaker 1: go down. You were one of the few people warning
Speaker 1: of that. What do you think now as we are
Speaker 1: entering another crisis of sorts, right? I mean we had
Speaker 1: the pandemic, which was something completely different. Um, then we
Speaker 1: I guess spent printed and spent as much money as
Speaker 1: we could. And now we're going to pay the price
Speaker 1: for that. We're gonna get the hangover for that party
Speaker 1: that we had. Right. Well, we we don't have anything
Speaker 1: huge like the dot com uh nonsense of the late
Speaker 1: of the late uh the unities early two thousand's, and
Speaker 1: we're certainly in housing. You know, we've had a bubble
Speaker 1: and housing you've had the flight from city apartments to
Speaker 1: the suburbs, rural areas with a pandemic, and a big
Speaker 1: run in single family housing. But it's it just doesn't
Speaker 1: compare with the with the subprime mortgage nonsense that we
Speaker 1: saw a decade ago. So but it's it's more a
Speaker 1: little of this, a little of that. And again I
Speaker 1: think that I think the overall arching theme is there's
Speaker 1: just been too much money in the economy pumped out
Speaker 1: by the UH Congress administration in response to the pandemic,
Speaker 1: and then of course the FED just I mean, you know,
Speaker 1: there are assets went from from four billion to nine
Speaker 1: billion in a matter of five years, I mean traillion.
Speaker 1: It's unbelievable. And of course what the problem now is
Speaker 1: the FED is embarked on the on the mission to
Speaker 1: get rid of that liquidity. Now, how much they're going
Speaker 1: to get rid of Uh, they're taking Their target is
Speaker 1: a month, but just add that up and see how
Speaker 1: many years they were taking it to even go to
Speaker 1: trillion back it's uh, it's what do you think? And
Speaker 1: and it wasn't even five years by the way I'm
Speaker 1: looking at If you type FED val so f E
Speaker 1: D space B A l go on the Bloomberg terminal,
Speaker 1: you can see the one I learned their balance sheet.
Speaker 1: We went from UH in two years three point six trillion,
Speaker 1: let's say two eight point five trillion, so in two years, um,
Speaker 1: So what is the FED now? It seems that Powell
Speaker 1: is intent and we were just talking about this within
Speaker 1: Signarella and along, intent on raising rates until he breaks
Speaker 1: inflation and doesn't care what else he breaks. Is that
Speaker 1: the right interpretation. The one thing he doesn't want to
Speaker 1: break has already bent is FED credibility. I think that's
Speaker 1: the whole, the whole secret to the FED action. They
Speaker 1: were behind the curve. They clearly did not recognize that
Speaker 1: inflation was more than just supply chain disruptions reopening the
Speaker 1: economy very ephemeral UH features and so they they really
Speaker 1: are playing catch up. And and you know, Paul Is,
Speaker 1: he's made it clear he's he's an effect said we're
Speaker 1: going to do this recession or no recession. And of
Speaker 1: course he's also fighting the string of puts, the Greens
Speaker 1: fan put, the Bernankee put, the yelling put, and everybody
Speaker 1: thought there was going to be a pole put, you know,
Speaker 1: was the FED would bail out Wall Street and so
Speaker 1: he has he was really behind the behind the a
Speaker 1: brill there and and uh, I think it's as they say,
Speaker 1: the FED normally, uh turns towards ease even before the
Speaker 1: peak in business. They never know where the peak in
Speaker 1: business is until National Bureau Economic Research says so, and
Speaker 1: that a year later, and that's you know, and when
Speaker 1: you find out it's about those hand as a pocket
Speaker 1: in your underwear because it's three or four quarters later.
Speaker 1: But their point is, Uh, the FED, when they see
Speaker 1: that they've done the dirty deed and precipitated recession, they
Speaker 1: ease off. This time. I think they're going to continue.
Speaker 1: We and we probably are already in the recession, but
Speaker 1: I think they're going to continue. And they really want
Speaker 1: to see confirmation that inflation is down and that their
Speaker 1: credibility is re established. And you know, I think there's
Speaker 1: still a lot of of question is whether Fed and
Speaker 1: the and the and whether Paul and the Fed half
Speaker 1: teeth right. So I mean we're speaking with Gary Shilling,
Speaker 1: President a Gary Shilling and Company. Gary, how about the consumer?
Speaker 1: It seems like the consumers still hanging in there, buying stuff,
Speaker 1: going on trips. You know, it doesn't feel like the
Speaker 1: consumers really uh Bloomberg column a few weeks ago, pointing
Speaker 1: out that it's the real economy declining. The nominal economy
Speaker 1: isn't well when you get eight point three rear inflation,
Speaker 1: you know, if if that that that's on top, that's
Speaker 1: the that's the veil of inflation. And this is what
Speaker 1: we had in the late sixties and nineteen seventies. Uh.
Speaker 1: You know, I can remember back then, Uh the uh,
Speaker 1: the gal Jones industrials were skirting back and forth around
Speaker 1: a thousand for uh for ten years in real terms,
Speaker 1: in real terms, it declined. It declined seventy percent. Yeah,
Speaker 1: And it's the same thing here. And I think I
Speaker 1: think the media is And that's why I wrote that
Speaker 1: column when we're calum because I think the media is
Speaker 1: very off base and not realizing that the real economy
Speaker 1: is real. Real retail sales are down, real hourly wages
Speaker 1: are down. Uh and and and you know the consumer
Speaker 1: is is really retrenching and there and the consumer doesn't
Speaker 1: have a lot of spending power a lot. I mean
Speaker 1: maybe that's what is driving the Fed here. Got to
Speaker 1: get that inflation down. Well oh yeah, oh yeah, oh yeah,
Speaker 1: they've got the bit. They've gotten their bit and their teeth.
Speaker 1: But you know, you look at the consumer and they
Speaker 1: they've spent a lot of that of that, uh the
Speaker 1: money they got from uh pandemic, uh stimulus and where
Speaker 1: else where what else they got? Housing? House prices are declining,
Speaker 1: stocks stocks are collapsing, So people really don't have the money,
Speaker 1: you know. Obviously the guys on the top are okay,
Speaker 1: but the rest are are are in trouble. And so
Speaker 1: we're gonna we're gonna see further declines in real spending.
Speaker 1: In all likelihood, no more money, But we got honey.
Speaker 1: When's the next batch coming out? Garry is also the
Speaker 1: probably the most famous apiarist on Wall Street, Is that right? Okay? Yeah?
Speaker 1: You keep bees in I think two different places, right yeah. Well,
Speaker 1: I've got some out on Fire Island, Beach House, most
Speaker 1: of them in New Jersey, a couple of locations. But
Speaker 1: I gotta tell you, this is the worst year for
Speaker 1: honey I've ever had. We normally, we normally take off
Speaker 1: three or four thousand of those one pound jars that
Speaker 1: we hand around you guys, and this year we got
Speaker 1: si wow, WHOA, Well, we'll have to I'm glad. I
Speaker 1: don't try to make my living in agriculture. All right, Gary,
Speaker 1: thank you so much for joining Gary Shilling. He's president
Speaker 1: of a Gary Shilling and Company. Joining us live in
Speaker 1: his Bloomberg Interactive Broker's studio because Matt Miller went and
Speaker 1: grabbed him from the television studio. I'm going is that
Speaker 1: I want to get right to our next guest, Matt Winkler.
Speaker 1: He's the editor in chief emeritus founder of Bloomberg News.
Speaker 1: He's usually in our Bloomberg and Actor Brooker studio, best
Speaker 1: in our San Francisco Bureau, which is a phenomenal office
Speaker 1: by the way, right on the wharf. They're overlooking the
Speaker 1: Bay Bridge. Good stuff there. Who knows what kind of
Speaker 1: trouble he's getting into, Matt. I hope he's going to
Speaker 1: Humphrey Slocum, No Hill, No Humphrey Slocum. That's the ice
Speaker 1: cream place that's near the office. And I'm gonna say,
Speaker 1: if you get a chance, stop by there and order
Speaker 1: a scoop of secret breakfast ice cream. Okay, so there's
Speaker 1: actually he needs to go to Taddich Grill. That is
Speaker 1: the oldest restaurant in San Francisco. It is awesome and
Speaker 1: I think it's right up. Matt's Ali, Matt, You've got
Speaker 1: a great column out today about Israel. Ignore Israel politics.
Speaker 1: It's economy is thriving. When I think Israel economy, I
Speaker 1: think technology. What's what's driving Israel these days? Well, you
Speaker 1: just nailed it. It's great to be with you, and
Speaker 1: it is technology. And and essentially what happened is during
Speaker 1: the past decade, corporate Israel, if you like which is
Speaker 1: you know more than six companies, was transformed to something
Speaker 1: much more diverse. And the diversity is really what's driving
Speaker 1: the economy. Where Israel ten years ago was mostly you know,
Speaker 1: if you like pharmaceutical Tiva is obviously the name comes
Speaker 1: to mind. And you know some industrial companies today you're
Speaker 1: talking about UM. You know dozens of companies with more
Speaker 1: than a billion dollars of capitalization market capitalization, and they're
Speaker 1: in tech and it's food tech, and it's every other
Speaker 1: kind of water tech, it's climate change, it's sustainability. UM.
Speaker 1: Everywhere you look, there's innovation and that really has transformed
Speaker 1: the economy. As you said, I think that you know,
Speaker 1: to me, innovation is the key. I UM consistently see
Speaker 1: companies that aren't afraid to take risk coming out of REEL. Lately,
Speaker 1: there's been a spate of documentaries as well on cannabis
Speaker 1: research and hallucinogenics, and it seems that they lead the
Speaker 1: world and research. They're not just saying that because those
Speaker 1: things sound fun, but because they don't have this kind
Speaker 1: of puritanical UM sort of regulatory system that we have
Speaker 1: in the West. What do you what do you think
Speaker 1: allows them to get out there and do this kind
Speaker 1: of innovation. I think there are two things. One is,
Speaker 1: as you just said, it's there is a lack of
Speaker 1: fear of failure. There just is no fear of failure
Speaker 1: in Israel. People just do what they think UM has potential,
Speaker 1: and they don't worry about whether it's going to fail
Speaker 1: or not. The second thing is probably UM they're often creating,
Speaker 1: if you like, solutions for problems that have yet to
Speaker 1: be defined. If that sounds crazy, uh, that is very
Speaker 1: much a characteristic And an example of that is if
Speaker 1: you go back to UM when Mobile I. UM really
Speaker 1: came about UM and Mobile I today is you know,
Speaker 1: of the auto market, cars everywhere around the world are
Speaker 1: using the mobile I equipment for driver assistance and UM
Speaker 1: you can't miss a mobile eye product really in any vehicle, um,
Speaker 1: anywhere and so UM at the time that invention, if
Speaker 1: you like, was dismissed. UM, and people were very skeptical.
Speaker 1: And so it's a good example of you know, Israel
Speaker 1: doing things really way ahead of where the world is
Speaker 1: at the moment. And Matt, you've, as always you've got
Speaker 1: some great charts and some great data in your columns.
Speaker 1: I'm looking at one here, just amazing. I never even
Speaker 1: thought about it, but among the thirty one currencies mobily
Speaker 1: that trade against the dollar actively over the last ten years,
Speaker 1: only one has outperformed the US dollar, and that's Israeli shuckle.
Speaker 1: That tells you that the market really believes in this
Speaker 1: Israel story. Yeah, that's really, if you like, the leading indicator,
Speaker 1: and a very consistent one. Um. You know, if if
Speaker 1: I told you ten years ago that the shekel would
Speaker 1: be the top performing currency in the world, um all yeah,
Speaker 1: when the dollar is as robust as it is, um,
Speaker 1: you know that that just would have been dismissed out
Speaker 1: of hand. And yet Um, as you say, it underlies
Speaker 1: really what's going on in the economy. Um, and most
Speaker 1: people are really not paying attention to it because we've
Speaker 1: got these perennial headlines about you know, West Bank clashes,
Speaker 1: missiles from Hamas and Gaza, and of course a nuclear
Speaker 1: showdown with Iran, and you know there far too often,
Speaker 1: you know, the stories that we read and listen and watch,
Speaker 1: and yet um, the real story is the innovation and
Speaker 1: the strength of the Israeli economy and how stable it is.
Speaker 1: I'm curious also about the academic institutions there, because you know,
Speaker 1: research is often rooted in universities. You touch on Hebrew University,
Speaker 1: but I see uh, tons of researchers. It's almost like
Speaker 1: they have a whole system of Stanfords there. Yeah, um,
Speaker 1: you know, I didn't mention this, but um, it's well known.
Speaker 1: You know, everyone in Israel who is um, you know
Speaker 1: eighteen or so goes into the armed forces and it's
Speaker 1: part of their requirement national service, and you know when
Speaker 1: they come out, they then go into university. But there
Speaker 1: already is a if you like a focus on a
Speaker 1: maturity level, uh, that you find in Israeli universities, and
Speaker 1: it's not you know, anyone in particular, it's all of them.
Speaker 1: And out of that comes the innovation that we're talking
Speaker 1: about Yeah, and Matt, I wonder you say something that
Speaker 1: geolitical risk investing in Israel, but they seem to attract
Speaker 1: the investment dollars despite those risks. Right, there isn't a
Speaker 1: company that you know about that doesn't have R and
Speaker 1: d uh in Israel. You know, whether it's Alphabet, whether
Speaker 1: it's Apple, whether it's Microsoft, there's there isn't a company
Speaker 1: that is in technology that doesn't have uh, something significant
Speaker 1: as a presence in Israel. And that's because of the
Speaker 1: engineering that's that's vested there, and uh, you know, that's
Speaker 1: probably an asset that just continues to grow. Alright, good stuff.
Speaker 1: As always appreciate getting a time from Matt Winkler, editor
Speaker 1: in chief emeritus and founder of Bloomberg News, calling in
Speaker 1: from our studios in San Francisco. I will I will
Speaker 1: again say, definitely get some ice cream, Matt Humphrey Slocum.
Speaker 1: It's right next to the office, and they have My
Speaker 1: favorite flavor is called Secret Breakfast Delicious. I think cocktail
Speaker 1: cocktails at Tatach Grill later in the day, Matt, thank
Speaker 1: you so much. We appreciate it. I want to talk
Speaker 1: about the airline business. Um. You know, people will definitely.
Speaker 1: We're back on the flights on the planes this summer
Speaker 1: in a big way. Every people traveling everywhere, taking advantage
Speaker 1: of the strong dollar heading over to Europe and other
Speaker 1: parts of the world. The question, though, is, you know,
Speaker 1: how profitable are these airlines going to be in this
Speaker 1: new world. George Ferguson covers Airlines Aerospace for Bloomberg Intelligence
Speaker 1: and one of the airlines that I have not flown
Speaker 1: because i'm you know, I'm in a new work person
Speaker 1: in Neworks all about United Airlines is Frontier Airlines. George
Speaker 1: talked to us about Frontier Airlines. What are your thoughts here?
Speaker 1: So with the merger of Jet Blue and Spirit will
Speaker 1: be the only ultra low cost carrier in the US
Speaker 1: right now. I'm sure another one will rise, uh, you know,
Speaker 1: to to compete with them. Um. They lease a lot
Speaker 1: of their fleet, which means that it's great for growth, right.
Speaker 1: There's no cash out when you take airplanes. You can
Speaker 1: expand pretty quickly. The challenges in a downturn when you
Speaker 1: want to lay off capacity, it's really hard because you've
Speaker 1: gotta pay rental payments and everything you got out on
Speaker 1: you know, on the tarmac. It's not like you have
Speaker 1: airplanes your own out there that you can park and
Speaker 1: not have the painting against it. So it gets hard
Speaker 1: to knock down capacity, which means they're typically an adder
Speaker 1: of capacity, you know, or or maintaining capacity again through
Speaker 1: ups and downs, and that can be very dilutive unfares
Speaker 1: in soft periods, and so that may be a challenge
Speaker 1: for them as we as you're going to economic slowdown
Speaker 1: as we get into the you know now through the
Speaker 1: end of the year, begave in the year, but they,
Speaker 1: um do they you know, the benefit of leasing, at
Speaker 1: least I know from cars is that you always have
Speaker 1: the newest and best and most fuel efficient thing. Is
Speaker 1: that the case with their fleet as well? Yeah, a
Speaker 1: lot of what they're leasing is the is the newest,
Speaker 1: uh airplanes, which are most most fuel efficient for sure.
Speaker 1: Uh yeah, So I mean it's absolutely advantage Again, it's
Speaker 1: it's one of those things where you can expand faster
Speaker 1: because there's no cash out. You definitely have most fuel
Speaker 1: efficient equipment. But if you get to a downturn and
Speaker 1: you've got to park airplanes, it gets very painful. Are
Speaker 1: we coming to a downturn? I don't know, you tell
Speaker 1: me it looks like the tenure Treasury is telling me that,
Speaker 1: and and inflation tell me I said, was to keep
Speaker 1: raising rates and that's got to slow things down. So
Speaker 1: I think they're so stepping back, Georgia. On the airline business,
Speaker 1: what are the companies telling you about kind of their demand? Again,
Speaker 1: they had a presumably from a traffic perspective, of a
Speaker 1: strong summer. What do they think about the next six
Speaker 1: or three to six months? Maybe? Yeah, So, I mean,
Speaker 1: you know, we're getting ready to go into earning season here,
Speaker 1: we'll get Delta tomorrow. Um. But we had American sort
Speaker 1: of pre announced most of their results earlier this week,
Speaker 1: and what you know what I thought interesting? One, they're
Speaker 1: they're all touting the fact that they're beating UM levels
Speaker 1: of revenue. They are American beat. Two, the revenue was
Speaker 1: up fourteen against that, but costs are up to and
Speaker 1: so profitability still lacks twenty nine. So was it a
Speaker 1: strong summer from the volume of you know flyers they carried? Absolutely,
Speaker 1: that was good. Costs are costs are higher, right, and
Speaker 1: that's why revenues are higher. Fuel right up sevent depends
Speaker 1: at what point in the in the quarter you wanted
Speaker 1: to measure it uh and labor. Right, there's a lot
Speaker 1: of labor inflation out there. The airlines aren't. I the
Speaker 1: into that we kind of dial in five to ten
Speaker 1: percent kind of labor inflation, and that means that they're
Speaker 1: against still lagging their twenty levels of profitability. I mean,
Speaker 1: I think if they're carrying close to twenty nine levels
Speaker 1: of passengers, they ought to be able to find a
Speaker 1: way to get back to that profitable profitability level. They
Speaker 1: haven't yet. They've got to drive more efficiency into their
Speaker 1: businesses when you look at when you look across the sector, um,
Speaker 1: who's got the biggest who's the best positioned in America?
Speaker 1: You know? So I think that as we go into
Speaker 1: the winter here and the business travel recovery continues, I
Speaker 1: think the airlines focused on some of those more premium travelers,
Speaker 1: business travelers, high end leisure. I think they're better situated, right,
Speaker 1: and so American Delta United, Right, They're going to continue
Speaker 1: to gain from more overseas travel, from more business travel.
Speaker 1: And I think the more that you're catering to leisure,
Speaker 1: especially low end leisure, which I think is getting pinched
Speaker 1: the most by inflation, the more challenging challenging is going
Speaker 1: to get and those airlines like Frontier and Spirit will
Speaker 1: be putting all their capacity in the marketplace instead of
Speaker 1: cutting some of it short. And that means it's going
Speaker 1: to get very competitive at the bottom end of the market.
Speaker 1: So where are we, George, in terms of capacity? And
Speaker 1: you know, are are there enough planes? Are there pilots?
Speaker 1: Are there enough baggage handlers? Where are we? Again is
Speaker 1: an industry capacity versus pre pandemic, you know, so they
Speaker 1: you know, the airline's kind of started the summer out
Speaker 1: trying to fly about twenty levels of capacity, maybe a
Speaker 1: couple of percents shure. Now we're ten to fifteen percent
Speaker 1: below twenty nine levels for lots of the carriers, you know,
Speaker 1: the ultra low cost are they're above, but they're they've
Speaker 1: been growing throughout the pandemic um and so that that's
Speaker 1: relaxed things a bit on the marketplace. I think there
Speaker 1: are plenty of airplanes. I'm just looking at Boeing's report
Speaker 1: for deliveries this month. They've delted fourteen airplays into in
Speaker 1: the Southwest in the last month. Um, they've got more
Speaker 1: parked than the tarmac out there. If you need some
Speaker 1: so I don't think there's a sort of of airplanes.
Speaker 1: Pilots are a bit of a challenge, but again I
Speaker 1: think at these lower capacity levels they shouldn't be too bad.
Speaker 1: But they're a bit of a challenge. And everybody's got
Speaker 1: a problem with labor. But again I hear there's less
Speaker 1: hiccups right now. So I think operations are stabilized a bit,
Speaker 1: and some of that that stuff is when more stabilized,
Speaker 1: maybe I'll go to pilot school, Matt, and you know,
Speaker 1: get my pilots lace and I'm gonna fly some of
Speaker 1: these big birds. I think it's it's difficult. I mean,
Speaker 1: it's probably fun to get your pilots license, but then
Speaker 1: to fly some of the big planes that might might
Speaker 1: be past myspired day, those are the most fun. Those
Speaker 1: are the most fun, exactly right. George Ferguson he covers
Speaker 1: airlines aerospace for Bloomberg Intelligence. He's been doing it for decades.
Speaker 1: Before he was a Wall Street guy, he was actually
Speaker 1: in the United States Army, believe it or not, an
Speaker 1: intelligence officer of all things, which go figure. George Ferguson,
Speaker 1: UH aerospace analysts, Bloomberg Intelligence, PepsiCo. They reported some better
Speaker 1: and expected numbers because people still despite inflation, despite a
Speaker 1: blooming recession, or still drinking the pepsicola, still eating their fritos,
Speaker 1: which are my favorite snack. By the way, for those
Speaker 1: who care, Ken scha he does his stuff for a living.
Speaker 1: He's a senior equity analyst for Bloomberg Intelligence. He's been
Speaker 1: covering knees, you know, beverage, tobacco, cannab stocks for decades.
Speaker 1: Tons of experience. So I can should I be surprised
Speaker 1: with PepsiCo? They just reported some better and expected numbers.
Speaker 1: Business seems to be okay? Should I be surprised? Or
Speaker 1: is this what these companies do kind of in and
Speaker 1: out of different cycles. Yeah, hi, Paul, gait to be
Speaker 1: with you today. Um, no, you shouldn't be surprised. You know,
Speaker 1: I you ran the numbers and today represented PepsiCo's twenty
Speaker 1: straight EPs beat. So this is a company that has
Speaker 1: really leveraged it's uh diversity by product line, geographic reach,
Speaker 1: by channel. We did they beat your estimates as well?
Speaker 1: They did, And you know, next time you estimate Pepsi earnings,
Speaker 1: why don't you just add if they beat everybody twenty
Speaker 1: times in a row, then there's a problem. You know,
Speaker 1: you've got a point there, um, but you know it
Speaker 1: speaks to the strength of its brands. And these are
Speaker 1: iconic brands, as you mentioned Paul Prito Lay, Cheetahs, you know,
Speaker 1: Lady Chips, Quicker Roads. And what we learned is, even
Speaker 1: though they're effective, net pricing was up a real eye
Speaker 1: popping number of volumes are only down one. So consumers,
Speaker 1: you know, they accepted the price increases. They treat these
Speaker 1: brands as necessities and uh, it's it's no it's no
Speaker 1: surprise that the shares are up and other consumer staple
Speaker 1: stocks are benefiting today from you know this good news. So, um,
Speaker 1: what kind of innovation or or or you know, other
Speaker 1: products as pepsi out with them. Obviously we're addicted to cola,
Speaker 1: soda and salty snacks. What else are they doing? Well,
Speaker 1: they have something called nitro soda. If you but if
Speaker 1: you pour, it comes out and you'll follow me. It
Speaker 1: doesn't like it doesn't it sound like a big deal.
Speaker 1: But for you know, loyal consumers of these products, you know,
Speaker 1: little things like that do make a difference. Gives them
Speaker 1: another reason to go down the soda io and try
Speaker 1: it out. Um, and you know the company's innovation, particularly
Speaker 1: lays chips, you know they had the campaigns are going
Speaker 1: down for a while now about you know, asking consumers
Speaker 1: what your favorite flavor is, and you know they respond is, Uh,
Speaker 1: that's where the company's strength is. It's it's willingness to
Speaker 1: stick its neck out and take some chances with different flavors,
Speaker 1: you know, different formats and things like that, and consumers
Speaker 1: love that. You know, these are fun, these are fun products.
Speaker 1: These are not you know and assesses like you know,
Speaker 1: motor oil. These are uh, you know, fund So I
Speaker 1: have to be entertaining as well as you know, pursuable.
Speaker 1: So all right, let's switch over to another beverage company here.
Speaker 1: All right, So when we talk about like these energy
Speaker 1: drinks like Red Bull and Monster, I never got into that.
Speaker 1: I don't think I'm the demo. I think it's some
Speaker 1: more of the younger folks. But I look at Monster
Speaker 1: Beverage Corps. It's a publicly traded company. M and st
Speaker 1: is this taking to put into your Bloomberg terminal. This
Speaker 1: thing's got a forty seven billion dollar market cap. It's
Speaker 1: outperforming the market this year. Like a lot of the
Speaker 1: consumer staples down only about six talk to us about
Speaker 1: that that segment, Kennedy. It's it's a really big segment
Speaker 1: of the beverage market. It really is. UM energy is
Speaker 1: a fifteen sixteen billion dollar category or so Monsters had
Speaker 1: the biggest share for a long long time. Very quietly.
Speaker 1: You know, energy has been uh the strongest segment within
Speaker 1: the beverage category for a quite a number of years now,
Speaker 1: and that's why you're seeing companies like Coca Cola, which
Speaker 1: owns about Monster by the way, but particularly UM PepsiCo
Speaker 1: you know, just bought you know, Red Bull last year.
Speaker 1: It's got a new PepsiCo Red Bull, you know, the
Speaker 1: PepsiCo bought um Rock Star Star Uh and they have
Speaker 1: a deal with Celsius Holdings, which is an up and
Speaker 1: coming energy drink taking the healthy energy angle. But they've
Speaker 1: been more aggressive in the energy space because it's done
Speaker 1: so well and so Monster though, bat your question is
Speaker 1: that they remain the leader. They have a very asset
Speaker 1: light model, so they really leverage just that category and
Speaker 1: kind of outsourced you know, distribution of Coca Cola. They
Speaker 1: even distribution, UH outsource a lot of their co packing
Speaker 1: and so UM it's really been a pure play on
Speaker 1: energy and it's worked out really well for shareholders. Um. Alright,
Speaker 1: so Paul and I, neither one of us really needs
Speaker 1: any of that energy stuff. I don't need drink coffee.
Speaker 1: You're in coffee, but I haven't express everyone. I mean
Speaker 1: coffees for closers anyway. UM, I prefer to mellow out
Speaker 1: a little bit. When are these companies going to come
Speaker 1: out with some THHC infused beverages? Well, um, when the
Speaker 1: FDA provides better clarity on what they can do with it.
Speaker 1: You have us DA came out a while ago and said, yeah,
Speaker 1: you know, you can grow hemp by CBD products and
Speaker 1: so on. But the FDA quickly stepped in as a
Speaker 1: few years ago and said, you know what, that's great,
Speaker 1: but when it comes to a package product and in
Speaker 1: testing these products, we need to have more testing. So
Speaker 1: you know, it's one of those gray areas, like many
Speaker 1: things in cannabis where some states where it's state legal. Um,
Speaker 1: you have generally small beverage companies selling CBD infused beverages. Uh.
Speaker 1: In Canada you have quite a bit of th HC
Speaker 1: AND's beverages. They're not legal in the US. Haven't seen
Speaker 1: any th HC beverages here yet? Um, which th HC
Speaker 1: that's the th HC is the one that makes you high.
Speaker 1: And C b D is the one that I guess
Speaker 1: like there are some THHC beverages in it, but again
Speaker 1: it's it's state by state. These are small producers. You
Speaker 1: don't know the big guys in there yet. I guess
Speaker 1: The bottom line, ken is are we going to get
Speaker 1: the Safe Banking Act past? This is what everybody's waiting for,
Speaker 1: some real federal regulations so that these companies which have
Speaker 1: you know, tremendous growth and revenue streams can bank. Well,
Speaker 1: you know it, it's hard to predict, you know, Um,
Speaker 1: you know, our track record predicting the safe banking hasn't
Speaker 1: been you know, spot on like everybody else's, you know,
Speaker 1: like like many things are cannabis, it's been much delayed.
Speaker 1: And I think hope is the key word with cannabis.
Speaker 1: We know that people like to consume these products. We
Speaker 1: know it's legal in many states. But until we get
Speaker 1: that federal legalization or at least a loosening of laws
Speaker 1: in a more minor way like safe banking or whatever, um,
Speaker 1: you're going to get a lot of skepticism out there.
Speaker 1: These companies have a tough time growing when they're fighting
Speaker 1: things like I R s to a D, which prevents
Speaker 1: them from taking normal business business expenses. They have a
Speaker 1: tiny valuation, like it's I haven't seen anything else like it.
Speaker 1: They're trading for two time sales. Yeah, well, you know,
Speaker 1: because they're buying large unprofitable. They're profitable on the E
Speaker 1: but online, they would point out. But because of two
Speaker 1: A D and their inability to shield themselves from from
Speaker 1: federal taxes, um, a lot of them are unprofitable. And there's,
Speaker 1: like I said, there's limited growth, and there's a lot
Speaker 1: of limitations of what they can do. They can't, you know,
Speaker 1: take products across state bounds, which means they state boarders,
Speaker 1: which means you can't have the economies of scale that
Speaker 1: are typical you know, consumer product goods company can have.
Speaker 1: All right, so we can I guess, you know, I
Speaker 1: guess the point now it's just kind of you know,
Speaker 1: for this is just continue to wait for federal legislation.
Speaker 1: Ken Sa, senior equity analysts for Bloomberg Intelligence, walking us
Speaker 1: through all things consumer products, including the cannabis business. Thanks
Speaker 1: for listening to the Bloomberg Markets podcast. You can subscribe
Speaker 1: and listen to interviews with Apple Podcasts or whatever podcast
Speaker 1: platform you prefer. I'm Matt Miller. I'm on Twitter at
Speaker 1: Matt Miller three. Pet On Ball Sweeney I'm on Twitter
Speaker 1: at pt Sweeney. Before the podcast, you can always catch
Speaker 1: us worldwide at Bloomberg Radio