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Speaker 1: This is Bloomberg surveillance. One of the stories that hasn't

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Speaker 1: gotten a lot of inc is how poorly the Republicans

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Speaker 1: are doing on fundraising for congressional candidate. The political environment

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Speaker 1: is awful, and I think this is one of the

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Speaker 1: things trading markets dot one people say the market spottom

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Speaker 1: me now to me that implies we'll have a big

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Speaker 1: secical rebound, and that I don't see Bloomberg surveillance. You're

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Speaker 1: linked to the world of economics, finance, and investment on

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Speaker 1: Bloomberg Radio. This is Bloomberg surveillance. Sim David Gura in

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Speaker 1: for Tom Keane, going solo here for the final hour.

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Speaker 1: The four X Brief brought to you by Interactive Broker's

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Speaker 1: winner of FX Week's two thou fifteen award for the

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Speaker 1: best retail Forex trading platform, visit ib at ib k

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Speaker 1: r dot com slash four x. Wrapping up a week

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Speaker 1: here with a lot of central banking news. The dollar

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Speaker 1: continuing to be weak, heading the dollar in next declining

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Speaker 1: for the fifth straight day. It is down point for

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Speaker 1: seven percent at ninety three. The n strengthening just a

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Speaker 1: little bit here at one oh seven point to three.

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Speaker 1: The year in the pound weakening as well. UH. Dave

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Speaker 1: Wilson is here with a look at the markets here

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Speaker 1: ahead of their open. Here about thirty minutes away from

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Speaker 1: the opening. Bill Dave Wilson, Bloomberg Stocks Editor, Well, we

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Speaker 1: gotta start with Amazon dot Com if you want to

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Speaker 1: talk about what's going on today. Shares up twelve percent

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Speaker 1: first quarter sales and profit, top to animists average estimates

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Speaker 1: in new Bloomberg survey. The results showed robust demand for

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Speaker 1: faster delivery of items bought online, all with cloud computing

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Speaker 1: services and gadgets such as the voice activated at home assistant,

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Speaker 1: the Amazon Echo. It's also a big day for oil earnings.

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Speaker 1: You've got x On Mobile shares just up half a

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Speaker 1: percent at the moment. UH, even though earnings at the

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Speaker 1: company fell for the sixth straight quarter, and this decline

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Speaker 1: was actually the biggest at sixty UH left Xion with

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Speaker 1: its smallest quarterly profits. Suppose the key here is that

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Speaker 1: x On was pro football, Chevron was not. In fact,

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Speaker 1: h X the biggest US rival post the first quarter

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Speaker 1: loss of thirty nine cents of share, which was more

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Speaker 1: than double the average loss estimate among analysts we survey

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Speaker 1: and Chevron shares are down one percent. You also heard

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Speaker 1: from Philip sixty six down three percent. First quarter earnings

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Speaker 1: dropped six as profit margins narrowed from oil refining and

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Speaker 1: chemicals production. We've also had a number of biotechnology company

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Speaker 1: earnings out. Gilead Science is down five and a half percent.

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Speaker 1: Their revenue failed to meet the average projection for the

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Speaker 1: first time in three years. Earnings also trailed estimates. The

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Speaker 1: shortfalls resulted from disappointing sales of gileads block blockbuster hepatitis

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Speaker 1: C pills Savaldi and harvony m Gen. On the other end,

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Speaker 1: up a half a percent. UH their first quarter earnings

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Speaker 1: and revenue beat estimates, and m JAM raised it's full

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Speaker 1: your profit projection and backs. Altens up three and a

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Speaker 1: half percent. The drug company's first quarter profit in sales

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Speaker 1: surpass estimates, backs halted the target of a thirty five

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Speaker 1: billion dollar takeover offer from uk A drugmaker Shire Moving

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Speaker 1: to the online world, Expedia up eleven percent. The online

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Speaker 1: travel agency reported a surprise first quarter profit sales surpassed estimates.

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Speaker 1: Expeed A benefited from a takeover of home rental site

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Speaker 1: home Away sooner than the company expected, and linked In's

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Speaker 1: up seven and a half percent the professional networking websites

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Speaker 1: first quarter earnings. The revenue b AN estimates LinkedIn second

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Speaker 1: quarter profit forecast also top projections. A couple more for you, David,

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Speaker 1: TiVo up six percent. The digital video recording pioneer accepted

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Speaker 1: a takeover offer from ROV, provider of on screen guides

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Speaker 1: for television listings. The cash and stock deal that at

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Speaker 1: one point one billion dollars. Uh Roby shares also higher,

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Speaker 1: up about seven percent, and eight K Steel holding the

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Speaker 1: most active stock and early trading down nine percent. The

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Speaker 1: steelmaker raised twenty nine million dollars by selling the equipment

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Speaker 1: of a twenty two and a half percent stay BML

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Speaker 1: Cattle Market said the share sale may prompt their medals

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Speaker 1: and mining companies to follow suit. Just really quickly. Here, David,

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Speaker 1: looking at that Amazon number, everyone was focused on Amazon

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Speaker 1: Web services, the cloud computing portion of this an amazing

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Speaker 1: beat when you look at how fast that that part

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Speaker 1: of the business has grown. Revenue up sixty from a

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Speaker 1: year ago. We're talking about a billion dollars worth of

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Speaker 1: increase there, uh profit surging even more than that. It's

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Speaker 1: an area that doesn't require the kind of expense that

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Speaker 1: goes into providing all these items online, you know, having

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Speaker 1: to build distribution centers here, there and everywhere. Uh, it's

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Speaker 1: a less capital intensive business, you might say, and Amazon

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Speaker 1: is reaping the benefits of growth in that area. All right,

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Speaker 1: Tave Wilson, Bloomberg Stocks head, are you wanting me here?

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Speaker 1: I really appreciate it. I want to turn now to

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Speaker 1: Richard Dobbs. He's a director, a senior partner with McKenzie

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Speaker 1: and an author of a fascinating new report here called

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Speaker 1: Diminishing Returns Why investors may need to lower their expectations.

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Speaker 1: He joins us now here on bloombergs Veillance. Richard, good

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Speaker 1: to have you with us. Good morning. I want to

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Speaker 1: start with the the thesis, if you will, that being

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Speaker 1: investment returns over the next twenty years are likely to

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Speaker 1: fall short of the returns of two thousand and fourteen period.

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Speaker 1: You kind of characterize that as a as a real

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Speaker 1: golden age for a variety of reasons. And before we

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Speaker 1: get into what what might be coming down the pike,

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Speaker 1: talk a bit about what contributed to that level of growth,

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Speaker 1: that level of investment returning here over the last thirty years.

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Speaker 1: I mean, obviously short term we have ups and downs

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Speaker 1: in the market, and that they are lot of movements.

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Speaker 1: What we're studying here is long term trends, and actually

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Speaker 1: you can link longer term trends much more to the

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Speaker 1: global economy. And it's been a it's been a wonderful

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Speaker 1: thirty year pearage in terms of the underlying trends that

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Speaker 1: have actually supported great. We've had our falling information um

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Speaker 1: inflation effects is being killed and that that's helped provide

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Speaker 1: a big up particulate of staff the period we've had

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Speaker 1: pulling interest rates, capsules become progressively cheaper. We've had good

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Speaker 1: GDP growth, so the vast majority that there is global

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Speaker 1: GDP grace and somewhere around through in a half per center,

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Speaker 1: that's really helped PARA great. And finally, corporations have done

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Speaker 1: really well. Corporates have grown their profitability. There there's income

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Speaker 1: SEMENTI five to them more than GDP because they've had

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Speaker 1: the benefit of new customers around the world. They've had

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Speaker 1: the benefit of automation and global supply chains bringing their

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Speaker 1: costs down, and they've had falling taxes and falling interest rates.

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Speaker 1: And that all of that mixed together means that the

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Speaker 1: returns that we've seen in the last the last thirty

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Speaker 1: years for both exts and bombs have been on average

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Speaker 1: around two pc for extis and four cent for bombs,

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Speaker 1: more than the hundred year average. It's been a great

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Speaker 1: period in terms of returns of those of those numbers

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Speaker 1: of a real returns. Talk a bit about your process

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Speaker 1: here than the numbers that you crunched. Pe ratio is

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Speaker 1: hugely important here in the mouth, but you can you

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Speaker 1: can work out what what drives the PE ratio. It's

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Speaker 1: a forward expectation of growth and return on invested gastal

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Speaker 1: and so we built that up and we've looked at

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Speaker 1: growth rates in comparison to GDP growth rates, and you

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Speaker 1: can say, well, how much is GDP gonna grow going forwards?

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Speaker 1: And we can get different scenarios and then you can

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Speaker 1: link that back to prasias and they are we likely

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Speaker 1: to get the saving mansion of bratias of the P

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Speaker 1: ratios contracted it. And you know, we all know that

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Speaker 1: the world is going to grow slower to begin with,

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Speaker 1: you know, in the short term because the secular stagnation

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Speaker 1: of the problems at dead levels. And in the longer

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Speaker 1: term we're going to have the impact of that we're

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Speaker 1: no longer growing our workforce globally. Now obviously some parts

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Speaker 1: of the world will still be, but other parts are

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Speaker 1: gonna have a shrinking word China is gonna have a

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Speaker 1: hunder and fifty million fewer workers, So we're not going

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Speaker 1: to have that benefit driving growth. And you can link

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Speaker 1: that Mathemasky back to what does that mean for the

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Speaker 1: B ratio and so we can talk about, you know,

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Speaker 1: how how might that change and that we're going to

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Speaker 1: see any expansion going forward, or that we're going to

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Speaker 1: see a contraction and and that change in the employment picture.

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Speaker 1: They're driven largely by technology, in part by technology. Uh well,

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Speaker 1: technology is another factor. I mean we look going forward,

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Speaker 1: I mean there's going to be the basically on GDP

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Speaker 1: growth is that we're actually gonna be having a shrinking

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Speaker 1: number of workers in many countries because of falling fertility

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Speaker 1: rates for aging, and you know we will if you

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Speaker 1: think about it, countries like China because of the single

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Speaker 1: child policy coming through. When the single child single children

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Speaker 1: all retire, they're going to have fewer children. And you

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Speaker 1: can see that sort of coming through and there will

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Speaker 1: be a hundred and fifty million you're working age people now.

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Speaker 1: Technology is another factors. Technology is going to change the

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Speaker 1: nature of competition. UM companies are going to be competing

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Speaker 1: with technology companies doing step out from the step out

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Speaker 1: companies are going to create a lot of value, but

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Speaker 1: typically they destroyed four times as much or five times

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Speaker 1: as much in the industries they disrupt. We're also going

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Speaker 1: to see technology allowing small and medium sized enterprises to

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Speaker 1: compete globally. A small enterprise historic who couldn't compete with

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Speaker 1: a large company, but I bought the other day is

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Speaker 1: just an example. I bought some garden seas on Amazon.

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Speaker 1: When they arrived, I actually realized I hadn't brought on

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Speaker 1: on Amazon. I bought them on Amazon Marketplace, and it

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Speaker 1: was the most small enterprise in China that was selling

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Speaker 1: globally and being able to complete. Do you think about it? There?

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Speaker 1: You know, and this was you see it a aut

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Speaker 1: it Barbara and others. Well, we're now seeing these small

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Speaker 1: enterprises compete with large RUMs and these guys have a

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Speaker 1: very different constructure. I mean, these seeds were in Britain,

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Speaker 1: there were a pound of package. You know, my local

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Speaker 1: garden center was five pounds of packets of similar seeds

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Speaker 1: because you know, it's a different structure, and these small

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Speaker 1: enterprises and compete or you think about people with B

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Speaker 1: and B being able to compete with the big established

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Speaker 1: hotel team. So we're seeing that's happening. We're also seeing

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Speaker 1: the rise of emerging market companies, and these companies are

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Speaker 1: much less concerned about return on invest gaps, are much

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Speaker 1: more about growth and when these companies come in, and

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Speaker 1: that's going to be a drag on possibilities. When you

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Speaker 1: put all that together, we don't think corporate profitability is

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Speaker 1: going to go up nearly as fast, and ddps going

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Speaker 1: up less fast. Corporate profitabilities going up there faster, That

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Speaker 1: means less in the in the long run, less exty returns.

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Speaker 1: We're gonna keep talking to you here in the in

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Speaker 1: the next portion of the show before we get to

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Speaker 1: the break on, ask you you looked here at the

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Speaker 1: US and Europe. They're pretty similar. Yes, actually more similar

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Speaker 1: than we so pastly because of course you know US companies.

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Speaker 1: Now when you look at most jobs, you know US companies,

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Speaker 1: they actually have a big Europe and that's similar in

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Speaker 1: the European So so we're actually seeing a much greater

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Speaker 1: convergence between those two markets that we've actually expected. Um,

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Speaker 1: but but when you actually get behind the island of

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Speaker 1: lying sales, you find that there is that different that similarity.

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Speaker 1: All right, Richard, stay with us. That's Richard Dobbs. He's

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Speaker 1: a director at McKinsey, the author of a new report

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Speaker 1: Diminishing Returns why investors need to lower their expectations of

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Speaker 1: fascinating new report. We're gonna continue talking to him about

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Speaker 1: here on Bloomberg Surveillance. I'm David Gura in for Tom

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Speaker 1: Keene and Mike McKee today, just taking a quick look

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Speaker 1: at futures here. They're continuing to weaken. We're looking at

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Speaker 1: the Dow down sixty two points, the Nasdaq futures down

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Speaker 1: twenty points, sp SMP down seven. This is Bloomberg Surveillance

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Speaker 1: on Bloomberg Radio now Michael barfers and national and international headlines. David,

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Speaker 1: thank you very much. There's word rebels have Sheldon Mosque

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Speaker 1: in the government held area the northern Assyrian city of Aleppo.

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Speaker 1: At least fifteen people are dead and thirty others are wounded.

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Speaker 1: This morning's assaults came after Friday's prayers. It comes after

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Speaker 1: twenty people were arrested outside of Donald Trump rally last

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Speaker 1: night in Coasta Mesa, California. Vice President Joe Biden says

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Speaker 1: David Michael, thanks very much. This is Bloomberg Surveillance on

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Speaker 1: Bloomberg Radio. I'm David Gerbery and continue talking with Richard

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Speaker 1: Dobson McKenzie about his new report on investment returns here

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Speaker 1: grew us dot Index Futures. They're slipping ahead of the

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Speaker 1: open of Wall Street. Chevron folding about one on a

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Speaker 1: half percent. Had reported wider than estimated loss. Gillion Sciences

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Speaker 1: that's a retreating at the first quote of profit missed estimates.

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Speaker 1: They had lower than expected sales of their hippotytis C treatments.

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Speaker 1: Amazon that's been searching. They posted better than estimated results

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Speaker 1: X on Mobile Little Change. That's earnings beat estimates, though

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Speaker 1: it did post the smallest profits since n and we

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Speaker 1: had to Economic report app this morning at a thirty

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Speaker 1: showed consumers spending grows less than forecast in March. That

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Speaker 1: wraps up the weakest quarter at a year for the

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Speaker 1: biggest part of the U S economy, even as incomes accelerated.

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Speaker 1: And right now SMP futures and down seven that's down

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Speaker 1: four tenths of a present, the down futures down sixty five,

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Speaker 1: that's down four tens, and the NASD index down twenty two.

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Speaker 1: Then as day futures that's down half a percent. The

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Speaker 1: euro one fourteen thirty eighth to a weekening dollar. The

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Speaker 1: yen also right now one or seven twenty four, the

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Speaker 1: event getting stronger, that's up about eight tense continuing, it's

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Speaker 1: a strength from earlier this morning. And that was a

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Speaker 1: Bloomberg business. I'm John Tucker. We bring your market updates

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Speaker 1: every fifteen months during the tradeing date right here on

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Speaker 1: Bloomberg and David, I feel sorry for you. It's like

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Speaker 1: everybody has abandoned you in the studio to feel that

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Speaker 1: way a little bit here David Gura on Blueberg Surveillance

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Speaker 1: in for Michael McKee who's on assignmon and Tom Keane

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Speaker 1: enjoying the last few hours of a well deserved vacation.

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Speaker 1: I'm talking with Richard Dobbs. He is a director at McKinsey,

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Speaker 1: author of a new report, Diminishing Returns Why investors need

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Speaker 1: to lower their expectations. Let's talk a bit about those

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Speaker 1: expectations now, Richard, you write for UH many investors have

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Speaker 1: lived their entire professional lives during this golden era, and

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Speaker 1: a long period of lower returns would require painful adjustments.

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Speaker 1: What exactly are you forecasting? What do you think might

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Speaker 1: be coming down the pike? I mean, if we look

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Speaker 1: at XTSE again average pier of European and US ext

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Speaker 1: we've lived in a world of nearly eight percent real

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Speaker 1: returns the last thirty years. I you going forward is

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Speaker 1: that will be going into a world or somewhere between

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Speaker 1: four and six defense um one or three percent less um.

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Speaker 1: And if we if we look at bombs um, we've

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Speaker 1: we've lived in this wonderful bond period five and a

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Speaker 1: half percent real returns. Our sons going forward is that

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Speaker 1: it will be somewhere between in the next twenty years

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Speaker 1: zero and two percent, so much lower returns um. And

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Speaker 1: if you look at us a portfolio, the portfolio over

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Speaker 1: the about two to four percent less than than we've

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Speaker 1: had over the last thirty years. The problem is the

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Speaker 1: thirty years we've been in has been wonderful. I mean,

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Speaker 1: if you know, the numbers we have aren't two out

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Speaker 1: of line with what we've seen over last hundred. It's

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Speaker 1: just we had a very good year, but good thirty

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Speaker 1: year period. But it's the period most of us us

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Speaker 1: as a benchmark because it's one we've lived to. You say,

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Speaker 1: get used to. What what does that look like? To

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Speaker 1: define that for going to have to do so? So

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Speaker 1: take a thirty year old a thirty year old, now,

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Speaker 1: I mean it is quite I mean in some ways

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Speaker 1: it's quite bleak. A first year old instead of having

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Speaker 1: to put in into their pension maybe should be putting

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Speaker 1: in twenty into their pension and planning to work for

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Speaker 1: another five years plus. That also the impact of life expectancy. Um.

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Speaker 1: You know, it requires just you know, putting a bit

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Speaker 1: more money, but are to retire less unless um you know,

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Speaker 1: if you take us UM, city and state local pensions,

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Speaker 1: employee government employee pensions that they current believe there's a

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Speaker 1: DEFICITI about a trillion dollars. Unfortunately, they're pretty optimistic on

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Speaker 1: the returns. They assume they're still going to get somewhere

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Speaker 1: between seven and eight the nominal um when we put

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Speaker 1: our returns in. We think those deficits they have, which

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Speaker 1: you know everyone's obviously upset worried about, are going to

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Speaker 1: be closer to instead of the one trillion, somewhere between

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Speaker 1: two and three trillion. And that means that governments are

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Speaker 1: going to have to, you know, follow the example of

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Speaker 1: Illinois and have these conversations about over putting in more

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Speaker 1: money or removing benefits or or other types of measures,

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Speaker 1: and it's quite a challenge. Now there's also, you know,

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Speaker 1: the third group who are going to be hit by this,

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Speaker 1: a u sum educational endowments. We think that payments from

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Speaker 1: some of these educational allowments could fall in total by

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Speaker 1: about thirteen billion dollars um and for some universities that

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Speaker 1: something like thirty thousands of students. These education endowments have

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Speaker 1: really supported a lot of great universities. Those universities can't

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Speaker 1: assume that those those payments are going to be still there.

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Speaker 1: Now that that's sort of the negative side of needing

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Speaker 1: to be um lower expectations and put more money in

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Speaker 1: and all of that. There is also a bolstered side

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Speaker 1: that people do need to start thinking through first of

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Speaker 1: all cost base. Um it's interesting in the UK there

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Speaker 1: are a lot of very very small local government pension schemes.

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Speaker 1: They've all been merged into six major funds. About ninety

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Speaker 1: funds have been merged into six to get more cost efficiency.

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Speaker 1: I mean, I was looking at some of my investments

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Speaker 1: the other day and the discovered I had a whole

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Speaker 1: group that I've taken up many years ago and I

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Speaker 1: was playing two present year charges on it. You know,

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Speaker 1: we all need to sort of you know, the personal

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Speaker 1: sides in the government side, just have to look at

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Speaker 1: our charges and and and pair a bit less. And

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Speaker 1: finally we've got to find other assets. Um, it's the

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Speaker 1: main large extreme markets are not going to do well.

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Speaker 1: We need to think about emergant markets so obviously have

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Speaker 1: ups and downs too, and and other opportunities to invest

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Speaker 1: in other types of assets infrastructure, etcetera. I'll be able

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Speaker 1: to look at that. And finally, if there are funds

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Speaker 1: that are able to deliver also consistently, the value of

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Speaker 1: outsa in this world is going to be much harder

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Speaker 1: than the value of you know, in a lower beat

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Speaker 1: of returns world than it would have been none in

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Speaker 1: the higher world. You know. Hearing you talk about college endowments,

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Speaker 1: I'm reminded of some comments that Larry Summer is the

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Speaker 1: former president of Harvard's course Emility Economy, just a couple

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Speaker 1: of weeks ago, saying that's Harvard, which is paid out

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Speaker 1: about five percent of its endowment for a while now,

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Speaker 1: might have to reevaluate that in light of your rate

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Speaker 1: environment we're in right now. He his his his argument

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Speaker 1: was based on the returns you get in on cash.

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Speaker 1: Actually he was saying cash and bonds. But you know,

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Speaker 1: we're we're we're making the argument that this is also

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Speaker 1: the case on nextus. So we would agree with his division,

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Speaker 1: and you know us educational abstinence have had a very

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Speaker 1: wonderful period. Now obviously part of what they can also

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Speaker 1: do is use the start to try and get more

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Speaker 1: um more donations from some of their alumni. As an

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Speaker 1: alumni standpard, I know how effective they can be asking

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Speaker 1: for more money, but you just need to need to

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Speaker 1: set that up as well, because you know the returns

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Speaker 1: are going to be less. Good Richard, thank you very

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Speaker 1: much for joining us today. Really appreciate that. Is Richard

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Speaker 1: Dabs there of McKenzie, he's the author of a new

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Speaker 1: report Diminishing Returns Why investors may need to lower their

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Speaker 1: expectations are published by McKenzie. Joining us there from London today,

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Speaker 1: you're listening to Bloomberg Surveillance on Bloomberg Radio. I'm David

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Speaker 1: Grewery in for Tom Keane, who was on vacation, Mike McKee,

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Speaker 1: who is on assignment. More and Berg surveillance coming up

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Speaker 1: here on Bloomberg Radio. After shortbreak, we're cutting down to

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Speaker 1: the opening bell, brought to you by the Jeep Grand Cherokee,

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