1 00:00:00,120 --> 00:00:06,800 Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. 2 00:00:11,640 --> 00:00:15,440 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 3 00:00:15,480 --> 00:00:18,720 Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day 4 00:00:18,720 --> 00:00:22,280 Speaker 2: for insight from the best in markets, economics, and geopolitics 5 00:00:22,400 --> 00:00:24,920 Speaker 2: from our global headquarters in New York City. We are 6 00:00:24,920 --> 00:00:27,680 Speaker 2: live on Bloomberg Television weekday mornings from six to nine 7 00:00:27,720 --> 00:00:31,280 Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or 8 00:00:31,320 --> 00:00:33,960 Speaker 2: anywhere else you listen, and as always on the Bloomberg 9 00:00:34,040 --> 00:00:37,600 Speaker 2: Terminal and the Bloomberg Business app. Stephanie Roth of Wolf 10 00:00:37,600 --> 00:00:40,280 Speaker 2: for Research anticipated one hundred and seventy five thousand jobs 11 00:00:40,320 --> 00:00:42,760 Speaker 2: were added last month and for unemployment to come in 12 00:00:42,840 --> 00:00:45,880 Speaker 2: line at four point two percent. Definitely, I'm pleased to 13 00:00:45,880 --> 00:00:48,600 Speaker 2: say is back with u. Stephanie. First of all, welcome back. 14 00:00:48,720 --> 00:00:51,440 Speaker 2: Second of all, congratulations on your little baby girl. We're 15 00:00:51,440 --> 00:00:53,479 Speaker 2: looking forward to more conversations with you in the future. 16 00:00:53,479 --> 00:00:56,720 Speaker 2: So thanks for racing back for payrolls Friday. We appreciate it. 17 00:00:56,920 --> 00:01:00,040 Speaker 2: Let's talk about payrolls first, Stephanie, Let's get to it. 18 00:01:00,160 --> 00:01:02,840 Speaker 2: On Friday, the matin estimate our survey around one hundred 19 00:01:02,840 --> 00:01:05,479 Speaker 2: and sixty five thousand. We've already heard from the feed 20 00:01:05,600 --> 00:01:07,920 Speaker 2: Share chairman poull In Jackson Hole that he does not 21 00:01:08,040 --> 00:01:11,360 Speaker 2: welcome any further deterioration in this job's market. What is 22 00:01:11,440 --> 00:01:14,360 Speaker 2: further calling further deterioration in this job's market? 23 00:01:14,360 --> 00:01:16,280 Speaker 3: How would we define that? On Friday? 24 00:01:17,360 --> 00:01:17,800 Speaker 4: I think that. 25 00:01:17,760 --> 00:01:20,200 Speaker 5: Would be another payrolls print that's sub one hundred and 26 00:01:20,200 --> 00:01:23,160 Speaker 5: fifty thousand. I think that would be the unemployment rate 27 00:01:23,280 --> 00:01:24,559 Speaker 5: potentially rising up to four. 28 00:01:24,440 --> 00:01:25,199 Speaker 4: Point four percent. 29 00:01:25,240 --> 00:01:27,679 Speaker 5: Again, not our call, but if we continue to just 30 00:01:27,720 --> 00:01:30,600 Speaker 5: see more signs of softness, our base case is that 31 00:01:30,680 --> 00:01:32,080 Speaker 5: a lot of the softness that we saw in the 32 00:01:32,080 --> 00:01:34,920 Speaker 5: month of July was driven by Hurricane Barrel, and we'll 33 00:01:34,920 --> 00:01:37,560 Speaker 5: see a thirty seven thousand rebound from the month from 34 00:01:37,640 --> 00:01:40,320 Speaker 5: the state of Texas, in which case our payrolls print 35 00:01:40,360 --> 00:01:42,080 Speaker 5: will be above one hundred fifty thousand, which we kind 36 00:01:42,120 --> 00:01:43,880 Speaker 5: of view as trend. So if we see a number 37 00:01:43,920 --> 00:01:46,800 Speaker 5: closer to one hundred thousand this month, and we'll have 38 00:01:46,840 --> 00:01:49,480 Speaker 5: to reassess our view on the labor market. But our 39 00:01:49,480 --> 00:01:52,040 Speaker 5: base case is the print should come in pretty solid. 40 00:01:51,800 --> 00:01:53,800 Speaker 2: Even if we get one fifty given the revisions we 41 00:01:53,840 --> 00:01:56,360 Speaker 2: saw over the previous year. Why shouldn't I just chop 42 00:01:56,400 --> 00:01:59,280 Speaker 2: off sixty seventy thousand of that number on Friday? 43 00:02:00,440 --> 00:02:03,600 Speaker 5: Well, I think the revisions might be a little bit overstated, right, 44 00:02:03,680 --> 00:02:07,800 Speaker 5: So we initially had the numbers that came in and 45 00:02:07,800 --> 00:02:10,360 Speaker 5: then it was revised down because of unemployment insurance records, 46 00:02:10,360 --> 00:02:13,400 Speaker 5: and it's actually possible the revisions won't be quite as 47 00:02:13,480 --> 00:02:17,920 Speaker 5: large ones we get the final numbers because immigration has 48 00:02:17,960 --> 00:02:19,760 Speaker 5: been playing a role here and it's possible that's not 49 00:02:19,760 --> 00:02:22,400 Speaker 5: necessarily getting counted in the unemployment insurance So basically it's 50 00:02:22,400 --> 00:02:24,639 Speaker 5: a lot of noise to say I wouldn't necessarily chop 51 00:02:24,639 --> 00:02:25,840 Speaker 5: off sixty to seventy thousand. 52 00:02:26,040 --> 00:02:28,359 Speaker 4: Maybe you can chop off thirty to forty thousand. 53 00:02:28,000 --> 00:02:30,239 Speaker 5: But then you're still looking at a label market that's 54 00:02:30,240 --> 00:02:33,640 Speaker 5: still growing jobs and an economy that's doing okay. And 55 00:02:33,680 --> 00:02:35,960 Speaker 5: by the way, consumer spending is growing about three percent 56 00:02:35,960 --> 00:02:36,440 Speaker 5: in reil. 57 00:02:36,320 --> 00:02:38,839 Speaker 6: Chirvice slowing, so not slow. I'd also love to get 58 00:02:38,880 --> 00:02:42,160 Speaker 6: your take on what happened yesterday with the ism manufacturing. 59 00:02:42,280 --> 00:02:45,520 Speaker 6: We just had Andrew Hollandhorse published and report saying a 60 00:02:45,600 --> 00:02:49,680 Speaker 6: fifth consecutive sub fifty ISM reading shows the manufacturing sector 61 00:02:49,720 --> 00:02:53,480 Speaker 6: is in a sustained contraction. Do you foresee that through 62 00:02:53,520 --> 00:02:54,240 Speaker 6: the end of the year. 63 00:02:55,560 --> 00:02:56,360 Speaker 4: The ism has. 64 00:02:56,280 --> 00:02:58,000 Speaker 5: Been weak for a long time. It hasn't been a 65 00:02:58,000 --> 00:03:02,560 Speaker 5: great measure of what's happening in terms of the broad economy. 66 00:03:02,720 --> 00:03:05,360 Speaker 5: And by the way, measures of sentiment, which is effectively 67 00:03:05,360 --> 00:03:09,160 Speaker 5: what a PMI is, it's asking you, purchasing managers, how 68 00:03:09,160 --> 00:03:12,040 Speaker 5: are conditions this month versus last month? Same as consumer confidence, 69 00:03:12,040 --> 00:03:13,360 Speaker 5: that would have told you we were in a recession 70 00:03:13,360 --> 00:03:15,480 Speaker 5: for all of last year. So I wouldn't necessarily take 71 00:03:15,520 --> 00:03:18,000 Speaker 5: that as an indication of where actual broad growth is 72 00:03:18,040 --> 00:03:19,160 Speaker 5: for the economy. 73 00:03:19,400 --> 00:03:21,280 Speaker 4: That said, the manufacturing sector has. 74 00:03:21,160 --> 00:03:24,600 Speaker 5: Been hurt by elevated rates, and we've seen a cyclical 75 00:03:24,639 --> 00:03:27,880 Speaker 5: slowdown in a lot of parts of rate sensitive aspects 76 00:03:27,880 --> 00:03:30,320 Speaker 5: of the economy. We might see that for the next 77 00:03:30,400 --> 00:03:32,320 Speaker 5: quarter or so, but now that rates have come down, 78 00:03:32,440 --> 00:03:35,320 Speaker 5: we should start to see a rebound in the manufacturing sector. 79 00:03:35,480 --> 00:03:37,880 Speaker 5: I wouldn't necessarily anticipate that in Q three, I think 80 00:03:37,960 --> 00:03:40,320 Speaker 5: Q four, and heading into next year, especially as we 81 00:03:40,360 --> 00:03:44,360 Speaker 5: get certainty from a political perspective, I think there might 82 00:03:44,400 --> 00:03:46,840 Speaker 5: be and they mentioned this in the report yesterday, there 83 00:03:46,880 --> 00:03:49,200 Speaker 5: might be some hesitation to invest just because we don't 84 00:03:49,240 --> 00:03:51,560 Speaker 5: know what the political landscape will be, especially from a 85 00:03:51,600 --> 00:03:53,280 Speaker 5: tax perspective, but our base. 86 00:03:53,160 --> 00:03:55,280 Speaker 4: Case is Q four and to Q one you'll start to. 87 00:03:55,240 --> 00:03:58,000 Speaker 5: See a rebound in the manufacturing sector and the cyclical 88 00:03:58,040 --> 00:03:59,920 Speaker 5: parts of the economy won will start to pick up. 89 00:04:00,080 --> 00:04:02,280 Speaker 6: So basically our parts of the economy just on hold 90 00:04:02,400 --> 00:04:03,800 Speaker 6: until after November fifth. 91 00:04:04,880 --> 00:04:06,680 Speaker 4: I think that's fair well, at least on the cycle 92 00:04:06,720 --> 00:04:07,080 Speaker 4: go side. 93 00:04:07,120 --> 00:04:09,280 Speaker 5: On the business investment side, there have been some questions 94 00:04:09,320 --> 00:04:10,960 Speaker 5: about whether the consumers are. 95 00:04:10,720 --> 00:04:13,160 Speaker 4: Waiting to see the results of the election. I don't 96 00:04:13,160 --> 00:04:13,480 Speaker 4: think so. 97 00:04:13,520 --> 00:04:15,640 Speaker 5: I think the consumer and we certainly saw that with 98 00:04:15,720 --> 00:04:20,840 Speaker 5: Q two GDP consumer is continuing to spend in real terms. Certainly, 99 00:04:20,839 --> 00:04:22,960 Speaker 5: good spending has picked up a little bit. Services spending 100 00:04:22,960 --> 00:04:26,880 Speaker 5: has been fairly solid, albeit a little slower, but it's yeah, 101 00:04:26,920 --> 00:04:28,960 Speaker 5: I think it's fair to say. On the capital spending side, 102 00:04:28,960 --> 00:04:30,440 Speaker 5: there are a lot of companies that are just in 103 00:04:31,040 --> 00:04:33,440 Speaker 5: hold mode, and then once they see the results of 104 00:04:33,440 --> 00:04:36,000 Speaker 5: the election realistically, probably either way, they'll be able to 105 00:04:36,000 --> 00:04:38,919 Speaker 5: start investing in investing again and they'll have a greater 106 00:04:39,000 --> 00:04:40,760 Speaker 5: sense in terms of what the investing lines gap will 107 00:04:40,800 --> 00:04:41,280 Speaker 5: be next year. 108 00:04:41,400 --> 00:04:42,919 Speaker 2: Stephanie, we've gott to leave it that it's going to 109 00:04:42,920 --> 00:04:45,000 Speaker 2: have you back. The Brittian and Stephanie Roth of Wolf 110 00:04:45,120 --> 00:04:47,200 Speaker 2: Research on the light system the jumps market looking ahead 111 00:04:47,240 --> 00:04:58,080 Speaker 2: to Friday. But this is around a table amount of 112 00:04:58,080 --> 00:04:59,600 Speaker 2: a line of flack oral command in mornings. 113 00:04:59,680 --> 00:05:00,880 Speaker 3: It's going to thank you for having me. 114 00:05:01,000 --> 00:05:03,240 Speaker 2: Let's get to this credit market. How sensitive has this 115 00:05:03,279 --> 00:05:05,200 Speaker 2: credit market been to the growth scare of the last 116 00:05:05,520 --> 00:05:06,039 Speaker 2: four weeks. 117 00:05:06,160 --> 00:05:08,440 Speaker 7: It's been incredibly sensitive, and I think you can see 118 00:05:08,440 --> 00:05:11,000 Speaker 7: it both in the widening that happened in the during 119 00:05:11,000 --> 00:05:14,159 Speaker 7: the early part of August and the very swift snap back. 120 00:05:14,360 --> 00:05:15,680 Speaker 7: And I think what that shows you is that the 121 00:05:15,680 --> 00:05:18,800 Speaker 7: credit market is sensitive to the growth backdrop, especially high 122 00:05:18,800 --> 00:05:21,560 Speaker 7: heeled and leverage loan issuers in the credit market, not 123 00:05:21,920 --> 00:05:24,360 Speaker 7: just the cost of capital and the interest rate environment. 124 00:05:24,839 --> 00:05:28,719 Speaker 7: Starting trading yesterday morning, we had retraced the entirety of 125 00:05:28,800 --> 00:05:32,560 Speaker 7: the early August widening. We saw almost a record day 126 00:05:32,600 --> 00:05:34,800 Speaker 7: of new issues supply yesterday in the corporate credit market. 127 00:05:34,880 --> 00:05:36,880 Speaker 7: So spreads have gapped out a little bit wider than that, 128 00:05:37,200 --> 00:05:39,560 Speaker 7: but we're still in this kind of narrow range. We're 129 00:05:39,600 --> 00:05:42,320 Speaker 7: seeing widening get bought by investors. I think the key 130 00:05:42,400 --> 00:05:46,159 Speaker 7: for credit investors, is that one, yes, the forward path 131 00:05:46,200 --> 00:05:49,200 Speaker 7: of monetary policy matters, but the reasons behind that rate 132 00:05:49,240 --> 00:05:53,080 Speaker 7: cut really matter. And then two, we don't need really 133 00:05:53,160 --> 00:05:55,920 Speaker 7: strong growth in credit to remain resilient. We just kind 134 00:05:55,920 --> 00:05:58,080 Speaker 7: of just need trend or slightly above trend. And I 135 00:05:58,080 --> 00:06:01,240 Speaker 7: think there's really a wide chasm between a recessionary outcome 136 00:06:01,600 --> 00:06:04,240 Speaker 7: and the current pace of above trend or slightly above 137 00:06:04,279 --> 00:06:06,200 Speaker 7: trend growth, and that we live in that space in between. 138 00:06:06,400 --> 00:06:09,360 Speaker 2: United the recent round trip, how symmetrical was the widening 139 00:06:09,480 --> 00:06:11,200 Speaker 2: versus the tightening beneath the surface? 140 00:06:11,520 --> 00:06:12,560 Speaker 3: What led and what lacks? 141 00:06:12,880 --> 00:06:17,800 Speaker 7: So actually a kind of higher beta cyclical sectors led 142 00:06:17,880 --> 00:06:20,840 Speaker 7: the tightening, but it wasn't uniform. For example, triple c's 143 00:06:20,839 --> 00:06:25,480 Speaker 7: are still underperforming the overall broader index tightening. But this 144 00:06:25,520 --> 00:06:29,160 Speaker 7: has been almost a low quality rally in that high 145 00:06:29,200 --> 00:06:32,599 Speaker 7: yield and leverage loans have been outperforming their investment grade 146 00:06:32,640 --> 00:06:35,440 Speaker 7: peers over the past few months. That's continued the year 147 00:06:35,440 --> 00:06:37,200 Speaker 7: to date trend. And so for all of them talk 148 00:06:37,200 --> 00:06:40,080 Speaker 7: about concerns about downside risks, I think investors are making 149 00:06:40,080 --> 00:06:42,520 Speaker 7: the calculus that are saying, Okay, I'm entering at pretty 150 00:06:42,520 --> 00:06:45,440 Speaker 7: attractive all in yields. Growth is slowing, but it's not slow, 151 00:06:45,880 --> 00:06:48,760 Speaker 7: and therefore the outcome for corporate credit investors can be 152 00:06:48,800 --> 00:06:49,600 Speaker 7: quite resilient in. 153 00:06:49,520 --> 00:06:51,520 Speaker 3: That BACKDROPD what are you personally advocating for? 154 00:06:51,640 --> 00:06:53,880 Speaker 7: Yeah, so, I think there have been a couple act 155 00:06:53,880 --> 00:06:57,120 Speaker 7: allocation shifts that have been super relevant. The first and 156 00:06:57,160 --> 00:06:59,080 Speaker 7: foremost has been the trade off between high ode and 157 00:06:59,120 --> 00:07:02,760 Speaker 7: leverage loans. For most of this year, that equation was 158 00:07:03,000 --> 00:07:05,040 Speaker 7: very clearly in favor of leverage loans because of the 159 00:07:05,120 --> 00:07:07,479 Speaker 7: rate backdrop. I think it's now shifted more neutral between 160 00:07:07,520 --> 00:07:10,920 Speaker 7: hyold and leverage zones. That's one. Two, the recent volatility 161 00:07:10,960 --> 00:07:13,720 Speaker 7: has showed us how quickly the market can change. That's 162 00:07:13,800 --> 00:07:16,320 Speaker 7: especially true for the barrowers that may have found that 163 00:07:16,320 --> 00:07:18,080 Speaker 7: they were locked out of the market, even just for 164 00:07:18,120 --> 00:07:19,880 Speaker 7: a short period of time. So I think we've seen 165 00:07:19,880 --> 00:07:23,280 Speaker 7: more interest from investors on kind of private capital, something 166 00:07:23,320 --> 00:07:25,680 Speaker 7: that's not at the whim of the public market volatility. 167 00:07:25,880 --> 00:07:28,080 Speaker 7: And Then three, I still like moving down in quality 168 00:07:28,080 --> 00:07:30,400 Speaker 7: within the investment grade spectrum. I think one of the 169 00:07:30,480 --> 00:07:33,680 Speaker 7: key developments since the pandemic is that that cliff between 170 00:07:33,720 --> 00:07:36,400 Speaker 7: downgraded from IG to high yield isn't as severe as 171 00:07:36,440 --> 00:07:38,800 Speaker 7: maybe we would have thought several months ago. And so 172 00:07:38,880 --> 00:07:41,240 Speaker 7: if you can own triple B rated firms that have 173 00:07:41,280 --> 00:07:43,680 Speaker 7: a strong incentive to stay investment grade, and even if 174 00:07:43,680 --> 00:07:46,360 Speaker 7: they do fall to highyield, will likely be supported and bought. 175 00:07:46,520 --> 00:07:47,560 Speaker 3: I actually like that, So. 176 00:07:47,520 --> 00:07:50,800 Speaker 7: I think within IG moving down in quality makes a 177 00:07:50,840 --> 00:07:52,920 Speaker 7: lot of sense. Within high yield, I would not go 178 00:07:53,000 --> 00:07:54,760 Speaker 7: all the way down in quality to that triple C 179 00:07:54,880 --> 00:07:57,560 Speaker 7: cohort because they've likegged when you say the corporate credit 180 00:07:57,680 --> 00:08:01,640 Speaker 7: reaction to the cuts is more important aka normalization or easiness, they're. 181 00:08:01,480 --> 00:08:05,400 Speaker 6: Actually seeing the deterioration in the economy. That scenario is 182 00:08:05,440 --> 00:08:08,440 Speaker 6: not reflected right now in valuations. What would it take 183 00:08:08,640 --> 00:08:09,800 Speaker 6: for that scenario. 184 00:08:09,360 --> 00:08:11,040 Speaker 3: To be reflected? You're exactly right. 185 00:08:11,160 --> 00:08:13,600 Speaker 7: I think three sixteen is where we're on the Hyaled index. 186 00:08:13,640 --> 00:08:16,960 Speaker 7: That's nowhere near even the post financial crisis average. So 187 00:08:17,040 --> 00:08:19,160 Speaker 7: what we are baking in at the moment is truly 188 00:08:19,400 --> 00:08:22,520 Speaker 7: a pretty benign outcome for credit. I think, as Stephanie mentioned, 189 00:08:22,600 --> 00:08:25,320 Speaker 7: you would need to see deterioration in the labor market, 190 00:08:25,600 --> 00:08:28,400 Speaker 7: the growth backdrop that is consistent with the weakness that 191 00:08:28,440 --> 00:08:31,600 Speaker 7: we saw in July, such that it kind of spooks 192 00:08:31,640 --> 00:08:34,920 Speaker 7: credit investors that growth is not even at trend, but 193 00:08:35,000 --> 00:08:38,880 Speaker 7: actually meaningfully below. That's really the critical factor. But again, 194 00:08:39,160 --> 00:08:42,240 Speaker 7: so long as we have trend growth, companies have shown 195 00:08:42,240 --> 00:08:44,440 Speaker 7: that they've had an ability to navigate this cost of 196 00:08:44,440 --> 00:08:48,640 Speaker 7: capital environment, and so really it's an extreme downside risk 197 00:08:48,679 --> 00:08:51,559 Speaker 7: to growth now. I think the important thing for investors, though, 198 00:08:51,559 --> 00:08:53,000 Speaker 7: is there is a lot of room for spreads to 199 00:08:53,040 --> 00:08:56,080 Speaker 7: widen in such a scenario where we're kind of nearing 200 00:08:56,200 --> 00:08:58,920 Speaker 7: kind of not recessionary levels, but a sharp slowdown. I 201 00:08:58,920 --> 00:09:01,760 Speaker 7: think you could see spreads five fifty six hundred from 202 00:09:01,760 --> 00:09:03,720 Speaker 7: three to sixteen. So there's a lot of room to wipe. 203 00:09:03,840 --> 00:09:05,240 Speaker 2: You've got your finger in the pulse of this market. 204 00:09:05,280 --> 00:09:07,360 Speaker 2: I think an interesting question for Friday would be how 205 00:09:07,440 --> 00:09:10,000 Speaker 2: sensitive this market would be too stronger than expected dates 206 00:09:10,120 --> 00:09:13,000 Speaker 2: versus weaker than expected dates. What would generate the launcher move. 207 00:09:13,080 --> 00:09:15,160 Speaker 7: I think weaker than expected data because it feels to 208 00:09:15,160 --> 00:09:17,640 Speaker 7: me like stronger than expected data is almost priced in 209 00:09:17,720 --> 00:09:21,400 Speaker 7: at the moment I realized that GDP can be revised 210 00:09:21,400 --> 00:09:23,720 Speaker 7: in third quarters tracking at two percent, so I would 211 00:09:23,720 --> 00:09:26,439 Speaker 7: say that's not extremely above trend. But we've had resilient 212 00:09:26,440 --> 00:09:28,880 Speaker 7: growth all year, and I think the consumer has surprised 213 00:09:28,880 --> 00:09:31,760 Speaker 7: to the upside in terms of spending, albeit bifurcated. 214 00:09:31,400 --> 00:09:32,439 Speaker 3: Just quickly on supplying. 215 00:09:32,440 --> 00:09:34,280 Speaker 2: You mentioned it the amount of supply we've had in 216 00:09:34,280 --> 00:09:36,480 Speaker 2: the last twenty four hours, the announcement of companies bringing 217 00:09:36,559 --> 00:09:39,160 Speaker 2: debt to market. Are they operating from a position of 218 00:09:39,160 --> 00:09:40,880 Speaker 2: strength or weakness or stress? 219 00:09:41,679 --> 00:09:45,080 Speaker 7: A position of proactivity and strength. And Stephanie had mentioned 220 00:09:45,160 --> 00:09:48,880 Speaker 7: kind of capital spending slowing, but capital management has not slowed, 221 00:09:49,000 --> 00:09:51,120 Speaker 7: and so if companies I think are being proactive in 222 00:09:51,200 --> 00:09:53,480 Speaker 7: terms of capital management in the balance sheet as they 223 00:09:53,640 --> 00:09:54,760 Speaker 7: moved towards later in the year. 224 00:09:54,760 --> 00:09:56,720 Speaker 3: And the event risk a clinic as always, it's got 225 00:09:56,760 --> 00:09:57,040 Speaker 3: to see it. 226 00:09:57,120 --> 00:09:59,240 Speaker 2: Thank you, AMOUDA line a black croc with the lysis 227 00:09:59,280 --> 00:10:02,320 Speaker 2: in the credit market use where the Barclay's Energy Investor 228 00:10:02,320 --> 00:10:05,079 Speaker 2: Conference kicking off today in New York. Baker Hugh CEO 229 00:10:05,160 --> 00:10:08,720 Speaker 2: Lorenzo similarly attending, following a better than expected earnings report 230 00:10:08,920 --> 00:10:11,440 Speaker 2: earlier this summer, the company seeing high demand for its 231 00:10:11,480 --> 00:10:14,800 Speaker 2: drilling services and equipment in international markets and place to 232 00:10:14,880 --> 00:10:17,679 Speaker 2: say that. Joining us around the table is Lorenzo. Good morning, sir, 233 00:10:17,960 --> 00:10:19,959 Speaker 2: great to be with you. Let's talk about the outlook. 234 00:10:19,960 --> 00:10:22,679 Speaker 2: You raised the midpoint of that outlook, competitors did not 235 00:10:23,200 --> 00:10:26,439 Speaker 2: a similar story with competitors, though, was this better international 236 00:10:26,440 --> 00:10:29,880 Speaker 2: bankdrop compared to say, what's happening domestically? What explains that 237 00:10:29,960 --> 00:10:31,440 Speaker 2: divide does emergent right now? 238 00:10:32,600 --> 00:10:34,720 Speaker 8: I think, first of all, as you look at Baker Hughes, 239 00:10:34,960 --> 00:10:37,800 Speaker 8: the strength of our portfolio is much broader than just 240 00:10:37,880 --> 00:10:41,280 Speaker 8: oil field services, and so as you look at the 241 00:10:41,280 --> 00:10:43,800 Speaker 8: results that we posted in second quarter and also the 242 00:10:43,840 --> 00:10:47,360 Speaker 8: increase in guidance, it's really based on that total portfolio 243 00:10:47,520 --> 00:10:52,040 Speaker 8: capability that we have that extends into rotating equipment, compression 244 00:10:52,480 --> 00:10:55,240 Speaker 8: and industrial sectors as well. As you look at the 245 00:10:55,240 --> 00:10:59,520 Speaker 8: international markets, again, they are going to continue to grow, 246 00:11:00,000 --> 00:11:01,720 Speaker 8: and again we said at the beginning of the year 247 00:11:02,120 --> 00:11:05,840 Speaker 8: we would see high single digit growth in the international markets. 248 00:11:06,120 --> 00:11:08,640 Speaker 8: We retain that view as we go into the second half, 249 00:11:08,880 --> 00:11:11,400 Speaker 8: and as we go into twenty twenty five, the growth 250 00:11:11,400 --> 00:11:14,320 Speaker 8: will still be there, it will decelerate, and it's really 251 00:11:14,400 --> 00:11:17,760 Speaker 8: driven by the demand that you're seeing internationally. When you 252 00:11:17,800 --> 00:11:20,920 Speaker 8: look at the exports, for example, from Saudi Arabia, a 253 00:11:20,960 --> 00:11:24,160 Speaker 8: lot of that goes to other countries, very little comes 254 00:11:24,200 --> 00:11:28,679 Speaker 8: into North America or goes into the developed marketplace. It 255 00:11:28,760 --> 00:11:32,400 Speaker 8: really is a developing market aspect, and the growing population 256 00:11:32,840 --> 00:11:35,679 Speaker 8: and demand for energy globally is increasing. 257 00:11:35,840 --> 00:11:37,640 Speaker 2: Can you talk to us about the headwinds domestically and 258 00:11:37,640 --> 00:11:39,160 Speaker 2: where they're coming from? Is it off the back of 259 00:11:39,200 --> 00:11:42,240 Speaker 2: the consolidation we've seen, we see more careful spending. Is 260 00:11:42,240 --> 00:11:44,120 Speaker 2: it off the back and lower prices? What's driving it? 261 00:11:45,120 --> 00:11:48,920 Speaker 8: There's definitely a lot of the aspects of consolidation that 262 00:11:48,960 --> 00:11:52,600 Speaker 8: have taken place. There's efficiency also that you're seeing within 263 00:11:52,679 --> 00:11:57,240 Speaker 8: the production which has enabled production to stay relatively flat 264 00:11:57,320 --> 00:12:01,400 Speaker 8: and increasing in some cases. And so domestically, I think 265 00:12:01,440 --> 00:12:04,080 Speaker 8: again we continue to see weakness as we look at 266 00:12:04,080 --> 00:12:07,199 Speaker 8: the second half of twenty twenty four and then also 267 00:12:07,240 --> 00:12:09,880 Speaker 8: in twenty twenty five, really looking at North America to 268 00:12:09,920 --> 00:12:13,640 Speaker 8: be flatish. The gas market may be increasing somewhat, but 269 00:12:14,000 --> 00:12:18,839 Speaker 8: North America is really the operators are being very pragmatic 270 00:12:18,880 --> 00:12:21,400 Speaker 8: with their balance sheet, and again, capital discipline is the 271 00:12:21,440 --> 00:12:22,040 Speaker 8: name of the game. 272 00:12:22,320 --> 00:12:24,840 Speaker 6: Yeah, you need a lot less capital now to produce 273 00:12:24,960 --> 00:12:27,400 Speaker 6: even more oil than you had in the past. But 274 00:12:27,480 --> 00:12:29,079 Speaker 6: you think it's going to be flat. Some of the 275 00:12:29,200 --> 00:12:32,320 Speaker 6: numbers we've run actually see thirteen point nine million barrels 276 00:12:32,320 --> 00:12:35,360 Speaker 6: a day coming from North America and then fourteen in 277 00:12:35,440 --> 00:12:38,640 Speaker 6: twenty twenty five. Do you think that's an accurate trajectory. 278 00:12:39,440 --> 00:12:42,680 Speaker 8: Again, if you look at between thirteen point nine and fourteen, 279 00:12:43,240 --> 00:12:45,400 Speaker 8: you're looking at a very slight difference, and again it's 280 00:12:45,440 --> 00:12:49,560 Speaker 8: driven by the efficiency. It's very transactional in North America. 281 00:12:49,840 --> 00:12:51,760 Speaker 8: So I think it's early to call right now and 282 00:12:51,800 --> 00:12:54,880 Speaker 8: will continue to monitor it. Baker Hughes is much more 283 00:12:54,880 --> 00:12:58,640 Speaker 8: focused on the production side and also the chemical side, 284 00:12:58,720 --> 00:13:01,400 Speaker 8: and I think what we are seeing is really a 285 00:13:01,440 --> 00:13:06,760 Speaker 8: focus on existing wells and also improving recovery rates from 286 00:13:06,800 --> 00:13:11,160 Speaker 8: existing wells, and that's where the mature assets solutions that 287 00:13:11,200 --> 00:13:15,079 Speaker 8: we provide actually have a huge opportunity. And it's actually 288 00:13:15,160 --> 00:13:20,080 Speaker 8: important to remember seventy percent of the world's production comes 289 00:13:20,120 --> 00:13:23,200 Speaker 8: from mature wells, and that's a well that's been in 290 00:13:23,240 --> 00:13:26,360 Speaker 8: operation for over twenty five years or has fifty percent 291 00:13:26,400 --> 00:13:30,760 Speaker 8: of its reserve depleted. If you're able to increase the 292 00:13:30,800 --> 00:13:34,640 Speaker 8: reserve recovery by one percent, you're going to add two 293 00:13:34,640 --> 00:13:38,120 Speaker 8: to three years of the production required globally. So there's 294 00:13:38,160 --> 00:13:43,000 Speaker 8: a big focus on capital discipline and maximizing the recovery 295 00:13:43,040 --> 00:13:45,359 Speaker 8: rates from the mature assets that are available. 296 00:13:45,520 --> 00:13:48,319 Speaker 6: You also mentioned gas. Can we talk about liquefied natural gas? 297 00:13:48,320 --> 00:13:51,679 Speaker 6: Because yesterday we actually saw the Energy Department go ahead 298 00:13:51,920 --> 00:13:56,800 Speaker 6: with an export license. Because the Biden mormonitorium on the 299 00:13:56,960 --> 00:14:00,560 Speaker 6: export license, the courts have pushed back. Is that a 300 00:14:00,600 --> 00:14:03,400 Speaker 6: sign that potentially we could see more LERG come online. 301 00:14:04,240 --> 00:14:06,840 Speaker 8: First of all, very pleased that the license was given 302 00:14:06,840 --> 00:14:09,920 Speaker 8: and congratulations to the team there. I think as you 303 00:14:09,960 --> 00:14:15,760 Speaker 8: look at the global expectations, it's that the monitorium actually 304 00:14:15,800 --> 00:14:19,000 Speaker 8: ceases in twenty twenty five. As you look at the LNG, 305 00:14:19,200 --> 00:14:23,640 Speaker 8: demand is expected to increase. We've predicted that by twenty 306 00:14:23,760 --> 00:14:27,000 Speaker 8: thirty we need an installed based capacity of eight hundred 307 00:14:27,000 --> 00:14:31,200 Speaker 8: million tons per annum and the US can contribute to that. 308 00:14:31,200 --> 00:14:34,200 Speaker 8: That being said, you know, you're never sure until it's done. 309 00:14:34,440 --> 00:14:37,800 Speaker 8: And international projects are continuing to go forward as well, 310 00:14:38,000 --> 00:14:41,520 Speaker 8: so the LNG will be available, and hopefully the United 311 00:14:41,560 --> 00:14:45,160 Speaker 8: States also participates as it's got plenty of gas that 312 00:14:45,240 --> 00:14:45,960 Speaker 8: it can explore. 313 00:14:46,000 --> 00:14:48,040 Speaker 2: A big focus on this program over the last I 314 00:14:48,080 --> 00:14:50,280 Speaker 2: would say six months or so, it has been the 315 00:14:50,320 --> 00:14:52,280 Speaker 2: burden that's going to emerge on the energy grid in 316 00:14:52,280 --> 00:14:55,160 Speaker 2: this country in the next several years. Every single day 317 00:14:55,200 --> 00:14:58,280 Speaker 2: we talk about Nvidia and Capex spend coming from some 318 00:14:58,400 --> 00:15:02,720 Speaker 2: major tech players, spend money throwing money at data centers. 319 00:15:03,120 --> 00:15:05,280 Speaker 2: Can you walk us through just the scale of demand 320 00:15:05,400 --> 00:15:08,360 Speaker 2: you're expecting to see and what you're hearing from some 321 00:15:08,440 --> 00:15:10,880 Speaker 2: of these utility providers and some of these companies, these 322 00:15:10,880 --> 00:15:14,680 Speaker 2: tech firms and the need for off grid solutions that 323 00:15:14,720 --> 00:15:17,280 Speaker 2: you can provide. How big is that growth opportunity for you? 324 00:15:18,120 --> 00:15:21,360 Speaker 8: It is a significant growth opportunity. And I think you 325 00:15:21,400 --> 00:15:24,800 Speaker 8: said earlier this isn't just about today. It is a 326 00:15:24,840 --> 00:15:27,000 Speaker 8: long term trend. If you look at some of the 327 00:15:27,040 --> 00:15:31,400 Speaker 8: statistics out there Generative AI, the consumption of electricity by 328 00:15:31,480 --> 00:15:35,360 Speaker 8: data centers, it's expected to double by twenty twenty six. 329 00:15:35,640 --> 00:15:39,280 Speaker 8: That's going from two percent to four percent of the 330 00:15:39,480 --> 00:15:43,000 Speaker 8: electricity usage. Think about that. That's the same amount of 331 00:15:43,000 --> 00:15:46,880 Speaker 8: electricity that Japan uses on an annual basis. So from 332 00:15:47,080 --> 00:15:51,480 Speaker 8: an installed capacity perspective, it's a significant increase. What do 333 00:15:51,560 --> 00:15:56,160 Speaker 8: we have as a challenge grid stability? And also I 334 00:15:56,200 --> 00:15:59,200 Speaker 8: live in Houston today, I have power outages on a 335 00:15:59,200 --> 00:16:03,920 Speaker 8: continuous basis, and we need off grid solutions and that's 336 00:16:03,960 --> 00:16:08,840 Speaker 8: where distributed power comes in. That's where opportunities for modular 337 00:16:09,040 --> 00:16:13,800 Speaker 8: capabilities of gas turbans that are packaged, smaller off grid, 338 00:16:13,920 --> 00:16:17,880 Speaker 8: and they provide the stability to the data centers for 339 00:16:18,000 --> 00:16:23,320 Speaker 8: ongoing operations, because the other important aspect is intermittency is 340 00:16:23,400 --> 00:16:27,000 Speaker 8: important because a data center can't go down, so you 341 00:16:27,080 --> 00:16:30,320 Speaker 8: need to have that consistency of power generation. 342 00:16:30,400 --> 00:16:32,520 Speaker 2: What does growth look like in this area currently and 343 00:16:32,560 --> 00:16:34,360 Speaker 2: what will growth look like in the years to come 344 00:16:34,400 --> 00:16:37,160 Speaker 2: for you exclusively specifically for us. 345 00:16:37,000 --> 00:16:39,760 Speaker 8: If you look at the industrial gas turbans that we 346 00:16:39,840 --> 00:16:43,880 Speaker 8: provide significant opportunity. Just look at the ratio of the 347 00:16:43,920 --> 00:16:47,600 Speaker 8: increase on the electricity utilization from two to four percent. 348 00:16:48,080 --> 00:16:51,680 Speaker 8: So we're looking and working with the hyperscalers, looking at 349 00:16:51,720 --> 00:16:55,040 Speaker 8: the ecosystem, and we're looking at the opportunity of mini 350 00:16:55,040 --> 00:16:57,120 Speaker 8: gas turbans being sold into this market. 351 00:16:57,240 --> 00:16:59,560 Speaker 2: What's the overall contribution to your revenue mixed do you 352 00:16:59,640 --> 00:17:01,480 Speaker 2: expect to come from that in the next. 353 00:17:01,440 --> 00:17:02,160 Speaker 3: Say several years. 354 00:17:02,200 --> 00:17:04,040 Speaker 2: The reason I asked that question is we've seen a 355 00:17:04,080 --> 00:17:06,760 Speaker 2: big rally in utility companies in line with the rally 356 00:17:06,800 --> 00:17:09,040 Speaker 2: we've seen in AI firms. And if we're to sit 357 00:17:09,080 --> 00:17:11,600 Speaker 2: here today and think about the changing characteristics of your stock, 358 00:17:12,040 --> 00:17:14,800 Speaker 2: I need to know what the contribution from that area 359 00:17:14,840 --> 00:17:16,560 Speaker 2: would be to the overall top bottom line. 360 00:17:16,600 --> 00:17:18,000 Speaker 3: What's that going to look like in years. 361 00:17:17,760 --> 00:17:20,239 Speaker 8: To come as we look at it, and again, this 362 00:17:20,320 --> 00:17:23,720 Speaker 8: could be from five hundred megawatts to one point five 363 00:17:23,760 --> 00:17:25,560 Speaker 8: gig watts, and that's what we're looking at from a 364 00:17:25,560 --> 00:17:29,520 Speaker 8: scaling perspective, and again from a dollar perspective, it's going 365 00:17:29,600 --> 00:17:32,719 Speaker 8: to range based on five hundred million to potentially larger, 366 00:17:32,920 --> 00:17:34,920 Speaker 8: and it's going to come over a series of years. 367 00:17:35,000 --> 00:17:35,959 Speaker 3: As we go forward. 368 00:17:36,240 --> 00:17:39,199 Speaker 8: We look at it as a major new area that 369 00:17:39,280 --> 00:17:43,080 Speaker 8: we can focus on. We've participated before and we've played 370 00:17:43,200 --> 00:17:46,080 Speaker 8: in distributed power generation, and we look at this as 371 00:17:46,080 --> 00:17:47,680 Speaker 8: a growth factor for Baker Hues. 372 00:17:47,920 --> 00:17:50,520 Speaker 6: A big concern to the US energy industry has always 373 00:17:50,520 --> 00:17:53,760 Speaker 6: been these cyber attacks, whether it's colonial, what'sly recently happened 374 00:17:53,800 --> 00:17:56,280 Speaker 6: with Halliburton. Have you seen any impact. 375 00:17:57,200 --> 00:18:01,480 Speaker 8: So we haven't seen any impact. Again, though we're very vigilant. Obviously, 376 00:18:01,560 --> 00:18:05,280 Speaker 8: cybersecurity is a big concern for everybody and we're all 377 00:18:05,320 --> 00:18:08,600 Speaker 8: taking the measures accordingly to put the controls in place 378 00:18:08,720 --> 00:18:11,320 Speaker 8: and very much vigilant on a daily basis. 379 00:18:11,680 --> 00:18:14,960 Speaker 6: What does that look like meaning being vigilant, is that 380 00:18:15,080 --> 00:18:16,919 Speaker 6: having the proper systems in place. Is there a lot 381 00:18:16,920 --> 00:18:19,720 Speaker 6: of communication with the US government. 382 00:18:20,560 --> 00:18:23,679 Speaker 8: There's definitely a communication that takes place across the sector, 383 00:18:23,840 --> 00:18:28,119 Speaker 8: and there's also trade associations that discuss it. From a 384 00:18:28,160 --> 00:18:31,040 Speaker 8: standpoint of vigilance, it means making sure that we're doing 385 00:18:31,119 --> 00:18:34,240 Speaker 8: our own testing on our own systems, making sure that 386 00:18:34,280 --> 00:18:36,760 Speaker 8: we're putting in the controls, we're patching with the new 387 00:18:36,800 --> 00:18:41,000 Speaker 8: security that's available, and also doing our own fishing exercises. 388 00:18:41,359 --> 00:18:44,800 Speaker 8: And so we've got a team that continuously Red team, 389 00:18:44,880 --> 00:18:47,840 Speaker 8: Blue team, and we test our own systems. But I 390 00:18:48,080 --> 00:18:50,800 Speaker 8: also say, you can never be too careful, and you've 391 00:18:50,800 --> 00:18:52,960 Speaker 8: got to stay vigilant, and you've got to be prepared. 392 00:18:53,040 --> 00:18:54,600 Speaker 2: You've got a really busy day ahead of you before 393 00:18:54,600 --> 00:18:56,840 Speaker 2: we let you go. This conversation's got to time arise 394 00:18:56,920 --> 00:19:00,000 Speaker 2: in multiple decades, the time horizing of this market. The moment, 395 00:19:00,080 --> 00:19:02,480 Speaker 2: about five minutes, can we just reflect on yesterday's price action? 396 00:19:02,560 --> 00:19:05,320 Speaker 2: What's going on include energy markets at the moment. It's 397 00:19:05,359 --> 00:19:08,400 Speaker 2: a real tangible concern from your side around demand in China. 398 00:19:08,400 --> 00:19:09,119 Speaker 2: What's it all about. 399 00:19:10,240 --> 00:19:12,440 Speaker 8: I think you're always going to have volatility on a 400 00:19:12,520 --> 00:19:14,720 Speaker 8: daily basis, and it's something we deal with in the 401 00:19:15,240 --> 00:19:18,720 Speaker 8: business world. At the same time, leading a company, you've 402 00:19:18,720 --> 00:19:21,720 Speaker 8: got to focus on the fundamentals and the fundamentals of 403 00:19:21,760 --> 00:19:25,040 Speaker 8: the long term trajectory and make the right investment decisions. 404 00:19:25,320 --> 00:19:27,280 Speaker 8: That's what we're doing at Baker Hughes. And if you 405 00:19:27,320 --> 00:19:31,320 Speaker 8: look at the macro tailwinds, I think it's undeniable that 406 00:19:31,560 --> 00:19:34,800 Speaker 8: energy demand is continuing to increase. As you look at 407 00:19:34,800 --> 00:19:37,200 Speaker 8: the population and you look at the development of nations. 408 00:19:37,520 --> 00:19:39,840 Speaker 8: You also look at developed nations that are now seeing 409 00:19:39,880 --> 00:19:42,520 Speaker 8: that they don't have enough energy as well, such as 410 00:19:42,560 --> 00:19:44,800 Speaker 8: here in the United States. So we look at the 411 00:19:44,840 --> 00:19:48,240 Speaker 8: macro aspect and we're definitely seeing positive tailwinds. 412 00:19:48,280 --> 00:19:50,479 Speaker 2: Do you feel like the attitude of fossil fuels has 413 00:19:50,480 --> 00:19:52,719 Speaker 2: shifted in the last twelve months. Do you think governments, 414 00:19:52,760 --> 00:19:54,080 Speaker 2: particularly in the West, have had a bit of a 415 00:19:54,080 --> 00:19:54,800 Speaker 2: reality check. 416 00:19:55,480 --> 00:19:58,960 Speaker 8: I think there is an understanding that it's not just 417 00:19:59,000 --> 00:20:03,280 Speaker 8: about an energy ambition. It's also about an energy expansion, 418 00:20:03,640 --> 00:20:07,240 Speaker 8: and it's not about the fuel type. It's about reducing emissions. 419 00:20:07,640 --> 00:20:10,320 Speaker 8: And that's where gas plays a key role because it 420 00:20:10,400 --> 00:20:17,200 Speaker 8: is abundant, it's available, and you need affordable, secure, reliable energy. 421 00:20:17,400 --> 00:20:19,480 Speaker 2: Lorenzo appreciate it. You got a long down ahead of you. 422 00:20:19,520 --> 00:20:22,200 Speaker 2: Thanks for your time, Thank you, Thank you, Sir Lorenzo. Similarly, 423 00:20:22,240 --> 00:20:36,200 Speaker 2: there the Baker Hughes c EO Kate McShane of Goldman 424 00:20:36,280 --> 00:20:39,080 Speaker 2: Sachs saying the following. We have seen growing concerns around 425 00:20:39,119 --> 00:20:41,920 Speaker 2: the health of the US consumer and more value seeking 426 00:20:41,960 --> 00:20:45,840 Speaker 2: spending behavior. However, our economists continue to see a resilient 427 00:20:45,960 --> 00:20:49,160 Speaker 2: consumer and belief the concerns around weakness and consumer spending 428 00:20:49,520 --> 00:20:52,560 Speaker 2: are likely overdone. I'm pleased to say that alongside Kate, 429 00:20:52,600 --> 00:20:54,600 Speaker 2: It's Bloomberg's very own Lisa Bramb. 430 00:20:54,600 --> 00:20:55,040 Speaker 3: It's Lisa. 431 00:20:55,040 --> 00:20:59,720 Speaker 1: Good morning, Good morning, John, good morning Age. Thank you 432 00:20:59,720 --> 00:21:01,959 Speaker 1: so much much for having me and Frankly, this is 433 00:21:02,000 --> 00:21:04,120 Speaker 1: really the key question for so many on Wall Street 434 00:21:04,160 --> 00:21:06,800 Speaker 1: and Main Street. Basically how resilient is the consumer and 435 00:21:06,840 --> 00:21:09,120 Speaker 1: we talk about weakness. At what point are we talking 436 00:21:09,119 --> 00:21:12,199 Speaker 1: about actual weakness versus just it's getting competitive out there. 437 00:21:12,280 --> 00:21:14,880 Speaker 1: Kate McShane joining us here. Kate, thank you so much 438 00:21:14,880 --> 00:21:17,960 Speaker 1: for being with us. I am curious you know how 439 00:21:18,000 --> 00:21:19,080 Speaker 1: much weakness is there? 440 00:21:19,119 --> 00:21:20,120 Speaker 3: Do you give credence to. 441 00:21:20,040 --> 00:21:22,360 Speaker 1: This story that the consumer is fragile? 442 00:21:22,960 --> 00:21:23,240 Speaker 9: Yes? 443 00:21:23,400 --> 00:21:25,120 Speaker 4: So, good morning. Thanks for having us. 444 00:21:25,600 --> 00:21:27,720 Speaker 9: I think when it comes to the consumer, what we 445 00:21:27,800 --> 00:21:30,560 Speaker 9: continue see as a somewhat steady consumer. I think what 446 00:21:30,600 --> 00:21:32,880 Speaker 9: we've heard from most of the companies that we cover 447 00:21:33,119 --> 00:21:35,600 Speaker 9: is that not much has changed with the consumer over 448 00:21:35,640 --> 00:21:39,000 Speaker 9: the last six months. They're employed, wages are growing, but 449 00:21:39,080 --> 00:21:41,240 Speaker 9: they are being choiceful. And part of the reason why 450 00:21:41,280 --> 00:21:43,479 Speaker 9: they're being choiceful is because there has been a lot 451 00:21:43,520 --> 00:21:46,200 Speaker 9: of inflation over the last couple of years. Their money 452 00:21:46,200 --> 00:21:48,959 Speaker 9: doesn't go quite as far. So you are seeing choices 453 00:21:49,000 --> 00:21:53,760 Speaker 9: between consumables and discretionary. You're seeing choices between services and goods, 454 00:21:54,040 --> 00:21:56,359 Speaker 9: and I think that's what's differentiating maybe some of the 455 00:21:56,400 --> 00:21:59,480 Speaker 9: different performances that you're seeing out of Free Tael coming 456 00:21:59,480 --> 00:22:00,280 Speaker 9: out of the second. 457 00:22:00,680 --> 00:22:03,879 Speaker 1: Sadi Square, this idea that we keep hearing this and 458 00:22:03,960 --> 00:22:05,200 Speaker 1: yet margins are expanding. 459 00:22:05,960 --> 00:22:09,200 Speaker 9: Yes, well, there is some growth, so there is some 460 00:22:09,320 --> 00:22:12,399 Speaker 9: leverage in some of these retailers models. But at the 461 00:22:12,440 --> 00:22:15,560 Speaker 9: same time, you've seen costs dissipate, especially on the freight 462 00:22:15,720 --> 00:22:18,880 Speaker 9: side of things, and so there has been some improvement 463 00:22:18,920 --> 00:22:21,399 Speaker 9: in margins as costs have come down on freight. 464 00:22:21,920 --> 00:22:23,679 Speaker 1: Okay, so it's more of that story and not so 465 00:22:23,800 --> 00:22:27,439 Speaker 1: much that AI is creating this incredible efficiency that's overwhelming 466 00:22:27,440 --> 00:22:30,800 Speaker 1: any potential price losses in pricing power that they're losing. 467 00:22:31,160 --> 00:22:31,720 Speaker 4: Not yet. 468 00:22:31,800 --> 00:22:34,000 Speaker 9: I mean, we are starting to hear more, of course 469 00:22:34,040 --> 00:22:36,760 Speaker 9: about AI, just like we are across all the other industries, 470 00:22:36,800 --> 00:22:41,720 Speaker 9: but it's much more nacent and more about efficiencies with 471 00:22:41,840 --> 00:22:46,320 Speaker 9: regards to getting more efficient with how they catalog online, 472 00:22:46,359 --> 00:22:49,160 Speaker 9: with their e commerce and maybe freeing up some tasking 473 00:22:49,240 --> 00:22:53,200 Speaker 9: for their labor. But there isn't anything of scale yet 474 00:22:53,280 --> 00:22:57,280 Speaker 9: that we've seen that is revolutionizing what's happening with margins 475 00:22:57,280 --> 00:22:57,840 Speaker 9: in retail. 476 00:22:57,920 --> 00:23:00,840 Speaker 1: So just to be clear, when people say maybe some 477 00:23:00,920 --> 00:23:03,240 Speaker 1: of the increased productivity that we're seeing that's leading to 478 00:23:03,280 --> 00:23:07,240 Speaker 1: these higher margins stems from the idea of AI making inroads, 479 00:23:08,280 --> 00:23:10,000 Speaker 1: not really seeing that quite yet. 480 00:23:10,040 --> 00:23:10,720 Speaker 3: I don't believe. 481 00:23:11,000 --> 00:23:11,679 Speaker 4: I don't believe. 482 00:23:11,720 --> 00:23:14,000 Speaker 9: So again, it's being talked about, but I don't think 483 00:23:14,040 --> 00:23:17,000 Speaker 9: it's being touted necessarily as one of the bigger drivers 484 00:23:17,000 --> 00:23:18,720 Speaker 9: of my margins are better year over year. 485 00:23:18,920 --> 00:23:22,560 Speaker 1: When people talk about a more choiceful consumer or more 486 00:23:22,560 --> 00:23:26,040 Speaker 1: discretionary how much are they talking about just a sort 487 00:23:26,080 --> 00:23:29,040 Speaker 1: of stagnant pool and greater competition to get that pool. 488 00:23:29,040 --> 00:23:32,840 Speaker 1: And I'm thinking about higher income individuals, and increasingly the 489 00:23:32,880 --> 00:23:35,280 Speaker 1: holy Grail has been just to get a chunk of that. 490 00:23:36,080 --> 00:23:39,560 Speaker 9: Yes, well, they are speaking about the higher income individuals 491 00:23:39,600 --> 00:23:41,760 Speaker 9: too with the choiceful consumer, and I think it's maybe 492 00:23:41,880 --> 00:23:46,040 Speaker 9: less about consumables versus goods or consumables versus discretionary, but 493 00:23:46,040 --> 00:23:49,400 Speaker 9: it's that services versus goods. Part of what we saw 494 00:23:49,480 --> 00:23:52,400 Speaker 9: during the pandemic was a really heightened demand for goods 495 00:23:52,520 --> 00:23:56,520 Speaker 9: things apparel, home goods, things like that, consumer electronics, and 496 00:23:56,520 --> 00:23:58,320 Speaker 9: then as soon as the world opened up, you went. 497 00:23:58,240 --> 00:23:59,119 Speaker 3: Back to services. 498 00:23:59,359 --> 00:24:03,359 Speaker 9: We haven't white seen that pivot back to discretionary goods. 499 00:24:03,400 --> 00:24:06,399 Speaker 9: It was only on Target and Walmart's conference calls that 500 00:24:06,440 --> 00:24:09,800 Speaker 9: they have just seen some stabilization in goods. So it's 501 00:24:09,880 --> 00:24:13,160 Speaker 9: that choicefulness that's happening at the higher end as well, 502 00:24:13,280 --> 00:24:15,000 Speaker 9: because they're choosing between. 503 00:24:14,680 --> 00:24:15,560 Speaker 3: Services and goods. 504 00:24:15,760 --> 00:24:17,800 Speaker 1: So you've been doing this a very long time. 505 00:24:18,000 --> 00:24:18,840 Speaker 3: You've been all the sasts. 506 00:24:18,840 --> 00:24:21,000 Speaker 1: Six years before that, you were at City Group and 507 00:24:21,040 --> 00:24:23,320 Speaker 1: Credit Suite, and this has been a conference, it's been 508 00:24:23,320 --> 00:24:26,120 Speaker 1: going on for thirty one years. How is this time 509 00:24:26,160 --> 00:24:29,159 Speaker 1: different in terms of just the tenor of certainty or 510 00:24:29,240 --> 00:24:32,119 Speaker 1: lack thereof in terms of the economic cycle as well? 511 00:24:32,119 --> 00:24:33,920 Speaker 1: As the interest rate cycle as well as some of 512 00:24:33,920 --> 00:24:36,000 Speaker 1: the technological overlays that you're seeing. 513 00:24:36,359 --> 00:24:38,200 Speaker 3: Yes, so the cyclicality is. 514 00:24:38,119 --> 00:24:40,000 Speaker 9: Always the name of the game. Right year to year, 515 00:24:40,320 --> 00:24:42,680 Speaker 9: we're going to be in different cycles, and so certainly 516 00:24:42,760 --> 00:24:46,120 Speaker 9: right now we're discussing about the health of the consumer 517 00:24:46,200 --> 00:24:49,119 Speaker 9: because of the interest rate environment we're in, because of 518 00:24:49,720 --> 00:24:52,280 Speaker 9: what's happened over the last five years. But I think 519 00:24:52,320 --> 00:24:55,119 Speaker 9: what's so different about the conference this year and what 520 00:24:55,200 --> 00:24:57,639 Speaker 9: companies are going to be talking about, is we are 521 00:24:57,760 --> 00:25:01,000 Speaker 9: entering year five post COVID. Most of the companies here 522 00:25:01,040 --> 00:25:04,679 Speaker 9: had benefited in a significant way during COVID when everyone 523 00:25:04,760 --> 00:25:07,720 Speaker 9: was shut in and needed to be entertained or needed 524 00:25:07,760 --> 00:25:10,520 Speaker 9: to buy food, and now we should be entering a 525 00:25:10,560 --> 00:25:13,680 Speaker 9: period in twenty twenty five where it's more normal for 526 00:25:13,920 --> 00:25:17,680 Speaker 9: consumer behavior. And so we're going to be focused on asking, 527 00:25:18,200 --> 00:25:20,439 Speaker 9: in addition to the macro and what the expectation is 528 00:25:20,480 --> 00:25:22,920 Speaker 9: for the health of the consumer, what their behavior looks 529 00:25:22,960 --> 00:25:24,200 Speaker 9: like in twenty twenty five. 530 00:25:24,080 --> 00:25:24,760 Speaker 1: What are you seeing? 531 00:25:24,880 --> 00:25:25,720 Speaker 3: What's the answer to that. 532 00:25:25,840 --> 00:25:28,960 Speaker 9: So we're still seeing that choiceful consumer, but as I 533 00:25:29,000 --> 00:25:31,480 Speaker 9: mentioned with Walmart and Target, they are starting to see 534 00:25:31,480 --> 00:25:35,080 Speaker 9: some stabilization indiscretionary goods, and so our thought is that 535 00:25:35,160 --> 00:25:39,720 Speaker 9: you will see more normalization of the consumer balancing the 536 00:25:39,840 --> 00:25:42,600 Speaker 9: choices between goods and consumables and services. 537 00:25:42,720 --> 00:25:46,680 Speaker 1: How much do you see the most powerful companies consolidating 538 00:25:46,720 --> 00:25:48,760 Speaker 1: their market share in a way that we haven't really 539 00:25:48,800 --> 00:25:50,600 Speaker 1: seen in the past. And I'm thinking of Walmart, I'm 540 00:25:50,600 --> 00:25:52,879 Speaker 1: thinking of Amazon, I'm thinking of some of the behemoths. 541 00:25:53,200 --> 00:25:56,040 Speaker 9: Yes, we do think that that is an element that's 542 00:25:56,040 --> 00:25:58,280 Speaker 9: happening across retail to the haves and. 543 00:25:58,600 --> 00:25:59,520 Speaker 4: Almost the have nots. 544 00:25:59,560 --> 00:26:03,320 Speaker 9: And part of the phenomenon is that the scale and 545 00:26:03,359 --> 00:26:06,040 Speaker 9: the one stops shopping is really appealing to the consumer. 546 00:26:06,119 --> 00:26:08,720 Speaker 9: So if we take Walmart as an example, it's not 547 00:26:08,800 --> 00:26:12,480 Speaker 9: just the value that they're offering the consumer, the discounted prices, 548 00:26:12,520 --> 00:26:16,720 Speaker 9: the rollbacks, but it's the convenience. It's the fulfillment optionality 549 00:26:16,760 --> 00:26:19,200 Speaker 9: that you can get with delivery or click and collect 550 00:26:19,280 --> 00:26:20,200 Speaker 9: or buy online. 551 00:26:19,880 --> 00:26:20,720 Speaker 3: And pick up in store. 552 00:26:21,160 --> 00:26:23,960 Speaker 1: What do you think is the biggest anxiety at this 553 00:26:24,040 --> 00:26:27,880 Speaker 1: conference for the eighty sum companies and executives that are here. 554 00:26:28,520 --> 00:26:32,520 Speaker 9: I do think it's figuring out the consumer. That's probably one. 555 00:26:32,720 --> 00:26:37,119 Speaker 9: I would say tariffs is another. That's a big question 556 00:26:37,200 --> 00:26:39,359 Speaker 9: mark as to what that looks like post the election, 557 00:26:39,520 --> 00:26:42,600 Speaker 9: and it could be very costly and retailers are going 558 00:26:42,640 --> 00:26:43,720 Speaker 9: to have to figure out what they do with their 559 00:26:43,720 --> 00:26:45,119 Speaker 9: pricing as a result of that. 560 00:26:45,560 --> 00:26:47,560 Speaker 1: Kate McShane, thank you so much for being with us, 561 00:26:47,600 --> 00:26:49,760 Speaker 1: Thank you for having us here. That was Kate McShane, 562 00:26:50,000 --> 00:26:52,720 Speaker 1: us retailing analyst at Goldman Sax here at the Goldman 563 00:26:52,800 --> 00:26:53,840 Speaker 1: Sax Retailing Conference. 564 00:26:54,440 --> 00:26:58,000 Speaker 2: This is the Bloomberg Seventans podcast, bringing you the best 565 00:26:58,000 --> 00:27:01,560 Speaker 2: in markets, economics, angiopolitic. 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