WEBVTT - Meta Misfire, Market Selloff 0:00:02.920 --> 0:00:10.840 Bloomberg Audio Studios, podcasts, radio news. You're listening to the 0:00:10.840 --> 0:00:15.040 Bloomberg Intelligence Podcast. Catch us live weekdays at ten am 0:00:15.040 --> 0:00:18.040 Eastern on Affo, Cardplay and Android Auto with the Bloomberg 0:00:18.079 --> 0:00:21.400 Business App. Listen on demand wherever you get your podcasts, 0:00:21.640 --> 0:00:24.480 or watch us live on YouTube. 0:00:25.200 --> 0:00:26.800 One of the stocks in the news you were right 0:00:26.840 --> 0:00:30.440 and a thick of earnings is Facebook. The kids call 0:00:30.480 --> 0:00:33.199 it meta. It's not about ten percent today. They put 0:00:33.200 --> 0:00:35.280 out some numbers last night after the closed revenue a 0:00:35.320 --> 0:00:38.199 little bit slower than expected, and then they ramping up 0:00:38.479 --> 0:00:42.279 spending on artificial intelligence, and that's setting the stock back 0:00:42.320 --> 0:00:44.879 a little bit. Here, let's get some perspective on Facebook, 0:00:44.920 --> 0:00:48.080 and nobody better there than David Kirkpatrick. He is the 0:00:48.080 --> 0:00:50.919 founder of Techomedy and he's also the author of The 0:00:50.960 --> 0:00:54.760 Facebook Effect In My Mind, the definitive book on Facebook 0:00:55.000 --> 0:00:58.280 when it just kind of bursts onto the public consciousness. David, 0:00:58.320 --> 0:01:00.880 thanks so much for joining us here. What were your 0:01:00.920 --> 0:01:05.360 takeaways from I guess their results, the conference call last night, 0:01:05.640 --> 0:01:08.680 Mark Zuckerber's comments about the investments required for AI. 0:01:08.880 --> 0:01:09.919 How do you put it all together? 0:01:10.720 --> 0:01:13.119 Well, first of all, their results were stellar. You can't 0:01:13.120 --> 0:01:16.040 say anything other than that they are making great growth 0:01:16.319 --> 0:01:20.440 and profit. The problem, such as there is a problem, 0:01:21.040 --> 0:01:24.600 is that they are spending so much money on capital costs, 0:01:25.000 --> 0:01:29.039 mostly connected to artificial intelligence, and the question of what 0:01:29.080 --> 0:01:32.120 the returns on that will be, I think is legitimately 0:01:32.520 --> 0:01:36.200 on investors' minds, and that, probably more than any other factor, 0:01:36.680 --> 0:01:39.720 explains the fairly dramatic drop in the stock. 0:01:40.440 --> 0:01:42.960 How about for you, though, David, I mean, are you questioning, 0:01:43.480 --> 0:01:45.959 you know, just how good of an investment this might be, 0:01:46.120 --> 0:01:48.880 or you think it's this is perhaps like a you know, 0:01:48.960 --> 0:01:51.559 it will be a significant revenue driver at some point. 0:01:52.880 --> 0:01:53.800 It's a great question. 0:01:53.840 --> 0:01:56.040 Well, first of all, you've got to look at this company, 0:01:56.120 --> 0:01:59.600 of all the tech companies, has just skyrocketed in the 0:01:59.680 --> 0:02:02.560 last year or so, so you know, this is a 0:02:02.680 --> 0:02:05.840 very highly valued stock compared to what it was, and 0:02:05.920 --> 0:02:09.280 I think given the extraordinary run up, a little bit. 0:02:09.120 --> 0:02:10.800 Of a correction is hardly a shock. 0:02:11.400 --> 0:02:16.799 So probably you could say it's not at all problematic 0:02:16.880 --> 0:02:18.799 that the stock has pulled back a little bit. From 0:02:18.800 --> 0:02:22.040 that perspective, I think the most interesting thing. I'm actually 0:02:22.040 --> 0:02:24.600 here at the Council on Foreign Relations having just attended 0:02:24.639 --> 0:02:27.520 a meeting that was very heavily focused on energy, and 0:02:27.919 --> 0:02:31.480 you know, even Zuckerberg in his remarks yesterday, was talking 0:02:31.560 --> 0:02:34.560 about the energy costs of AI are going to be 0:02:34.720 --> 0:02:38.120 one of the significant capital expenditures they're having to deal with, 0:02:38.280 --> 0:02:40.919 so they have to build their own renewable energy infrastructure 0:02:40.919 --> 0:02:43.240 in many instances these days, and this is true of 0:02:43.280 --> 0:02:46.480 all these big companies. The thing that I'm thinking about 0:02:46.600 --> 0:02:50.600 right now is whether, in some sense, because of the 0:02:50.600 --> 0:02:54.560 sheer scale of the investments that are having to be 0:02:54.639 --> 0:02:56.839 made in data centers and the energy. 0:02:56.560 --> 0:02:58.919 Associated with them, that these. 0:02:58.760 --> 0:03:02.160 Companies are shifting to in the long run a fundamentally 0:03:02.160 --> 0:03:04.760 different business model that's a little bit more like a 0:03:04.880 --> 0:03:08.560 utility where they're just going to be facing these ongoing 0:03:08.680 --> 0:03:12.480 gigantic costs just to stay abreast with one another. I 0:03:12.520 --> 0:03:14.560 don't think we know the answer to that yet, but 0:03:14.639 --> 0:03:16.680 it could very well be starting to happen. 0:03:16.800 --> 0:03:20.320 I gotta say, though, when you're looking at the estimates 0:03:20.320 --> 0:03:23.080 for the CAPEX here, to me, it doesn't look like 0:03:23.120 --> 0:03:26.399 it's all that different from what they had previously estimated. 0:03:26.440 --> 0:03:29.480 So they now think capex this capital expenditure is going 0:03:29.520 --> 0:03:31.160 to be in the range of thirty five to forty 0:03:31.200 --> 0:03:34.480 billion dollars before thirty to thirty seven. 0:03:34.920 --> 0:03:35.240 I don't know. 0:03:35.320 --> 0:03:37.080 That sounds pretty similar to me, is it not? 0:03:37.880 --> 0:03:39.960 It is similar, and you know, I think you know, 0:03:40.320 --> 0:03:42.360 markets tend to overreact, there's no question. 0:03:42.600 --> 0:03:44.960 I mean, I think that what people were reacting to in. 0:03:44.960 --> 0:03:49.280 Zuckerberg's call yesterday was more a tone that he was 0:03:49.840 --> 0:03:53.960 conveying that the payoff for some of these expenditures maybe 0:03:54.000 --> 0:03:58.360 a little longer than people expected. They don't face any 0:03:58.400 --> 0:04:01.720 fundamental problem in the short term. So in that sense, 0:04:01.720 --> 0:04:05.160 you're right, And in fact, I think Meta has done 0:04:05.200 --> 0:04:08.520 an unusually good job of taking advantage of AI in 0:04:08.640 --> 0:04:11.400 the recent year or two in that they are doing 0:04:11.440 --> 0:04:13.800 a better job targeting advertising with AI. 0:04:14.240 --> 0:04:15.880 That's a concrete benefit. 0:04:17.040 --> 0:04:19.400 The thing that's also interesting, though to me, if I 0:04:19.440 --> 0:04:22.120 were an investor, that I would be somewhat concerned about, 0:04:22.680 --> 0:04:25.960 is that the Meta AI product, which they're just rolling 0:04:25.960 --> 0:04:29.000 out to their customers or their users across a lot 0:04:29.000 --> 0:04:33.080 of their services, effectively is a way of declaring that 0:04:33.120 --> 0:04:36.720 they're competing head to head with Google, because they're basically 0:04:36.760 --> 0:04:41.400 starting to do what is effectively search inside Instagram, inside 0:04:41.440 --> 0:04:45.760 Facebook using their meta AI product. So you've got to 0:04:46.120 --> 0:04:48.440 that's a different business model. If they go down that 0:04:48.600 --> 0:04:53.159 road too far, they still have an extraordinary ability to 0:04:53.160 --> 0:04:57.240 target advertising that is superior to pretty much anybody else, 0:04:57.240 --> 0:04:59.440 and that's going to guarantee a lot of profit for 0:04:59.480 --> 0:05:00.200 the long term. 0:05:00.680 --> 0:05:04.800 David, where is the metaverse these days in terms of 0:05:04.839 --> 0:05:06.720 mister Zuckerberg's the zeitgeist. 0:05:07.720 --> 0:05:10.720 Well, in his zeitgeist, it's very prominent. I don't think 0:05:10.760 --> 0:05:13.640 it's really high in the zeitgeist of much of anybody else. 0:05:14.000 --> 0:05:16.880 I mean, it's so prominent he renamed his company. I 0:05:16.880 --> 0:05:19.640 wouldn't be surprised if he regrets that now. But he 0:05:19.720 --> 0:05:22.640 got out of a tight spot with Francis Hougan at 0:05:22.680 --> 0:05:26.200 the moment by doing that. I don't think the metaverse 0:05:26.240 --> 0:05:28.200 is nearly such a big deal as you would think 0:05:28.240 --> 0:05:30.560 listening to him, and I don't think any other company 0:05:30.560 --> 0:05:32.839 thinks it's that big of a deal in any kind 0:05:32.839 --> 0:05:35.680 of short term. The degree to which it could be 0:05:35.720 --> 0:05:38.680 a big deal long term is unknown. We know that 0:05:38.760 --> 0:05:42.200 AI is changing everything now. We have no reason to 0:05:42.240 --> 0:05:47.440 think that metaverse issues are going to change everything anytime soon. 0:05:48.279 --> 0:05:51.680 Not that I would think that. Zacharbergo to commented on this, 0:05:51.760 --> 0:05:53.440 but I'm sure, he's got to be thinking, you know, 0:05:53.520 --> 0:05:56.560 what if TikTok gets banned and potentially what a boon 0:05:56.640 --> 0:05:59.520 that would be for Instagram and the reals product. I mean, 0:05:59.720 --> 0:06:01.760 how much you think is that getting priced into the 0:06:01.760 --> 0:06:02.560 stock right now? 0:06:03.600 --> 0:06:04.799 Probably not at all. 0:06:05.440 --> 0:06:08.200 There's also things that aren't being priced in, like extreme 0:06:08.360 --> 0:06:11.520 regulatory pushback in Europe that's really changing the way that 0:06:11.720 --> 0:06:15.120 Meta is able to target users in advertising across all 0:06:15.160 --> 0:06:18.240 of its product lines. So there's big shifts happening. It's 0:06:18.320 --> 0:06:21.360 very hard to know where these companies are headed. But yes, 0:06:21.440 --> 0:06:24.520 if TikTok really were banned, which frankly I do not expect, 0:06:25.320 --> 0:06:28.280 that would be fantastically great news for this company, and 0:06:28.600 --> 0:06:30.880 one would want to, you know, go along on them 0:06:30.920 --> 0:06:34.400 if you thought that's really likely. So yeah, there's so 0:06:34.480 --> 0:06:38.960 many shifting parts in this equation it is astonishing. 0:06:38.600 --> 0:06:41.960 All right, David Busy busy week for tech earnings. Also 0:06:42.040 --> 0:06:44.800 Microsoft and Alphabet. Let's just go to Alphabet because that's 0:06:44.880 --> 0:06:48.560 kind of Dove's tails on kind of the digital advertising 0:06:48.640 --> 0:06:52.240 theme that we started last night with Facebook. How are 0:06:52.240 --> 0:06:55.080 they are good friends at Google slash Alphabet? 0:06:55.120 --> 0:06:56.600 How are they doing? What do you expect here with 0:06:56.600 --> 0:06:57.400 their earnings, well. 0:06:57.320 --> 0:07:00.600 I think I think again, earnings from the standpoint of 0:07:00.640 --> 0:07:04.880 the ongoing business will be good. The question again will arise, 0:07:05.000 --> 0:07:07.799 how much are they spending on AI and data center 0:07:07.880 --> 0:07:12.520 infrastructure and what's the chronology of the likely payoff? And 0:07:12.560 --> 0:07:16.200 you're seeing concerns being raised by analysts that the number 0:07:16.560 --> 0:07:19.920 of investment is going to be higher and the possible 0:07:20.040 --> 0:07:21.560 long term returns, just like. 0:07:21.560 --> 0:07:23.320 With META, could be longer. 0:07:24.200 --> 0:07:28.600 But these businesses are thriving for the most part overall. 0:07:28.680 --> 0:07:31.480 I think Microsoft in particular, which is also coming up, 0:07:31.880 --> 0:07:34.840 is a company that just can't really do anything wrong 0:07:34.880 --> 0:07:38.240 from the standpoint of investors, and I think they but 0:07:38.360 --> 0:07:41.480 they too are going to be spending even more on 0:07:41.720 --> 0:07:45.640 AI infrastructure and it's becoming almost like an energy investment 0:07:45.720 --> 0:07:48.920 as well as a data center and server investment. 0:07:49.200 --> 0:07:51.200 So then it sounds like, though there has to be 0:07:51.280 --> 0:07:53.880 an investor's mind at least, there is a ceiling for 0:07:54.280 --> 0:07:57.920 how much investment in AI is too much. It sounds 0:07:57.960 --> 0:07:59.640 like that there is a bit of a threshole than. 0:07:59.600 --> 0:08:02.760 To find let's figure out what the ceiling is. I 0:08:02.760 --> 0:08:03.440 have no clue. 0:08:03.520 --> 0:08:06.440 Nobody really knows what's happening with AI. It's a frenzy. 0:08:06.880 --> 0:08:11.400 Everybody's piling in rightly so, but the exact terms of 0:08:11.520 --> 0:08:15.080 long term competition are effectively unknown. So to say the 0:08:15.120 --> 0:08:17.600 ceiling is X or the ceiling is why it's pretty 0:08:17.600 --> 0:08:18.040 hard to. 0:08:17.920 --> 0:08:21.680 Do, all right, David, So stepping back here, who do 0:08:21.680 --> 0:08:25.000 you think among is is a. 0:08:25.200 --> 0:08:26.680 How real is AI to you? 0:08:26.840 --> 0:08:27.960 I mean, I think that a lot of people are 0:08:27.960 --> 0:08:29.800 trying to get a sense of is this just big 0:08:29.880 --> 0:08:31.680 data we were talking about four or five years ago, 0:08:31.840 --> 0:08:34.360 or is this something fundamentally different. 0:08:35.520 --> 0:08:37.760 Well, it is something fundamentally different. 0:08:38.320 --> 0:08:41.240 I think that's widely believed at this point, and I 0:08:41.320 --> 0:08:44.880 believe it. But again, the way it's going to manifest 0:08:44.880 --> 0:08:49.439 itself in business terms is extremely hard to predict. I 0:08:49.480 --> 0:08:54.040 know for myself, I am surprisingly often using chat GPT 0:08:54.200 --> 0:08:56.880 instead of Google, and I'm getting results that I really 0:08:56.920 --> 0:08:59.480 can use and I think many people are finding that. 0:09:00.320 --> 0:09:03.520 So this is changing the nature of these businesses in 0:09:03.559 --> 0:09:06.280 a fundamental way. And I think if it's if Meta, 0:09:06.360 --> 0:09:11.000 for example, successfully deploys meta AI across all its products 0:09:11.000 --> 0:09:13.160 and just while you're in the middle of using Instagram 0:09:13.559 --> 0:09:16.600 or Facebook, you can do a search using their their 0:09:17.160 --> 0:09:19.960 AI tool that you would have otherwise had to leave 0:09:20.080 --> 0:09:21.200 metas product. 0:09:20.920 --> 0:09:21.920 To go to Google to do. 0:09:22.679 --> 0:09:26.560 That's a strategic benefit for them, So it is worth 0:09:26.600 --> 0:09:30.200 making those investments. But you know, when you're talking about 0:09:30.280 --> 0:09:34.840 annual capital expenditures of forty billion dollars, you know it's 0:09:34.880 --> 0:09:37.040 hard to know what is it? Should it be forty five? 0:09:37.160 --> 0:09:38.280 Should it be thirty five? 0:09:38.600 --> 0:09:40.520 Look? I wish I knew. 0:09:41.720 --> 0:09:43.120 David, Thanks so much for joining us. 0:09:43.240 --> 0:09:45.920 As always, always appreciate getting your perspective on all things tech. 0:09:46.200 --> 0:09:50.480 David Kirkpatrick, founder of tech Ominie and also the author 0:09:50.520 --> 0:09:53.320 of the book The Seminal Book I Think on Facebook 0:09:53.360 --> 0:09:54.400 is the Facebook Effect. 0:09:54.440 --> 0:09:59.720 There you're listening to the Bloomberg Intelligence Podcast. Catch us 0:09:59.760 --> 0:10:01.920 Live I have week days at ten am Eastern on 0:10:02.040 --> 0:10:05.400 applecar Play and Android Auto with the Bloomberg Business Act. 0:10:05.559 --> 0:10:08.439 You can also listen live on Amazon Alexa from our 0:10:08.440 --> 0:10:12.839 flagship New York station Just Say Alexa playing Bloomberg eleven thirty. 0:10:13.960 --> 0:10:16.720 Big economic data point coming out today GDP plus some 0:10:16.720 --> 0:10:18.880 inflation data coming out spooking the markets a little bit. Here, 0:10:18.880 --> 0:10:21.120 I'm looking at the yield curb the two year treasury 0:10:21.440 --> 0:10:24.960 seeing right at five percent, big move up seven basis points, 0:10:25.200 --> 0:10:27.400 and that kind of feeds into Like I'm looking at 0:10:27.440 --> 0:10:30.080 the thirty year fixed mortgage, it's now back up to 0:10:30.120 --> 0:10:32.600 seven point two four percent. 0:10:32.880 --> 0:10:35.520 Better believe it's going to be higher next week, assuming 0:10:35.679 --> 0:10:38.000 you know that the trend right now still holds. And 0:10:38.040 --> 0:10:40.319 I'm sure you know Powell next week probably gonna have 0:10:40.360 --> 0:10:43.280 to rip up the script say something a bit more hawkish. Yep, 0:10:43.400 --> 0:10:45.240 we're gonna have Ibra Jersey come in and tell us 0:10:45.280 --> 0:10:48.200 all about it now. So Ira Jersey joining us on 0:10:48.440 --> 0:10:51.560 Zoom from Princeton, New Jersey, where we definitely need to 0:10:51.559 --> 0:10:52.560 host our next show from. 0:10:52.640 --> 0:10:54.240 We will do that at some point. 0:10:54.400 --> 0:10:57.880 So IRA's archiefus Interest Rate Strategies at Bloomberg Intelligence. Thanks 0:10:57.920 --> 0:10:58.440 for joining us. 0:10:58.480 --> 0:10:58.720 Ira. 0:10:59.280 --> 0:11:02.360 We've been looking at these GDP numbers and obviously the 0:11:02.400 --> 0:11:05.160 inflation print really seems to be driving the market action today. 0:11:05.200 --> 0:11:06.160 Tell us what you're looking at. 0:11:07.200 --> 0:11:10.240 Yeah, So obviously that inflation print just implies that the 0:11:10.480 --> 0:11:12.640 monthly number that we get tomorrow is going to be 0:11:13.679 --> 0:11:16.959 is going to be much higher than economists are expecting, 0:11:17.000 --> 0:11:20.119 and that is a big driver. You know, when inflations 0:11:20.200 --> 0:11:23.520 is high, that the market has to continue to reprice 0:11:24.520 --> 0:11:27.520 the expectations of when and if the Federal Reserve is 0:11:27.520 --> 0:11:30.480 going to actually cut interest rates, And the market now 0:11:30.600 --> 0:11:34.000 is much more symmetric in thinking not only yes, it's 0:11:34.040 --> 0:11:36.280 like fifty percent chance that they're going to cut interest rates, 0:11:36.280 --> 0:11:39.560 but there's actually a growing chance that's being priced into 0:11:39.640 --> 0:11:42.440 markets that the Fed's next move may actually be an 0:11:42.480 --> 0:11:47.400 interest rate increase, right, a hike at some point. I 0:11:47.480 --> 0:11:50.840 personally think that that's a relatively low probability, still probably 0:11:50.880 --> 0:11:53.840 lower than what the market's pricing. But on hold is 0:11:54.480 --> 0:11:57.960 I think a growing default scenario for the next nine 0:11:58.000 --> 0:12:01.080 to twelve months for the Fed because inflation is just 0:12:01.120 --> 0:12:03.079 too high. It's way above their comfort level. 0:12:03.600 --> 0:12:06.959 So, you know, Ira, I guess one of the questions is, here, 0:12:07.160 --> 0:12:10.040 did the FED in j Powell back in December when 0:12:10.040 --> 0:12:12.160 it kind of had that Fed pivot started talking a 0:12:12.160 --> 0:12:14.760 little bit more dubbish in hindsight? 0:12:14.880 --> 0:12:18.040 Was that a mistake? Well, it was a mistake because 0:12:18.040 --> 0:12:20.080 their forecasts were wrong, right Like, at the end of 0:12:20.080 --> 0:12:24.000 the day, the FED makes forecasts just like everyone makes forecasts, 0:12:24.000 --> 0:12:27.800 and their forecasts for how quickly inflation was going to 0:12:27.840 --> 0:12:31.760 slow down was incorrect. And you know we, I mean 0:12:31.800 --> 0:12:33.679 we were incorrect too, and we were among the more 0:12:33.720 --> 0:12:39.400 hawkish or less dubvish, probably strategists on the street. You know. 0:12:39.440 --> 0:12:42.960 The issue that's come up is that when you looked 0:12:42.960 --> 0:12:45.080 at the survey data, a lot of the survey data 0:12:45.120 --> 0:12:47.840 back in December and even in January and February, it 0:12:48.000 --> 0:12:50.640 was pointing toward a slow down in the economy. So 0:12:50.679 --> 0:12:54.720 a lot of the traditional indicators for economic activity, like ism, 0:12:54.800 --> 0:12:57.959 new orders, like some of the consumer confidence surveys, they 0:12:58.000 --> 0:13:02.440 were all pointing to a potential slowdown. But and even 0:13:02.440 --> 0:13:05.440 though those have rebounded just a little bit, the hard data, 0:13:05.520 --> 0:13:09.760 so things like retail sales, personal consumption, spending, the jobs 0:13:09.840 --> 0:13:13.439 data obviously is probably among the most important and visible 0:13:13.760 --> 0:13:16.760 of these numbers, those have all been reasonably robust. So 0:13:16.800 --> 0:13:19.640 there's this disconnect between what people are saying and what 0:13:19.679 --> 0:13:21.960 people are doing. And I think that that's really been 0:13:22.000 --> 0:13:25.400 a challenge for forecasters who rely on these surveys for 0:13:25.400 --> 0:13:29.160 forward looking indicators and they just haven't been realized. So, 0:13:30.120 --> 0:13:32.720 you know, so they made a bad forecast, so therefore 0:13:32.720 --> 0:13:35.520 they made a bad pivot, and now they have to 0:13:35.600 --> 0:13:37.800 kind of take some of that back. And that's exactly 0:13:37.800 --> 0:13:39.560 what you've heard out of a lot of the FED 0:13:39.600 --> 0:13:42.520 speakers the last couple of weeks during the quiet period now, 0:13:42.720 --> 0:13:44.800 so you're not going to hear anything from FED speakers 0:13:44.880 --> 0:13:48.040 until next Wednesday. But when you go back and you 0:13:48.080 --> 0:13:49.720 listen to what Jay Powell said and a lot of 0:13:49.720 --> 0:13:53.600 the other speakers, you know they're going to probably continue 0:13:53.640 --> 0:13:56.520 to say, like, look at unless inflation goes down more 0:13:56.559 --> 0:13:59.720 significantly and substantially, we're going to keep interest rates on hold, 0:13:59.760 --> 0:14:02.960 and think that that's probably what Japowe will say next week. 0:14:03.080 --> 0:14:05.719 So it sounds like you think, then, Ira that this 0:14:06.160 --> 0:14:09.040 you know, print that we got today, the robust inflation 0:14:09.120 --> 0:14:11.440 prints that we've gotten to start this year, who knows 0:14:11.440 --> 0:14:14.280 what we'll see tomorrow, doesn't seem to really change the 0:14:14.360 --> 0:14:16.960 narrative a whole lot. That the economy is still proving, 0:14:17.800 --> 0:14:20.200 you know, to run really strong. Doesn't seem like interest 0:14:20.240 --> 0:14:23.160 rates are really denting that a whole lot, And that's 0:14:23.200 --> 0:14:25.240 still the narrative that they're going to go with. Or 0:14:25.280 --> 0:14:27.120 do you think that anything has changed here? 0:14:28.400 --> 0:14:30.600 Yeah, I don't think very much has changed. You know, 0:14:30.720 --> 0:14:34.760 interest rate sensitive sectors have certainly been affected by interest 0:14:34.840 --> 0:14:38.360 rate hikes, But what's happened over the last fifteen to 0:14:38.360 --> 0:14:43.560 twenty years is that we've shifted away, firstly from interest 0:14:43.600 --> 0:14:46.760 rate sensitive growth to non interest rate sensitive growth. So 0:14:46.840 --> 0:14:49.400 things like the services sector. When you dig into the 0:14:49.440 --> 0:14:53.200 details of today's GDP report, you see that on a 0:14:53.200 --> 0:14:57.880 seasonally adjusted annualized basis, the retail the services sector so 0:14:58.040 --> 0:15:02.200 a four percent growth, whereas the durable goods sector so 0:15:02.320 --> 0:15:05.600 a negative one percent growth. Right, So, so and durable 0:15:05.640 --> 0:15:07.920 goods where things like autos, right, so, auto sales have 0:15:07.920 --> 0:15:11.240 slowed down substantially. Part of that's on price, you know, 0:15:11.280 --> 0:15:15.080 certainly prices have gone up, but that's also credit availability. Right. 0:15:15.160 --> 0:15:18.440 Large purchases like automobiles and houses you tend to buy, 0:15:18.600 --> 0:15:21.000 tend to be purchased on credit of some form or another, 0:15:21.440 --> 0:15:24.920 and so those are very sensitive to these higher interest rates, 0:15:25.120 --> 0:15:28.560 where whereas service sector, the service sector just isn't you know, 0:15:28.640 --> 0:15:32.920 services aren't a you know, services spending have more to 0:15:32.960 --> 0:15:36.080 do with wages, how much disposable cash you have as 0:15:36.080 --> 0:15:38.880 opposed to as opposed to you know, you're not going 0:15:38.960 --> 0:15:41.320 to probably go out and go to the movies and 0:15:41.360 --> 0:15:44.120 then you know finance that over ten years, Right, that's 0:15:44.160 --> 0:15:46.840 just not something you're gonna do. You're gonna spend. But 0:15:46.840 --> 0:15:48.400 but if you have. You know, if you get a 0:15:48.400 --> 0:15:51.280 pay raise, you might go to that an extra movie 0:15:51.280 --> 0:15:53.800 every month. And that's basically what you're seeing in the data. 0:15:54.120 --> 0:15:56.200 And if those trends continue, then you can wind up 0:15:56.240 --> 0:15:59.960 having an okay economy and the Federal Reserve, you know, 0:16:00.160 --> 0:16:02.080 might not have to move interest rates very much at all. 0:16:02.200 --> 0:16:04.400 Well then what can they do about inflation? Then? If 0:16:04.480 --> 0:16:09.560 our economy is just structurally more resistant to higher interest rates? 0:16:10.800 --> 0:16:12.320 Yeah, well, there's not much you could do. You could 0:16:12.320 --> 0:16:15.120 either raise interest rates a lot more, and you know, 0:16:15.160 --> 0:16:18.400 that would probably ultimately be recessionary because you'd wind up 0:16:18.400 --> 0:16:21.320 with a recession in housing, a recession maybe in the 0:16:21.360 --> 0:16:24.280 auto sector and some of the other interest rates sensitive sectors, 0:16:24.320 --> 0:16:27.480 and that could to start ultimately to bring down the 0:16:27.600 --> 0:16:30.600 entire economy. Or you know, you could do things that 0:16:30.600 --> 0:16:34.160 are politically unpopular, things like raising taxes for example, just 0:16:34.200 --> 0:16:37.640 reduce the ability for the household sector to spend money. 0:16:38.720 --> 0:16:42.600 Or and this is something that I think a mistake 0:16:42.640 --> 0:16:45.680 that the Federal Reserve made. The Federal Reserve could come 0:16:45.720 --> 0:16:47.600 out and just say like, hey, we're not worried about 0:16:47.840 --> 0:16:50.960 two and a half three percent inflation anymore. You know, 0:16:51.440 --> 0:16:54.200 that's fine, and if you go back to the nineteen nineties, 0:16:54.200 --> 0:16:57.000 for example, like we were running at around two and 0:16:57.040 --> 0:17:01.000 a half to three percent pc deflator, So you know, 0:17:01.080 --> 0:17:03.240 why not pivot back to that, you know, I think 0:17:03.240 --> 0:17:06.400 the mistake that the FED made was having a hard 0:17:06.440 --> 0:17:09.720 target of two percent on inflation as opposed to something 0:17:09.800 --> 0:17:12.320 just a little bit more flexible. And the fact is 0:17:12.359 --> 0:17:15.400 that inflation's not increasing, right, Inflation is not going up anymore, 0:17:15.520 --> 0:17:18.080 it's just not coming down. And because it's not coming down, 0:17:18.800 --> 0:17:21.119 it's they're not reaching their two percent target. And I 0:17:21.160 --> 0:17:23.480 think that's where the disconnect really has come. 0:17:23.840 --> 0:17:25.560 All right, Ira, thank you so much for joining us 0:17:25.560 --> 0:17:29.320 our Jersey chief US interest rate stratag just Bloomberg Intelligence 0:17:29.600 --> 0:17:33.080 joining us from the Princeton campus down via zoom there. 0:17:33.119 --> 0:17:34.280 So interesting to see. 0:17:34.280 --> 0:17:38.560 So the GDP print again the takeaway, as I understand 0:17:38.640 --> 0:17:42.439 from you, Molly, the headline very disappointing, but if you 0:17:42.440 --> 0:17:43.880 dig underneath it a little bit less. 0:17:43.720 --> 0:17:46.879 So yeah, exactly, I think, you know, one of the 0:17:46.920 --> 0:17:51.200 parts of the headline that was disappointing was the fact 0:17:51.240 --> 0:17:54.800 that trade subtracted from growth, as in higher imports relative 0:17:54.840 --> 0:17:57.960 to exports. But higher imports also mean that there's a 0:17:57.960 --> 0:18:00.200 lot of demand. The idea is just that we're we're 0:18:00.200 --> 0:18:03.120 seeing it from outside the country rather than producing it here. 0:18:03.240 --> 0:18:06.280 So I think that still bodes well for the story 0:18:06.320 --> 0:18:09.320 of the consumer and the health of the consumer, and 0:18:09.359 --> 0:18:12.160 that demanding the economy is still strong, and obviously that's 0:18:12.160 --> 0:18:16.720 still making inflation not go away. 0:18:17.119 --> 0:18:21.000 You're listening to the Bloomberg Intelligence Podcast. Catch us live 0:18:21.080 --> 0:18:24.160 weekdays at ten am Eastern on Apple Car playing Android 0:18:24.200 --> 0:18:27.280 Otto with the Bloomberg Business App. Listen on demand wherever 0:18:27.359 --> 0:18:30.960 you get your podcasts, or watch us live on YouTube. 0:18:31.720 --> 0:18:34.240 Molly Smith, she's sitting in for Alex Steel this week 0:18:34.240 --> 0:18:34.879 on Paul Sweeney. 0:18:34.880 --> 0:18:36.840 We're live here on Bloomberg Interrector Brooker's. 0:18:36.520 --> 0:18:38.560 Studio, streaming live on YouTube, so you can head over 0:18:38.600 --> 0:18:41.560 to YouTube dot com and search Bloomberg Podcasts and that's 0:18:41.600 --> 0:18:44.160 where you will find us. We had that GDP print 0:18:44.280 --> 0:18:48.040 that came out this morning, significantly weaker on the surface 0:18:48.280 --> 0:18:51.600 than the forecast and showing a pretty market decline from 0:18:51.600 --> 0:18:54.320 the last month as well, and that's kind of having 0:18:54.359 --> 0:18:56.199 an impact on the market sins. John Tucker is just 0:18:56.240 --> 0:19:00.679 reporting yields up, stock prices down. Let's get perspective here. 0:19:00.720 --> 0:19:02.639 We can do that with Barry Ridholts. He's host of 0:19:02.680 --> 0:19:05.600 Masters in Business on Bloomberg Radium. It's also the founder 0:19:05.680 --> 0:19:09.159 rid Holt's Wealth management. Hey, Barry, So we get the 0:19:09.200 --> 0:19:11.600 economic data, it kind of freaks people out as it 0:19:11.600 --> 0:19:14.520 relates to where this economy is going a what did 0:19:14.560 --> 0:19:16.760 you read into the economic data that came out today, 0:19:16.760 --> 0:19:20.119 both on GDP and inflation and maybe how the market's 0:19:20.160 --> 0:19:20.800 reacting to it. 0:19:22.000 --> 0:19:25.880 Yeah, So I always love I always love the attempt 0:19:25.960 --> 0:19:30.080 to impose rationality on what is essentially a free for all. 0:19:31.240 --> 0:19:34.919 We've we've had the FED crank up rates five hundred 0:19:34.920 --> 0:19:39.119 and twenty five point basis points from zero, and we 0:19:39.280 --> 0:19:44.679 continue to hear the phrase long and variable lags on 0:19:44.960 --> 0:19:49.399 the growth side. And at a certain point you have 0:19:49.480 --> 0:19:52.640 to assume the root. You know, the chickens come home 0:19:52.680 --> 0:19:56.960 to roost, and this is the natural impact of the 0:19:57.119 --> 0:20:00.959 higher cost of credit, higher rates. We've already seen housing 0:20:01.040 --> 0:20:04.880 slow because there's no real supply around, but now you're 0:20:04.880 --> 0:20:08.400 seeing an impact things like automobile sales. Remember went through 0:20:08.440 --> 0:20:11.880 a big period where you couldn't get cars easily. Now 0:20:11.920 --> 0:20:14.960 that's behind us, and car sales are starting to slow down. 0:20:15.680 --> 0:20:20.240 Gasoline sales are starting to slow down. You have to 0:20:20.359 --> 0:20:23.639 lay this right at the feet of the FED. And 0:20:23.760 --> 0:20:27.320 yet at the same time, when we take apart the 0:20:27.359 --> 0:20:33.040 inflation data, you know, the FED BLS data includes renewals 0:20:33.560 --> 0:20:37.119 as well as someone moving into a new house or apartment. 0:20:38.200 --> 0:20:41.560 If your lease renews, if you just renew your lease 0:20:42.400 --> 0:20:44.639 that was set in motion two years ago when you 0:20:44.680 --> 0:20:49.000 did your priorly lease, the FED has nothing. What's over 0:20:49.040 --> 0:20:50.560 to do with rates, have nothing to do with it. 0:20:50.960 --> 0:20:54.200 But two years ago lea that lease had a heavy 0:20:55.080 --> 0:20:57.880