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Speaker 2: One of the stocks in the news you were right
Speaker 2: and a thick of earnings is Facebook. The kids call
Speaker 2: it meta. It's not about ten percent today. They put
Speaker 2: out some numbers last night after the closed revenue a
Speaker 2: little bit slower than expected, and then they ramping up
Speaker 2: spending on artificial intelligence, and that's setting the stock back
Speaker 2: a little bit. Here, let's get some perspective on Facebook,
Speaker 2: and nobody better there than David Kirkpatrick. He is the
Speaker 2: founder of Techomedy and he's also the author of The
Speaker 2: Facebook Effect In My Mind, the definitive book on Facebook
Speaker 2: when it just kind of bursts onto the public consciousness. David,
Speaker 2: thanks so much for joining us here. What were your
Speaker 2: takeaways from I guess their results, the conference call last night,
Speaker 2: Mark Zuckerber's comments about the investments required for AI.
Speaker 3: How do you put it all together?
Speaker 4: Well, first of all, their results were stellar. You can't
Speaker 4: say anything other than that they are making great growth
Speaker 4: and profit. The problem, such as there is a problem,
Speaker 4: is that they are spending so much money on capital costs,
Speaker 4: mostly connected to artificial intelligence, and the question of what
Speaker 4: the returns on that will be, I think is legitimately
Speaker 4: on investors' minds, and that, probably more than any other factor,
Speaker 4: explains the fairly dramatic drop in the stock.
Speaker 5: How about for you, though, David, I mean, are you questioning,
Speaker 5: you know, just how good of an investment this might be,
Speaker 5: or you think it's this is perhaps like a you know,
Speaker 5: it will be a significant revenue driver at some point.
Speaker 6: It's a great question.
Speaker 4: Well, first of all, you've got to look at this company,
Speaker 4: of all the tech companies, has just skyrocketed in the
Speaker 4: last year or so, so you know, this is a
Speaker 4: very highly valued stock compared to what it was, and
Speaker 4: I think given the extraordinary run up, a little bit.
Speaker 6: Of a correction is hardly a shock.
Speaker 4: So probably you could say it's not at all problematic
Speaker 4: that the stock has pulled back a little bit. From
Speaker 4: that perspective, I think the most interesting thing. I'm actually
Speaker 4: here at the Council on Foreign Relations having just attended
Speaker 4: a meeting that was very heavily focused on energy, and
Speaker 4: you know, even Zuckerberg in his remarks yesterday, was talking
Speaker 4: about the energy costs of AI are going to be
Speaker 4: one of the significant capital expenditures they're having to deal with,
Speaker 4: so they have to build their own renewable energy infrastructure
Speaker 4: in many instances these days, and this is true of
Speaker 4: all these big companies. The thing that I'm thinking about
Speaker 4: right now is whether, in some sense, because of the
Speaker 4: sheer scale of the investments that are having to be
Speaker 4: made in data centers and the energy.
Speaker 6: Associated with them, that these.
Speaker 4: Companies are shifting to in the long run a fundamentally
Speaker 4: different business model that's a little bit more like a
Speaker 4: utility where they're just going to be facing these ongoing
Speaker 4: gigantic costs just to stay abreast with one another. I
Speaker 4: don't think we know the answer to that yet, but
Speaker 4: it could very well be starting to happen.
Speaker 5: I gotta say, though, when you're looking at the estimates
Speaker 5: for the CAPEX here, to me, it doesn't look like
Speaker 5: it's all that different from what they had previously estimated.
Speaker 5: So they now think capex this capital expenditure is going
Speaker 5: to be in the range of thirty five to forty
Speaker 5: billion dollars before thirty to thirty seven.
Speaker 7: I don't know.
Speaker 5: That sounds pretty similar to me, is it not?
Speaker 4: It is similar, and you know, I think you know,
Speaker 4: markets tend to overreact, there's no question.
Speaker 6: I mean, I think that what people were reacting to in.
Speaker 4: Zuckerberg's call yesterday was more a tone that he was
Speaker 4: conveying that the payoff for some of these expenditures maybe
Speaker 4: a little longer than people expected. They don't face any
Speaker 4: fundamental problem in the short term. So in that sense,
Speaker 4: you're right, And in fact, I think Meta has done
Speaker 4: an unusually good job of taking advantage of AI in
Speaker 4: the recent year or two in that they are doing
Speaker 4: a better job targeting advertising with AI.
Speaker 6: That's a concrete benefit.
Speaker 4: The thing that's also interesting, though to me, if I
Speaker 4: were an investor, that I would be somewhat concerned about,
Speaker 4: is that the Meta AI product, which they're just rolling
Speaker 4: out to their customers or their users across a lot
Speaker 4: of their services, effectively is a way of declaring that
Speaker 4: they're competing head to head with Google, because they're basically
Speaker 4: starting to do what is effectively search inside Instagram, inside
Speaker 4: Facebook using their meta AI product. So you've got to
Speaker 4: that's a different business model. If they go down that
Speaker 4: road too far, they still have an extraordinary ability to
Speaker 4: target advertising that is superior to pretty much anybody else,
Speaker 4: and that's going to guarantee a lot of profit for
Speaker 4: the long term.
Speaker 2: David, where is the metaverse these days in terms of
Speaker 2: mister Zuckerberg's the zeitgeist.
Speaker 4: Well, in his zeitgeist, it's very prominent. I don't think
Speaker 4: it's really high in the zeitgeist of much of anybody else.
Speaker 4: I mean, it's so prominent he renamed his company. I
Speaker 4: wouldn't be surprised if he regrets that now. But he
Speaker 4: got out of a tight spot with Francis Hougan at
Speaker 4: the moment by doing that. I don't think the metaverse
Speaker 4: is nearly such a big deal as you would think
Speaker 4: listening to him, and I don't think any other company
Speaker 4: thinks it's that big of a deal in any kind
Speaker 4: of short term. The degree to which it could be
Speaker 4: a big deal long term is unknown. We know that
Speaker 4: AI is changing everything now. We have no reason to
Speaker 4: think that metaverse issues are going to change everything anytime soon.
Speaker 5: Not that I would think that. Zacharbergo to commented on this,
Speaker 5: but I'm sure, he's got to be thinking, you know,
Speaker 5: what if TikTok gets banned and potentially what a boon
Speaker 5: that would be for Instagram and the reals product. I mean,
Speaker 5: how much you think is that getting priced into the
Speaker 5: stock right now?
Speaker 6: Probably not at all.
Speaker 4: There's also things that aren't being priced in, like extreme
Speaker 4: regulatory pushback in Europe that's really changing the way that
Speaker 4: Meta is able to target users in advertising across all
Speaker 4: of its product lines. So there's big shifts happening. It's
Speaker 4: very hard to know where these companies are headed. But yes,
Speaker 4: if TikTok really were banned, which frankly I do not expect,
Speaker 4: that would be fantastically great news for this company, and
Speaker 4: one would want to, you know, go along on them
Speaker 4: if you thought that's really likely. So yeah, there's so
Speaker 4: many shifting parts in this equation it is astonishing.
Speaker 2: All right, David Busy busy week for tech earnings. Also
Speaker 2: Microsoft and Alphabet. Let's just go to Alphabet because that's
Speaker 2: kind of Dove's tails on kind of the digital advertising
Speaker 2: theme that we started last night with Facebook. How are
Speaker 2: they are good friends at Google slash Alphabet?
Speaker 3: How are they doing? What do you expect here with
Speaker 3: their earnings, well.
Speaker 4: I think I think again, earnings from the standpoint of
Speaker 4: the ongoing business will be good. The question again will arise,
Speaker 4: how much are they spending on AI and data center
Speaker 4: infrastructure and what's the chronology of the likely payoff? And
Speaker 4: you're seeing concerns being raised by analysts that the number
Speaker 4: of investment is going to be higher and the possible
Speaker 4: long term returns, just like.
Speaker 6: With META, could be longer.
Speaker 4: But these businesses are thriving for the most part overall.
Speaker 4: I think Microsoft in particular, which is also coming up,
Speaker 4: is a company that just can't really do anything wrong
Speaker 4: from the standpoint of investors, and I think they but
Speaker 4: they too are going to be spending even more on
Speaker 4: AI infrastructure and it's becoming almost like an energy investment
Speaker 4: as well as a data center and server investment.
Speaker 5: So then it sounds like, though there has to be
Speaker 5: an investor's mind at least, there is a ceiling for
Speaker 5: how much investment in AI is too much. It sounds
Speaker 5: like that there is a bit of a threshole than.
Speaker 6: To find let's figure out what the ceiling is. I
Speaker 6: have no clue.
Speaker 4: Nobody really knows what's happening with AI. It's a frenzy.
Speaker 4: Everybody's piling in rightly so, but the exact terms of
Speaker 4: long term competition are effectively unknown. So to say the
Speaker 4: ceiling is X or the ceiling is why it's pretty
Speaker 4: hard to.
Speaker 2: Do, all right, David, So stepping back here, who do
Speaker 2: you think among is is a.
Speaker 3: How real is AI to you?
Speaker 2: I mean, I think that a lot of people are
Speaker 2: trying to get a sense of is this just big
Speaker 2: data we were talking about four or five years ago,
Speaker 2: or is this something fundamentally different.
Speaker 6: Well, it is something fundamentally different.
Speaker 4: I think that's widely believed at this point, and I
Speaker 4: believe it. But again, the way it's going to manifest
Speaker 4: itself in business terms is extremely hard to predict. I
Speaker 4: know for myself, I am surprisingly often using chat GPT
Speaker 4: instead of Google, and I'm getting results that I really
Speaker 4: can use and I think many people are finding that.
Speaker 4: So this is changing the nature of these businesses in
Speaker 4: a fundamental way. And I think if it's if Meta,
Speaker 4: for example, successfully deploys meta AI across all its products
Speaker 4: and just while you're in the middle of using Instagram
Speaker 4: or Facebook, you can do a search using their their
Speaker 4: AI tool that you would have otherwise had to leave
Speaker 4: metas product.
Speaker 6: To go to Google to do.
Speaker 4: That's a strategic benefit for them, So it is worth
Speaker 4: making those investments. But you know, when you're talking about
Speaker 4: annual capital expenditures of forty billion dollars, you know it's
Speaker 4: hard to know what is it? Should it be forty five?
Speaker 4: Should it be thirty five?
Speaker 6: Look? I wish I knew.
Speaker 3: David, Thanks so much for joining us.
Speaker 2: As always, always appreciate getting your perspective on all things tech.
Speaker 2: David Kirkpatrick, founder of tech Ominie and also the author
Speaker 2: of the book The Seminal Book I Think on Facebook
Speaker 2: is the Facebook Effect.
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Speaker 2: Big economic data point coming out today GDP plus some
Speaker 2: inflation data coming out spooking the markets a little bit. Here,
Speaker 2: I'm looking at the yield curb the two year treasury
Speaker 2: seeing right at five percent, big move up seven basis points,
Speaker 2: and that kind of feeds into Like I'm looking at
Speaker 2: the thirty year fixed mortgage, it's now back up to
Speaker 2: seven point two four percent.
Speaker 5: Better believe it's going to be higher next week, assuming
Speaker 5: you know that the trend right now still holds. And
Speaker 5: I'm sure you know Powell next week probably gonna have
Speaker 5: to rip up the script say something a bit more hawkish. Yep,
Speaker 5: we're gonna have Ibra Jersey come in and tell us
Speaker 5: all about it now. So Ira Jersey joining us on
Speaker 5: Zoom from Princeton, New Jersey, where we definitely need to
Speaker 5: host our next show from.
Speaker 3: We will do that at some point.
Speaker 5: So IRA's archiefus Interest Rate Strategies at Bloomberg Intelligence. Thanks
Speaker 5: for joining us.
Speaker 3: Ira.
Speaker 5: We've been looking at these GDP numbers and obviously the
Speaker 5: inflation print really seems to be driving the market action today.
Speaker 5: Tell us what you're looking at.
Speaker 7: Yeah, So obviously that inflation print just implies that the
Speaker 7: monthly number that we get tomorrow is going to be
Speaker 7: is going to be much higher than economists are expecting,
Speaker 7: and that is a big driver. You know, when inflations
Speaker 7: is high, that the market has to continue to reprice
Speaker 7: the expectations of when and if the Federal Reserve is
Speaker 7: going to actually cut interest rates, And the market now
Speaker 7: is much more symmetric in thinking not only yes, it's
Speaker 7: like fifty percent chance that they're going to cut interest rates,
Speaker 7: but there's actually a growing chance that's being priced into
Speaker 7: markets that the Fed's next move may actually be an
Speaker 7: interest rate increase, right, a hike at some point. I
Speaker 7: personally think that that's a relatively low probability, still probably
Speaker 7: lower than what the market's pricing. But on hold is
Speaker 7: I think a growing default scenario for the next nine
Speaker 7: to twelve months for the Fed because inflation is just
Speaker 7: too high. It's way above their comfort level.
Speaker 2: So, you know, Ira, I guess one of the questions is, here,
Speaker 2: did the FED in j Powell back in December when
Speaker 2: it kind of had that Fed pivot started talking a
Speaker 2: little bit more dubbish in hindsight?
Speaker 7: Was that a mistake? Well, it was a mistake because
Speaker 7: their forecasts were wrong, right Like, at the end of
Speaker 7: the day, the FED makes forecasts just like everyone makes forecasts,
Speaker 7: and their forecasts for how quickly inflation was going to
Speaker 7: slow down was incorrect. And you know we, I mean
Speaker 7: we were incorrect too, and we were among the more
Speaker 7: hawkish or less dubvish, probably strategists on the street. You know.
Speaker 7: The issue that's come up is that when you looked
Speaker 7: at the survey data, a lot of the survey data
Speaker 7: back in December and even in January and February, it
Speaker 7: was pointing toward a slow down in the economy. So
Speaker 7: a lot of the traditional indicators for economic activity, like ism,
Speaker 7: new orders, like some of the consumer confidence surveys, they
Speaker 7: were all pointing to a potential slowdown. But and even
Speaker 7: though those have rebounded just a little bit, the hard data,
Speaker 7: so things like retail sales, personal consumption, spending, the jobs
Speaker 7: data obviously is probably among the most important and visible
Speaker 7: of these numbers, those have all been reasonably robust. So
Speaker 7: there's this disconnect between what people are saying and what
Speaker 7: people are doing. And I think that that's really been
Speaker 7: a challenge for forecasters who rely on these surveys for
Speaker 7: forward looking indicators and they just haven't been realized. So,
Speaker 7: you know, so they made a bad forecast, so therefore
Speaker 7: they made a bad pivot, and now they have to
Speaker 7: kind of take some of that back. And that's exactly
Speaker 7: what you've heard out of a lot of the FED
Speaker 7: speakers the last couple of weeks during the quiet period now,
Speaker 7: so you're not going to hear anything from FED speakers
Speaker 7: until next Wednesday. But when you go back and you
Speaker 7: listen to what Jay Powell said and a lot of
Speaker 7: the other speakers, you know they're going to probably continue
Speaker 7: to say, like, look at unless inflation goes down more
Speaker 7: significantly and substantially, we're going to keep interest rates on hold,
Speaker 7: and think that that's probably what Japowe will say next week.
Speaker 5: So it sounds like you think, then, Ira that this
Speaker 5: you know, print that we got today, the robust inflation
Speaker 5: prints that we've gotten to start this year, who knows
Speaker 5: what we'll see tomorrow, doesn't seem to really change the
Speaker 5: narrative a whole lot. That the economy is still proving,
Speaker 5: you know, to run really strong. Doesn't seem like interest
Speaker 5: rates are really denting that a whole lot, And that's
Speaker 5: still the narrative that they're going to go with. Or
Speaker 5: do you think that anything has changed here?
Speaker 7: Yeah, I don't think very much has changed. You know,
Speaker 7: interest rate sensitive sectors have certainly been affected by interest
Speaker 7: rate hikes, But what's happened over the last fifteen to
Speaker 7: twenty years is that we've shifted away, firstly from interest
Speaker 7: rate sensitive growth to non interest rate sensitive growth. So
Speaker 7: things like the services sector. When you dig into the
Speaker 7: details of today's GDP report, you see that on a
Speaker 7: seasonally adjusted annualized basis, the retail the services sector so
Speaker 7: a four percent growth, whereas the durable goods sector so
Speaker 7: a negative one percent growth. Right, So, so and durable
Speaker 7: goods where things like autos, right, so, auto sales have
Speaker 7: slowed down substantially. Part of that's on price, you know,
Speaker 7: certainly prices have gone up, but that's also credit availability. Right.
Speaker 7: Large purchases like automobiles and houses you tend to buy,
Speaker 7: tend to be purchased on credit of some form or another,
Speaker 7: and so those are very sensitive to these higher interest rates,
Speaker 7: where whereas service sector, the service sector just isn't you know,
Speaker 7: services aren't a you know, services spending have more to
Speaker 7: do with wages, how much disposable cash you have as
Speaker 7: opposed to as opposed to you know, you're not going
Speaker 7: to probably go out and go to the movies and
Speaker 7: then you know finance that over ten years, Right, that's
Speaker 7: just not something you're gonna do. You're gonna spend. But
Speaker 7: but if you have. You know, if you get a
Speaker 7: pay raise, you might go to that an extra movie
Speaker 7: every month. And that's basically what you're seeing in the data.
Speaker 7: And if those trends continue, then you can wind up
Speaker 7: having an okay economy and the Federal Reserve, you know,
Speaker 7: might not have to move interest rates very much at all.
Speaker 5: Well then what can they do about inflation? Then? If
Speaker 5: our economy is just structurally more resistant to higher interest rates?
Speaker 7: Yeah, well, there's not much you could do. You could
Speaker 7: either raise interest rates a lot more, and you know,
Speaker 7: that would probably ultimately be recessionary because you'd wind up
Speaker 7: with a recession in housing, a recession maybe in the
Speaker 7: auto sector and some of the other interest rates sensitive sectors,
Speaker 7: and that could to start ultimately to bring down the
Speaker 7: entire economy. Or you know, you could do things that
Speaker 7: are politically unpopular, things like raising taxes for example, just
Speaker 7: reduce the ability for the household sector to spend money.
Speaker 7: Or and this is something that I think a mistake
Speaker 7: that the Federal Reserve made. The Federal Reserve could come
Speaker 7: out and just say like, hey, we're not worried about
Speaker 7: two and a half three percent inflation anymore. You know,
Speaker 7: that's fine, and if you go back to the nineteen nineties,
Speaker 7: for example, like we were running at around two and
Speaker 7: a half to three percent pc deflator, So you know,
Speaker 7: why not pivot back to that, you know, I think
Speaker 7: the mistake that the FED made was having a hard
Speaker 7: target of two percent on inflation as opposed to something
Speaker 7: just a little bit more flexible. And the fact is
Speaker 7: that inflation's not increasing, right, Inflation is not going up anymore,
Speaker 7: it's just not coming down. And because it's not coming down,
Speaker 7: it's they're not reaching their two percent target. And I
Speaker 7: think that's where the disconnect really has come.
Speaker 2: All right, Ira, thank you so much for joining us
Speaker 2: our Jersey chief US interest rate stratag just Bloomberg Intelligence
Speaker 2: joining us from the Princeton campus down via zoom there.
Speaker 3: So interesting to see.
Speaker 2: So the GDP print again the takeaway, as I understand
Speaker 2: from you, Molly, the headline very disappointing, but if you
Speaker 2: dig underneath it a little bit less.
Speaker 5: So yeah, exactly, I think, you know, one of the
Speaker 5: parts of the headline that was disappointing was the fact
Speaker 5: that trade subtracted from growth, as in higher imports relative
Speaker 5: to exports. But higher imports also mean that there's a
Speaker 5: lot of demand. The idea is just that we're we're
Speaker 5: seeing it from outside the country rather than producing it here.
Speaker 5: So I think that still bodes well for the story
Speaker 5: of the consumer and the health of the consumer, and
Speaker 5: that demanding the economy is still strong, and obviously that's
Speaker 5: still making inflation not go away.
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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Speaker 2: Molly Smith, she's sitting in for Alex Steel this week
Speaker 2: on Paul Sweeney.
Speaker 3: We're live here on Bloomberg Interrector Brooker's.
Speaker 2: Studio, streaming live on YouTube, so you can head over
Speaker 2: to YouTube dot com and search Bloomberg Podcasts and that's
Speaker 2: where you will find us. We had that GDP print
Speaker 2: that came out this morning, significantly weaker on the surface
Speaker 2: than the forecast and showing a pretty market decline from
Speaker 2: the last month as well, and that's kind of having
Speaker 2: an impact on the market sins. John Tucker is just
Speaker 2: reporting yields up, stock prices down. Let's get perspective here.
Speaker 2: We can do that with Barry Ridholts. He's host of
Speaker 2: Masters in Business on Bloomberg Radium. It's also the founder
Speaker 2: rid Holt's Wealth management. Hey, Barry, So we get the
Speaker 2: economic data, it kind of freaks people out as it
Speaker 2: relates to where this economy is going a what did
Speaker 2: you read into the economic data that came out today,
Speaker 2: both on GDP and inflation and maybe how the market's
Speaker 2: reacting to it.
Speaker 8: Yeah, So I always love I always love the attempt
Speaker 8: to impose rationality on what is essentially a free for all.
Speaker 8: We've we've had the FED crank up rates five hundred
Speaker 8: and twenty five point basis points from zero, and we
Speaker 8: continue to hear the phrase long and variable lags on
Speaker 8: the growth side. And at a certain point you have
Speaker 8: to assume the root. You know, the chickens come home
Speaker 8: to roost, and this is the natural impact of the
Speaker 8: higher cost of credit, higher rates. We've already seen housing
Speaker 8: slow because there's no real supply around, but now you're
Speaker 8: seeing an impact things like automobile sales. Remember went through
Speaker 8: a big period where you couldn't get cars easily. Now
Speaker 8: that's behind us, and car sales are starting to slow down.
Speaker 8: Gasoline sales are starting to slow down. You have to
Speaker 8: lay this right at the feet of the FED. And
Speaker 8: yet at the same time, when we take apart the
Speaker 8: inflation data, you know, the FED BLS data includes renewals
Speaker 8: as well as someone moving into a new house or apartment.
Speaker 8: If your lease renews, if you just renew your lease
Speaker 8: that was set in motion two years ago when you
Speaker 8: did your priorly lease, the FED has nothing. What's over
Speaker 8: to do with rates, have nothing to do with it.
Speaker 8: But two years ago lea that lease had a heavy
Speaker 8: high number built into it. Back that out and you're
Speaker 8: at the two percent inflation target for the FED.
Speaker 5: I think there's got to be more to it though
Speaker 5: than housing right now though, no, Barry, I mean, it
Speaker 5: sounds like there's so many other broader services costs right
Speaker 5: now that are so expensive. I mean one of them
Speaker 5: that was in the GDP report was financial services and insurance.
Speaker 5: I mean we talk a lot about in this show,
Speaker 5: especially homeowners insurance, car insurance. I mean, those are things
Speaker 5: you can't really avoid.
Speaker 8: That's right, But you have to look at what's driving
Speaker 8: those prices higher. Is it monetary policy? Is it you know,
Speaker 8: pent up demand? Look at what's been going on in
Speaker 8: Florida with both homeowners and automobiles, it's very difficult to
Speaker 8: get insurance. And you have to turn around and say,
Speaker 8: you have all these cars that have gotten flooded out
Speaker 8: from repeated hurricanes and repeated flooding events. You have all
Speaker 8: these homeowners who live right on the water. This isn't
Speaker 8: These are prices going up, but you have an externality
Speaker 8: driving it. It's not inflation, it's global warming and climate change.
Speaker 8: And just maybe Florida is a crazy example, because you know,
Speaker 8: Florida is Florida. But when we look around and look
Speaker 8: at the things that are going higher, like healthcare and
Speaker 8: the cost of education that's been in the backdrop for
Speaker 8: twenty five years and has been the most expensive side
Speaker 8: of the services thing, insurance is a very specific reaction
Speaker 8: to an externality and not what we think of. Hey,
Speaker 8: if the FED raises rates to ten percent, are they
Speaker 8: going to make the cost of waterfront homeowner's insurance any
Speaker 8: cheaper in Florida? Or when you have all these cars
Speaker 8: flooded out or being destroyed in places by weather, the
Speaker 8: FED has zero impact on that. You have to put
Speaker 8: that into a different context than usual inflation.
Speaker 2: So barring with today's pullback, you know, we got the
Speaker 2: S and P off about you know, five percent from
Speaker 2: its highs. That feels like it's just a healthy kind
Speaker 2: of pullback in what may be an otherwise upwardly trajecting market.
Speaker 3: Is that how you view it? Is there anything else
Speaker 3: going on here?
Speaker 8: You read my mind? Paul. Look, look, we finished the
Speaker 8: first quarter with the Nasdaq one hundred up eight point
Speaker 8: five percent and the S and P five hundred up
Speaker 8: ten point two percent. That's a good year forget quarter
Speaker 8: that's on average eight to ten percent is what you
Speaker 8: should rationally expect from equity market. So a little bit
Speaker 8: of a pullback is healthy. Let me also point out,
Speaker 8: even though we have very strong earnings and revenue numbers,
Speaker 8: a lot of it was built into the expectations and
Speaker 8: they're a little disappointing compared to Q four. So look,
Speaker 8: what are we about. A quarter way through, about one
Speaker 8: hundred and forty companies have reported plus four point five
Speaker 8: percent on profits and plus about ball parking. This because
Speaker 8: as the numbers come out, the shifts, but plus three
Speaker 8: point five percent on revenues go back to Q four.
Speaker 8: And as good as these numbers sound, it was plus
Speaker 8: six point eight percent on earnings and plus nearly four
Speaker 8: percent on revenues, as it almost makes Q one look
Speaker 8: a little disappointing. I also suspect a lot of these
Speaker 8: strong numbers have been built into expectations, and so it's
Speaker 8: never the actual numbers but how the market reacts to
Speaker 8: those numbers that are so revealing.
Speaker 5: Well, market reaction today has been rough, and we've got
Speaker 5: now like the traders bets for the timing of the
Speaker 5: first FED cut fully priced for the first meeting now
Speaker 5: out to December. I mean, remember, not too long ago
Speaker 5: people thought that first cut was going to be coming
Speaker 5: last month. So tell us a little bit about the
Speaker 5: the environment for the for rate cuts here, and I
Speaker 5: mean also that possibility if we don't get one at
Speaker 5: all in twenty twenty four.
Speaker 8: Right, my, this is a little bit one part analysis,
Speaker 8: one part wishful thinking. From reading everything Jerome Palell has
Speaker 8: been saying and talking about and just looking at the
Speaker 8: arc of the data that's been coming in, I suspect
Speaker 8: the FED very much recognizes that the economy is beginning
Speaker 8: to slow, not dramatically, but a little bit, and they're
Speaker 8: now at the point where they're looking for an excuse
Speaker 8: to take rates down marginally more than half of people,
Speaker 8: So about half of the homes out single family homes
Speaker 8: don't have mortgages, but of those that do, half are
Speaker 8: four percent or less and something like sixty five percent
Speaker 8: are at five percent or less. So these people have
Speaker 8: golden handcuff with their mortgages. That's why there's no supply
Speaker 8: or such limited supply of homes out there, and that's
Speaker 8: the biggest single component in the inflation numbers. I suspect J.
Speaker 8: Powell understands that the sort of paradox we've been living
Speaker 8: with is that if the FED lower's rates, which will
Speaker 8: ultimately bring mortgage rates down, you'll see a whole lot
Speaker 8: more supply hit the market, and that could have an impact,
Speaker 8: especially in the rental market, of driving that aspect of
Speaker 8: either PCE or CPI inflation lower seems kind of counterintuitive
Speaker 8: for lower inflation reduce FMC rates, but that's the odd
Speaker 8: situation we find ourselves in after underbuilding single family homes
Speaker 8: for a decade post GFC.
Speaker 2: Hey, Barry, you know mothers is you know, referencing the
Speaker 2: Werp function, how the market was discounting maybe six rate
Speaker 2: huts cuts some beginning of the year, and here we
Speaker 2: are now down to like one. Is that unusual for
Speaker 2: the market to get it so wrong or change.
Speaker 3: Its bets in such a short period of time? Does
Speaker 3: that typically happen?
Speaker 8: But one of my old time favorite authors is William Goldman,
Speaker 8: who wrote Marathon Man at the print says Bride, and
Speaker 8: he won Academy Awards for the screenplay for Butch Cassidy
Speaker 8: and The Sun Dancer Kid. He used to very famously
Speaker 8: say nobody knows anything, and that when you're looking out forward,
Speaker 8: look at the track record of economists, of the Fed themselves,
Speaker 8: and of people who are forecasting, including the market, when
Speaker 8: rate cuts are going to happen, where rates are going
Speaker 8: to go. It's been so consistently wrong for so long.
Speaker 8: I mean, look at the dot plot is hilariously wrong.
Speaker 8: At a certain point you have to ask yourself, why
Speaker 8: are we paying any attention to these forecasts. I know
Speaker 8: it's a necessary evil, and it's all part of how
Speaker 8: we do our jobs. I think we have to dramatically
Speaker 8: lower the weight we put on these sorts of forecasts.
Speaker 8: You know, occasionally even a blind squirrel finds a nuts,
Speaker 8: so sometimes somebody gets it right. But when you take
Speaker 8: the average when look at the overall consensus. Not only
Speaker 8: were we expecting was the market pricing in rate cuts
Speaker 8: last year, because perhaps because they.
Speaker 3: Were pricing in a recession.
Speaker 8: But look how wrong they were on the round of increases,
Speaker 8: how quickly it came, how far it went. Of all
Speaker 8: the many things that the human genius can do, predicting
Speaker 8: things like FED funds rate just ain't one.
Speaker 5: Of them real quickly for you here, Barry. So next
Speaker 5: week Fed's going to be presumably holding interest rates. We're
Speaker 5: not getting any new forecasts thirty seconds, which we look
Speaker 5: out for.
Speaker 8: I mean, I want to see how we continue to
Speaker 8: do earnings wise. We're running a pretty reasonable beat rate,
Speaker 8: although obviously the better companies, the better earnings come out earlier.
Speaker 8: It's that it's the components of inflation. And I want
Speaker 8: to keep an eye on consumer spending. That'll let us
Speaker 8: know if the FED has kept us too tight for
Speaker 8: too long and it's really beginning to bite into the economy.
Speaker 2: All right, Barry, thank you so much for joining us.
Speaker 2: As always, Barry red Hooltz. He is the host of
Speaker 2: Masters in Business on Bloomberg Radio. Highly recommend you check
Speaker 2: out that podcast. He gets phenomenal guests week after week
Speaker 2: after week, and a lot of smart discussion about investing
Speaker 2: and about these markets.
Speaker 3: Oh and he's got a day job.
Speaker 2: He's the founder of Ordholts Wealth Management, so we appreciate
Speaker 2: getting a few minutes of his time.
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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Speaker 1: Just Say Alexa playing Bloomberg eleven thirty.
Speaker 3: James Abatte joints us.
Speaker 2: He's a managing director a chief investment officer at Center
Speaker 2: Asset Management. Joining us from New York via zoom.
Speaker 3: James, thanks so much for joining us here.
Speaker 2: What did you take away from the economic data we
Speaker 2: saw this morning and what it may be mean for
Speaker 2: the Federal Reserve?
Speaker 9: Well, when you look at today's release of annualized GDP
Speaker 9: of one point six percent, it was much well within expectations,
Speaker 9: and it was combined with a higher inflation reading with
Speaker 9: the PCE coming into three point seven percent. Now we
Speaker 9: may see you know, some offset to that tomorrow with
Speaker 9: the with PPI numbers impacting the flator, which is the
Speaker 9: Fed's preferred metric in terms of its two percent price target.
Speaker 9: But the bottom line is that when you look at
Speaker 9: equities and the fact that we see no safe harbor
Speaker 9: in the equity markets today is that the margin of
Speaker 9: safety for markets, and US markets in particular, is that
Speaker 9: the expectations have been that the FED would be reducing
Speaker 9: rates at least two or three times through the end
Speaker 9: of the year, and we would see the economy move
Speaker 9: strongly ahead to support what we have in terms of
Speaker 9: double digit earnings expectations for the S and P five hundred.
Speaker 9: So neither of the data points that came out today
Speaker 9: are consistent with either of those pillars that's been holding
Speaker 9: up the market since the rally began in October twenty
Speaker 9: twenty three.
Speaker 5: Right, that's the PCEE data coming out tomorrow that you
Speaker 5: are just referring to. So we'll get a look at
Speaker 5: the March inflation data there. But coming back to this
Speaker 5: GDP report today, I mean, when you're looking at the
Speaker 5: service level of slower growth and higher inflation, doesn't really
Speaker 5: sound like that soft landing story that we've all been
Speaker 5: betting on.
Speaker 9: Huh, Well, not everybody's been betting on that.
Speaker 6: I think you know.
Speaker 9: Our view has been that when you look at the
Speaker 9: major economic indicators, there has been somewhat of a disconnect,
Speaker 9: meaning that the market was highly dependent upon both interest
Speaker 9: rates declining and earnings expectations, which were consistent with a
Speaker 9: booming economy. So if you just want to look at
Speaker 9: top down indicators that would give some indications of economic activity,
Speaker 9: I mean, ism, indicase or leading economic indicators, they remain
Speaker 9: in kind of flatish or recessionary type levels. They seem
Speaker 9: to be bouncing or pivoting higher, but not yet to
Speaker 9: any type of booming economic recovery. So from that perspective,
Speaker 9: when you look at what's happening from an earnings perspective,
Speaker 9: you've got essentially flatish sales growth. Still, you've got profit
Speaker 9: margins across the S and P five hundred stable but
Speaker 9: with labor costs continuing to be pressure, potential for a
Speaker 9: degradation of profit margins. And when you can look at
Speaker 9: what expectations are embedded in the S and P five hundred,
Speaker 9: it's essentially mid single digit's revenue growth with double digit
Speaker 9: earnings growth. Now, how you get to that two times
Speaker 9: operating leverage. When sales growth is relatively mnemic. Outside of
Speaker 9: things that are tied towards AI and profit margins, declining
Speaker 9: doesn't really reconcile with essentially the expectations that are embedded
Speaker 9: in earnings expectations as well as some of the top
Speaker 9: down indicators is mentioned via the manufacturing statistics like the PMIS,
Speaker 9: as well as leading economic indicators.
Speaker 3: I'll tell you where to make money.
Speaker 2: Chipotle Mexican grill sas a four percent today all time high.
Speaker 2: People are still buying their tacos and burritos.
Speaker 5: It's because they're not letting the employees eat the chicken.
Speaker 3: I know, that's exactly right. We talked about that earlier.
Speaker 2: So James, how about in a fixed income space here,
Speaker 2: I can get five percent sitting into your treasuries.
Speaker 3: Is that a fair trade? Or should I go out
Speaker 3: and maybe take some credit risk here?
Speaker 4: No?
Speaker 9: I think if you look at premiums and credit premiums
Speaker 9: are high yield premiums in particular are consistent with the
Speaker 9: equity risk premium. And the equity risk premium is nothing
Speaker 9: more than the anticipated return of stocks versus the risk
Speaker 9: re alternative, which is as you mentioned. You know yielding
Speaker 9: five percent right now. So you know our view at
Speaker 9: this point in terms of the market. Why we've been
Speaker 9: very defensive, have re implemented hedges in our American Select
Speaker 9: Equity Fund is the fact that the way we calculate
Speaker 9: a forward equity risk premium, it's at the level that
Speaker 9: we last witnessed in early two thousand and I hate
Speaker 9: to say it, right before the crash of nineteen eighty seven.
Speaker 9: So both credit premiums and equity risk premiums leave no
Speaker 9: margin of safety, which is something that either leads to
Speaker 9: a flat equity market or potentially some type of major
Speaker 9: drawdown if there's the implementation or instigation of some type.
Speaker 5: Of cattle Looking at the two year yield coming up
Speaker 5: on five percent on the day, got to think if
Speaker 5: maybe you know, you didn't hash in on it when
Speaker 5: it was five point two in October, maybe a little
Speaker 5: bit of a second chance here? Is this a good level?
Speaker 7: Yeah?
Speaker 9: I think that's very important because the expectations are that,
Speaker 9: you know, the FED, even if they do see continuing
Speaker 9: economic weakness, or maybe there is some type of financial
Speaker 9: event in regional banks, or even the further escalation of
Speaker 9: some kind of geopolitical crisis, which would really be the
Speaker 9: only cover that the FED would have to reduce interest rates.
Speaker 9: I would tell people that, you know, if you're relying
Speaker 9: upon a reduction in interest rates from these levels, be
Speaker 9: careful what you wish for. Bec When you look at
Speaker 9: market draw downs over many periods of time, some of
Speaker 9: the most significant market draw downs happen when the FED
Speaker 9: is aggressively easing in response to a crisis. And our
Speaker 9: view going into the year was that the Fed was
Speaker 9: not going to reduce rates unless there was actually the
Speaker 9: introduction of a slower economic environment or a crisis. So
Speaker 9: to lock in, you know, a five point two percent
Speaker 9: yield at this point in time, I think, is you know,
Speaker 9: a wise choice VISA VI other investment alternatives right now,
Speaker 9: particularly since the premium that you're being paid for owning
Speaker 9: equities as well as owning credit is an essence zero.
Speaker 3: All right, James, thanks so much for joining us there.
Speaker 2: James Abode, Managing director and chief investment officer for Center
Speaker 2: Asset Management. Decidedly conservative outlook there, and that is being
Speaker 2: born out today with the market down.
Speaker 3: I don't know.
Speaker 2: I guess you could look at today's data and say,
Speaker 2: all right, economy slowing down. Maybe the FED will in
Speaker 2: fact cut rates. They're not worried about an overheating economy,
Speaker 2: but you did have that inflation for in that kind of.
Speaker 5: That really is just taking the entire story today. And
Speaker 5: you know, as we've been saying, some of these underlying
Speaker 5: measures of growth underneath the GDP figure still pretty strong,
Speaker 5: so I'm sure the Fed will definitely a tune to
Speaker 5: some of those as well.
Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
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Speaker 2: It is earning season in full, fast and furious. They
Speaker 2: are coming a good print coming out of a large
Speaker 2: farmer company, astro Zenica, just early early this morning moving
Speaker 2: matstock here and we are fortunate right now to check
Speaker 2: in with Pascal Sorio. He is the CEO of Astrosenica.
Speaker 2: He is in London, joining us via zoom Patrick. Thanks
Speaker 2: so much, Pascal, Thanks so much for taking the time.
Speaker 2: We really appreciate getting a few minutes of your time.
Speaker 2: You guys reported numbers this morning. What are the key
Speaker 2: takeaways from your most recent quarter for your investors?
Speaker 10: Hugbar, thank you so much for having me. Yes, we
Speaker 10: had a tremendous out of the year. Like Shittys sales,
Speaker 10: our revenue I should say, grow by nineteen percent. But
Speaker 10: the exciting piece was that every portfolio of products grew
Speaker 10: very strongly. Oncology plus twenty six percent to five billions
Speaker 10: for the quarter, cardiovascular twenty three percent, rare disease sixteen
Speaker 10: percent growth, ge geographies grew nineteen percent in the US
Speaker 10: and Europe. The most remarkable was forty percent growth in
Speaker 10: the emerging markets outside of China, and China itself is
Speaker 10: returning to grows. So really a very very strong start
Speaker 10: of the year. And beyond the financials, our portfolio pipeline
Speaker 10: is making a tremendous progress, and we started new face
Speaker 10: rituals and we announced very positive results in particular in oncology,
Speaker 10: which we present to the ASCO in Chicago very soon.
Speaker 5: Yeah, you've got an investor day coming up next month,
Speaker 5: and it seems like like you just said you're going
Speaker 5: to discuss the pipeline, including the timing of future treatment
Speaker 5: and their revenue potential. So can you give us a
Speaker 5: little seat peak for some of us who can't wait.
Speaker 10: Yes, exactly, Actually, Marti, thank you for that question. What
Speaker 10: we're going to try and show to investors is that
Speaker 10: we can be a strong growth company not only for
Speaker 10: the next seven hs to twenty thirty, but even beyond that.
Speaker 10: And so the growth over the next period of time
Speaker 10: to twenty and thirty is going to be driven by
Speaker 10: what we have in our hands today and what is
Speaker 10: going to come out of our first three pipeline very soon.
Speaker 10: So we're going to add pact attention to investors of
Speaker 10: investors to the major growth drivers. We're going to show
Speaker 10: them where consensus is actually underestimating some of our products
Speaker 10: and the opportunities we have in our pipeline. We have
Speaker 10: a very large pipeline of new projects and some of
Speaker 10: those areunderestimated. Beyond that, we will also want we also
Speaker 10: want to show investors what our strategies and what our
Speaker 10: plans are for the long term. We've been investing in
Speaker 10: new platforms, new technology which we believe will shave the
Speaker 10: future of medicine in cancer, immune diseases, and beyond form
Speaker 10: stand search therapis ginsrapis, antibody, drug conjure gates, radio conjugates.
Speaker 10: So really this is our goal show people that we
Speaker 10: are focused on today but also tomorrow to twenty thirty
Speaker 10: and a long term.
Speaker 2: The CEO we're speaking with, Pascal Sorio, the CEO of
Speaker 2: Astra Zennic. I'm looking at the stock here. A z
Speaker 2: N is the ticket. It's a big company, two hundred
Speaker 2: and thirty billion dollar market cap. Stock is up six
Speaker 2: percent today on the back of those strong earnings, up
Speaker 2: twelve percent.
Speaker 3: Year to date.
Speaker 2: Pascal, I always joke to people and I say, in
Speaker 2: my next life, I want to come back as a
Speaker 2: healthcare mn A banker, because it seems like every Monday
Speaker 2: we come in and pharmaceutical company A is buying pharmaceutical
Speaker 2: company B or biotechnology company C. How does MNA growth
Speaker 2: via acquisition fit in with your growth strategy vis A
Speaker 2: V organic growth that comes from your own in house
Speaker 2: R and D.
Speaker 10: Yeah, thanks, thanks, another great question. We identified a number
Speaker 10: of years ago the technology platforms of the future, as
Speaker 10: I said a minute ago, So if you look at
Speaker 10: seal therapy, for instance, we have our own internal efforts
Speaker 10: and we've been complimenting this with acquisitions or licensing agreements. Particular,
Speaker 10: we bought a cell therapy company and that is bringing
Speaker 10: us technologies but also products, and we've been putting all
Speaker 10: of this together to actually build a portfolio of products
Speaker 10: in cells therapy, engine therapy, in aultiboty, drug conjugates, and beyond.
Speaker 10: So we target mead small to mid size Burton acquisitions.
Speaker 10: That really has been our strategy, so we can integrate
Speaker 10: them much better and then we can add value along
Speaker 10: the way before.
Speaker 5: We launch Pascal. What can you tell us about drug
Speaker 5: prices right now? I mean, this is such a sensitive
Speaker 5: topic here in the US, especially in an election near
Speaker 5: something that's really close to the heart of so many
Speaker 5: consumers and voters. I mean, how can can you tell
Speaker 5: us a little bit about the pricing strategy? And you know,
Speaker 5: are people able to afford a lot of these medications?
Speaker 10: Yeah, you know, it's important for us of all to
Speaker 10: remember that in the United States, of course, you know,
Speaker 10: price is an issue like everywhere in the world, but
Speaker 10: in the United States, patients have access to innovative medicines
Speaker 10: that can save their lives much faster than in Europe
Speaker 10: or in other parts of the world. Innovation is rewarded
Speaker 10: and access is much faster now. Price is definitely a consideration.
Speaker 10: Of course, the IRA, of course has some challenges and
Speaker 10: some issues we are trying to work to addrese but
Speaker 10: there is also a big benefit for patients, which is
Speaker 10: that starting in twenty twenty five, there will be a
Speaker 10: copy cup. Patients will not pay more than two thousand
Speaker 10: dollars a year who are on medical PATHYP products, and
Speaker 10: this year it's too three five hundred and six hundred
Speaker 10: dollars as of max. So ultimately, if you're a MEDICA patient,
Speaker 10: you will not pay more than two thousand dollars a
Speaker 10: year for your medicines, regardless of how many medicines you
Speaker 10: have and how much the cost. So that will be
Speaker 10: really an enormous progress for patients. And of course some
Speaker 10: of these rebates that are discounts that are required to
Speaker 10: compensate for for this, we will be paying. But suddenly
Speaker 10: we see that as a big improvement for patients and
Speaker 10: hopefully also an incremental revenue for us, because patients will
Speaker 10: be able to afford their medicines and take them and
Speaker 10: stay on them longer. So you know, win win, really
Speaker 10: better for patients and hopefully better for the industry as well.
Speaker 2: The PASCAL I'm looking at the on the Bloomberg terminal,
Speaker 2: the PGeo function which shows me kind of your revenue
Speaker 2: by segment, and I see that oncology is your biggest
Speaker 2: revenue line there about thirty seven percent of total revenue.
Speaker 2: What are the opportunities there in your oncology business. I
Speaker 2: know it's a competitive business, but you have in the pipeline.
Speaker 2: What do you have to bring to market? How do
Speaker 2: you think about that business?
Speaker 10: Yeah, ourcology portfolio of products go by twenty six percent
Speaker 10: in the first quarter to five billion dollars five billion
Speaker 10: dollars in a quarter. So we are on a very
Speaker 10: strong trajectory driven by a number of products that we
Speaker 10: have in a portfolio for lung cancer, briacet cancer, prostate cancer,
Speaker 10: or variant cancer. And there's more to come. And the
Speaker 10: future of oncology really is about combination therapy, combination of
Speaker 10: antibody drug conjugates, as I said before, those products that
Speaker 10: target the tumor cells and deliver a toxin at the
Speaker 10: site of the tumor cell and essentially kill the tumor
Speaker 10: cells without affecting the helcy cells around and combining this
Speaker 10: with immuno oncology products and then in long run adding
Speaker 10: cell therapy to this. So there's an enormous amount of
Speaker 10: innovation that's going on in cancer. The clogy of cancer.
Speaker 10: He's being improved very rapidly and as a result, new
Speaker 10: medicines are coming up. There are still cancers, unfortunately that
Speaker 10: are difficult to treat. But one of the other aspects
Speaker 10: of cancer that is very important is diagnosing patients early
Speaker 10: so you can intercept the disease early. If you look
Speaker 10: at breast cancer, mamographies have really helped diagnose breast cancer
Speaker 10: very early and survival right at five years is ninety
Speaker 10: nine percent when patients are diagnosed early. Lung cancer is
Speaker 10: the opposite diagnos too late. So there are no technologies
Speaker 10: that will enable to patients and doctors to diagnose cancer
Speaker 10: very early and treat it only. So the combination of
Speaker 10: these plus new treatments gives us hope that there is
Speaker 10: a possibility that in the near future we could actually
Speaker 10: turn cancer, cure cancer, or turn it to a chronic
Speaker 10: condition that people can live with.
Speaker 2: Pascal thirty seconds left here one of our readers rights,
Speaker 2: and it says on if your May twenty first investor day.
Speaker 2: Are you going to give a big sales target for
Speaker 2: twenty thirty?
Speaker 10: I think I will have to invite people to our
Speaker 10: meeting and Cambridge in the UK, we've even you know,
Speaker 10: offered to offer them at lunch, so I won't disclose
Speaker 10: that today, but they we suddenly will show people our
Speaker 10: strategy and why we believe we can be a gross
Speaker 10: company and what would be the gross drivers. But I
Speaker 10: can't say today whether we will be disclosing your target
Speaker 10: at that point.
Speaker 2: All right, Pascal, thank you so much for joining us.
Speaker 2: Really appreciate you sparing a few minutes of your time today.
Speaker 2: Pascal Sorio, he's the CEO of Astra Zeneca, joining us
Speaker 2: from London via zoom.
Speaker 3: The company reported strong numbers this morning.
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