WEBVTT - Softer Than Expected Inflation Points to Muted Tariff Fallout 0:00:02.720 --> 0:00:09.040 Bloomberg Audio Studios, podcasts, radio news, and Android auto with 0:00:09.119 --> 0:00:12.240 the Bloomberg Business App. Listen on demand wherever you get 0:00:12.240 --> 0:00:15.040 your podcasts, or watch us live on YouTube. 0:00:15.520 --> 0:00:17.279 Let's get to the bond market here. So we had 0:00:17.440 --> 0:00:21.320 CPI came in better than expected, yet you have yields 0:00:21.360 --> 0:00:23.439 lower by two basis points in the front end head 0:00:23.440 --> 0:00:27.280 scratcher for me Ira Jersey, Bloomberg Intelligence Senior US Interest 0:00:27.400 --> 0:00:31.120 Rates strategist. So in my one plus one equals two, 0:00:31.360 --> 0:00:33.640 you get inflation less of a problem. Therefore the Fed 0:00:33.680 --> 0:00:35.760 won't have to cut. Why are my yield lower here? 0:00:36.640 --> 0:00:38.880 Well that's well, it's not only that the Fed won't 0:00:38.920 --> 0:00:41.120 have to cut, but that the Fed can maybe cut 0:00:41.120 --> 0:00:44.960 a little bit, right we take Yeah, So you know, 0:00:45.080 --> 0:00:48.879 lower inflation and inflation below target or at their target 0:00:49.120 --> 0:00:51.840 is a necessary condition for the Federal Reserve to cut. 0:00:52.520 --> 0:00:53.199 So so the. 0:00:53.159 --> 0:00:55.040 Fact that you only had a zero point two percent 0:00:55.120 --> 0:00:58.680 month on month on inflation not a massive surprise. Quite frankly, 0:00:58.720 --> 0:01:00.920 it wasn't a huge miss really when you look at 0:01:00.920 --> 0:01:02.920 a lot of the details. But it was also a 0:01:02.920 --> 0:01:05.080 good sign because people are worried that tariffs are gonna 0:01:05.080 --> 0:01:07.240 have an effect. But remember the tariff's only went into 0:01:07.240 --> 0:01:09.120 effect last month, so we're not going to see that 0:01:09.240 --> 0:01:11.720 on shelf prices until this month and next month. So 0:01:12.520 --> 0:01:15.560 I think the market in general like this relatively muted 0:01:16.360 --> 0:01:18.679 reaction from the market is something that we're gonna have 0:01:18.680 --> 0:01:21.560 to look through, at least on the inflation front for 0:01:21.600 --> 0:01:23.520 the next until we get the prints from the next 0:01:23.520 --> 0:01:24.199 couple of months. 0:01:24.640 --> 0:01:26.760 What's the FED looking at IIRO these days? Is it 0:01:26.800 --> 0:01:30.320 focusing more on inflation or more on growth? Because I 0:01:30.360 --> 0:01:33.160 think a lot of folks are probably concerned that whatever 0:01:33.200 --> 0:01:36.000 inflation levels we get, it's going to kind of hurt 0:01:36.080 --> 0:01:36.600 growth more. 0:01:36.640 --> 0:01:37.920 So what do you think the Fed's looking at? 0:01:38.840 --> 0:01:43.240 Yeah, well, this is certainly the conundrum that the Federal 0:01:43.280 --> 0:01:45.480 Reserve is going to have going forward, particularly if we 0:01:45.520 --> 0:01:48.080 get an increase in inflation and then we see a 0:01:48.120 --> 0:01:53.680 significant downshift in growth and certainly the job market. Right, 0:01:53.680 --> 0:01:56.880 Remember that growth itself is not what the Federal Reserves 0:01:56.880 --> 0:01:57.400 mandate is. 0:01:57.560 --> 0:01:58.720 It's really the job market. 0:01:58.760 --> 0:02:01.120 So you can have slow growth or no growth with 0:02:01.280 --> 0:02:04.760 a job market that's okay but not great, And I 0:02:04.800 --> 0:02:08.560 think that that's the that's the potential, you know, big 0:02:08.560 --> 0:02:11.160 issues that the FED might go to. So Ja Powell 0:02:11.200 --> 0:02:14.160 last week was pretty clear in saying that, look, we're 0:02:14.200 --> 0:02:17.640 going to basically focus on whichever of the two parts 0:02:17.639 --> 0:02:21.040 of our dual mandate is farther from where we want 0:02:21.080 --> 0:02:24.200 it to be. So if inflation jumps to five percent 0:02:24.320 --> 0:02:26.919 and unemployment is still kind of, you know, four and 0:02:26.960 --> 0:02:30.640 a half percent and not climbing quickly, then they're going 0:02:30.680 --> 0:02:33.639 to focus on inflation. But if inflation kind of hovers 0:02:33.680 --> 0:02:35.960 two and a half three percent, but it looks like 0:02:36.040 --> 0:02:37.920 we're going to have negative job prints and we're going 0:02:37.960 --> 0:02:41.600 to have five plus percent unemployment rate, then the Fed 0:02:41.639 --> 0:02:44.400 will key on that and cut interest rates and maybe 0:02:44.400 --> 0:02:48.120 give up a little bit on its inflation fighting mode 0:02:48.200 --> 0:02:50.280 for at least some temporary period of time. 0:02:50.840 --> 0:02:52.400 But you know, we're still far away from that. 0:02:52.440 --> 0:02:54.400 I mean, our view had been going into this year, 0:02:54.440 --> 0:02:56.280 and I think I mentioned it to you guys last week, 0:02:56.639 --> 0:02:59.640 is that we always thought that that the market was 0:02:59.680 --> 0:03:02.400 priced for the Fed to cut too early. Cutting in 0:03:02.480 --> 0:03:05.520 June or July we never thought was a realistic possibility 0:03:06.160 --> 0:03:09.880 because of this, you know, dueling economic scenarios that you 0:03:09.960 --> 0:03:13.000 just laid out, Paul. So so now we're probably pricing 0:03:13.040 --> 0:03:15.560 for something a bit more realistic. You know, fourth quarter 0:03:15.720 --> 0:03:18.560 only two cuts this year, you know, you know, that's 0:03:18.639 --> 0:03:21.440 kind of where we think the market's going to kind 0:03:21.440 --> 0:03:22.320 of find a steady state. 0:03:22.840 --> 0:03:25.240 So does that mean that around four percent is the 0:03:25.280 --> 0:03:26.200 top for the two year? 0:03:27.680 --> 0:03:30.040 Yeah, I think it is unless we wind up getting 0:03:30.080 --> 0:03:32.880 some pretty some better economic data, so you know, we 0:03:33.160 --> 0:03:38.120 had an upside surprise on next month's employment and we 0:03:38.120 --> 0:03:41.000 wind up having decent retail sales data, all of those things. 0:03:41.880 --> 0:03:44.760 I don't think that anything above four to twenty probably 0:03:44.760 --> 0:03:48.120 on the two year makes sense. Like there's no reason 0:03:48.200 --> 0:03:50.800 right now for the two year to be trading above 0:03:51.080 --> 0:03:54.600 the federal fund rate, right So why would you sell 0:03:54.640 --> 0:03:57.040 off fifty basis points in the two year unless you 0:03:57.080 --> 0:03:58.920 really thought the Fed was going to hike, which I 0:03:58.960 --> 0:04:01.520 think is not really it's much more likely that they 0:04:01.560 --> 0:04:04.360 stay They stay steady for the next two years, and 0:04:04.440 --> 0:04:06.880 it is at the increase rates at any time over 0:04:06.920 --> 0:04:10.600 the next two years. That being said, just the financial 0:04:10.800 --> 0:04:12.840 fair value right now on the two year note we 0:04:12.920 --> 0:04:15.400 have at three point eight percent, So maybe the market's 0:04:15.400 --> 0:04:18.719 gone just a little bit too far being very close 0:04:18.760 --> 0:04:19.800 to four percent right now. 0:04:20.440 --> 0:04:23.320 Are international investors still buying US treasures? 0:04:23.400 --> 0:04:24.839 Are they still mad at US. 0:04:25.680 --> 0:04:28.200 Now they are, And in fact, if you look at 0:04:28.240 --> 0:04:31.880 the recent treasury auctions, they have been purchasing just the 0:04:31.920 --> 0:04:36.200 same amount that they had been over the past couple 0:04:36.240 --> 0:04:39.560 of years. Actually around ten percent of the recent treasury 0:04:39.600 --> 0:04:43.000 auctions went to foreign investors, and that's pretty much in 0:04:43.080 --> 0:04:46.560 line some of the investors that I've been speaking to say, well, look, 0:04:46.760 --> 0:04:49.720 it's an economic decision that we're making. If our choice 0:04:49.720 --> 0:04:52.800 is to buy our local government debt or by treasuries 0:04:52.839 --> 0:04:54.760 and then hedge some of our currency risk or all 0:04:54.800 --> 0:04:57.320 of our currency risk, and we can still pick up 0:04:57.440 --> 0:05:01.279 yields compared to our home currency, to our home bond market, 0:05:01.480 --> 0:05:03.960 then we're going to keep doing that trade. And so 0:05:04.320 --> 0:05:07.479 until that economics changes, or there's real fear that the 0:05:07.560 --> 0:05:09.440 US is going to default on its debt or something 0:05:09.480 --> 0:05:13.480 like that, I think private foreign investors, in particular, are 0:05:13.480 --> 0:05:14.400 you just going to keep buying? 0:05:14.880 --> 0:05:15.080 Hey? 0:05:15.120 --> 0:05:16.480 I are always good to catch up. I are a 0:05:16.520 --> 0:05:19.839 Jersey Bloomberg Intelligence senior US Interest Rate a strategist at 0:05:19.920 --> 0:05:20.520 joining us there. 0:05:20.560 --> 0:05:25.600 So you're listening to the Bloomberg Intelligence podcast. Catch us 0:05:25.640 --> 0:05:29.040 Live weekdays at ten am Eastern on Applecarcklay and Android 0:05:29.080 --> 0:05:32.400 Auto with the Bloomberg Business App. Listen on demand wherever 0:05:32.440 --> 0:05:35.560 you get your podcasts, or watch us live on YouTube. 0:05:35.920 --> 0:05:40.160 Pretty solid day after a big, big, big move yesterday 0:05:40.200 --> 0:05:41.240 in the equity indices. 0:05:41.760 --> 0:05:43.159 Let's see what the professionals are doing. 0:05:43.200 --> 0:05:47.000 Sarah Ponzik joins US first vice president of Wealth Management 0:05:47.160 --> 0:05:48.760 UBS Private Wealth Management. 0:05:49.400 --> 0:05:52.320 She's down there in Boca Raton, Florida. If you care, 0:05:52.920 --> 0:05:53.599 eighty two. 0:05:53.520 --> 0:05:56.480 And mostly Sonny in Boca today. I mean, if if 0:05:56.480 --> 0:05:58.960 that's your gig, fine, enjoy it. I don't know. 0:05:59.400 --> 0:06:02.760 We go for the change of seasons here, which Sarah 0:06:02.800 --> 0:06:04.720 does not much. Jealous, Sarah, this is all that. 0:06:05.400 --> 0:06:08.240 Sarah, You're jealous. No, if I make you feel any better. 0:06:08.240 --> 0:06:10.479 We had a really bad storm yesterday. I have palm 0:06:10.520 --> 0:06:12.359 fronds all over the house. 0:06:12.520 --> 0:06:13.479 So it happens. 0:06:13.520 --> 0:06:17.559 Today's sunny and warm and humid. But we are starting 0:06:17.560 --> 0:06:18.600 to get some good brain. 0:06:18.839 --> 0:06:21.039 Good for our good friends in South Florida. There. 0:06:21.120 --> 0:06:22.960 Hey, Sarah, what do you tell your clients? I mean, boy, 0:06:23.000 --> 0:06:25.520 you've had a market that just a few weeks ago 0:06:25.680 --> 0:06:30.360 was down twenty percent from its peak. Now just year today, 0:06:30.360 --> 0:06:32.440 we're back to flat. Are slightly up here, I mean 0:06:32.440 --> 0:06:34.120 the volatility has been amazing. What do you tell your 0:06:34.160 --> 0:06:35.200 clients these days? 0:06:36.240 --> 0:06:39.400 It's been a whirlwind these past six weeks or so. 0:06:39.440 --> 0:06:41.479 However long it's been, it feels like it's been a 0:06:41.520 --> 0:06:44.080 lot longer than that, I think, I think for all 0:06:44.120 --> 0:06:48.440 of us. But the message throughout April, which was really 0:06:48.480 --> 0:06:50.560 the month in which we saw the brunch of the volatility, 0:06:51.120 --> 0:06:55.040 was that you need to stick with your plan, and 0:06:55.080 --> 0:06:58.120 you certainly don't want to be selling out of stocks 0:06:58.120 --> 0:07:00.800 at the lows. If anything, if you were someone who 0:07:00.839 --> 0:07:03.559 had had a liquidity event, if you had been sitting 0:07:03.560 --> 0:07:05.839 on cash for a long time, that was the time 0:07:05.839 --> 0:07:09.320 you wanted to start phasing into markets and start deploying 0:07:09.360 --> 0:07:13.920 your capital and taking advantage of the volatility. Because, yes, 0:07:14.680 --> 0:07:18.520 Liberation Day was certainly a day, I'm sure we all remember, 0:07:18.560 --> 0:07:21.680 a very volatile one at that. But the expectation was 0:07:21.720 --> 0:07:24.920 that was peak uncertainty, that was peak pessimism, and the 0:07:25.160 --> 0:07:28.400 hope was that there would be negotiations, that we would 0:07:28.480 --> 0:07:31.040 see come to the forefront between the United States and 0:07:31.080 --> 0:07:34.600 other countries, particularly China, and that we would see these 0:07:34.600 --> 0:07:38.000 tariff rates come down. Now, thankfully, that is what's happened, 0:07:38.040 --> 0:07:42.840 and we've seen markets react very favorably to that at 0:07:42.880 --> 0:07:45.320 this point in time, you Alex, you know, you just 0:07:45.400 --> 0:07:49.120 ran through the numbers. Really, it says if markets have 0:07:49.320 --> 0:07:52.640 made up all of those losses. It's pretty amazing to 0:07:52.680 --> 0:07:55.560 think about, considering the sp at a time was almost 0:07:55.560 --> 0:07:58.720 down twenty percent at its low, and now we're just 0:07:58.760 --> 0:08:02.560 about flat. So sure, at this point the risk reward 0:08:02.840 --> 0:08:05.800 doesn't look quite as favorable as it looked when the 0:08:05.800 --> 0:08:11.080 market was down ten, fifteen, eighteen percent, But the outlook 0:08:11.200 --> 0:08:15.320 is still pretty positive from here, especially with the expectation 0:08:16.040 --> 0:08:21.040 that you know, hopefully trade negotiations will continue, and you 0:08:21.080 --> 0:08:26.160 know growth is slowing a bit, Inflation you know, is 0:08:26.840 --> 0:08:29.920 under control, as we saw this morning. So there's other 0:08:30.000 --> 0:08:33.680 reasons fundamentally to continue to think that, you know, twelve 0:08:33.679 --> 0:08:35.560 months from now, the market's going to be higher than 0:08:35.600 --> 0:08:36.360 where we are today. 0:08:36.800 --> 0:08:39.679 So if the calls you were getting a month ago 0:08:39.840 --> 0:08:42.319 were what do I do? What's changing? I'm kind of 0:08:42.320 --> 0:08:44.520 freaking out. What are the calls you're getting now today? 0:08:45.920 --> 0:08:50.240 Well, people certainly feel better. It's really interesting. You know, 0:08:50.360 --> 0:08:53.400 typically investors, we all know that you want to be 0:08:53.840 --> 0:08:57.000 fearful when people are greedy, and greedy when people are fearful, 0:08:57.000 --> 0:09:00.800 but in actuality, you know, people don't don't always act 0:09:00.840 --> 0:09:01.640 that way. 0:09:02.320 --> 0:09:02.480 You know. 0:09:02.520 --> 0:09:04.600 It's interesting that, you know, the calls that we were 0:09:04.600 --> 0:09:07.319 getting at the April lows, when markets were down between 0:09:07.320 --> 0:09:10.840 fifteen and twenty percent, were more panicky, asking do we 0:09:10.840 --> 0:09:12.720 need to change our strategy? What should we be doing here? 0:09:12.760 --> 0:09:15.880 Should we be selling stocks, buying bonds, buying gold? And 0:09:15.920 --> 0:09:19.320 we did meet some tweaks, but certainly weren't selling stocks 0:09:19.320 --> 0:09:21.560 at those levels. It was more so talking about adding 0:09:21.600 --> 0:09:25.720 at those levels. Now people feel better, you know, people, 0:09:26.360 --> 0:09:28.520 It's interesting you would think that when markets are at 0:09:28.559 --> 0:09:31.000 the highs, people are saying, should I take chips off 0:09:31.040 --> 0:09:34.440 the table? But that's not necessarily the case. People feel better, 0:09:34.440 --> 0:09:38.000 people feel more optimistic now that we're seeing, you know, 0:09:38.040 --> 0:09:40.600 countries come to the table and discuss and these teriff 0:09:40.640 --> 0:09:43.559 rights come down. With that said, I mean, I'm actually 0:09:43.600 --> 0:09:45.640 about to have a conversation with a client who has 0:09:45.679 --> 0:09:48.960 a big home purchase coming up over the next couple 0:09:49.040 --> 0:09:51.920 of months. That's someone given that we've seen a rally, 0:09:52.600 --> 0:09:54.839 that you might want to consider taking chips off the 0:09:54.880 --> 0:09:56.920 table if you have a big near term purchase coming 0:09:57.000 --> 0:09:59.640 up and you need liquidity. You need cash. Okay, you 0:09:59.679 --> 0:10:03.319 probably feel pretty great now you're not selling with stocks 0:10:03.400 --> 0:10:06.040 down fifteen percent, you're selling with them flat now on 0:10:06.080 --> 0:10:09.240 the year roughly, so that you're someone who has something 0:10:09.320 --> 0:10:13.280 like that coming up that changes the parameters. But we 0:10:13.360 --> 0:10:15.839 typically like to say, you know, to clients who have 0:10:16.040 --> 0:10:19.880 near term events where they need cash on hand, or 0:10:19.920 --> 0:10:22.720 if you're someone who is retired and you're spending down 0:10:22.760 --> 0:10:26.319 your portfolio, we typically recommend that you have a liquidity 0:10:26.320 --> 0:10:29.360 buffer in your portfolio, say you know, for whatever that 0:10:29.440 --> 0:10:32.319 project is, or say you know, even two to three 0:10:32.520 --> 0:10:36.439 years of expenses, because that way, when the market does 0:10:36.640 --> 0:10:40.720 fall and it's going to happen, and it's natural, you know, 0:10:40.920 --> 0:10:43.040 we're all going to witness many more of these in 0:10:43.080 --> 0:10:46.760 our lifetimes most likely, you know. That way, you're not 0:10:46.800 --> 0:10:48.440 freaking out because you know you have the cash on 0:10:48.520 --> 0:10:50.959 hand to meet the expense needs that you need in 0:10:50.960 --> 0:10:51.600 the near term. 0:10:52.000 --> 0:10:53.920 Sarah, thank you so much for joining us. Always appreciate 0:10:53.960 --> 0:10:54.839 getting a few minutes of your time. 0:10:54.880 --> 0:10:58.440 Sarah Ponzek, first vice president of wealth management at UBS 0:10:58.520 --> 0:10:59.360 Private Wealth Management. 0:10:59.360 --> 0:11:03.440 Down there and book time, Florida. 0:11:03.559 --> 0:11:07.240 You're listening to the Bloomberg Intelligence podcast Catch US Live 0:11:07.320 --> 0:11:10.400 weekdays at ten am Eastern on Apple Coarclay, and Android 0:11:10.440 --> 0:11:13.720 Auto with the Bloomberg Business App. Listen on demand wherever 0:11:13.800 --> 0:11:16.880 you get your podcasts, or watch US live on YouTube. 0:11:17.000 --> 0:11:19.240 All right, well, let's get to one of the most 0:11:19.320 --> 0:11:23.240 underperforming stocks within the market today, dragging on the Dow 0:11:23.360 --> 0:11:25.839 Jones Industrial Average. Now, I know many people don't look 0:11:25.840 --> 0:11:27.800 at it, but nonetheless it's a pretty chunky move, so 0:11:27.840 --> 0:11:30.839 it's worth discussing. And that's United Health. Glenn lessev Is, 0:11:30.840 --> 0:11:35.440 Bloomberg Intelligence Senior equity analyst joins us. Now, So suspending 0:11:35.440 --> 0:11:38.520 the twenty twenty five outlook, naming a new CEO, what 0:11:38.679 --> 0:11:40.040 was the biggest surprise here? 0:11:42.440 --> 0:11:47.079 So the biggest surprise was suspending the twenty twenty five guidance. 0:11:47.760 --> 0:11:52.000 And this comes after the company lowered twenty twenty five 0:11:52.120 --> 0:11:56.720 out cloak just about three weeks ago when the company 0:11:56.720 --> 0:11:59.160 reported first quarter results. 0:12:00.120 --> 0:12:02.160 So what's the problem with this business? 0:12:02.160 --> 0:12:05.560 I thought the healthcare insurance business just just rips it. 0:12:07.160 --> 0:12:13.760 Well, it all goes in cycles, right, It is surprising 0:12:13.800 --> 0:12:20.600 that United is having these problems basically that began in 0:12:22.000 --> 0:12:23.680 at the start of twenty twenty four. 0:12:23.960 --> 0:12:25.280 If you remember there was a. 0:12:25.280 --> 0:12:28.240 Change healthcare attack, and after that, it just seems that 0:12:28.720 --> 0:12:33.760 United management was trying to fix things while other things 0:12:33.800 --> 0:12:37.679 fell apart and has been on the back foot. And 0:12:37.760 --> 0:12:42.040 that's probably one of the reasons that the CEO that 0:12:42.160 --> 0:12:45.480 led the company see in twenty twenty one, I believe, 0:12:45.960 --> 0:12:50.880 left the company and the chairman and former CEO is 0:12:50.920 --> 0:12:55.560 taking the reins to sort of reposition United for you know, 0:12:55.640 --> 0:12:57.520 next phase growth. 0:12:58.160 --> 0:13:00.800 So, right, well, where is that it's going to come from? 0:13:00.840 --> 0:13:03.280 Because there are higher than expected medical costs, right and 0:13:03.320 --> 0:13:06.880 some reimbursement struggles. Can you walk us through we learned about. 0:13:06.640 --> 0:13:08.960 That, yes, basically. 0:13:09.040 --> 0:13:14.920 So basically, the company cited that the medical cost trend 0:13:14.960 --> 0:13:19.280 among new members in the unit's medicare portfolio is accelerating 0:13:19.320 --> 0:13:24.800 relative to the first quarter trends, which was higher than 0:13:24.880 --> 0:13:30.400 expected already. Basically, if it continues, the company can always 0:13:31.200 --> 0:13:36.520 sort of try to get more premium per member from 0:13:36.559 --> 0:13:40.840 the government as it deals with Medicare, to sort of 0:13:40.920 --> 0:13:47.400 to reset the margin expectations or normalize the margins. That 0:13:47.520 --> 0:13:53.199 being said, you know, if the medical costs continue to accelerate, 0:13:55.280 --> 0:13:58.360 and specifically with the sort of with everything that's going 0:13:58.400 --> 0:14:03.240 on in Washington, with the sort of funding overhanging all that, 0:14:03.280 --> 0:14:06.640 it may become a problem over the longer term. But 0:14:06.800 --> 0:14:10.680 at the same time, you know, managed care companies can 0:14:10.760 --> 0:14:14.520 always exit under performing markets. It just may take a 0:14:14.559 --> 0:14:21.040 little bit longer than sort of investors would like to see. 0:14:21.680 --> 0:14:25.400 You're listening to the Bloomberg Intelligence podcast. Catch us live 0:14:25.480 --> 0:14:28.840 weekdays at ten am Eastern on Applecarplay and Android Auto 0:14:28.960 --> 0:14:32.040 with the Bloomberg Business app. Listen on demand wherever you 0:14:32.080 --> 0:14:35.000 get your podcasts, or watch us live on YouTube. 0:14:35.640 --> 0:14:38.600 Another stock in the news Microsoft, So this is cutting 0:14:38.640 --> 0:14:41.840 three percent of its employees to reduce management layers. 0:14:41.880 --> 0:14:43.920 I'm looking at the stock here. It's pretty much unchanged 0:14:43.960 --> 0:14:46.800 on the day. It's up six percent year to date. 0:14:46.840 --> 0:14:49.520 But anytime Microsoft does anything, we want to get to 0:14:49.600 --> 0:14:51.600 the bottom of it. On a rag rana he does that. 0:14:51.680 --> 0:14:54.880 Force's Bloomberg Intelligence Senior Technology channelst onnurags. 0:14:54.880 --> 0:14:58.080 It's just kind of annual culling of the ranks. 0:14:58.200 --> 0:15:01.720 Or is this saying something about Microsoft and maybe where 0:15:01.720 --> 0:15:02.560 it sees its future. 0:15:03.760 --> 0:15:05.960 I think it's a little bit of both, because you know, 0:15:06.040 --> 0:15:09.240 and the numbers three percent does not say much. But 0:15:09.360 --> 0:15:11.560 at the same time, Microsoft is not hiring at the 0:15:11.560 --> 0:15:13.880 same pace that it used to. And I think one 0:15:13.920 --> 0:15:16.760 of the areas where it is deploying AI is coding 0:15:17.280 --> 0:15:19.720 or you know, R and D. That's an area where 0:15:19.720 --> 0:15:23.720 we anticipate productivity to improve because of the tools we have, 0:15:24.480 --> 0:15:28.000 and not anticipating headcount to grow up. Second thing, Microsoft 0:15:28.040 --> 0:15:31.160 is investing very heavily in AI right now. The capex 0:15:31.280 --> 0:15:34.000 is going to be extremely high, you know, as north 0:15:34.040 --> 0:15:37.400 those eighty billion dollars for the next twelve months, and 0:15:37.680 --> 0:15:39.680 you know that they have to offset some of that 0:15:39.840 --> 0:15:43.440 pressure on gross margins with cuts on the operating expense 0:15:43.480 --> 0:15:47.040 side so that the net operating margin doesn't get impacted. 0:15:47.080 --> 0:15:48.560 So I think I think it's a little bit of 0:15:48.560 --> 0:15:49.160 all the above. 0:15:49.760 --> 0:15:52.480 Was this a surprise, Not really. 0:15:52.520 --> 0:15:55.120 I mean three percent to me does not come as 0:15:55.120 --> 0:15:55.560 a surprise. 0:15:55.600 --> 0:15:58.520 Three percent is you know, in an environment like right 0:15:58.520 --> 0:16:02.240 now where companies are not anticipating the real attrition rate, 0:16:02.560 --> 0:16:04.800 so on a normalized basis of a company is seeing 0:16:04.800 --> 0:16:08.000 attrition employee attrition between ten to fifteen percent. We're not 0:16:08.040 --> 0:16:10.000 seeing that right now, so the company has to do 0:16:10.080 --> 0:16:12.360 something in order to get back to the normal range 0:16:12.400 --> 0:16:15.400 of their financial planning. So it is I said this 0:16:15.480 --> 0:16:18.200 doesn't sound too much to me, but they could be 0:16:18.200 --> 0:16:20.840 a little bit more based on you know, who they 0:16:20.880 --> 0:16:23.200 are trying to get rid of. If it's higher on 0:16:23.240 --> 0:16:26.120 the paychecks, then I think it has to do with, 0:16:26.280 --> 0:16:27.680 you know, protecting your margins. 0:16:29.320 --> 0:16:32.000 An Rob talk to us about just what the investment 0:16:32.040 --> 0:16:35.080 thesis is regarding Microsoft right now. Given some of the 0:16:35.120 --> 0:16:38.680 tariff uncertainty, given some of the geopolitics uncertainty, what's the 0:16:38.760 --> 0:16:40.240 call on Microsoft these days? 0:16:40.880 --> 0:16:42.480 You know, for the last few years we have been 0:16:42.480 --> 0:16:44.640 saying this is probably one of the cleanest stories in 0:16:44.720 --> 0:16:49.080 AI and software land because it doesn't get impacted with tariffs. 0:16:49.360 --> 0:16:52.960 There is some marginal secondary impact because of you know, 0:16:53.000 --> 0:16:55.520 if we do get into an economic slowdown. But the 0:16:55.520 --> 0:16:58.400 real benefit for them is they are hosting chat GPT, 0:16:59.280 --> 0:17:02.240 the most favorite app of consumers right now, and they 0:17:02.320 --> 0:17:04.440 get the benefit of that. So if you have let's say, 0:17:04.720 --> 0:17:06.960 you know, your user base goes from two hundred million 0:17:07.080 --> 0:17:08.919 users to three hundred to four hundred now we are 0:17:08.920 --> 0:17:12.760 close to about five hundred million users, it really helps 0:17:12.840 --> 0:17:15.680 Microsoft because they are hosting that app, and as those 0:17:15.840 --> 0:17:19.119 users use chappid JAGGPT for a longer period of time, 0:17:19.320 --> 0:17:20.320 they get to make more money. 0:17:20.359 --> 0:17:22.440 So I think that's really one of the bigger. 0:17:22.160 --> 0:17:24.960 Benefits where they are offsetting the risk that we are 0:17:25.000 --> 0:17:27.960 seeing that other software vendors are seeing because of the 0:17:28.080 --> 0:17:31.760 lack of headcount growth across the tech landscape. 0:17:32.359 --> 0:17:34.719 So based on that, do we think that we're going 0:17:34.760 --> 0:17:38.000 to see other tech companies follow suit in this particular way. 0:17:38.040 --> 0:17:41.000 Like if Microsoft is a creme de la creme, as 0:17:41.040 --> 0:17:42.920 you see it, who's next? 0:17:43.400 --> 0:17:45.120 So Alex, when you look at it, as I said, 0:17:45.119 --> 0:17:47.359 three percent does not scare me as much. But if 0:17:47.560 --> 0:17:50.000 over the next six months we start companies come out 0:17:50.040 --> 0:17:52.359 and say, well, I'm laying off like sevent to ten 0:17:52.400 --> 0:17:55.679 percent of my workforce, that is concerning because that's concerning 0:17:55.720 --> 0:17:56.400 for two reasons. 0:17:56.400 --> 0:17:59.120 One, these companies. 0:17:58.680 --> 0:18:01.680 Do buy software from other companies such as a Workday 0:18:01.800 --> 0:18:04.959 or a sales force, because these two companies are seeing 0:18:05.000 --> 0:18:08.480 some pressure on their seat growth because their end customers 0:18:08.520 --> 0:18:12.199 are not hiding as much. So lack of hiding is 0:18:12.320 --> 0:18:15.480 concerned not just for the companies or the industry themselves, 0:18:15.720 --> 0:18:18.560 but for the software landscape as well, because primarily this 0:18:18.680 --> 0:18:21.480 is a seat based monetization. 0:18:20.960 --> 0:18:24.919 Model anark before we got all enmeshed in terrors over 0:18:24.960 --> 0:18:26.880 the last few months, we seemingly talk to. 0:18:26.800 --> 0:18:28.600 You every day about the AI story. 0:18:28.680 --> 0:18:31.000 That's kind of follow the radar screen a little bit 0:18:31.000 --> 0:18:34.439 here for I think Global Wall Street, not for you guys. 0:18:34.680 --> 0:18:36.640 What is the AI story today? 0:18:37.000 --> 0:18:39.679 What's the feeling in the marketplace about AI as a 0:18:39.680 --> 0:18:40.600 growth story for tech? 0:18:41.440 --> 0:18:41.680 Yeah. 0:18:41.720 --> 0:18:43.720 One of the things Code one of the things that 0:18:43.960 --> 0:18:47.280 deep Seat did for the entire space was divided the 0:18:47.320 --> 0:18:50.840 space in two different buckets. One was the AI infrastructure 0:18:50.880 --> 0:18:53.240 play and the other one is more on the application 0:18:53.359 --> 0:18:56.240 side of it, and Microsoft i think guided them a 0:18:56.280 --> 0:19:00.000 little bit towards that framework because when you look at it, 0:19:00.119 --> 0:19:03.440 Microsoft is really focused on the inferencing side of it, 0:19:03.600 --> 0:19:06.399 which is hosting the applications. Things that are more on 0:19:06.440 --> 0:19:09.680 the infrastructure side, whether it's the chip building from Nvidia 0:19:09.800 --> 0:19:12.960 or a recent type like code viv, they have not 0:19:13.080 --> 0:19:15.600 done as well as some of the other vendors because 0:19:15.640 --> 0:19:17.879 people are wondering, why do I need to play the 0:19:17.880 --> 0:19:20.920 infrastructure game because it's CAPEX heavy and we do not 0:19:21.080 --> 0:19:22.840 know how things are going to shape up in the 0:19:22.840 --> 0:19:25.280 next two to three years. One thing is sort of 0:19:25.320 --> 0:19:28.840 certain that even after three years, the number of use 0:19:28.880 --> 0:19:31.280 cases on AI is going to rise. So you're going 0:19:31.359 --> 0:19:33.919 to be on the application or the inference side of 0:19:33.960 --> 0:19:36.440 things rather than the infrastructure side of things. 0:19:36.320 --> 0:19:38.240 Right, And that's going to be a lot more profitable 0:19:38.280 --> 0:19:41.879 going forward, but it also requires something very different at 0:19:41.920 --> 0:19:43.199 the end of the day. Right, You're going to have 0:19:43.960 --> 0:19:47.760 basically locations that are closer to the actual use point, right, 0:19:47.800 --> 0:19:49.840 so closer to where I am and where you are, 0:19:50.000 --> 0:19:51.560 versus out in the middle of nowhere. But you have 0:19:51.600 --> 0:19:54.240 a huge heavy load. How does that change either investment 0:19:54.320 --> 0:19:55.560 or power usage, et cetera. 0:19:56.480 --> 0:19:58.760 That's probably one of the most important questions out there 0:19:58.840 --> 0:20:02.520 right now. Like a Microsoft is saying, for my training needs, 0:20:02.800 --> 0:20:04.880 I will go to those data centers that are out 0:20:04.920 --> 0:20:07.480 in the boondogs in middle of nowhere, and that could 0:20:07.520 --> 0:20:10.120