WEBVTT - Surveillance: The Fed's Dramatic Pivot with Citi's Mann 0:00:00.080 --> 0:00:13.040 Ye. Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene 0:00:13.480 --> 0:00:17.560 Jay Ley. We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:28.200 Bloomberg dot com, and of course, on the Bloomberg. A 0:00:28.440 --> 0:00:32.120 speech about the zero lower bound a day before the blackout, 0:00:32.840 --> 0:00:36.080 weeks before the Federal Reserve decision, and woman to believe 0:00:36.120 --> 0:00:40.120 it was purely academic. It's like the smoke signals of 0:00:40.280 --> 0:00:44.440 Arthur Burns pipe. It's it's become a parlor game. And 0:00:44.600 --> 0:00:46.360 the good news is we have the right guest to 0:00:46.400 --> 0:00:50.400 try and parse the silliness of this. Joy James Sweet. 0:00:50.560 --> 0:00:54.040 Just credit Sweet, chief Economist dropping by the studio. Great 0:00:54.080 --> 0:00:56.040 to see it, James, try and make sense of this 0:00:56.120 --> 0:00:58.280 for us. What on earth has happened with FED speak 0:00:58.680 --> 0:01:01.040 in the last twenty four hours. Well, everything I say 0:01:01.120 --> 0:01:03.200 is part of an academic speech and has nothing to 0:01:03.200 --> 0:01:07.560 do course of course. Um yeah, I think the Fed 0:01:07.600 --> 0:01:09.760 has signaled that they're going to cut. I mean we 0:01:09.800 --> 0:01:14.399 expect him to cut by um. The market speculation is 0:01:14.560 --> 0:01:18.680 maybe they'll do fifty. Ironically, the data says maybe they 0:01:18.680 --> 0:01:22.319 should do zero. But but the marketers really debating whether 0:01:22.319 --> 0:01:25.160 they're going to do twenty five or fifty, and the 0:01:25.240 --> 0:01:30.000 comments from from President Williams yesterday really moved the market 0:01:30.080 --> 0:01:33.440 sharply towards expecting fifty. And then he brought that back 0:01:33.520 --> 0:01:36.000 later in the day. Did he bring it back because 0:01:36.800 --> 0:01:38.479 they're not going to do fifty and he doesn't want 0:01:38.520 --> 0:01:40.640 to market miss priced, or did he bring it back 0:01:40.680 --> 0:01:43.480 because they're gonna do fifty. Anyone surprised the market and 0:01:43.560 --> 0:01:46.839 have everyone excited about a dubble shock from the Fed. 0:01:46.920 --> 0:01:49.000 I'm not sure. But you know, again, I don't think 0:01:49.000 --> 0:01:51.200 the data really supports any cut at all, So we're 0:01:51.200 --> 0:01:54.559 going to continue to forecast. The heart of this discussion 0:01:55.000 --> 0:01:59.360 is we're asking too much from one institution forrest about 0:01:59.400 --> 0:02:03.600 the names of the people, governor pharaoh, you know, you know, whatever, 0:02:03.680 --> 0:02:08.280 nobody needs. That just we're asking too much of economists 0:02:08.480 --> 0:02:13.040 who have a toolkit that everyone agrees, including Vice Chairman Clarada, 0:02:13.120 --> 0:02:18.200 with world class research, which is prone to probabilities and likelihoods. Right. 0:02:18.320 --> 0:02:20.880 I think that's fair and I think even you know 0:02:20.919 --> 0:02:24.440 a lot of the presidents, including Mr Williams, were past 0:02:25.160 --> 0:02:30.200 um research heads at their local feds UM, and you know, 0:02:30.520 --> 0:02:35.440 very competent monetary policy experts UM, but you know certain 0:02:35.480 --> 0:02:37.680 kind of people may be prone to a certain kind 0:02:37.680 --> 0:02:41.000 of thinking. And lots of papers about this scary zero bound. 0:02:41.120 --> 0:02:43.600 Let's go to the inertial force. Here is it linear? 0:02:43.720 --> 0:02:47.000 They cut let's forget about fifty basis point they got, 0:02:48.200 --> 0:02:50.840 then they cut another. Always see the date I get 0:02:50.840 --> 0:02:54.679 all that is it. That's a measured green spanning and 0:02:54.800 --> 0:02:57.480 linear move. I don't buy it for a minute. When 0:02:57.520 --> 0:03:00.800 does the umph click in? Well, I think when you 0:03:00.960 --> 0:03:05.079 when you need a sharp move, um, you know you can, 0:03:05.160 --> 0:03:08.560 you can deliver that. But really the question is do 0:03:08.600 --> 0:03:12.600 you need it? Governor Ferrell was saying yesterday. Know, I 0:03:12.600 --> 0:03:14.600 think most people don't think you need it right now. 0:03:14.600 --> 0:03:17.280 I think the communication we've had quite clearly from the FETE, though, 0:03:17.360 --> 0:03:19.080 is that they think they need to get ahead of it. 0:03:19.120 --> 0:03:21.560 They need to do more with less, they have limited ammunition. 0:03:21.680 --> 0:03:24.560 Don't wait for it to materialize, James. I think that's 0:03:24.560 --> 0:03:27.240 why so many people find it so confusing at the moment, 0:03:27.240 --> 0:03:29.720 because they look at the heart day in America and 0:03:29.760 --> 0:03:32.440 they say things are okay. Then they listen to the 0:03:32.440 --> 0:03:35.520 feed and the communication and they're wondering what's wrong, Well, 0:03:35.560 --> 0:03:38.360 the real tailor rule probably should have p M eyes 0:03:38.520 --> 0:03:42.040 and forward break evens in it. And it feels like 0:03:42.280 --> 0:03:44.320 it's a good point. Yeah, it feels like that's what 0:03:44.360 --> 0:03:48.480 they're responding to, because I think the tailor rule that 0:03:48.560 --> 0:03:54.360 has forward actual inflation and you know, forward actual unemployment 0:03:55.000 --> 0:03:58.400 based on really what you can see now, it doesn't 0:03:58.480 --> 0:04:02.320 really suggest a breakdown of inflation or or arise in unemployment. 0:04:02.680 --> 0:04:04.520 So you have to have a pro you have to 0:04:04.560 --> 0:04:08.360 be forecasting something meaningful in the absence of cuts to 0:04:08.440 --> 0:04:11.920 justify cuts, and we're not. Is there value to the 0:04:12.000 --> 0:04:14.400 five year five year forward's looking at five years and 0:04:14.400 --> 0:04:16.200 then five years for it from that? Is there too 0:04:16.200 --> 0:04:19.080 far up? It's not. There's not really much value because 0:04:19.120 --> 0:04:21.880 it's it's basically very correlated with oil prices, and it's 0:04:21.920 --> 0:04:24.120 really telling you whether the ten year and the thirty 0:04:24.160 --> 0:04:26.159 year going up and down or not. So what's the 0:04:26.480 --> 0:04:30.000 X axis of tools that would be useful for them? 0:04:30.000 --> 0:04:31.640 And the answer is, I'll a p M E S. 0:04:32.200 --> 0:04:35.120 It's shockingly short, isn't it. Well, the p M I 0:04:35.279 --> 0:04:38.240 S I don't. I think they do definitely respond to 0:04:38.320 --> 0:04:41.040 and we've done some some thorough empirical work showing that 0:04:41.120 --> 0:04:44.240 both the ECB and the FED tend to react to 0:04:44.440 --> 0:04:46.760 sharp moves down in in P M I S. But 0:04:46.839 --> 0:04:49.160 the problem is the labor market tends not to react 0:04:49.240 --> 0:04:51.880 to sharp move downs in PM. You and I did 0:04:51.880 --> 0:04:57.240 thorough empyropical work. Was that over those beers. Paul Sweeney 0:04:57.279 --> 0:05:00.719 out is over for Budweiser's and we did her oracle work. 0:05:00.839 --> 0:05:04.480 And right, James, just thinking about things at the moment. 0:05:04.560 --> 0:05:07.280 The research that you guys have done on industrial production 0:05:07.320 --> 0:05:11.360 worldwide and manufacturing. You came out quite early and said 0:05:11.400 --> 0:05:14.160 that there are some one off factors behind the manufacturing 0:05:14.160 --> 0:05:17.120 recession we are seeing as it was gaining momentum, and 0:05:17.160 --> 0:05:20.000 you think they're fading. And what I find really interesting 0:05:20.080 --> 0:05:21.839 is not where we are right now, where will be 0:05:21.960 --> 0:05:24.600 month end? Were set to get an interest right cut. 0:05:24.920 --> 0:05:27.400 It's what the economy looks like going into the back 0:05:27.560 --> 0:05:30.120 end of this year. And your base case with a 0:05:30.240 --> 0:05:32.640 right cup without a rate cut is things are going 0:05:32.680 --> 0:05:34.920 to improve. So just walk me through that because I 0:05:34.920 --> 0:05:38.080 think it's important, right well, I I really separate the 0:05:38.120 --> 0:05:42.400 real economy into global manufacturing trade industrial production, which of course, 0:05:42.440 --> 0:05:47.480 as a US component and labor market, households in developed economies, 0:05:47.520 --> 0:05:52.400 so on. On the first, on industrial production, basically, trade 0:05:52.480 --> 0:05:57.800 uncertainty tariff fears caused a sharp, sharp slowdown towards the 0:05:57.880 --> 0:06:00.440 end of last year, centered on a drop in imports 0:06:00.440 --> 0:06:03.960 in China. UH. And so from October to March you 0:06:04.080 --> 0:06:08.800 had really bad global industrial production growth, and the Chinese 0:06:08.839 --> 0:06:13.280 industrial production data, for mysterious reasons, didn't really reflect it. 0:06:13.360 --> 0:06:16.159 But um, but I think, you know, I I think 0:06:16.520 --> 0:06:18.520 we had a really big slump. It wasn't a U 0:06:18.600 --> 0:06:21.320 S slump, but it was a big slump. March to May, 0:06:21.600 --> 0:06:25.520 we actually had some recovery. Um. Since since the tariffs 0:06:25.560 --> 0:06:27.880 went up, it's likely that we're back in that slump 0:06:27.960 --> 0:06:31.560 in manufacturing activity. UH. Investment is likely to be pretty 0:06:31.560 --> 0:06:34.800 soft in manufacturing globally. But meanwhile, the labor market in 0:06:34.839 --> 0:06:38.640 the US, nothing has happened. Inflation in the US nothing 0:06:38.680 --> 0:06:42.320 has happened either. Financial services inflation, which they can't measure, 0:06:42.560 --> 0:06:45.120 came down a little bit. Basically, the rest of the 0:06:45.160 --> 0:06:48.240 inflation data are stable, and if anything, core inflation is 0:06:48.320 --> 0:06:51.280 likely to rise. So so you know, basically you've got 0:06:51.360 --> 0:06:53.640 two things. You've got a manufacturing slump, which should really 0:06:53.680 --> 0:06:56.520 get no worse, but not really, you know, we don't 0:06:56.560 --> 0:07:00.240 see robust growth and inflation and and and unemployment where 0:07:00.320 --> 0:07:03.800 basically still nothing is happening. I've never seen Sweeney is 0:07:04.000 --> 0:07:06.920 fired up. What solid mean? Do you? When when the 0:07:07.040 --> 0:07:09.880 when these fancy guys at these institutions say it's a 0:07:10.000 --> 0:07:14.360 solid economy? What solid you? Because right now, I mean 0:07:14.680 --> 0:07:18.400 unemployment is at three six three seven GDP. Growth for 0:07:18.440 --> 0:07:19.840 the first half of the year is going to be 0:07:20.080 --> 0:07:24.480 mid two's um you know, corporates the flow of credit 0:07:24.640 --> 0:07:27.119 to just about anyone who wants it in the US, 0:07:27.640 --> 0:07:31.920 it's pretty good right now. So what's not solid? Really? 0:07:31.960 --> 0:07:35.080 The straight James Sweeney with se does David Blanche Flowers 0:07:35.280 --> 0:07:37.520 no doubt listening up in the handover thew Hampshire going 0:07:37.680 --> 0:07:40.040 he doesn't know he's talking about he wants. Do you 0:07:40.040 --> 0:07:43.200 think Danny wants fifty beats? I'm not sure I actually 0:07:43.200 --> 0:07:44.840 I haven't spoke to him for a couple of weeks, 0:07:44.880 --> 0:07:47.240 but imagine it's up there at the fifty level. I 0:07:47.240 --> 0:08:03.920 think he wants a big adjustment. You too short of 0:08:04.000 --> 0:08:06.800 is it now? A chapterin Man of City Groupe The 0:08:06.920 --> 0:08:11.000 Chief Economists and always kept a man on international economics, 0:08:11.000 --> 0:08:13.200 except we're not going to do that on a New 0:08:13.280 --> 0:08:16.480 York Friday. We're going to talk domestic economics with Dr Man. 0:08:16.840 --> 0:08:19.360 What is the research that you see with your vast 0:08:19.400 --> 0:08:24.000 team at City Group? Is it an economy that justifies 0:08:24.960 --> 0:08:29.800 no decision? I guess an out front basis point cut 0:08:30.320 --> 0:08:32.840 or Catherine, can you get all dramatic today and tell 0:08:32.880 --> 0:08:37.120 me we need a fifty basis point cut? Well, you know, 0:08:37.240 --> 0:08:41.679 I think that there's been um, some real challenging communications 0:08:42.160 --> 0:08:45.240 that the FED has been uh presenting to us. I 0:08:45.240 --> 0:08:49.240 think your person who is on before talks about fresh 0:08:49.360 --> 0:08:52.520 clues as if you know, we're trying to uncover the 0:08:52.600 --> 0:08:55.400 true FED, and I think we're The real challenge here 0:08:55.559 --> 0:08:59.360 is that there was a very dramatic pivot from language 0:08:59.360 --> 0:09:04.959 that used the vocabulary of patient monitor data dependence to 0:09:05.200 --> 0:09:12.160 change to language and vocabulary of preemptive, preventive, large and 0:09:12.280 --> 0:09:15.600 bold moves. And so you know, it's like, Wow, how 0:09:15.600 --> 0:09:17.640 do we all of a sudden move from patient and 0:09:17.720 --> 0:09:21.640 monitoring and data dependence to something completely different? Because the 0:09:21.720 --> 0:09:26.760 incoming data for the United States do not warrant change 0:09:26.960 --> 0:09:31.439 in tone, and so it's what happened? What what did 0:09:31.440 --> 0:09:34.520 we see? In? Frankly, the incoming data from the foreign 0:09:34.520 --> 0:09:40.000 economies as well, does not warrant the type of market 0:09:40.120 --> 0:09:44.720 pricing in of dramatic action of you know, fifty basis 0:09:44.720 --> 0:09:48.199 point to mark. The market UM is pricing in much 0:09:48.280 --> 0:09:53.600 more than the data warrant, and they are effectively pricing 0:09:53.640 --> 0:09:57.920 in this recent language change, which is also a puzzle 0:09:58.559 --> 0:10:03.200 because the language change is dramatic without the data being 0:10:03.559 --> 0:10:06.280 with it being dramatic, Doctor man, how did we get 0:10:06.320 --> 0:10:09.720 to the point where we're preemptive? And if you read 0:10:09.840 --> 0:10:13.440 melts or three volumes or Timberlake of the Georgia School 0:10:14.120 --> 0:10:17.640 or Bernanke and the rest of it from academics, where's 0:10:17.679 --> 0:10:22.679 the evidence of preemptive works? Well, we can go back 0:10:22.760 --> 0:10:25.920 to the you know, the long and variable lags UH 0:10:25.920 --> 0:10:29.040 story about monetary policy, that it does take a long 0:10:29.120 --> 0:10:33.000 time for monetary policy to work through um the real 0:10:33.200 --> 0:10:36.679 side of the economy, because in the olden days, that 0:10:36.800 --> 0:10:41.319 was the channel you changed monetary policy. Banks reacted, then 0:10:41.360 --> 0:10:44.000 you had to change in the cost of capital uh 0:10:44.120 --> 0:10:46.640 to cost of credit, and then and then that followed 0:10:46.640 --> 0:10:49.720 through the real economy. And so so you did need 0:10:49.800 --> 0:10:54.280 to look very far forward, uh to prospects for the 0:10:54.320 --> 0:10:59.400 economy and adjust monetary policy appropriately in light of the 0:10:59.520 --> 0:11:02.600 change in economic activity. And then of course also we 0:11:02.679 --> 0:11:05.880 cared a lot about inflation um and that also had 0:11:06.200 --> 0:11:09.280 long and variable lives to affect inflation um. But we're 0:11:09.280 --> 0:11:13.360 at a time right now where what matters more or 0:11:13.400 --> 0:11:16.920 seems to be much more of the dynamic is the 0:11:17.000 --> 0:11:20.559 market expects something to happen, for the FED to move 0:11:20.600 --> 0:11:23.199 in a particular way, and then if the FED does 0:11:23.240 --> 0:11:27.920 not deliver on what the market expects, then that yields 0:11:27.960 --> 0:11:33.520 an implied tightening. The market believes the implied tightening, even 0:11:33.559 --> 0:11:36.720 if there's no change at all, the implied tightening generates 0:11:36.720 --> 0:11:40.600 a real tightening, or they believe so, and that real 0:11:40.760 --> 0:11:46.280 tightening has consequences for the real side economy. And and 0:11:46.360 --> 0:11:48.520 you know, we can argue about whether or not that's 0:11:48.600 --> 0:11:51.960 that's appropriate or to consider, but it means the transmission 0:11:51.960 --> 0:11:54.559 mechanism is very different. So, Katherine, I'm just looking at 0:11:54.840 --> 0:11:56.880 one of your recent notes and the charts that you 0:11:56.920 --> 0:11:59.600 find interesting. I'm looking at the one on job growth. 0:11:59.600 --> 0:12:01.360 I mean, you know, you look at some of the data. 0:12:01.520 --> 0:12:04.560 This is a data dependent FED. The jobs growth would 0:12:04.600 --> 0:12:07.080 suggest that the FED can maybe sit this one out, 0:12:07.080 --> 0:12:10.160 But that's not what the language seems to be. Well, 0:12:10.200 --> 0:12:12.280 that's right. I mean, as I say, we when the 0:12:12.559 --> 0:12:15.800 you know, the language uh was patient, monitor and data 0:12:15.840 --> 0:12:18.160 to pantheons uh and then it and then then it 0:12:18.240 --> 0:12:22.679 really really pivoted very rapidly to this notion of needing 0:12:22.720 --> 0:12:27.480 to have insurance guns or preventive cuts, preemptive uh cuts UH. 0:12:27.559 --> 0:12:30.760 And I think that they're you're getting very different language 0:12:30.840 --> 0:12:35.400 from from different members of the broad body, not just 0:12:35.480 --> 0:12:37.480 the f o MC that there is, the voting body, 0:12:37.480 --> 0:12:40.720 but the broad body that addresses the state of the 0:12:40.800 --> 0:12:43.200 U S economy, state of the global economy and how 0:12:43.240 --> 0:12:46.160 it impacts the US economy as part of the decision 0:12:46.160 --> 0:12:48.600 making process. So you are starting to you know, you 0:12:48.640 --> 0:12:52.120 are seeing quite a range of views uh in in 0:12:52.240 --> 0:12:56.520 the in the commentary. But but the market had definitely 0:12:56.840 --> 0:13:03.199 tended to um focus quite a bit more on this preemptive, preventive, 0:13:03.840 --> 0:13:07.280 large and bold moves that have come out in in 0:13:07.320 --> 0:13:12.360 the most recent testimony and other commentary of the past 0:13:12.400 --> 0:13:14.760 several days too short of visit, Dr Man, thank you 0:13:14.800 --> 0:13:17.240 so much for joining us. Really wonderful to get a 0:13:17.280 --> 0:13:20.480 briefing from City Group chief economist Catherine Man this morning. 0:13:35.640 --> 0:13:38.600 It's rare, Paul, that we have someone dark in the 0:13:38.640 --> 0:13:42.079 door who has a degree in natural philosophy from William 0:13:42.080 --> 0:13:46.079 and Mary, which is so no, but I mean, I 0:13:46.160 --> 0:13:48.319 mean in physics right now, William and Mary. It's the 0:13:48.360 --> 0:13:54.280 William Smallhow small was Thomas Jefferson's iconic mentor, Like Jefferson 0:13:54.360 --> 0:13:57.280 always said, this guy is a guy that jumped started in, 0:13:57.400 --> 0:14:00.440 Lisa Ellis with us. What was it like doing physics 0:14:00.480 --> 0:14:03.520 where you're supposed to do history. You go to William 0:14:03.559 --> 0:14:06.120 Mary to do American history and you got out of 0:14:06.200 --> 0:14:10.560 slide rule? Yeah, yeah, that's right. Well when the Mary 0:14:10.679 --> 0:14:14.520 is beautiful as you highlighted, steeped in history. I was 0:14:14.559 --> 0:14:18.640 actually there during the three hundredth anniversary and the institution 0:14:18.800 --> 0:14:22.720 and um. But it's the natural sciences are strong too. 0:14:22.760 --> 0:14:25.480 There's a lot of um. The NASA has a big 0:14:25.480 --> 0:14:28.440 and wrong that barely describes the physics program as one 0:14:28.480 --> 0:14:30.440 of the best in the country. Paul, why don't you 0:14:30.440 --> 0:14:33.080 bring it from offa Nathan's and Lisa Ellis here on 0:14:33.160 --> 0:14:35.680 a on a three year old computer company that ain't 0:14:35.680 --> 0:14:38.080 get done? You know, I was saying earlier. I pulled 0:14:38.120 --> 0:14:40.000 up the five year chart on IBM, and it's returned 0:14:40.000 --> 0:14:42.360 to whopping negative one point two percent over the last 0:14:42.600 --> 0:14:44.280 five years. Just looking at the stocks at LASA, I 0:14:44.320 --> 0:14:48.120 know they reported earnings. What's what's the key takeaway here? 0:14:48.120 --> 0:14:50.200 I know you're not really constructive on the stock here, 0:14:50.200 --> 0:14:53.000 but what was the takeaway you took out of the earnings? Yeah, 0:14:53.040 --> 0:14:57.560 there's they were mixed results. That's the overall takeaway. The 0:14:57.640 --> 0:15:00.400 two that this strong the big positive and the strong 0:15:00.480 --> 0:15:05.120 negative pretty bipolar. Actually. UM on the on the positive side, 0:15:05.240 --> 0:15:07.920 the software number, which is a lot of what tends 0:15:07.960 --> 0:15:10.760 to move the stock on earnings, was quite good five 0:15:10.800 --> 0:15:13.520 point four percent for their software business. That's a very 0:15:13.520 --> 0:15:17.080 profitable business, very important to the sort of perpetuation of 0:15:17.120 --> 0:15:20.280 the franchise. UM. On the flip side, however, their cloud 0:15:20.440 --> 0:15:24.600 number was terrible. It was five percent in the quarter. 0:15:25.000 --> 0:15:28.360 That's down from twelve percent growth a last quarter. And 0:15:28.400 --> 0:15:30.240 this was a business that just in as of two 0:15:30.280 --> 0:15:34.280 thousand seventeen was doing. And obviously you compare that to 0:15:34.600 --> 0:15:37.600 you know, Microsoft to just reported and for Microsoft Azure, 0:15:37.600 --> 0:15:41.280 they're putting up numbers like an excess of sixty percent growth. 0:15:41.320 --> 0:15:44.280 So alright, so that brings us to red Hat. Red Hat, 0:15:44.440 --> 0:15:48.320 as I recall, was a big acquisition presumably going to 0:15:48.360 --> 0:15:50.440 help them in the cloud. What can you tell us 0:15:50.440 --> 0:15:52.600 about red Hat You think that is going to do 0:15:52.640 --> 0:15:55.000 what IBM needs to be done to their cloud business? Well, 0:15:55.000 --> 0:15:58.840 it it definitely helps UM, you know, within the scale 0:15:59.040 --> 0:16:03.400 of IBM. Unfortunately, just from a financial perspective, it doesn't 0:16:03.400 --> 0:16:06.360 move the needle that much just because of the difference 0:16:06.360 --> 0:16:11.640 in scale UM. But from a competitiveness perspective, it helps them. 0:16:11.840 --> 0:16:15.440 The real area where IBM is struggling right now in 0:16:15.560 --> 0:16:18.960 cloud is in the platform as a service business. That's 0:16:18.960 --> 0:16:22.200 where they would compete with like a Microsoft Azure. Red 0:16:22.240 --> 0:16:24.800 Hat has one of the leading products in that space, 0:16:24.840 --> 0:16:28.080 their open Shift product. Again, financially not a big deal, 0:16:28.120 --> 0:16:30.400 it's only a few hundred million in revenue, but more 0:16:30.520 --> 0:16:35.760 strategically it should help IBM positioning in that space where 0:16:35.800 --> 0:16:39.800 IBMS product, uh you know, has been lagging those piers. 0:16:39.840 --> 0:16:42.720 I look at the vectors of their income statement and frankly, 0:16:42.760 --> 0:16:45.520 if you didn't know what was IBM their constructive EBITA 0:16:46.040 --> 0:16:51.680 manage rising, free cash flow manage rising. The revenue line 0:16:51.840 --> 0:16:55.600 is an unmitigated disaster at the board level. Are they 0:16:55.640 --> 0:17:02.200 just simply managing IBM to be a smaller company? Uh, realistically, yes, 0:17:02.360 --> 0:17:05.439 I mean they are in you know that sort of 0:17:05.480 --> 0:17:09.000 like shrink to grow type of mode. Does that work 0:17:09.040 --> 0:17:12.720 in your experience at Mackenzie years ago? Does Mackenzie do 0:17:12.840 --> 0:17:16.840 shrink to grow? What is that? Well? I mean meaning 0:17:16.920 --> 0:17:21.760 there are pieces of IBM that are in areas of 0:17:21.760 --> 0:17:24.439 of of I T that are in structural decline and 0:17:24.480 --> 0:17:28.200 they've got to work their way well the challenges that 0:17:28.640 --> 0:17:32.840 you know, IBM is really about major large customers where 0:17:32.880 --> 0:17:35.160 they are selling almost like an all you can eat. 0:17:35.200 --> 0:17:43.520 They sell hundreds of millions in software servers services. Microsoft 0:17:43.560 --> 0:17:46.439 does that as as well. That's true, but they the 0:17:46.480 --> 0:17:49.360 point is you can't really break apart those pieces. It's 0:17:49.400 --> 0:17:52.920 like the you know, it's like these large customer situations. 0:17:52.920 --> 0:17:55.680 So they sort of have to just manage manage through that, 0:17:56.400 --> 0:17:59.399 you know, runoff of some of the declining area. Do 0:17:59.480 --> 0:18:04.480 not know this? They have three employees? Yeah, wow, that's right. 0:18:04.640 --> 0:18:09.600 It's because they still are the within IBM um they 0:18:09.640 --> 0:18:14.400 have over forty you know, over half of IBM's revenue 0:18:14.480 --> 0:18:19.080 is in services. They actually are still although Accenture is 0:18:19.440 --> 0:18:22.320 inching up on them, the single largest I T services 0:18:22.359 --> 0:18:24.560 player out there. That's why they that's the hundreds of 0:18:24.560 --> 0:18:27.520 thousands of employees are there services. So at least I 0:18:27.520 --> 0:18:30.560 see on August two they're having an investor webcast. They're 0:18:30.560 --> 0:18:32.040 not even gonna bring you in for the rubber chicken. 0:18:32.240 --> 0:18:34.240 It's just a webcast. So what do they need to 0:18:34.280 --> 0:18:37.880 get across to the street on this August two kind 0:18:37.880 --> 0:18:40.879 of webcast with this kind of their investor meeting. The 0:18:41.920 --> 0:18:46.280 UM Well that the key thing in the immediate term 0:18:46.280 --> 0:18:48.639 for the street is going to be numbers. There is 0:18:48.680 --> 0:18:53.560 some uncertainty around how red Hat because it's a software company, 0:18:53.600 --> 0:18:56.080 there's this purchase Accounty Dynamics is going to fold in. 0:18:56.160 --> 0:18:59.000 So they're going to give new twenty nineteen guidance. They're 0:18:59.040 --> 0:19:01.560 also going to give some new medium term guidance around 0:19:01.880 --> 0:19:04.720 the revenue and earnings and free cash flow impacts on 0:19:04.760 --> 0:19:07.680 the business for the street. Honestly, a lot of it 0:19:07.680 --> 0:19:10.520 will be about that, but I think to get the 0:19:10.560 --> 0:19:14.360 stock to move positively, they'll need to give more tangible 0:19:15.119 --> 0:19:19.400 UM nearer term meaning twenty type of time frame synergies 0:19:19.440 --> 0:19:21.399 from Red Hat and they talk a lot about the 0:19:21.440 --> 0:19:23.840 concept of the synergies, but not a lot about the 0:19:23.920 --> 0:19:27.720 numbers for ten years. I mean they're all concept. I mean, 0:19:28.040 --> 0:19:30.560 you know the stock is up this year. Let's give 0:19:30.640 --> 0:19:33.720 a little bit of a break. Okay, there are one 0:19:33.720 --> 0:19:37.199 your targets one right, that's right. How soon do we 0:19:37.240 --> 0:19:39.360 get to your target? I mean is this by next week? 0:19:39.480 --> 0:19:42.960 Or uh no, we would we I mean our price 0:19:42.960 --> 0:19:45.159 targets are when your price targets, so that would be 0:19:45.200 --> 0:19:48.800 a one year time frame. Um, the big, the big 0:19:48.880 --> 0:19:51.400 question marks are going to be you know, the this 0:19:52.119 --> 0:19:55.959 you know will Will red Hat. Really it can't just 0:19:56.200 --> 0:19:59.480 be red Hat folded into IBM. Red Hat has to 0:19:59.600 --> 0:20:04.240 make the broader IBM businesses be better to really change 0:20:04.280 --> 0:20:07.160 that long term, like you said, that long term negative 0:20:07.200 --> 0:20:10.560 trajectory on the revenue, and that's what we'll all be 0:20:10.600 --> 0:20:14.040 watching for. Just does that cloud number get better? Right now? 0:20:14.080 --> 0:20:18.159 Cloud number five percent versus azure at sixty three I 0:20:18.200 --> 0:20:20.600 think percent or sixty seven was the number they put up. 0:20:21.080 --> 0:20:24.400 You know that those growth rates need to start normalizing. 0:20:24.600 --> 0:20:26.879 You're sit in the same room with Moffatt Nathanson. Do 0:20:26.920 --> 0:20:30.600 you have to hear them? They do? They sit right 0:20:30.640 --> 0:20:32.520 to write down the hall from me and you just 0:20:32.760 --> 0:20:37.760 you just all day. It's media, media, cable. What's the content? 0:20:37.960 --> 0:20:41.959 Very quickly, what's the content of IBM? It's a Nathanson question. 0:20:42.400 --> 0:20:46.800 What's the content of IBM, meaning like what what's their future? 0:20:46.880 --> 0:20:52.800 What's the code? Yeah, that means cloud software at services. 0:20:52.840 --> 0:20:55.760 That's I mean they there with the d n A 0:20:55.960 --> 0:21:02.560 and the specialty is infrastructures. Is is big enterprise I 0:21:02.800 --> 0:21:08.960 T infrastructure services like the platforms that run business software. 0:21:09.520 --> 0:21:12.879 So this includes everything from the servers, the storage, the 0:21:12.920 --> 0:21:15.719 middleware layers, the service you know, the labor that wraps 0:21:15.760 --> 0:21:19.119 around that. And that's what's moving into these cloud models 0:21:19.119 --> 0:21:21.159 and they need to be a leader there. Lisa, thank us. 0:21:21.200 --> 0:21:24.960 Lisa Ellis Moffatt Nathanson with a cell on international business 0:21:38.440 --> 0:21:42.679 right now out of Stanford, and not a body joins us. 0:21:43.040 --> 0:21:48.040 She has been just superb on questioning banks in the 0:21:48.080 --> 0:21:50.960 shadows of the shadows within our banking system were under 0:21:51.000 --> 0:21:54.119 the professor body join us this morning. Wonderful to have 0:21:54.160 --> 0:21:58.240 you with us. Professor you're right about the leverage ratchet effect. 0:21:58.680 --> 0:22:01.479 Are we leveraging up a global system as we did 0:22:01.560 --> 0:22:05.280 in two thousand five? In two thousand six. Yeah, I 0:22:05.320 --> 0:22:09.760 think that basically the system continues to be built on 0:22:10.000 --> 0:22:12.879 piles and piles of that, and we you know, it 0:22:12.960 --> 0:22:17.160 all worked wonderfully with leverage on the upside, but there's 0:22:17.240 --> 0:22:19.800 leverage on the upside. Is a character of the leverage 0:22:19.800 --> 0:22:22.879 build up this time? Is it different than what we 0:22:22.920 --> 0:22:29.600 saw twelve years ago? You know, they're they're always variations 0:22:29.680 --> 0:22:33.960 on exactly what it is that that's the underlying assets. 0:22:34.040 --> 0:22:38.040 But fundamentally, you know, that is that you invest in 0:22:38.160 --> 0:22:41.360 various things. You call them, you know, loans or other 0:22:41.640 --> 0:22:47.080 real world, real world economy firms, our small businesses, you know, 0:22:47.280 --> 0:22:52.760 leverage loans. They now call them covenant light loans, you know, 0:22:53.000 --> 0:22:59.960 not subprime mortgages, um where households are as indebted. But yeah, 0:23:00.280 --> 0:23:04.840 that is a huge part of the economy. So, professor, 0:23:05.040 --> 0:23:07.399 just ten years after the financial crisis, wonder if you 0:23:07.440 --> 0:23:09.480 could just give us a sense of or your sense 0:23:09.480 --> 0:23:12.719 of kind of the state of the US financial system. 0:23:12.920 --> 0:23:16.280 Is it safer than it was pre crisis? I don't 0:23:16.320 --> 0:23:21.280 think it's fundamentally safer. I think, uh, it's you know, 0:23:21.320 --> 0:23:24.560 you could imagine where the next big shock will come from. 0:23:24.600 --> 0:23:28.600 Will it come from from you? Know, business or corporations 0:23:28.760 --> 0:23:32.199 default or will it come from I'm kind of scared 0:23:32.240 --> 0:23:37.080 of any kind of cyber problem. Uh, any many hacking 0:23:37.320 --> 0:23:41.280 or some systems crashing and all of a sudden, uh, 0:23:41.560 --> 0:23:45.080 you know, if a fragile system collapses. So I think 0:23:45.119 --> 0:23:49.359 that it's still remains very difficult to see through a 0:23:49.520 --> 0:23:54.320 system that's so connected and so global and so uh. 0:23:54.359 --> 0:23:56.080 There is a lot of debt, and a lot of 0:23:56.880 --> 0:23:59.600 debt that we don't see it off balance sheet commitment, 0:24:00.040 --> 0:24:04.160 things that can sort of trigger all kinds of contagion 0:24:04.440 --> 0:24:08.439 mechanisms that we saw. So I'm not I'm not feeling 0:24:08.480 --> 0:24:12.000 that it's much different. Professor. In your paper, you have 0:24:12.040 --> 0:24:17.400 a wonderful literature review of thinking about our behavior when 0:24:17.440 --> 0:24:20.000 we leverage up and you go back to you know, 0:24:20.040 --> 0:24:22.640 I love the paper from the late eighties Jacob Frankel 0:24:23.000 --> 0:24:27.280 Folks now the chairman of JP Morgan International, Michael Dooley 0:24:27.440 --> 0:24:30.800