1 00:00:02,920 --> 00:00:07,240 Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. 2 00:00:09,960 --> 00:00:13,840 Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live 3 00:00:13,920 --> 00:00:16,599 Speaker 2: weekdays at ten am Eastern on Affo car Playing and 4 00:00:16,720 --> 00:00:19,600 Speaker 2: Broud Auto with the Bloomberg Business App. Listen on demand 5 00:00:19,680 --> 00:00:23,320 Speaker 2: wherever you get your podcasts, or watch us live on YouTube. 6 00:00:24,960 --> 00:00:27,560 Speaker 3: Nice m and a trade here in the financial space 7 00:00:27,600 --> 00:00:31,000 Speaker 3: here today we got Capital One Financial. They're acquiring Discover 8 00:00:31,320 --> 00:00:34,560 Speaker 3: Financial and thirty five billion dollars all stock deals, so 9 00:00:34,640 --> 00:00:36,640 Speaker 3: the need to go to the bond market. They're going 10 00:00:36,680 --> 00:00:39,720 Speaker 3: to create the largest US credit card company by loan volume, 11 00:00:39,800 --> 00:00:42,560 Speaker 3: giving the combined entity struggle foothold against some of the 12 00:00:42,600 --> 00:00:44,080 Speaker 3: big Wall Street behemos. 13 00:00:44,159 --> 00:00:44,840 Speaker 4: Let's see what's. 14 00:00:44,760 --> 00:00:48,120 Speaker 3: Behind the deal here, and with the numbers show us 15 00:00:48,159 --> 00:00:51,440 Speaker 3: Ben Elliott, he's consumer finance anols for Bloomberg Intelligence. Jurnes 16 00:00:51,479 --> 00:00:55,000 Speaker 3: us via zoom from Washington, DC. All right, bet, what's 17 00:00:55,040 --> 00:00:57,600 Speaker 3: Capital One thinking here? Is this another one of these 18 00:00:57,680 --> 00:00:59,680 Speaker 3: deals that's really driven by scale? 19 00:01:01,040 --> 00:01:03,640 Speaker 1: Yeah, so everything's driven by scale and the credit card business, Paul, 20 00:01:04,160 --> 00:01:06,800 Speaker 1: And the big thought here from Capital One is that 21 00:01:07,600 --> 00:01:10,240 Speaker 1: if they can acquire this sort of rare and valuable 22 00:01:10,319 --> 00:01:15,840 Speaker 1: thing that Discover has, which is a discrete proprietary payments network. 23 00:01:16,600 --> 00:01:18,800 Speaker 1: Then they can sort of start to compete with the 24 00:01:18,880 --> 00:01:22,200 Speaker 1: Visa and MasterCard on a much bigger scale over time, 25 00:01:22,280 --> 00:01:23,880 Speaker 1: and they're paying a premium for it. 26 00:01:24,640 --> 00:01:27,479 Speaker 5: Ben is the timing at all surprise just given kind 27 00:01:27,520 --> 00:01:30,600 Speaker 5: of the issues that Discover had towards the end of 28 00:01:30,640 --> 00:01:31,360 Speaker 5: twenty twenty three. 29 00:01:32,240 --> 00:01:37,000 Speaker 1: So it leaves Capital One with a potential legal overhang. 30 00:01:37,440 --> 00:01:41,400 Speaker 1: The legal issues are not settled yet at Discover. They've 31 00:01:41,400 --> 00:01:43,200 Speaker 1: had a couple of new issues that are sort of 32 00:01:43,280 --> 00:01:45,199 Speaker 1: outside of the scope of of what they've been dealing 33 00:01:45,200 --> 00:01:47,960 Speaker 1: with over the past couple of years. Discover's been talking 34 00:01:47,960 --> 00:01:49,760 Speaker 1: about sort of a five hundred million dollars a year 35 00:01:49,880 --> 00:01:53,320 Speaker 1: run rate of additional compliance expense. So that's sort of 36 00:01:53,360 --> 00:01:55,280 Speaker 1: a burden that Capital One is going to have to 37 00:01:55,360 --> 00:01:58,680 Speaker 1: take on with this acquisition. But I think it's probably 38 00:01:58,800 --> 00:02:00,840 Speaker 1: pretty well understood the sc of that, and I think 39 00:02:00,840 --> 00:02:02,680 Speaker 1: it's it's probably priced into the deal. 40 00:02:03,200 --> 00:02:06,920 Speaker 3: All right, So give us a sense of the size 41 00:02:07,040 --> 00:02:10,920 Speaker 3: of Visa, I guess, the Visa network, the master Card network, 42 00:02:11,000 --> 00:02:14,480 Speaker 3: and now this new combined network is it is it 43 00:02:14,639 --> 00:02:16,800 Speaker 3: competitive to Visa and MasterCard? 44 00:02:16,840 --> 00:02:21,800 Speaker 1: I guess even amics So historically it's completely non competitive. 45 00:02:22,320 --> 00:02:26,240 Speaker 1: Visa and MasterCard together are about penn trillion in domestic 46 00:02:26,440 --> 00:02:30,360 Speaker 1: US credit and debit card volume, and Discover is about 47 00:02:30,400 --> 00:02:33,679 Speaker 1: five hundred and fifty billion. So it's always been this 48 00:02:33,680 --> 00:02:36,320 Speaker 1: sort of the tiny, you know, red headed stepchild of 49 00:02:36,360 --> 00:02:38,760 Speaker 1: the of the large payment networks. But you know, if 50 00:02:38,800 --> 00:02:41,600 Speaker 1: you add to that capital ones hundreds of billions of 51 00:02:41,680 --> 00:02:46,080 Speaker 1: dollars of credit card loans and you sort of extrapolate 52 00:02:46,160 --> 00:02:49,000 Speaker 1: future growth there, it has the potential to sort of 53 00:02:49,760 --> 00:02:52,400 Speaker 1: compete more like an American Express, which is closer to 54 00:02:52,480 --> 00:02:53,360 Speaker 1: one and a half trillion. 55 00:02:54,040 --> 00:02:56,440 Speaker 5: Then I feel like we can't talk about deals without 56 00:02:56,680 --> 00:03:00,679 Speaker 5: the threat of regulatory scrutiny. What does this bring and 57 00:03:00,760 --> 00:03:04,200 Speaker 5: what could the FTC raise any red flags about? 58 00:03:05,320 --> 00:03:08,160 Speaker 1: Yeah, so I'm obviously not a regulatory expert. Paul knows 59 00:03:08,240 --> 00:03:10,560 Speaker 1: well that we have a great m and a analyst 60 00:03:10,600 --> 00:03:13,880 Speaker 1: Bloomberg Intelligence. Generally, I'm sure you guys will ask her later. 61 00:03:14,000 --> 00:03:18,880 Speaker 1: But overall, this deal I think will be relatively sort 62 00:03:18,880 --> 00:03:23,680 Speaker 1: of non offensive to regulators. You know, Discover is historically 63 00:03:23,760 --> 00:03:26,720 Speaker 1: not been very competitive with the large networks, so actually 64 00:03:27,080 --> 00:03:29,200 Speaker 1: bringing sort of the power of capital want to bear 65 00:03:30,080 --> 00:03:32,560 Speaker 1: will make it more competitive with the large networks was 66 00:03:32,639 --> 00:03:35,520 Speaker 1: as the potential to give customers a real sort of 67 00:03:35,720 --> 00:03:39,560 Speaker 1: fourth alternative, whereas in the past you really only had 68 00:03:39,560 --> 00:03:42,160 Speaker 1: one option. Right, you get a Discover card, it only 69 00:03:42,200 --> 00:03:45,440 Speaker 1: has one sort of set of of rewards. It's got 70 00:03:45,480 --> 00:03:48,480 Speaker 1: a relatively low credit line versus some of the other offerings. 71 00:03:48,520 --> 00:03:51,320 Speaker 1: It doesn't have sort of you know, high end travel 72 00:03:51,480 --> 00:03:54,560 Speaker 1: rewards offerings. So I think if Capital One can start 73 00:03:54,600 --> 00:03:56,440 Speaker 1: to issue some of its sort of higher end cards 74 00:03:56,720 --> 00:04:00,080 Speaker 1: on the Discover network, that could be pro competitive, and 75 00:04:00,200 --> 00:04:03,000 Speaker 1: that might make the deal somewhat more attractive to regulators. 76 00:04:03,520 --> 00:04:06,240 Speaker 3: So I'm looking at MasterCard. The shares of MasterCard and 77 00:04:06,320 --> 00:04:09,120 Speaker 3: v so each down maybe two three percent. Do they 78 00:04:09,200 --> 00:04:11,800 Speaker 3: really care here in terms of a response. 79 00:04:12,640 --> 00:04:17,120 Speaker 1: You know, I think they're looking at this as sort 80 00:04:17,160 --> 00:04:20,120 Speaker 1: of an interesting gambit. It's definitely like, you know, it's 81 00:04:20,120 --> 00:04:22,400 Speaker 1: a shot across the bow visa MasterCard. But this is 82 00:04:22,440 --> 00:04:27,840 Speaker 1: a huge, probably decades long battle that Discover Network, backed 83 00:04:27,880 --> 00:04:30,280 Speaker 1: by Capital One, will be fighting. You know, they plan 84 00:04:30,400 --> 00:04:34,120 Speaker 1: to keep the Discover branding in place for the most 85 00:04:34,160 --> 00:04:38,239 Speaker 1: part and shift primarily debit card volume to Discover at first. 86 00:04:38,839 --> 00:04:40,880 Speaker 1: So you know, even in the first call, it three 87 00:04:40,960 --> 00:04:42,920 Speaker 1: years of this transaction, They're not really going to be 88 00:04:43,000 --> 00:04:47,560 Speaker 1: issuing Capital One credit cards on the Discover network, and 89 00:04:47,680 --> 00:04:50,680 Speaker 1: so that really puts off any concern for Visa and MasterCard, 90 00:04:51,160 --> 00:04:53,560 Speaker 1: you know, into the medium to long term. 91 00:04:54,680 --> 00:04:58,240 Speaker 5: Ben in terms of kind of what these credit cards 92 00:04:58,560 --> 00:05:02,600 Speaker 5: offer Discover from my understanding, mainly cash back. Capital One 93 00:05:02,760 --> 00:05:04,760 Speaker 5: has a range of some of those rewards cards. How 94 00:05:04,800 --> 00:05:08,400 Speaker 5: does that impact potentially acquiring new customers and new users 95 00:05:08,440 --> 00:05:10,880 Speaker 5: of for both companies or I guess the folded end company. 96 00:05:12,200 --> 00:05:14,520 Speaker 1: Yeah, so I think that will make it a challenge 97 00:05:14,800 --> 00:05:17,840 Speaker 1: for Capital One to issue some of its sort of 98 00:05:18,400 --> 00:05:22,080 Speaker 1: high fee, high reward cards on the Discover network because 99 00:05:22,200 --> 00:05:25,200 Speaker 1: historically the Discover network's only been used for a very 100 00:05:25,279 --> 00:05:28,120 Speaker 1: limited cash back card with caps that I think it's 101 00:05:28,160 --> 00:05:31,200 Speaker 1: like fifteen hundred dollars a quarter of cash back. So 102 00:05:31,360 --> 00:05:33,680 Speaker 1: for your high spenders, people who are putting tens of 103 00:05:33,760 --> 00:05:36,120 Speaker 1: thousands of dollars on a credit card, that's not a 104 00:05:36,160 --> 00:05:39,680 Speaker 1: very attractive offering. So that means that the brand has 105 00:05:39,760 --> 00:05:43,360 Speaker 1: not been sort of in their minds as you know, 106 00:05:43,400 --> 00:05:46,800 Speaker 1: a potential credit card they might acquire. So Capital One 107 00:05:46,880 --> 00:05:48,800 Speaker 1: is going to have to do some relatively heavy lifting 108 00:05:48,839 --> 00:05:52,080 Speaker 1: and you see that in what is a very modest 109 00:05:52,440 --> 00:05:55,800 Speaker 1: run rate synergy assumption in their in their sort of 110 00:05:56,120 --> 00:06:00,679 Speaker 1: deal model which only cuts back discovers marketing costs ten percent. 111 00:06:01,480 --> 00:06:04,360 Speaker 1: So you know one is gonna have to do some 112 00:06:04,440 --> 00:06:07,000 Speaker 1: pretty heavy marketing I think to start to leverage that 113 00:06:07,080 --> 00:06:08,080 Speaker 1: network on the credit card. 114 00:06:07,960 --> 00:06:11,760 Speaker 3: Side, the American Express. What's the investment call there these days? 115 00:06:12,080 --> 00:06:12,240 Speaker 6: Ben? 116 00:06:12,320 --> 00:06:14,240 Speaker 4: What are investors thinking about MX? 117 00:06:15,160 --> 00:06:18,320 Speaker 1: You know, MX is the super premium fashion of the 118 00:06:18,440 --> 00:06:24,040 Speaker 1: highest spending, sort of most financially sound customers. So that 119 00:06:24,560 --> 00:06:28,960 Speaker 1: is a sort of you know, it's sort of a 120 00:06:30,320 --> 00:06:33,479 Speaker 1: recession safe trade, if you will. So you know, when 121 00:06:34,080 --> 00:06:36,640 Speaker 1: people are looking at the forward curve and they're they're 122 00:06:37,279 --> 00:06:39,960 Speaker 1: seeing rate cuts, you know, they're expecting a recession. Potentially 123 00:06:41,120 --> 00:06:42,800 Speaker 1: they look at the AMX spender and think that this 124 00:06:42,960 --> 00:06:46,960 Speaker 1: person will last the longest and have the sort of 125 00:06:47,040 --> 00:06:50,600 Speaker 1: lowest level of charge offs through a potential recession. So 126 00:06:51,080 --> 00:06:54,200 Speaker 1: that makes it very attractive. And additionally, MX is a 127 00:06:54,400 --> 00:06:59,040 Speaker 1: ton of momentum in acquiring millennial and gen Z high 128 00:06:59,080 --> 00:07:03,320 Speaker 1: earning customer, which is the most valuable sort of wallet 129 00:07:03,360 --> 00:07:05,200 Speaker 1: chair that's out there, and MX does it better than 130 00:07:05,200 --> 00:07:07,640 Speaker 1: anyone else, So that also kind of makes them attractive 131 00:07:07,640 --> 00:07:08,200 Speaker 1: to investors. 132 00:07:08,520 --> 00:07:12,720 Speaker 3: Hey, Ben, here at Bloomberg LP, we recently switched our 133 00:07:12,840 --> 00:07:17,600 Speaker 3: corporate credit card from one vendor to another. Why did 134 00:07:17,640 --> 00:07:20,320 Speaker 3: that happen? Is that simply priced? Somebody came along and said, hey, 135 00:07:20,560 --> 00:07:21,680 Speaker 3: Bloomberg will do it cheaper. 136 00:07:21,760 --> 00:07:23,240 Speaker 4: Is that how that that business goes? 137 00:07:24,600 --> 00:07:24,800 Speaker 7: Well? 138 00:07:24,840 --> 00:07:27,600 Speaker 1: Obviously I have no insight into that particular deal, but 139 00:07:29,440 --> 00:07:30,720 Speaker 1: you know, that can be a number of things. That 140 00:07:30,800 --> 00:07:33,000 Speaker 1: can be the sort of reward structure, that can be 141 00:07:33,040 --> 00:07:36,160 Speaker 1: the cost structure. That could even just be you know, 142 00:07:36,240 --> 00:07:40,480 Speaker 1: simple sort of customer service and applicability of sort of 143 00:07:40,560 --> 00:07:45,000 Speaker 1: technology on the on the corporate fulfillment side. So you know, 144 00:07:45,280 --> 00:07:48,360 Speaker 1: I don't really have any insight into what that particular was. 145 00:07:48,960 --> 00:07:51,840 Speaker 4: It all works for me. It all goes to redo 146 00:07:51,960 --> 00:07:53,400 Speaker 4: keeper of the whatever the card is. 147 00:07:54,120 --> 00:07:57,920 Speaker 3: All right, Ben, So what is the big competitive overview 148 00:07:58,080 --> 00:08:01,680 Speaker 3: of kind of consumer finance? Are we using more credit, 149 00:08:01,960 --> 00:08:05,920 Speaker 3: more debit, more venmo what a kind of the big 150 00:08:05,960 --> 00:08:06,400 Speaker 3: trends there? 151 00:08:07,360 --> 00:08:10,920 Speaker 1: Yeah, So there's been a huge growth in credit volume 152 00:08:11,040 --> 00:08:13,840 Speaker 1: over the last couple of years, especially sort of in 153 00:08:13,920 --> 00:08:16,240 Speaker 1: the post pandemic period. There's been even more of a 154 00:08:16,280 --> 00:08:20,120 Speaker 1: secular shift away from cash. As for the various sort 155 00:08:20,160 --> 00:08:25,560 Speaker 1: of channels. Right, credit is really attracted to higher end consumers, 156 00:08:25,600 --> 00:08:29,520 Speaker 1: people with more discretionary income, because that offers the huge 157 00:08:29,640 --> 00:08:32,920 Speaker 1: valuable reward potential. And then if you step down to 158 00:08:33,280 --> 00:08:35,600 Speaker 1: debit cards, there's some cash back but for the most part, 159 00:08:36,080 --> 00:08:38,520 Speaker 1: not a lot of rewards there, but there's some convenience. 160 00:08:39,000 --> 00:08:42,120 Speaker 1: And then sort of the lower tier kind of fintech 161 00:08:42,200 --> 00:08:45,760 Speaker 1: payments systems, you know, they offer they're sort of targeted 162 00:08:45,800 --> 00:08:50,559 Speaker 1: at sort of youngers or gen Z lower spenders, and 163 00:08:50,600 --> 00:08:52,920 Speaker 1: they are the people who are exploring things like buy now, 164 00:08:53,000 --> 00:08:54,679 Speaker 1: pay later, which is sort of a way to give 165 00:08:54,679 --> 00:08:56,240 Speaker 1: credit to people who don't really have a lot of 166 00:08:56,480 --> 00:08:59,120 Speaker 1: credit history or substantial earnings history. 167 00:09:00,080 --> 00:09:01,319 Speaker 4: Ben, thanks so much for that. Appreciate it. 168 00:09:01,400 --> 00:09:04,559 Speaker 3: Ben Elliott, consumer finance analysts for Bloomberg Intelligence is joining 169 00:09:04,640 --> 00:09:07,200 Speaker 3: us via zoom on from Washington, DC. And then there 170 00:09:07,240 --> 00:09:09,599 Speaker 3: are those of us walk around with a lot of 171 00:09:09,720 --> 00:09:11,120 Speaker 3: cash because that's how you play. 172 00:09:11,600 --> 00:09:13,280 Speaker 5: You pay who do you pay in cash? 173 00:09:13,360 --> 00:09:15,880 Speaker 3: I got very few people, very few people now, And 174 00:09:15,920 --> 00:09:17,760 Speaker 3: it used to be I mean, but I mean, you 175 00:09:17,880 --> 00:09:19,560 Speaker 3: walk into a bar in the Jersey short you got 176 00:09:19,640 --> 00:09:21,360 Speaker 3: to put a fifty down on the bar to make 177 00:09:21,360 --> 00:09:22,679 Speaker 3: sure you let them know you have let them know 178 00:09:22,679 --> 00:09:23,200 Speaker 3: you're serious. 179 00:09:23,559 --> 00:09:25,600 Speaker 4: I mean, I'm not going to give them like tap 180 00:09:25,679 --> 00:09:27,520 Speaker 4: my phone. I mean they throw me out. But no, 181 00:09:27,760 --> 00:09:30,320 Speaker 4: you're right. I mean you just don't use cash anymore now. 182 00:09:30,520 --> 00:09:32,719 Speaker 5: I only use cash at wholal carts in New York 183 00:09:32,760 --> 00:09:35,200 Speaker 5: City and my dive bars that I can't say their 184 00:09:35,280 --> 00:09:37,000 Speaker 5: names because otherwise people go to it, so we got 185 00:09:37,080 --> 00:09:37,760 Speaker 5: to keep it secreted. 186 00:09:37,800 --> 00:09:39,240 Speaker 4: But those are the only places I use cash. 187 00:09:39,320 --> 00:09:41,800 Speaker 3: I know it's crazy, so but I mean, now it's 188 00:09:41,880 --> 00:09:44,360 Speaker 3: just I'm thinking. You know, one of the greatest companies 189 00:09:44,440 --> 00:09:47,199 Speaker 3: or technologies in that space was Square. They're the ones 190 00:09:47,240 --> 00:09:49,920 Speaker 3: that revolutionized, I think for the local retailer. I mean, 191 00:09:49,920 --> 00:09:51,160 Speaker 3: because all you have to do is stick nothing on 192 00:09:51,240 --> 00:09:53,480 Speaker 3: your phone, and then a local retailer immediately has the 193 00:09:53,559 --> 00:09:54,440 Speaker 3: ability to. 194 00:09:54,559 --> 00:09:57,760 Speaker 4: Kind of migrate to a you know, you know more 195 00:09:57,800 --> 00:09:58,720 Speaker 4: of electronic payment. 196 00:09:58,880 --> 00:10:01,640 Speaker 5: That completely changed, especially here in New York City, where 197 00:10:01,640 --> 00:10:03,520 Speaker 5: if you would go to a farmer's market before you'd 198 00:10:03,559 --> 00:10:05,000 Speaker 5: have to worry about do I have enough cash? 199 00:10:05,040 --> 00:10:06,280 Speaker 8: What if I want to buy more things? 200 00:10:06,720 --> 00:10:07,280 Speaker 4: Just have to pay. 201 00:10:07,360 --> 00:10:08,440 Speaker 5: It's so much more simple. 202 00:10:08,520 --> 00:10:13,000 Speaker 3: But so great company Square, great ticker symbol SQ. 203 00:10:13,520 --> 00:10:15,160 Speaker 4: What do you do then you change a name of 204 00:10:15,200 --> 00:10:16,600 Speaker 4: your company to block Plock. 205 00:10:16,880 --> 00:10:19,120 Speaker 5: You traded sixty five bucks, down from a high of 206 00:10:19,200 --> 00:10:19,840 Speaker 5: two to eighty one. 207 00:10:20,000 --> 00:10:22,439 Speaker 4: Yep, just crazy, let's change our name. 208 00:10:24,280 --> 00:10:28,120 Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live 209 00:10:28,240 --> 00:10:31,760 Speaker 2: weekdays at ten am Eastern on applecar Play and Android 210 00:10:31,800 --> 00:10:34,520 Speaker 2: Auto with the Bloomberg Business App. You can also listen 211 00:10:34,679 --> 00:10:37,760 Speaker 2: live on Amazon Alexa from our flagship New York station, 212 00:10:38,160 --> 00:10:39,480 Speaker 2: Just Say Alexa Play. 213 00:10:39,600 --> 00:10:41,160 Speaker 7: Bloomberg eleven thirty. 214 00:10:42,240 --> 00:10:45,680 Speaker 3: Talking about Home Depot Company reported some numbers here, let's 215 00:10:45,679 --> 00:10:47,839 Speaker 3: bring in Drew Redding. Drew covers all the home building 216 00:10:47,880 --> 00:10:50,360 Speaker 3: stocks which had just been ripping really for the last 217 00:10:50,400 --> 00:10:52,040 Speaker 3: couple of years, because that's the only way to get 218 00:10:52,040 --> 00:10:53,160 Speaker 3: a home is you got to build a new one. 219 00:10:53,440 --> 00:10:55,760 Speaker 3: And he also covers all the companies that are around 220 00:10:55,800 --> 00:10:57,080 Speaker 3: the home building industry. 221 00:10:56,800 --> 00:10:57,760 Speaker 4: Including HD. 222 00:10:58,520 --> 00:11:01,520 Speaker 3: It's up about six tens of one percent here today, Drew, 223 00:11:01,520 --> 00:11:03,760 Speaker 3: thanks so much for joining us here. Break down what 224 00:11:03,960 --> 00:11:07,120 Speaker 3: you saw and heard from our good friends at Home Depot. 225 00:11:08,240 --> 00:11:10,439 Speaker 6: Sure, so the three and a half percent decline and 226 00:11:10,520 --> 00:11:13,480 Speaker 6: same store sales was pretty much freight in line with 227 00:11:13,600 --> 00:11:16,280 Speaker 6: what was expected. You have to keep in mind though, 228 00:11:16,640 --> 00:11:19,000 Speaker 6: coming into the quarter, the bar was pretty low for 229 00:11:19,120 --> 00:11:22,480 Speaker 6: home depot. They continue to face the consumers who were 230 00:11:22,520 --> 00:11:25,800 Speaker 6: pulling back in big ticket discretionary categories, so think things 231 00:11:25,920 --> 00:11:30,839 Speaker 6: like flooring, cabinets, countertops. Conversely, they're seeing relative strength in 232 00:11:30,920 --> 00:11:33,000 Speaker 6: some of the smaller scale projects, so there's big ticket 233 00:11:33,040 --> 00:11:36,760 Speaker 6: projects are being deferred. We do think eventually they get completed, 234 00:11:37,080 --> 00:11:39,199 Speaker 6: but that may be more of a twenty twenty five story. 235 00:11:39,679 --> 00:11:42,320 Speaker 6: But coming into this quarter, the real debate was around 236 00:11:42,640 --> 00:11:45,360 Speaker 6: how twenty twenty four was going to shape up. So 237 00:11:45,440 --> 00:11:48,959 Speaker 6: they offered guidance suggesting that same store sales would fall 238 00:11:49,040 --> 00:11:51,520 Speaker 6: about one percent, and given what we heard from a 239 00:11:51,559 --> 00:11:54,280 Speaker 6: handful of their suppliers over the last couple of weeks, 240 00:11:54,679 --> 00:11:56,800 Speaker 6: which we're calling for a flat market, I think people 241 00:11:56,960 --> 00:11:59,480 Speaker 6: it caught people a little bit off guard. Ourselves included. 242 00:12:01,040 --> 00:12:02,760 Speaker 6: We do think that the first half is going to 243 00:12:02,800 --> 00:12:06,480 Speaker 6: be comparatively weaker than the second half as rates start 244 00:12:06,520 --> 00:12:08,040 Speaker 6: to pull back, and we think you could maybe get 245 00:12:08,080 --> 00:12:11,440 Speaker 6: a little bit bit of a boost from the housing market. Drew. 246 00:12:11,520 --> 00:12:13,160 Speaker 5: This may be a dumb question, but when I look 247 00:12:13,160 --> 00:12:15,199 Speaker 5: at some of the consumer data that we've been seeing, 248 00:12:15,640 --> 00:12:19,040 Speaker 5: we are seeing a rising ninety day credit card delinquencies. 249 00:12:19,320 --> 00:12:21,880 Speaker 5: How do things like that, What does the normal spender 250 00:12:21,960 --> 00:12:24,280 Speaker 5: at home depot look like? You're mentioning kind of a 251 00:12:24,360 --> 00:12:27,319 Speaker 5: pullback on some of those bigger projects. What kind of 252 00:12:27,520 --> 00:12:30,600 Speaker 5: demographic does home depot really see in terms of driving 253 00:12:30,720 --> 00:12:33,079 Speaker 5: sales and kind of putting those numbers together. 254 00:12:33,880 --> 00:12:36,800 Speaker 6: Yeah, so about eighty percent of home depots customers or 255 00:12:36,840 --> 00:12:40,600 Speaker 6: current homeowners. They typically have higher incomes, so they are 256 00:12:40,920 --> 00:12:44,040 Speaker 6: higher spenders and they're a little bit more resilient of 257 00:12:44,120 --> 00:12:47,000 Speaker 6: a customer. I think where we're seeing the relative weakness 258 00:12:47,080 --> 00:12:49,840 Speaker 6: is in some of the low end spending, which has 259 00:12:49,880 --> 00:12:52,800 Speaker 6: kind of gone away on the DIY side. But you know, 260 00:12:52,840 --> 00:12:54,679 Speaker 6: if we look big picture, what's happening in the home 261 00:12:54,720 --> 00:12:58,720 Speaker 6: improvement market is we're seeing a reversion to more typical 262 00:12:58,960 --> 00:13:02,200 Speaker 6: spending pattern. So if you think back to the pandemic, 263 00:13:02,360 --> 00:13:06,040 Speaker 6: we had the share of PCEE that went towards household 264 00:13:06,120 --> 00:13:08,839 Speaker 6: durables was at all time record, and we've seen that 265 00:13:09,000 --> 00:13:12,160 Speaker 6: moderate since really the first half of twenty twenty three. 266 00:13:12,280 --> 00:13:13,839 Speaker 6: So we think that there's a bit more of a 267 00:13:14,120 --> 00:13:16,959 Speaker 6: reversion that needs to take place with the remainder of 268 00:13:17,080 --> 00:13:19,760 Speaker 6: this year, which is going to keep total industry sales muted, 269 00:13:20,760 --> 00:13:22,680 Speaker 6: you know, but you talked about the consumer. You also 270 00:13:22,760 --> 00:13:27,360 Speaker 6: have the consumer out there who's battling with the cumulative 271 00:13:27,440 --> 00:13:30,319 Speaker 6: impact of massive inflation over the last couple of years. So, 272 00:13:30,800 --> 00:13:33,000 Speaker 6: you know, while we look at the head headline number 273 00:13:33,000 --> 00:13:35,439 Speaker 6: and we see that it's moderating, it's really the cumulative 274 00:13:35,480 --> 00:13:38,360 Speaker 6: impact that's kind of pressuring spending in the category. 275 00:13:39,160 --> 00:13:41,319 Speaker 3: Hey, Drew, what's the What do you think is a 276 00:13:41,400 --> 00:13:44,200 Speaker 3: normalized top line growth rate for like a home depot. 277 00:13:44,240 --> 00:13:44,720 Speaker 4: I'm I'm looking. 278 00:13:45,200 --> 00:13:47,520 Speaker 3: You know, pre pandemic was kind of mid single digit grower, 279 00:13:47,559 --> 00:13:49,959 Speaker 3: then of course exploded, you know, during the pandemic was 280 00:13:50,000 --> 00:13:52,839 Speaker 3: some you know, big double digit gains. What do you 281 00:13:52,880 --> 00:13:54,319 Speaker 3: think what do you kind of model out here for 282 00:13:54,400 --> 00:13:55,079 Speaker 3: top line growth? 283 00:13:55,920 --> 00:13:59,040 Speaker 6: Yeah, I think I think in a normalized environment, which 284 00:13:59,080 --> 00:14:01,839 Speaker 6: we think we get back to in twenty twenty five, 285 00:14:01,960 --> 00:14:04,679 Speaker 6: is probably in the three to four percent range as 286 00:14:04,679 --> 00:14:08,280 Speaker 6: a baseline. You know, there's a couple of industry factors 287 00:14:08,320 --> 00:14:10,240 Speaker 6: that we think will support that. Like I mentioned, we 288 00:14:10,320 --> 00:14:14,160 Speaker 6: think as rates start to moderate, perhaps as we get 289 00:14:14,200 --> 00:14:16,520 Speaker 6: through this year, we think that you could start to 290 00:14:16,520 --> 00:14:19,880 Speaker 6: see a boost from existing home sales. Remember, existing home 291 00:14:19,920 --> 00:14:22,600 Speaker 6: sales are the lowest level more than twenty five years, 292 00:14:22,680 --> 00:14:26,160 Speaker 6: and we know that people who move spend about twice 293 00:14:26,160 --> 00:14:29,640 Speaker 6: as much on remodeling as those who don't. So while 294 00:14:29,680 --> 00:14:34,240 Speaker 6: we don't see total housing turnover returning to you know, 295 00:14:34,360 --> 00:14:36,800 Speaker 6: kind of that five and a half level anytime soon, 296 00:14:36,840 --> 00:14:38,440 Speaker 6: we do think the fact that things have been so 297 00:14:38,640 --> 00:14:40,920 Speaker 6: depressed does serve as a tail and as we move 298 00:14:40,960 --> 00:14:43,440 Speaker 6: through the year. At the same time, you know, we've 299 00:14:43,520 --> 00:14:47,160 Speaker 6: had over forty percent increases in home prices since the pandemic, 300 00:14:47,320 --> 00:14:50,640 Speaker 6: so homeowner's equity right now is at all time ties. 301 00:14:50,880 --> 00:14:53,800 Speaker 6: The average home has about three hundred thousand dollars in equity, 302 00:14:53,840 --> 00:14:56,120 Speaker 6: So we think that's a source of pent up demand 303 00:14:56,240 --> 00:14:59,480 Speaker 6: for big ticket projects that once again, as rates start 304 00:14:59,520 --> 00:15:03,000 Speaker 6: to moderate, people will get more comfortable with tapping that equity. 305 00:15:03,480 --> 00:15:05,440 Speaker 5: And drew with that in mind, you mentioned some of 306 00:15:05,480 --> 00:15:09,400 Speaker 5: those big purchases, bigger projects. How much of that was 307 00:15:09,520 --> 00:15:13,360 Speaker 5: pulled forward though during the pandemic when people were buying homes, 308 00:15:13,400 --> 00:15:15,920 Speaker 5: we saw a booming market around the US, and it 309 00:15:16,000 --> 00:15:19,960 Speaker 5: did seem like cash being relatively free with the surplus 310 00:15:20,080 --> 00:15:23,160 Speaker 5: spending and stimulus checks, that people were putting money into 311 00:15:23,360 --> 00:15:24,080 Speaker 5: home improvement. 312 00:15:25,640 --> 00:15:27,840 Speaker 6: Yeah, great question, and I think that goes back to 313 00:15:27,880 --> 00:15:31,040 Speaker 6: the share of personal consumption that was spent on home improvement. 314 00:15:31,360 --> 00:15:33,080 Speaker 6: It was a lot of that stimulus money that was 315 00:15:33,120 --> 00:15:36,040 Speaker 6: out there for everybody. In terms of the big ticket project, 316 00:15:36,120 --> 00:15:37,880 Speaker 6: we think more of the pull forward was probably done 317 00:15:37,920 --> 00:15:40,080 Speaker 6: in the DIY segment. That's really where you saw the 318 00:15:40,080 --> 00:15:43,720 Speaker 6: boom early in the pandemic. That being said, we have 319 00:15:43,840 --> 00:15:47,480 Speaker 6: seen contractor backlogs over the last couple of years be 320 00:15:48,000 --> 00:15:51,480 Speaker 6: you know, elevated compared to more traditional levels. So to 321 00:15:51,600 --> 00:15:53,960 Speaker 6: some extent, it has been in both the DIY and 322 00:15:54,120 --> 00:15:57,320 Speaker 6: big ticket category. But we do think that the big 323 00:15:57,360 --> 00:15:59,880 Speaker 6: ticket categories where we're likely to see more growth from 324 00:15:59,880 --> 00:16:03,160 Speaker 6: home depot as they go after the professional contractor, as 325 00:16:03,200 --> 00:16:06,480 Speaker 6: they leverage you know, the age investments consumers are making 326 00:16:06,560 --> 00:16:08,480 Speaker 6: because of the age of the housing stock that pentep 327 00:16:08,520 --> 00:16:09,560 Speaker 6: equity they have in their home. 328 00:16:11,080 --> 00:16:14,040 Speaker 3: He drew from an investment perspective, how do you differentiate 329 00:16:14,760 --> 00:16:16,320 Speaker 3: home depot versus lows. 330 00:16:18,200 --> 00:16:19,840 Speaker 6: Yeah, so, I mean both of the stocks that you 331 00:16:19,920 --> 00:16:23,440 Speaker 6: mentioned earlier. The housing names have ripped recently. I think 332 00:16:23,960 --> 00:16:26,600 Speaker 6: home depots since the end of October is up more 333 00:16:26,600 --> 00:16:29,040 Speaker 6: than thirty percent because investors were placing their bets that 334 00:16:29,720 --> 00:16:31,960 Speaker 6: the fed of rat height cycle would come to an end, 335 00:16:32,320 --> 00:16:33,760 Speaker 6: so I think they're trying to get out ahead of 336 00:16:33,800 --> 00:16:36,600 Speaker 6: that and out ahead of that. Improvement in home sales. 337 00:16:37,000 --> 00:16:40,840 Speaker 6: In terms of comparing the two, Home Depot has really 338 00:16:40,920 --> 00:16:43,440 Speaker 6: benefited relatives to the Lows recently because of their exposure 339 00:16:43,480 --> 00:16:47,920 Speaker 6: to that professional customer. It's driven you know, outside outside 340 00:16:48,400 --> 00:16:52,720 Speaker 6: same store sales. It's driven better margins, and we expect 341 00:16:52,760 --> 00:16:55,240 Speaker 6: that the professional contractor is going to be a relative 342 00:16:55,320 --> 00:16:58,360 Speaker 6: area of strength going forward. Now with that being said, 343 00:16:58,520 --> 00:17:01,120 Speaker 6: Home Depot is trading out a premium to the market 344 00:17:01,760 --> 00:17:05,040 Speaker 6: and one of the biggest premiums versus Lows over the 345 00:17:05,119 --> 00:17:09,080 Speaker 6: last decade, you know. So to the extent that Low's 346 00:17:09,200 --> 00:17:12,119 Speaker 6: is able to leverage its investments in e commerce and 347 00:17:12,240 --> 00:17:15,840 Speaker 6: in their professional contractor business, that could be something to 348 00:17:15,920 --> 00:17:16,359 Speaker 6: look out for. 349 00:17:16,880 --> 00:17:20,119 Speaker 5: And drew, as we mentioned Dr Horden Toll Brothers, all 350 00:17:20,160 --> 00:17:24,440 Speaker 5: these homebuilders building out new apartments, new homes. Does that 351 00:17:24,600 --> 00:17:26,879 Speaker 5: benefit Home Depot or Lows or is that going to 352 00:17:26,960 --> 00:17:28,680 Speaker 5: more benefit the likes of a whirlpool. 353 00:17:30,520 --> 00:17:33,720 Speaker 6: Yeah, so that's that's primarily more geared towards the building 354 00:17:33,760 --> 00:17:38,119 Speaker 6: product manufacturers, and Lows business is more built around that 355 00:17:38,240 --> 00:17:41,240 Speaker 6: remodeling market and less so on the new construction side. 356 00:17:42,320 --> 00:17:43,919 Speaker 5: So what's the. 357 00:17:43,960 --> 00:17:47,600 Speaker 3: Average ticket size of a home depot? And not recently 358 00:17:47,640 --> 00:17:50,119 Speaker 3: ask is I'd never really go there? So what's like 359 00:17:50,160 --> 00:17:53,400 Speaker 3: an average ticket size? And is it different between home 360 00:17:53,480 --> 00:17:54,240 Speaker 3: depot and lows? 361 00:17:55,119 --> 00:17:58,479 Speaker 6: They're similar, probably somewhere between seventy five and ninety dollars. 362 00:17:58,960 --> 00:18:02,159 Speaker 6: And what we've seen more recently is that that average 363 00:18:02,200 --> 00:18:03,960 Speaker 6: ticket size has come down and that's one of the 364 00:18:04,040 --> 00:18:06,720 Speaker 6: things that's pressuring same sotore sales. And the reason that 365 00:18:06,840 --> 00:18:08,800 Speaker 6: average tickets are coming down is because you don't have 366 00:18:08,880 --> 00:18:12,320 Speaker 6: the same leverage to big ticket spending those categories I 367 00:18:12,400 --> 00:18:16,040 Speaker 6: mentioned earlier, like flooring, like cabinets, like countertops, Those are 368 00:18:16,080 --> 00:18:18,680 Speaker 6: some of the things that really drive that growth. And 369 00:18:18,760 --> 00:18:22,000 Speaker 6: with that pullback, we've seen a moderation and ticket we're. 370 00:18:21,840 --> 00:18:24,840 Speaker 5: Talking about the sales declining for a fifth quarter in 371 00:18:24,960 --> 00:18:28,200 Speaker 5: a row. When does that break out? Is it just 372 00:18:28,359 --> 00:18:32,080 Speaker 5: easing cop numbers going to ultimately lead to a rebound. 373 00:18:33,160 --> 00:18:34,760 Speaker 6: So that'll be part of it. I mean, the way 374 00:18:34,800 --> 00:18:36,840 Speaker 6: we're looking at the market is that the second half 375 00:18:37,040 --> 00:18:39,840 Speaker 6: outperforms the first half. I think home depot and the 376 00:18:39,960 --> 00:18:42,720 Speaker 6: industry can start to return to growth later this year, 377 00:18:42,840 --> 00:18:45,360 Speaker 6: kind of exiting twenty twenty four, and we think once 378 00:18:45,400 --> 00:18:47,840 Speaker 6: we look ahead to twenty twenty five, that's when you 379 00:18:47,920 --> 00:18:50,520 Speaker 6: start to see a more normalized growth in my environment 380 00:18:50,560 --> 00:18:52,600 Speaker 6: in that low single digit range. Call it. 381 00:18:53,040 --> 00:18:55,680 Speaker 3: All right, So home Depot they're primarily a US company. 382 00:18:55,800 --> 00:18:58,399 Speaker 3: Did any of these companies think about opening stores outside 383 00:18:58,440 --> 00:18:58,760 Speaker 3: the US? 384 00:19:00,560 --> 00:19:02,480 Speaker 6: Yeah, they have. I mean both home Depot and Lows 385 00:19:02,480 --> 00:19:07,720 Speaker 6: have had businesses outside of the US. Low's recently sold 386 00:19:07,760 --> 00:19:11,160 Speaker 6: its business in Canada. Home Depot operates in Mexico as well. 387 00:19:11,240 --> 00:19:13,200 Speaker 6: But for both of them, they've both made an effort 388 00:19:13,240 --> 00:19:16,000 Speaker 6: over the last several years to really focus on the 389 00:19:16,119 --> 00:19:19,960 Speaker 6: US market. So that's been a strategic initiative for both 390 00:19:19,960 --> 00:19:23,000 Speaker 6: of them, just because they see that long term growth 391 00:19:23,720 --> 00:19:25,400 Speaker 6: in the housing market and that's really where they want 392 00:19:25,400 --> 00:19:26,399 Speaker 6: to focus their attention to. 393 00:19:26,880 --> 00:19:29,200 Speaker 3: All Right, Drew, great stuff is always appreciate getting some 394 00:19:29,280 --> 00:19:32,360 Speaker 3: time Drew reading. He's a home builder analyst at Bloomberg Intelligence. 395 00:19:32,440 --> 00:19:36,920 Speaker 3: Joining us via zoom from the Bloomberg Intelligence headquarters in Princeton, 396 00:19:37,119 --> 00:19:37,679 Speaker 3: New Jersey. 397 00:19:39,160 --> 00:19:43,000 Speaker 2: You're listening to the Bloomberg Intelligence podcast. Catch us live 398 00:19:43,119 --> 00:19:44,880 Speaker 2: weekdays at ten am Eastern. 399 00:19:44,720 --> 00:19:47,200 Speaker 7: On Apple car playing and broud Otto with the Bloomberg 400 00:19:47,280 --> 00:19:47,920 Speaker 7: Business App. 401 00:19:47,960 --> 00:19:51,160 Speaker 2: Listen on demand wherever you get your podcasts, or watch 402 00:19:51,280 --> 00:19:52,480 Speaker 2: us live on YouTube. 403 00:19:55,040 --> 00:19:57,800 Speaker 3: At some economic data coming out. It's a little light today. 404 00:19:57,840 --> 00:19:59,320 Speaker 3: We got more coming up later this week. But the 405 00:20:00,000 --> 00:20:03,399 Speaker 3: I Think Index came out negative zero point four percent. 406 00:20:03,480 --> 00:20:06,560 Speaker 3: The consensus was negative zero point three percent, So a 407 00:20:06,560 --> 00:20:07,240 Speaker 3: little bit weaker there. 408 00:20:07,320 --> 00:20:07,920 Speaker 4: Let's break it down. 409 00:20:07,920 --> 00:20:09,920 Speaker 3: We had a negative revision as well to last month. 410 00:20:09,960 --> 00:20:12,720 Speaker 4: Dana Peterson, chief economist at the Conference Board. 411 00:20:12,960 --> 00:20:15,320 Speaker 3: So Dana talk to us about this leading index data 412 00:20:15,359 --> 00:20:16,280 Speaker 3: point that came out today. 413 00:20:16,359 --> 00:20:17,760 Speaker 4: What is it and what does it tell you? 414 00:20:19,200 --> 00:20:19,360 Speaker 6: Sure? 415 00:20:19,400 --> 00:20:22,639 Speaker 9: Absolutely, while it was down again, it's been negative for 416 00:20:22,920 --> 00:20:26,040 Speaker 9: more months than I can count over the last two years. 417 00:20:26,960 --> 00:20:29,040 Speaker 9: But the good news is that when we look at 418 00:20:29,119 --> 00:20:34,680 Speaker 9: the six month average growth rate, it's no longer signaling recession, 419 00:20:35,160 --> 00:20:36,480 Speaker 9: but it's still quite negative. 420 00:20:38,200 --> 00:20:41,439 Speaker 5: And how does this play into kind of the feeling 421 00:20:41,520 --> 00:20:45,120 Speaker 5: around the economy and what this can mean for market watchers, 422 00:20:45,240 --> 00:20:47,560 Speaker 5: for people kind of trying to guess what the Fed 423 00:20:47,840 --> 00:20:50,280 Speaker 5: will er won't do just given kind of some of 424 00:20:50,320 --> 00:20:52,040 Speaker 5: the economic data we continue to be seen. 425 00:20:53,680 --> 00:20:54,720 Speaker 10: Well, the thing is that it. 426 00:20:54,760 --> 00:20:58,000 Speaker 9: Does signal that the US economy probably is going to slow, 427 00:20:58,720 --> 00:21:01,800 Speaker 9: probably over the second and third quarter, maybe even starting now. 428 00:21:01,920 --> 00:21:04,640 Speaker 9: In the first quarter, we did get that pretty weak 429 00:21:04,920 --> 00:21:08,280 Speaker 9: retail sales data. But the thing is that the labor 430 00:21:08,359 --> 00:21:11,600 Speaker 9: market is still pumping out jobs, wages are rising, so 431 00:21:11,720 --> 00:21:14,240 Speaker 9: that could continue to support the consumer for some time. 432 00:21:14,760 --> 00:21:16,480 Speaker 9: But I think that, you know, we are going to 433 00:21:16,520 --> 00:21:20,080 Speaker 9: see slower economy, but that also means slower inflation. So 434 00:21:20,240 --> 00:21:23,280 Speaker 9: I think all these pieces give the FED cause to 435 00:21:23,440 --> 00:21:25,920 Speaker 9: start looking at interest rate cuts, probably around the middle 436 00:21:25,960 --> 00:21:26,360 Speaker 9: of the year. 437 00:21:27,240 --> 00:21:29,960 Speaker 3: So I mean, again, I'm looking at just this over time, 438 00:21:30,040 --> 00:21:32,760 Speaker 3: and the leading index has kind of been you know, 439 00:21:33,119 --> 00:21:36,040 Speaker 3: negative here since kind of I don't know, March of 440 00:21:36,160 --> 00:21:41,359 Speaker 3: twenty twenty two. I mean, how often how predictive of 441 00:21:42,040 --> 00:21:44,560 Speaker 3: is this index for the overall economy. 442 00:21:46,000 --> 00:21:48,600 Speaker 9: Usually the Lady Index does a really great job in 443 00:21:48,720 --> 00:21:52,560 Speaker 9: terms of poortending recessions, and that's because it captures a 444 00:21:52,640 --> 00:21:57,240 Speaker 9: number of factors, certainly manufacturing activity, hours work which is 445 00:21:57,280 --> 00:22:02,240 Speaker 9: often linked to manufacturing activity, financial market indicators, and credit conditions, 446 00:22:02,320 --> 00:22:06,840 Speaker 9: and certainly expectations among businesses and consumers and so all 447 00:22:06,920 --> 00:22:10,040 Speaker 9: those things. It's done a very good job of pretending 448 00:22:10,119 --> 00:22:12,920 Speaker 9: recession this time. I think it was a little challenge 449 00:22:12,960 --> 00:22:16,320 Speaker 9: because we had a surge and services activity and also 450 00:22:16,800 --> 00:22:19,159 Speaker 9: labor shortages meant that a lot of companies didn't let 451 00:22:19,240 --> 00:22:22,000 Speaker 9: people go, and those are things that aren't really captured 452 00:22:22,000 --> 00:22:24,880 Speaker 9: in the Leading Economic Index. So maybe that's why it's 453 00:22:24,920 --> 00:22:28,200 Speaker 9: been signaling for recession for a long time, but we 454 00:22:28,359 --> 00:22:29,680 Speaker 9: haven't actually had one. 455 00:22:30,240 --> 00:22:32,080 Speaker 3: All right, Danna, thanks so much for joining us. Appreciate 456 00:22:32,119 --> 00:22:34,840 Speaker 3: you hopping on breaking down this data point. Dana Peterson, 457 00:22:34,880 --> 00:22:37,480 Speaker 3: Chief Economists for the Conference Board. Again, the Leading Economic 458 00:22:38,000 --> 00:22:41,200 Speaker 3: Indicator came in a little bit weaker than expected this morning. 459 00:22:41,280 --> 00:22:44,560 Speaker 3: It's kind of been again negative really since for many 460 00:22:44,720 --> 00:22:46,919 Speaker 3: quarters now, so the question is what does that mean 461 00:22:47,040 --> 00:22:47,920 Speaker 3: for the economy. 462 00:22:49,560 --> 00:22:53,400 Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live 463 00:22:53,520 --> 00:22:56,440 Speaker 2: weekdays at ten am Eastern on applecar. 464 00:22:56,080 --> 00:22:58,800 Speaker 7: Play and Android Auto with the Bloomberg Business app. 465 00:22:58,960 --> 00:23:01,640 Speaker 2: You can also listen I have on Amazon Alexa from 466 00:23:01,640 --> 00:23:05,800 Speaker 2: our flagship New York station, just say Alexa playing Bloomberg eleven. 467 00:23:07,240 --> 00:23:09,480 Speaker 3: R J gallow joins is he's a senior portfolio manager 468 00:23:09,520 --> 00:23:11,880 Speaker 3: fixed to them at Federider Hermes. 469 00:23:12,800 --> 00:23:15,160 Speaker 4: You know, RJ, it's been a tough couple of years 470 00:23:15,200 --> 00:23:15,320 Speaker 4: for you. 471 00:23:15,400 --> 00:23:18,399 Speaker 3: Fixed income guys, twenty twenty two is just brutal, and 472 00:23:18,480 --> 00:23:21,040 Speaker 3: thanks to November December of last year, you had some 473 00:23:21,080 --> 00:23:24,119 Speaker 3: positive games, some pretty nice positive returns this year starting 474 00:23:24,160 --> 00:23:25,320 Speaker 3: off in the red yet again. 475 00:23:25,400 --> 00:23:27,880 Speaker 4: What's kind of your call here is as you look 476 00:23:27,880 --> 00:23:31,359 Speaker 4: ahead in your fixed income space, well. 477 00:23:31,280 --> 00:23:31,720 Speaker 10: Good morning. 478 00:23:32,480 --> 00:23:34,240 Speaker 8: You know it has been a wild ride. 479 00:23:34,320 --> 00:23:36,520 Speaker 11: But I think if you were looking at a fixed 480 00:23:36,560 --> 00:23:40,879 Speaker 11: income one on one textbook, if you told a college 481 00:23:40,880 --> 00:23:43,560 Speaker 11: student reading that textbook that inflation would rise to over 482 00:23:43,680 --> 00:23:46,640 Speaker 11: nine percent in short order, do you want to own 483 00:23:46,680 --> 00:23:50,520 Speaker 11: bond for rest or No? And then if you told 484 00:23:50,560 --> 00:23:53,720 Speaker 11: them that that inflation would fall from over nine percent 485 00:23:54,200 --> 00:23:56,840 Speaker 11: to a three handle, maybe even a two handle in 486 00:23:57,000 --> 00:24:00,640 Speaker 11: short order, then your answer would be different. It's been 487 00:24:00,720 --> 00:24:03,160 Speaker 11: a difficult time to be a fixed income portfolio manager. 488 00:24:03,200 --> 00:24:06,600 Speaker 11: But I also think we've re established value in a 489 00:24:06,640 --> 00:24:09,800 Speaker 11: market where yields had been suppressed for so long due 490 00:24:09,800 --> 00:24:14,520 Speaker 11: to the subpar growth in the global global financial crisis environment. 491 00:24:14,800 --> 00:24:17,920 Speaker 11: The pandemic demic unleashed many forces, the most important one 492 00:24:18,080 --> 00:24:21,760 Speaker 11: was a series of inflationary forces, and the bond market 493 00:24:22,119 --> 00:24:25,000 Speaker 11: paid the price. I think that prices in the past, 494 00:24:25,600 --> 00:24:29,919 Speaker 11: I think that the returns, respectively are much more attractive, 495 00:24:30,640 --> 00:24:31,960 Speaker 11: vastly superior. 496 00:24:31,600 --> 00:24:33,760 Speaker 8: To what we saw in twenty twenty two. 497 00:24:33,800 --> 00:24:37,040 Speaker 11: The fourth quarter of twenty three was extraordinary, but I 498 00:24:37,119 --> 00:24:40,440 Speaker 11: think we're expecting mid single digit kind of total returns 499 00:24:40,440 --> 00:24:43,159 Speaker 11: in a year that we face now as inflation is 500 00:24:43,320 --> 00:24:47,480 Speaker 11: apt to settle its recent bubbling has been a little unwelcome, 501 00:24:48,080 --> 00:24:51,440 Speaker 11: and the economy is doing relatively well. Recession doesn't seem 502 00:24:51,480 --> 00:24:53,920 Speaker 11: to be in the offing, But we think that this 503 00:24:54,119 --> 00:24:56,520 Speaker 11: environment for fixed income, given yields that have reset to 504 00:24:56,640 --> 00:25:00,000 Speaker 11: much more attractive real positive levels, still have a place. 505 00:25:00,119 --> 00:25:03,440 Speaker 5: Investors, Rgie, what do you like in an environment that 506 00:25:03,520 --> 00:25:06,600 Speaker 5: I would say continues to be relatively warm from an 507 00:25:06,800 --> 00:25:11,399 Speaker 5: economic data perspective, Well, I can tell you. 508 00:25:11,359 --> 00:25:14,400 Speaker 11: How we're positioning our fixed income portfolios. I mean, generally speaking, 509 00:25:15,920 --> 00:25:18,320 Speaker 11: the interest rate volatility that we just alluded to, we 510 00:25:18,400 --> 00:25:22,080 Speaker 11: think the worst is behind us. We've been constructed with 511 00:25:22,160 --> 00:25:25,320 Speaker 11: a neutral to a slightly long duration at various points 512 00:25:25,359 --> 00:25:28,960 Speaker 11: in the last six months. That's an expectation of the 513 00:25:29,000 --> 00:25:31,880 Speaker 11: fact that we think inflation will resume a downward march 514 00:25:32,720 --> 00:25:37,840 Speaker 11: and the FED will ease monetary policy, lowering rates because 515 00:25:38,520 --> 00:25:41,920 Speaker 11: high positive real rates are not normal. The FED is 516 00:25:42,119 --> 00:25:45,119 Speaker 11: admitted that they're restrictive in their current positioning and that 517 00:25:45,280 --> 00:25:49,439 Speaker 11: won't last. If inflation continues to march down towards two percent, 518 00:25:49,800 --> 00:25:54,160 Speaker 11: the Fed will feel compelled to support lower real rates 519 00:25:54,200 --> 00:25:56,800 Speaker 11: as well. They don't want to maintain a restrictive policy 520 00:25:57,240 --> 00:25:58,600 Speaker 11: when inflation's cooperating. 521 00:25:58,920 --> 00:26:00,639 Speaker 8: The economy has been It's. 522 00:26:00,560 --> 00:26:03,119 Speaker 11: Very true in the fixed income space, I think a 523 00:26:03,160 --> 00:26:06,159 Speaker 11: lot of money has been put to work chasing credit. 524 00:26:07,040 --> 00:26:10,600 Speaker 11: Why because with the strong economies that support profits, we've 525 00:26:10,640 --> 00:26:14,159 Speaker 11: been a little underweight credit number one. We had anticipated 526 00:26:14,200 --> 00:26:16,000 Speaker 11: we'd have slower growth last year than we did, so 527 00:26:16,080 --> 00:26:20,480 Speaker 11: that ended up being not helpful for our overall performance. 528 00:26:21,119 --> 00:26:23,160 Speaker 11: At this point, though, we think the valuations have gotten 529 00:26:23,280 --> 00:26:27,000 Speaker 11: very rich, so some slow down in the economy we 530 00:26:27,119 --> 00:26:30,119 Speaker 11: think is apt to produce opportunities where spreads might widen 531 00:26:30,160 --> 00:26:33,000 Speaker 11: a little bit and relative value will be more compelling 532 00:26:33,080 --> 00:26:34,080 Speaker 11: than what we're seeing now. 533 00:26:34,600 --> 00:26:37,000 Speaker 8: So we are overweight higher grade products. 534 00:26:37,000 --> 00:26:39,280 Speaker 11: So we're still overweight mortgages for example, in our multi 535 00:26:39,359 --> 00:26:42,800 Speaker 11: sector funds leaning long duration, as I mentioned in an 536 00:26:42,920 --> 00:26:46,400 Speaker 11: underweight ig high yield and commercial mortgage back securities, where 537 00:26:46,440 --> 00:26:49,920 Speaker 11: we think credit and valuation are not too compelling just yet. 538 00:26:51,240 --> 00:26:51,680 Speaker 6: You know r J. 539 00:26:51,800 --> 00:26:53,920 Speaker 3: I would say, up until I don't know, a couple 540 00:26:53,960 --> 00:26:57,040 Speaker 3: of weeks ago, people were certainly pressing in cuts it. 541 00:26:57,080 --> 00:26:59,600 Speaker 3: It's just a question of whether it was March, and 542 00:26:59,640 --> 00:27:01,600 Speaker 3: then the took that off the table. Then it became 543 00:27:01,680 --> 00:27:04,200 Speaker 3: if you look at the WORP function, maybe May, maybe June. 544 00:27:04,600 --> 00:27:06,400 Speaker 3: Now on the last week or so, I've actually heard 545 00:27:06,600 --> 00:27:08,119 Speaker 3: we had a guest com on say, hey, you have 546 00:27:08,320 --> 00:27:10,920 Speaker 3: to have a scenario where the next move is a 547 00:27:11,000 --> 00:27:12,280 Speaker 3: move higher in rates. 548 00:27:12,600 --> 00:27:14,960 Speaker 4: Does that seem reasonable to you in any case. 549 00:27:15,920 --> 00:27:17,639 Speaker 11: I can see why they would say that. I mean, so, 550 00:27:17,840 --> 00:27:20,320 Speaker 11: remember we finished last year with this like torred fixed 551 00:27:20,359 --> 00:27:21,960 Speaker 11: income rally, and we were happy about it. 552 00:27:22,040 --> 00:27:23,920 Speaker 8: You know, we were constructive on bonds. 553 00:27:23,960 --> 00:27:25,840 Speaker 11: It was great to see some positive returns which we 554 00:27:25,920 --> 00:27:27,199 Speaker 11: thought we would get by the end of the year. 555 00:27:27,240 --> 00:27:30,800 Speaker 11: And it really all happened in that fourth quarter. But 556 00:27:30,920 --> 00:27:33,680 Speaker 11: the market overshot. The market had gotten to the point 557 00:27:34,119 --> 00:27:36,640 Speaker 11: that some of the justifications I just mentioned for being 558 00:27:36,720 --> 00:27:39,879 Speaker 11: constructive had been fast forwarded and baked into prices to 559 00:27:39,960 --> 00:27:43,640 Speaker 11: a degree that wasn't sustainable by the data. Economic data 560 00:27:44,400 --> 00:27:46,440 Speaker 11: is pretty clear, the economy is a pretty good shape. 561 00:27:46,440 --> 00:27:48,680 Speaker 11: The labor market is still strong, inflation's a lot lower 562 00:27:48,720 --> 00:27:51,040 Speaker 11: than it was, but it's not low enough to justify 563 00:27:51,200 --> 00:27:53,840 Speaker 11: six or seven eases that had been priced into the market, 564 00:27:54,160 --> 00:27:57,480 Speaker 11: say by December of last year. We felt that data 565 00:27:57,520 --> 00:27:59,720 Speaker 11: would come along to probably push back on the market 566 00:27:59,720 --> 00:28:03,280 Speaker 11: a little bit more effectively than say, Fed speak pushbacked 567 00:28:03,359 --> 00:28:07,160 Speaker 11: on the market. Ultimately, what we saw was that data 568 00:28:07,240 --> 00:28:10,560 Speaker 11: has proven more powerful pushback than speeches from the FMC. 569 00:28:10,920 --> 00:28:13,639 Speaker 11: But the FMC has made clear they aren't going to 570 00:28:13,840 --> 00:28:17,200 Speaker 11: ease preemptively. They're only going to ease if the data 571 00:28:17,320 --> 00:28:21,639 Speaker 11: continues to back up justification that inflation is declining and 572 00:28:21,760 --> 00:28:24,920 Speaker 11: the Fed should be normalizing policy at a lower level. 573 00:28:25,160 --> 00:28:29,280 Speaker 11: What is normal policy remains a key question. Obviously, the 574 00:28:30,000 --> 00:28:32,680 Speaker 11: Fed suggests three eases in this calendar year. As the 575 00:28:32,760 --> 00:28:35,720 Speaker 11: median got in the summary the economic projections, they still 576 00:28:35,760 --> 00:28:37,760 Speaker 11: have a long run neutral FED funds rate of two 577 00:28:37,760 --> 00:28:40,120 Speaker 11: and a half percent. I would argue the bond market, 578 00:28:40,200 --> 00:28:42,200 Speaker 11: if you look at forward rates, thinks it's about one 579 00:28:42,240 --> 00:28:44,560 Speaker 11: hundred bases points higher than that, give or take. I 580 00:28:44,600 --> 00:28:47,640 Speaker 11: would side with the bond market on that. That means 581 00:28:47,680 --> 00:28:50,520 Speaker 11: that the bond market can can rally some as the 582 00:28:50,560 --> 00:28:53,480 Speaker 11: FED eases and the economy slows, but absent a recession, 583 00:28:53,840 --> 00:28:55,640 Speaker 11: I wouldn't be holding my breath for the ten year 584 00:28:55,720 --> 00:28:58,120 Speaker 11: to hit you three percent anytime too soon. 585 00:28:59,120 --> 00:28:59,960 Speaker 8: That's going to take a while. 586 00:29:01,000 --> 00:29:03,720 Speaker 5: Arjie, you mentioned economic data mattering. We have f MC 587 00:29:03,840 --> 00:29:07,240 Speaker 5: minutes tomorrow and then initial jobless claims pm I. What 588 00:29:07,520 --> 00:29:09,600 Speaker 5: data points are you looking at to get a better 589 00:29:09,640 --> 00:29:12,680 Speaker 5: read on what the FED can do and will do next. 590 00:29:14,880 --> 00:29:17,120 Speaker 11: It's funny, you know, the FED looks at the totality 591 00:29:17,160 --> 00:29:19,600 Speaker 11: of the data. I love that expression. But if you 592 00:29:19,720 --> 00:29:23,000 Speaker 11: had to provide some insight on what you give greater 593 00:29:23,280 --> 00:29:26,160 Speaker 11: attention to or greater weight, what you assign greater weight to, 594 00:29:27,280 --> 00:29:30,920 Speaker 11: you know, the inflation data is fundamentally important. The FED 595 00:29:31,440 --> 00:29:35,120 Speaker 11: would be very happy to see real economic data data 596 00:29:35,600 --> 00:29:39,480 Speaker 11: portraying an economy that is continuing to expand accompanied by 597 00:29:40,040 --> 00:29:40,880 Speaker 11: declining inflation. 598 00:29:41,360 --> 00:29:44,640 Speaker 8: That's that's the soft landing. That's what they that's what 599 00:29:44,720 --> 00:29:45,080 Speaker 8: they want. 600 00:29:45,720 --> 00:29:48,160 Speaker 11: So I think the inflation data still is first and 601 00:29:48,200 --> 00:29:52,120 Speaker 11: foremost the most important in the broader scope of data 602 00:29:52,120 --> 00:29:53,360 Speaker 11: streams that's coming out. 603 00:29:53,920 --> 00:29:54,040 Speaker 2: Uh. 604 00:29:54,280 --> 00:29:57,320 Speaker 11: You know that said, if the economy looks to be reaccelerating, 605 00:29:57,920 --> 00:30:00,440 Speaker 11: then the reason that's becomes a con or anything for 606 00:30:00,480 --> 00:30:04,200 Speaker 11: the bomb market is that you would be more cautious 607 00:30:04,240 --> 00:30:07,680 Speaker 11: about your expectations on inflation. Will inflation continue to decline 608 00:30:07,840 --> 00:30:10,920 Speaker 11: if the economy in fact reaccelerates, that would be a 609 00:30:11,000 --> 00:30:13,280 Speaker 11: real challenge for the market. That's the kind of data 610 00:30:13,360 --> 00:30:16,800 Speaker 11: set that might feed expectations that maybe the Fed will 611 00:30:16,840 --> 00:30:17,400 Speaker 11: tighten again. 612 00:30:18,320 --> 00:30:20,080 Speaker 8: I actually think that's highly unlikely. 613 00:30:20,560 --> 00:30:22,120 Speaker 11: I think if Fed funds rate of five and a 614 00:30:22,200 --> 00:30:25,880 Speaker 11: quarter five fifty is already clearly restrictive, you don't need 615 00:30:25,960 --> 00:30:28,440 Speaker 11: to tighten again as much as keep it there longer. 616 00:30:29,360 --> 00:30:31,840 Speaker 11: So keeping it there longer, if you you know, Paul, 617 00:30:31,880 --> 00:30:34,800 Speaker 11: you mentioned the work function before, that would translate into 618 00:30:34,880 --> 00:30:36,719 Speaker 11: the work function having to move. You'd have to keep 619 00:30:36,800 --> 00:30:40,080 Speaker 11: pushing out further and further into the future. You're easing dates. 620 00:30:40,160 --> 00:30:44,200 Speaker 11: So the Fed would react to data that portrays a stronger, 621 00:30:44,280 --> 00:30:49,000 Speaker 11: reaccelerating economy and or sticky inflation by just holding the 622 00:30:49,080 --> 00:30:50,920 Speaker 11: fort you know, stay at five and a quarter five 623 00:30:50,920 --> 00:30:54,400 Speaker 11: to fifty longer, and then that will reprice markets, as 624 00:30:54,480 --> 00:30:57,240 Speaker 11: we've already seen this year, as the market had to 625 00:30:57,280 --> 00:31:00,520 Speaker 11: reprice to higher expected yields after the we're shooting of 626 00:31:00,640 --> 00:31:01,040 Speaker 11: last year. 627 00:31:01,280 --> 00:31:03,000 Speaker 3: All right, ur Ja, thanks so much, for joining us 628 00:31:03,240 --> 00:31:05,040 Speaker 3: yet again. We all just appreciate getting your thoughts. 629 00:31:05,120 --> 00:31:05,240 Speaker 10: R J. 630 00:31:05,360 --> 00:31:09,360 Speaker 3: Gallow, Senior portfolio manager, Fixed Income, Federated Hermes, joining us 631 00:31:09,440 --> 00:31:12,920 Speaker 3: via Zoom from Pittsburgh, PA, one of my favorite towns, 632 00:31:13,160 --> 00:31:15,280 Speaker 3: great town there and Federate one of the big, big 633 00:31:15,920 --> 00:31:18,080 Speaker 3: money managers in Pittsburgh. 634 00:31:19,640 --> 00:31:23,480 Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live 635 00:31:23,600 --> 00:31:26,680 Speaker 2: weekdays at ten am Eastern on applecard. 636 00:31:26,120 --> 00:31:28,880 Speaker 7: Play and Android Otto with the Bloomberg Business App. 637 00:31:29,000 --> 00:31:31,840 Speaker 2: You can also listen live on Amazon Alexa from our 638 00:31:31,880 --> 00:31:36,240 Speaker 2: flagship New York station just Say Alexa playing Bloomberg eleven thirty. 639 00:31:37,360 --> 00:31:40,480 Speaker 3: We had that surge surgeon the markets in November December 640 00:31:40,560 --> 00:31:44,040 Speaker 3: last year, where we had stocks just rallying dramatically continuing 641 00:31:44,080 --> 00:31:46,160 Speaker 3: here into this year to a certain extent, and even 642 00:31:46,200 --> 00:31:49,320 Speaker 3: in a fixed income space. You major year in November 643 00:31:49,400 --> 00:31:52,840 Speaker 3: December last year. The question is did that pull some 644 00:31:52,920 --> 00:31:55,400 Speaker 3: performance from twenty twenty four? Let's check out somebody who 645 00:31:55,520 --> 00:31:57,360 Speaker 3: kind of does this stuff for a living. Terry Spath, 646 00:31:57,680 --> 00:32:02,400 Speaker 3: founder in CIO of Zoom of Wealth, based in Malibu, California, 647 00:32:02,520 --> 00:32:03,360 Speaker 3: joining us via Zoom. 648 00:32:03,640 --> 00:32:05,280 Speaker 4: So, Terry, how did you start this year? 649 00:32:05,320 --> 00:32:07,840 Speaker 3: What was your view of twenty twenty four going into 650 00:32:07,880 --> 00:32:10,440 Speaker 3: the year, given that really strong finish we had to 651 00:32:10,520 --> 00:32:11,280 Speaker 3: twenty twenty three. 652 00:32:12,400 --> 00:32:15,200 Speaker 10: Yes, thank you for having me on, Paul, And there 653 00:32:15,280 --> 00:32:17,440 Speaker 10: was a huge bond valley at the end of twenty 654 00:32:17,560 --> 00:32:21,080 Speaker 10: twenty three, and that was great, But that was on 655 00:32:21,120 --> 00:32:24,520 Speaker 10: the heels of the expectations of rate hikes in twenty 656 00:32:24,640 --> 00:32:28,320 Speaker 10: twenty four. And while we're not clear when that will happen, 657 00:32:28,920 --> 00:32:31,720 Speaker 10: when rate cuts will happen, how many we will get, 658 00:32:32,240 --> 00:32:34,320 Speaker 10: we're very confident that. 659 00:32:34,440 --> 00:32:36,960 Speaker 12: The FED is going to cut rates in twenty twenty four. 660 00:32:37,000 --> 00:32:38,680 Speaker 12: And it's not just because. 661 00:32:40,360 --> 00:32:43,960 Speaker 10: They feel as though they need to, because maybe inflation 662 00:32:44,200 --> 00:32:47,880 Speaker 10: is contracting, our employment is getting our unemployment. 663 00:32:47,360 --> 00:32:49,960 Speaker 12: Is getting too high. I think the FED is really 664 00:32:50,000 --> 00:32:50,920 Speaker 12: going to have to do some. 665 00:32:51,640 --> 00:32:56,760 Speaker 10: Work and pencil out how expensive debt is becoming for 666 00:32:56,880 --> 00:32:59,720 Speaker 10: the federal government. We've got rates that are much higher 667 00:32:59,760 --> 00:33:02,360 Speaker 10: than the were three four years ago when the government 668 00:33:02,440 --> 00:33:05,440 Speaker 10: was issuing five year paper. We've got a debt level 669 00:33:05,520 --> 00:33:09,080 Speaker 10: that's double what it was in twenty twenty. So those 670 00:33:09,160 --> 00:33:11,440 Speaker 10: are going to be drags on the economy, and we 671 00:33:11,600 --> 00:33:14,320 Speaker 10: do think that that's going to result in cuts in 672 00:33:14,680 --> 00:33:18,600 Speaker 10: interest rates at the federal level and that will be 673 00:33:19,440 --> 00:33:23,360 Speaker 10: a great tailwind, a continued tail wind for even just 674 00:33:23,440 --> 00:33:25,720 Speaker 10: the safest bonds that you can buy out there. 675 00:33:26,200 --> 00:33:26,400 Speaker 6: Terry. 676 00:33:26,480 --> 00:33:28,800 Speaker 5: That's interesting because I feel like most times I've talked 677 00:33:28,800 --> 00:33:30,920 Speaker 5: to people about a need for a cut, it is 678 00:33:31,600 --> 00:33:36,480 Speaker 5: not spurred by the fact that the national debt has moved, 679 00:33:36,600 --> 00:33:39,120 Speaker 5: has really picked up with the sharp move higher and 680 00:33:39,160 --> 00:33:41,160 Speaker 5: interest rates just looking at the warp function, which I 681 00:33:41,320 --> 00:33:44,360 Speaker 5: met reference far too often. Right now, we're penciling in 682 00:33:44,840 --> 00:33:47,960 Speaker 5: just south of fore cuts this year. You look back 683 00:33:48,040 --> 00:33:50,360 Speaker 5: coming into the year it was north of six Terry, 684 00:33:50,360 --> 00:33:52,800 Speaker 5: where do we fall with these rate cuts and what 685 00:33:52,920 --> 00:33:54,280 Speaker 5: does that path look like? 686 00:33:55,480 --> 00:33:57,840 Speaker 10: Well, I mean, I think that's a tough question to answer. 687 00:33:58,600 --> 00:34:01,360 Speaker 10: You know exactly when we're going to see rate cuts. Obviously, 688 00:34:01,560 --> 00:34:03,920 Speaker 10: the markets got a little bit ahead of themselves looking 689 00:34:04,000 --> 00:34:07,120 Speaker 10: for six cuts ats sort of an unprecedented level, And 690 00:34:07,160 --> 00:34:07,760 Speaker 10: in fact. 691 00:34:07,560 --> 00:34:10,000 Speaker 12: That was worrisome in our view because if you're having 692 00:34:10,080 --> 00:34:13,560 Speaker 12: six cuts or something really wrong in the economy. That said, 693 00:34:13,719 --> 00:34:15,560 Speaker 12: you know, they they raised rates late. 694 00:34:16,640 --> 00:34:19,040 Speaker 10: I think the risk to our view is that they 695 00:34:19,160 --> 00:34:21,120 Speaker 10: cut rates a little bit too slowly. 696 00:34:21,560 --> 00:34:23,000 Speaker 12: But I do think that we're going to see that 697 00:34:23,160 --> 00:34:25,600 Speaker 12: in twenty twenty four, and the reason for that is 698 00:34:25,680 --> 00:34:26,840 Speaker 12: that unemployment is. 699 00:34:28,600 --> 00:34:32,040 Speaker 10: Low, meaning full employment has been achieved, which is one 700 00:34:32,040 --> 00:34:33,680 Speaker 10: of the views of the Fed. We're in, you know, 701 00:34:34,560 --> 00:34:37,759 Speaker 10: knocking on the door of two percent inflation level that 702 00:34:37,800 --> 00:34:40,680 Speaker 10: they're looking for, and at you know, north of five percent, 703 00:34:40,719 --> 00:34:43,600 Speaker 10: and the FED funds rate and you've got it inverted, 704 00:34:43,800 --> 00:34:47,799 Speaker 10: meaning short term rates are higher than long term rates, 705 00:34:47,880 --> 00:34:49,719 Speaker 10: and that that's been the case now for a while. 706 00:34:49,840 --> 00:34:50,799 Speaker 12: That doesn't make sense. 707 00:34:50,880 --> 00:34:53,000 Speaker 10: I think the Fed is going to need to uninvert 708 00:34:53,520 --> 00:34:56,120 Speaker 10: the curve. And so we'll see that over the course 709 00:34:56,280 --> 00:34:58,520 Speaker 10: of this year. And just to do like a little 710 00:34:58,520 --> 00:35:00,200 Speaker 10: bit of math on that, if you've got a five 711 00:35:00,320 --> 00:35:03,440 Speaker 10: year treasury bond that's paying four percent and you get 712 00:35:03,440 --> 00:35:06,520 Speaker 10: a one percent cut, you're getting another you know, three 713 00:35:06,640 --> 00:35:09,680 Speaker 10: four percent in return. So on a five year treasury 714 00:35:09,760 --> 00:35:12,760 Speaker 10: you can earn a high single digit return. That'll probably 715 00:35:12,880 --> 00:35:15,359 Speaker 10: happen in twenty twenty four. And that's not a lot 716 00:35:15,480 --> 00:35:17,800 Speaker 10: less than what we would expect in the stock market, 717 00:35:17,880 --> 00:35:21,280 Speaker 10: but with a lot safer I guess characteristics. 718 00:35:21,719 --> 00:35:23,839 Speaker 12: So while you know, just to wrap it up, I mean, 719 00:35:24,440 --> 00:35:26,120 Speaker 12: when will that happen in twenty twenty four. 720 00:35:26,200 --> 00:35:28,440 Speaker 10: We're not sure, but we're pretty confident it will happen 721 00:35:28,600 --> 00:35:30,799 Speaker 10: over the course of this year that we'll see at 722 00:35:30,920 --> 00:35:32,000 Speaker 10: least three four cuts. 723 00:35:32,440 --> 00:35:34,680 Speaker 3: So, Terry, if I do think there's gonna be some cuts, 724 00:35:34,719 --> 00:35:38,040 Speaker 3: you're constructor for stocks for sure. Do I stick with 725 00:35:38,200 --> 00:35:42,440 Speaker 3: those Magnificent seven or maybe they're Magnificent five now names, 726 00:35:42,560 --> 00:35:45,040 Speaker 3: or do I try to find some performance elsewhere, whether 727 00:35:45,080 --> 00:35:46,800 Speaker 3: it's small to mid caps, whether it's value. 728 00:35:47,480 --> 00:35:48,239 Speaker 4: How do you think about that? 729 00:35:49,280 --> 00:35:51,160 Speaker 10: Yeah, I mean, listen, it's hard to, you know, make 730 00:35:51,239 --> 00:35:53,640 Speaker 10: a case against the Magnificent seven with the momentum that 731 00:35:53,719 --> 00:35:54,280 Speaker 10: it's enjoying. 732 00:35:54,320 --> 00:35:57,640 Speaker 12: But anytime there's magnificent in front of something, you know, 733 00:35:57,719 --> 00:35:59,760 Speaker 12: for an investment, it makes me a little bit worried. 734 00:36:00,760 --> 00:36:00,920 Speaker 6: You know. 735 00:36:01,040 --> 00:36:03,560 Speaker 12: I think even if you strip out if you look. 736 00:36:03,400 --> 00:36:07,440 Speaker 10: At the Mac seven, the earnings have been spectacular and 737 00:36:07,600 --> 00:36:10,600 Speaker 10: that has really driven the returns for those stocks. But 738 00:36:10,680 --> 00:36:13,160 Speaker 10: even stripping those out, I think you can see some 739 00:36:13,239 --> 00:36:15,799 Speaker 10: strength and large cap stocks continue through this year. 740 00:36:16,120 --> 00:36:18,560 Speaker 12: And the reason for that, again comes back to interest rates. 741 00:36:18,920 --> 00:36:20,880 Speaker 12: The problem the. 742 00:36:20,920 --> 00:36:23,880 Speaker 10: Trouble for small stocks, and they've been really lagging, and 743 00:36:23,960 --> 00:36:27,000 Speaker 10: the trouble for that is that their access to capital 744 00:36:27,200 --> 00:36:31,040 Speaker 10: is weak. Interest rates are high, and they're just you know, 745 00:36:31,120 --> 00:36:33,719 Speaker 10: that's just a challenge. Whereas large cap names have a 746 00:36:33,800 --> 00:36:36,799 Speaker 10: lot more access to capital, they can handle a little 747 00:36:36,800 --> 00:36:39,320 Speaker 10: bit higher interest rates, and we're going to see some 748 00:36:39,480 --> 00:36:42,759 Speaker 10: nice earnings in the large cap stocks, you know, high 749 00:36:42,800 --> 00:36:45,319 Speaker 10: single digit type earnings along with a dividend yield. 750 00:36:45,640 --> 00:36:48,080 Speaker 12: So this is a nice situation where. 751 00:36:47,960 --> 00:36:51,640 Speaker 10: You've got a year where we can see nice gains 752 00:36:51,680 --> 00:36:54,840 Speaker 10: in large cap stocks as well as kind of barbelle 753 00:36:54,960 --> 00:37:00,600 Speaker 10: over to the strongest the quality treasury market and you. 754 00:37:00,600 --> 00:37:02,360 Speaker 12: Can have a really nice return in that type of 755 00:37:02,400 --> 00:37:03,080 Speaker 12: a portfolio. 756 00:37:03,440 --> 00:37:06,000 Speaker 5: Okay, So Terry, with leaning into some of the bigger 757 00:37:06,040 --> 00:37:11,279 Speaker 5: stocks or their industries or sectors that you prefer, you know, 758 00:37:11,400 --> 00:37:11,920 Speaker 5: I think. 759 00:37:11,760 --> 00:37:15,200 Speaker 12: That there's sectors that we don't prefer right now. 760 00:37:15,360 --> 00:37:17,520 Speaker 10: The energy sector has been weak, and the reason for 761 00:37:17,640 --> 00:37:19,879 Speaker 10: that is that inflation's coming down. And when we look 762 00:37:19,880 --> 00:37:22,160 Speaker 10: at the commodity sector, and that's another reason why we 763 00:37:22,200 --> 00:37:25,160 Speaker 10: think inflation will stay cool in twenty twenty four. If 764 00:37:25,200 --> 00:37:28,319 Speaker 10: you look at the prices of commodities, they've been weak, 765 00:37:28,400 --> 00:37:32,839 Speaker 10: they've been negative, and that is that's the market telling 766 00:37:32,960 --> 00:37:35,560 Speaker 10: us that inflation is going to be tame in twenty 767 00:37:35,680 --> 00:37:39,960 Speaker 10: twenty four. So those sort of inflationary plays are not 768 00:37:40,640 --> 00:37:45,400 Speaker 10: attractive right now. You know, the obvious choice on the 769 00:37:45,480 --> 00:37:48,560 Speaker 10: other end of the spectrum are those companies that do 770 00:37:48,760 --> 00:37:50,759 Speaker 10: well in a low inflation environment, and those are the 771 00:37:50,800 --> 00:37:55,680 Speaker 10: ones that we've seen in technology, in the higher dividend plays. Actually, 772 00:37:55,719 --> 00:38:01,200 Speaker 10: I think those have been underheld by investors, and I 773 00:38:01,239 --> 00:38:04,080 Speaker 10: think that's attractive as a kind of pseudo bond play 774 00:38:04,160 --> 00:38:04,520 Speaker 10: as well. 775 00:38:05,200 --> 00:38:06,719 Speaker 4: All right, Terry, thank you so much for joining us. 776 00:38:06,719 --> 00:38:07,160 Speaker 4: Appreciate it. 777 00:38:07,520 --> 00:38:09,560 Speaker 3: Terry Spatha, founder and CEO of zoom of Wealth that 778 00:38:09,600 --> 00:38:11,319 Speaker 3: they are based in Malibu, California. 779 00:38:12,080 --> 00:38:16,600 Speaker 2: This is the Bloomberg Intelligence podcast, available on apples, Spotify, 780 00:38:16,800 --> 00:38:19,960 Speaker 2: and anywhere else you'll get your podcasts. Listen live each 781 00:38:20,040 --> 00:38:23,200 Speaker 2: weekday ten am to noon Eastern on Bloomberg dot com, 782 00:38:23,520 --> 00:38:26,879 Speaker 2: the iHeartRadio app, tune In, and the Bloomberg Business app. 783 00:38:27,040 --> 00:38:30,000 Speaker 2: You can also watch us live every weekday on YouTube 784 00:38:30,280 --> 00:38:32,080 Speaker 2: and always on the Bloomberg terminal.