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Speaker 1: This is the Bloomberg Surveillance Podcast.

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Speaker 2: I'm Tom Keene, along with Jonathan Farrell and Lisa Abramowitz.

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Speaker 2: Join us each day for insight from the best an economics, geopolitics,

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Speaker 2: finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple,

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Speaker 2: Spotify and anywhere you get your podcasts, and always on

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Speaker 2: Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business app.

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Speaker 3: Coatraining it down to join this now port filio manager

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Speaker 3: at Franklin Mitchell Seriestina. Can we start that the difference

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Speaker 3: in the inflation that the eurosone is experiencing right now

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Speaker 3: and that we are home in the United States. Is

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Speaker 3: there a big difference from your perspective.

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Speaker 4: We need to think about what's generating the inflation in

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Speaker 4: the Eurozone region and what has been generating it. And

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Speaker 4: the war in Ukraine has really not come to light

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Speaker 4: for such a long period of time, but that's really

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Speaker 4: what is reflected in those European inflation numbers. It's the

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Speaker 4: fact that someone cut off the gas supply and we

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Speaker 4: need to replace that gas, and that is the inflation

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Speaker 4: that people are dealing with. But we keep talking about it,

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Speaker 4: and I think it's so important. It's the reaction of

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Speaker 4: the governments that we have been very very positive upon

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Speaker 4: in terms of that incremental help that they're providing to

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Speaker 4: their citizens. And I think that that is where there's

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Speaker 4: that disconnect, is that the population is actually quite happy

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Speaker 4: because they're getting support and they're getting help, so they're

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Speaker 4: not protesting in the streets.

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Speaker 2: What's fascinating to me, and this came up at the

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Speaker 2: meetings of the IMF, and we have Reguard John When

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Speaker 2: is Leguard like in an hour? Thankfully five, it's going

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Speaker 2: to be here in she's speaking a different language to

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Speaker 2: a different culture and fabric. And I wonder, within all

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Speaker 2: your study by university, all the work you've done in equities,

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Speaker 2: are we at a point where we can say they've

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Speaker 2: gone beyond eurosclerosis and that they have a financial structure

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Speaker 2: more like us, more Anglo Saxon, if you will, than

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Speaker 2: what we knew when we were studying this.

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Speaker 4: It's trying to pansitioning. I think that the bond market

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Speaker 4: in the Eurozone is still not as robust as the

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Speaker 4: bond market that we see in the United States. And

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Speaker 4: what does that mean is that your companies don't go

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Speaker 4: into bankruptcy that is driven by the bondholders and the

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Speaker 4: breaching of those covenants because the debt is held in

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Speaker 4: the banks, and the banks tend to be wanting to

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Speaker 4: work with their customers on a longer period of time.

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Speaker 4: So even though you've had that transition, it's not being

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Speaker 4: a really noticeable one. But look, they're data dependent. I mean,

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Speaker 4: who does not want to hear the fact that the

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Speaker 4: people running the ECB are looking at the data and

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Speaker 4: they're being informed by the data, and they're saying that,

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Speaker 4: you know, the core inflation number is still high. It's

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Speaker 4: at five point six percent on a core basis. That's

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Speaker 4: significantly above two. We're not talking the difference between two

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Speaker 4: and three. We're talking you're multiple points higher. And they

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Speaker 4: need to I think forcefully was the word, but they

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Speaker 4: need to really push that number down.

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Speaker 5: So we haven't seen it it yet. Data dependency is

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Speaker 5: a key phrase on the show where you're going to

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Speaker 5: have an alarm go off and then we'll say, well,

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Speaker 5: what exactly do you mean by that?

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Speaker 6: Right?

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Speaker 5: And it means something different for everybody. For right now,

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Speaker 5: the Federal Reserve, it means a Senior Loan Officer survey

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Speaker 5: and perhaps what happens with respect to two regional banks

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Speaker 5: in Europe? Is it just core inflation? Is that the

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Speaker 5: pre eminent data dependency that we're looking at.

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Speaker 4: I think that they're looking at multiple of factors. They're

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Speaker 4: looking at what's happening in spreads in the periphery and

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Speaker 4: we saw that about a year ago where you saw

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Speaker 4: that blowout and spreads in Italy and the ECB reacted,

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Speaker 4: So that's one area of data they're looking at. They

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Speaker 4: are looking at inflation. They're also looking at Eurozone in

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Speaker 4: your employment metrics because one of the mechanisms for your

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Speaker 4: inflation it needs to be wager dross adjustment because people

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Speaker 4: need to get that to be able to cope with it.

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Speaker 4: And so they're looking at whether or not those higher

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Speaker 4: wages are causing employees to be laid off. So there's

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Speaker 4: a lot of different factors they're looking at.

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Speaker 3: Katrina, thank you, thank you, jumping on into the studio

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Speaker 3: and catching up with a thank t. Don't think that

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Speaker 3: Franklin Mitchell on the l likes to say CP decision.

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Speaker 1: Right now.

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Speaker 2: Stephen Raschudo joins is Steve Rashudo's chief economis at Mizuo,

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Speaker 2: and yes it is on the American economy. But Steven,

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Speaker 2: I got to start with the EU here and the

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Speaker 2: challenges that Madame Leguard faces. The idea here is the

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Speaker 2: animal spirit of the United States, our technical superiority.

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Speaker 1: Say Apple earnings this afternoon is one.

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Speaker 2: Example, gives us a certain as Ned Phelps of Columbia

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Speaker 2: would say, dynamism. Does Europe have the dynamism to have

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Speaker 2: a higher interest rate regime? Well, part of the problem

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Speaker 2: that they face is is all the conditions that you

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Speaker 2: just laid out. But in addition, there is a demographic issue,

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Speaker 2: and there is a wage subsidy issue, which certainly adds

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Speaker 2: to the whole concept of the whole eurosclerosis discussion that

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Speaker 2: we had been having for years about Europe. And I

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Speaker 2: think Europe is aging rapidly and they're finding a way

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Speaker 2: not to keep their best educated people on the sidelines

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Speaker 2: in a very comfortable lifestyle.

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Speaker 1: At least.

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Speaker 2: I want to note the eual craters here. I mean,

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Speaker 2: this is widely anticipated by John Ferrell, the ear craters.

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Speaker 1: As I would say on a radio, do a one.

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Speaker 5: Ten twenty one, yeah to one one exactly here this

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Speaker 5: is what I'm watching. Actually, it's exactly the chart that

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Speaker 5: I have up, not just because I'm waiting for it

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Speaker 5: to break out of the one ten range, but.

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Speaker 1: Steve to be proven correct.

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Speaker 5: I'm curious. I don't know what correct would mean for

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Speaker 5: me at this point, but I will I'm curious about whether, Steve,

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Speaker 5: you think people have overplayed the Europe's strength story, the

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Speaker 5: ability to withstand both higher rates and consistent growth. That

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Speaker 5: was sort of the consensus heading into this meeting, and

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Speaker 5: then all of a sudden they took the lesser of

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Speaker 5: the two options with the ECB today, and then in

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Speaker 5: the US you see that the data is still strong.

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Speaker 5: Does this underscore something that is important?

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Speaker 7: Well, I think there is that measure, and I think

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Speaker 7: when you're looking at the oil numbers, just I know

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Speaker 7: people are talking about a fat finger mistake in terms

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Speaker 7: of the client in oil, but I think what you're

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Speaker 7: seeing is globally around the world, you're not seeing the

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Speaker 7: kind of resilience. You're not seeing it coming out of

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Speaker 7: the Chinese opening, You're not seeing it coming out of Europe,

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Speaker 7: and I think, yeah, there's a greater potential for Europe

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Speaker 7: to run into resistance. Especially I heard one of your

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Speaker 7: commentators talking earlier today about the fact that Europe has

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Speaker 7: a much closer connection in terms of its mortgage environment

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Speaker 7: relative to the interest rate environment than we do in

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Speaker 7: the United States because we have fixed rate mortgages. They

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Speaker 7: have adjustable rate mortgage and that result is they have

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Speaker 7: a bigger economic impact from what's going on.

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Speaker 5: Well, let's build on that, because I was wondering whether

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Speaker 5: their mortgage situation is akin to the regional banking situation

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Speaker 5: in the US. You need the nodes of stress that

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Speaker 5: are emerging are distinct depending on what kind of capital

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Speaker 5: markets each region has. Do you think that the mortgage

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Speaker 5: issue in Europe could become the new regional banking crisis

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Speaker 5: in terms of people unable to pay for their monthly bills.

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Speaker 1: Yeah.

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Speaker 7: Without getting into the specifics of it, I think at

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Speaker 7: this particular juncture, I think you're probably okay. And one

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Speaker 7: of the reasons for it is because of the social

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Speaker 7: safety net that's created in Europe. But I think in

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Speaker 7: addition to that, you're in an environment where you know,

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Speaker 7: people in Europe are quicker to adjust their spending as

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Speaker 7: a result of this, So I think you know you're

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Speaker 7: looking at a potential downturn in the economy relative to

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Speaker 7: the strength everyone was looking for am I going to

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Speaker 7: say it's going to be a deeper, significant downturn at

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Speaker 7: this particular juncture.

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Speaker 1: I can't make that.

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Speaker 7: Call, but I do think it adds to the growth

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Speaker 7: to the recession call forecast, as the regional bank problem

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Speaker 7: adds to the recession forecast here. And if you look

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Speaker 7: at all the data we've gotten out this week, you know,

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Speaker 7: get much of its March data, some of it is

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Speaker 7: April data.

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Speaker 1: It's all strong.

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Speaker 7: Even when you look at the claims number this morning,

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Speaker 7: two forty two, between two fifty and between two hundred

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Speaker 7: and two fifty, you're not in a recession that's residual.

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Speaker 7: You've got to get into that two fifty to three

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Speaker 7: are to start saying, okay, it's a really shallow recession.

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Speaker 7: And then you keep on going up from there. And

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Speaker 7: then you look at claim continuing claims they dropped again.

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Speaker 7: So you know, we don't have that labor market issue

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Speaker 7: that I think a lot of people are concerned about.

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Speaker 2: Yet, if you just joining us on radio on television,

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Speaker 2: Stephen Shooto of MISSOI where this we could go for

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Speaker 2: three hours with them with the experience of the American economy.

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Speaker 2: Let's turn to America right now, I want you to

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Speaker 2: dovetail in with your colleague dominant Constum's idea of a

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Speaker 2: FED with monetary policy but with other stuff, including the

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Speaker 2: banking crisis, becoming a constanm states super restrictive. How close

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Speaker 2: are we to reshoot out super restrictive?

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Speaker 8: You know?

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Speaker 7: I mean, I think the Federal Reserve has a way

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Speaker 7: out of this that would be very, very simple, and

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Speaker 7: I think one of the things that they should do

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Speaker 7: immediately is end quantitative tightening. Part of the problem in

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Speaker 7: the overall scenario for the outlook for the US economy

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Speaker 7: is the fact that the Federal Reserve is taking down

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Speaker 7: its balance sheet. And the Fed seems to believe taking

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Speaker 7: down its balance sheet will not lead douart or dollar

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Speaker 7: to taking down reserves. It is taking down reserves, and

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Speaker 7: the net result is that's amplifying the problems. So the

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Speaker 7: Federal Reserve, you know, this is the second time they've

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Speaker 7: attempted to do both an interest rate increase and a

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Speaker 7: quantitative tightening, and they've blown it both times.

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Speaker 2: Okay, but is this like a British austerity? The United

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Speaker 2: Kingdom buried itself with some philosophical twentieth century austerity a

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Speaker 2: number of years ago. Do we have an austere Jerome Powell.

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Speaker 7: Well, I think the Federal Reserve is overplaying its hand

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Speaker 7: by using both quantitative tightening and interest rate policy at

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Speaker 7: the same time. They should separate the two. They should

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Speaker 7: use one at a time, and they should recognize that

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Speaker 7: largely when you go into a quantitative easing standpoint, you

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Speaker 7: do it and you assume it is permanent because you've

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Speaker 7: done it because you're afraid of deflation. Okay, this concept

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Speaker 7: that it's equivalent to an interest rate in reduction is wrong.

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Speaker 1: We're in a free reserve environment.

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Speaker 5: Building on that. Just over in Europe, when we are

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Speaker 5: about six minutes from the press conference with Christine Legard,

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Speaker 5: who heads the ECB, one person saying and Maria today,

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Speaker 5: I'll bringing us this that the most key point for

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Speaker 5: the press conference will be that they are ending reinvestment

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Speaker 5: of the APP basically one of their main bond purchasing

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Speaker 5: acid per programs. And this was sort of a nod

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Speaker 5: to the Hawks to basically say, Okay, we are going

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Speaker 5: to get rid of this program more quickly, even though

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Speaker 5: we're not going to raise rates by fifty basis points.

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Speaker 5: What are you looking for in terms of what Christine

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Speaker 5: Legard has to say about this.

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Speaker 7: Again, I think they're going to go down the same

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Speaker 7: path that we've gone down. There is this misconception that

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Speaker 7: what you put in you can take out. When you're

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Speaker 7: looking at the reserves in the system, the bank's balance

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Speaker 7: sheet expands to the level of reserves that are provided,

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Speaker 7: and it's harder to shrink the balance sheet than it

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Speaker 7: is to expand the balance sheet. And this is why

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Speaker 7: the FED thinks, well, if we put it on all

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Speaker 7: the automatic pilot, we read it, let it run in

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Speaker 7: the background, everything's fine. Okay, that's fine to some extent,

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Speaker 7: but you're also raising interest rates. So the reality is

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Speaker 7: separate the two. Leave them as separate policies because they

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Speaker 7: are distinctly separate policies guided for very distinctly different things.

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Speaker 7: So I think what the FED should do and I

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Speaker 7: think what the ECB should do is leave one alone,

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Speaker 7: do one and then come back to the other. The

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Speaker 7: ECB so far has only focused on one. The FED

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Speaker 7: was doing both at the same time. We've gotten into

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Speaker 7: a problem with less taking out of the system now

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Speaker 7: than we did in twenty eighteen. In twenty nineteen.

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Speaker 2: Don't be a stranger Stephen Raushudo where US was MISSOI

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Speaker 2: just a terrific team between Steve Rushudo and Dominique.

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Speaker 1: Constant joining us.

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Speaker 2: Now our reporter Matthew Monks after removed markets and truly

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Speaker 2: moved all of banking markets last night. Matthew, congratulations on

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Speaker 2: your reporting as simple as I can. In the April

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Speaker 2: twenty fifth statement by the leadership of pac West, they

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Speaker 2: say that credit dynamics are steady. I found that really, really,

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Speaker 2: really important. What are the credit metrics they have? Is

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Speaker 2: it real estate on Rodeo Drive? What do they actually

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Speaker 2: own away from the deposits.

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Speaker 9: They have a lot of commercial real estate, so that's

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Speaker 9: like multifamily apartment loans. They have a lot of business

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Speaker 9: loans like sover bawling credit lines to business is they

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Speaker 9: have a venture capital lending business.

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Speaker 8: The important thing to understand here this is not a credit.

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Speaker 9: Quality issue, uh not yet at least it's it's it's

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Speaker 9: an interest rate issue, which means that these loans are

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Speaker 9: no longer you know, worth what they were when they

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Speaker 9: wrote them. They're you know, their market value is below par,

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Speaker 9: but you know they're they're they're assuming that they all

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Speaker 9: get paid back. You know they will be worth whole eventually,

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Speaker 9: but it's really about the interest rate and the credit quality.

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Speaker 8: Is it's holding steady, which is different than the last crisis.

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Speaker 3: So Matt, let's talk about these strategic options, go through

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Speaker 3: them one by one. What is on the table here

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Speaker 3: and where you think the priority lies for leadership of

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Speaker 3: this bank.

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Speaker 9: So the ideal solution here would be some kind of

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Speaker 9: UH rescue merger with another larger institution. It's it's it's

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Speaker 9: a great franchise in California. There's a lot of people

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Speaker 9: that be interested in expanding California. But the issue, like

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Speaker 9: I said, it goes back to this kind of interest

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Speaker 9: rate risk and those loans. Since they're not worth what

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Speaker 9: they used to be, any potential buyer is going to

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Speaker 9: have to take a substantial hit right out the gate

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Speaker 9: marking down those loans, which would create a loss. So

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Speaker 9: it makes it really really hard for someone to buy them.

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Speaker 9: So obviously that would be the first priority for them,

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Speaker 9: is to find a merger parting.

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Speaker 8: But just getting someone to take that it would be

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Speaker 8: an issue.

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Speaker 5: Bet, we just saw the playbook with this, right, I mean,

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Speaker 5: we just saw the idea that basically you just wait

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Speaker 5: for the for the FDIC to come in and give

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Speaker 5: you some sort of loan loss agreement and then all

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Speaker 5: of a sudden it's a feasible purchase. Why is this

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Speaker 5: not just going to end up in the same place.

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Speaker 9: I don't know yet. If you can, I don't know.

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Speaker 9: I'm trying to get a head wrapt around of this.

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Speaker 1: Well.

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Speaker 9: Now there is one possible reason. Now, this is a

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Speaker 9: much smaller institution than First Republic. It's much smaller than

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Speaker 9: a Silicon Valley bank. So potentially, you know, a bank

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Speaker 9: could kind of step up in and eat a loss

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Speaker 9: and make it worth their while.

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Speaker 8: But it's kind of hard.

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Speaker 9: To argue with, you know, getting a sweetheart deal from

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Speaker 9: the FDIC.

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Speaker 8: I guess, but it's all still to be determined. Matt.

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Speaker 5: I don't want you to tip your hand, but I

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Speaker 5: know that you speak with a lot of people in

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Speaker 5: the world dealmaking. How much chatter is there about additional

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Speaker 5: m and a about additional kinds of tie ups in

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Speaker 5: the banking sector, perhaps under less distressed kinds of circumstances,

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Speaker 5: to get ahead of this type of thing.

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Speaker 8: I think everything's dead right now for the reason that

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Speaker 8: I mentioned.

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Speaker 9: I think long term, you're going to see a lot

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Speaker 9: of consolidation, but right now everything is just kind of

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Speaker 9: off the table, especially when you see that TD deal

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Speaker 9: graveling this morning. If you're a large institution, how are

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Speaker 9: you going to take that risk that it's going to

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Speaker 9: get shot down? These deals take nine months close to

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Speaker 9: begin with. Now you're going to do a deal and

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Speaker 9: it's just going to be open ended. So no, I mean,

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Speaker 9: I hate to say it, but unless it's kind of

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Speaker 9: forced or distressed bank, m and A right now is dead.

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Speaker 2: I mean, I don't want you to play sell side

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Speaker 2: analysts here. That's not the Bloomberg way, Matthew Monks. But

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Speaker 2: in your reporting, even if you have deposit stability from

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Speaker 2: thirty five billion down to twenty eight billion, is the

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Speaker 2: other side of the ledgers so diminished mark the market

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Speaker 2: that they're at a net capital negative right now?

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Speaker 1: I mean, is back west. I don't think zero capital.

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Speaker 8: No, I don't think so. I don't think they're in solving.

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Speaker 9: And then everybody that I was talking to last night,

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Speaker 9: you know, wasn't indicating that they're solving. I mean, it's

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Speaker 9: it's it's it's about investors in shorts selling down these

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Speaker 9: banks and just being merciless Uh, all the institutional investors

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Speaker 9: have led. You're not really seeing bargain investors kind of

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Speaker 9: get into the stock. It's really it's just it's just

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Speaker 9: investors sentiment that's just hammering these banks. I mean, the

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Speaker 9: three larger banks that failed before these were really incredibly

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Speaker 9: problematic banks with the one hundred billion of troubled assets

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Speaker 9: on their balance sheets.

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Speaker 8: It's it's not the case here.

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Speaker 9: This is really it's actually it's a it's actually really

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Speaker 9: nice franchise in pretty decent shape.

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Speaker 8: It's just getting pummeled humbled bank investors.

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Speaker 3: The deposit profile is so different compared to sleep and

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Speaker 3: we can put some numbers on that with these. We

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Speaker 3: did that a little bit earlier from a reporter's perspective

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Speaker 3: for you, Are you focused on that? Are we focused

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Speaker 3: on the right thing when we sit here and say

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Speaker 3: depositive stabilized, which is something that bank the communicy?

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Speaker 9: And yeah, absolutely, And I'm going back to the point

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Speaker 9: that so I think eighty percent or so of their

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Speaker 9: deposits are ensured that that that liquidity is not just

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Speaker 9: going to run off in a heartbeat. And these you know,

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Speaker 9: and these are these are insured kind of retail and

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Speaker 9: commercial deposits. Uh, I don't think that we're seeing a

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Speaker 9: run on them.

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Speaker 8: So yeah, I'm absolutely focused on that.

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Speaker 9: That's why I keep putting this message out here that

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Speaker 9: it's it's a different situation than some of these other institutions.

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Speaker 5: One of the listeners of the program had an amazing question,

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Speaker 5: which is, essentially, what is what you're saying that the

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Speaker 5: Fed has to cut rates to get bank consolidation to

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Speaker 5: take place? Is that kind of what people are waiting for,

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Speaker 5: that opportunity for perhaps a balance sheet that makes a

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Speaker 5: little bit more sense.

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Speaker 9: Yeah, well, I mean people are waiting for maybe the

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Speaker 9: government to raise the deposit insurance cap. That's one thing

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Speaker 9: that can kind of just stabilize thing and then maybe

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Speaker 9: create stability for m and a federal reserve, you know,

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Speaker 9: sluming its role when it comes into your straights. Yeah,

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Speaker 9: at this point, the private market is definitely waiting for

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Speaker 9: some kind of guidance from the government to stable life things,

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Speaker 9: to foster consolidation one way or the other.

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Speaker 3: Hey, matt one for the catch up with this tremendous reporting.

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Speaker 3: Matt let's talk against so before the week is out,

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Speaker 3: Thank you, sir. Matthew Monkster on the latest story with

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Speaker 3: pack Web. Do you want to get to around the

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Speaker 3: table right now? Whaley, Global Chief investment Strategist A black

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Speaker 3: Rock Whaley, Let's talk about what Tom's discussing and build

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Speaker 3: on it. We've had the rate shock, are you looking

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Speaker 3: for some kind of credit shock to follow?

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Speaker 6: We are expecting a version of credit tightening and crunch

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Speaker 6: to come through to do some of the output destruction

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Speaker 6: work for the fact, which is why we have now

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Speaker 6: entered the beginning of the pause face. They signaled pause yesterday.

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Speaker 6: We're expecting we're getting close to pick, if not at peak.

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Speaker 6: But more importantly from the meeting yesterday is that they

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Speaker 6: continue to consistently reiterate no for this year and markets

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Speaker 6: upricing in three cards for this year, and that this

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Speaker 6: connect is going to be a source of further market volatility.

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Speaker 2: If I look at three months ten spread out one

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Speaker 2: hundred and ninety three basis points, I can state I've

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Speaker 2: never seen in a textbook. I've never thought about it.

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Speaker 2: It never was back thirty years. It's a three standard

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Speaker 2: deviation move, totally unprecedented. In your note, you talk about

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Speaker 2: short term government paper. What will short term government paper

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Speaker 2: do when in some form the three month ten year

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Speaker 2: differential cracks.

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Speaker 6: Well, we expect a short term government paper to give

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Speaker 6: you income which we haven't had in fixed income for

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Speaker 6: a very very long time. And that is notwithstanding the

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Speaker 6: debt ceiling uncertainty. And that is notwithstanding this dispersion, this huge,

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Speaker 6: huge kind of discrepancy in terms of yields that you

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Speaker 6: get in three months versus ten years if you hold

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Speaker 6: it out for maturity, some of that uncertainty also kind

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Speaker 6: of washes away. The curve extremely inverted, is so inverted

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Speaker 6: that we think the next movie is for ten year

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Speaker 6: yields to do to come back up and curve to

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Speaker 6: steepen from those extremely inverted inverted levels, which is why

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Speaker 6: we long the front end, but we are less constructive

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Speaker 6: on the long end of the curve.

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Speaker 4: Well, DIDJ.

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Speaker 5: Powell give you confidence that they had under control a

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Speaker 5: sense of how deep some of the banking fissures go?

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Speaker 6: Can he give anyone confidence that is at its juncture?

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Speaker 6: Seeing that it's still early days, One thing I would

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Speaker 6: say the all in terms of what's playing out in

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Speaker 6: the banking sector is that we don't think this is

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Speaker 6: a banking specific, systematic, systemic type of crisis. We think

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Speaker 6: that this is just another expression of financial cracks appearing

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Speaker 6: in response to the fastest ray high cycle since the eighties.

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Speaker 6: Arguably what happened in the UK last September with the

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Speaker 6: LDI guilt yield spike volatility episode was another expression of

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Speaker 6: this financial cracks appearing. We know that as we fight

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Speaker 6: inflation in a word shaped by supply cost of fighting

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Speaker 6: inflation is higher and cracks would appear and it would

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Speaker 6: carry economic cost. And that's starting to come.

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Speaker 5: What's the next progression in this cascade of cracks that

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Speaker 5: you see, and it's the only policy response that can

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Speaker 5: really address this rate cuts or.

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Speaker 6: Provision of liquidity. They have been very swift with that

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Speaker 6: to start with, but now the boundary is getting blurred

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Speaker 6: a little bit through the transmission channel of credit tidening.

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Speaker 6: So which is why we're we think that we're basically

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Speaker 6: at peak rate unless inflation surprises on the upside because

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Speaker 6: of this huge uncertainty in terms of how big the

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Speaker 6: credit crunch is likely going to be, and it's still

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Speaker 6: early days to quantify precisely.

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Speaker 3: Can we turn to Tom's big focus. At the moment,

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Speaker 3: we thought we'd all be bailed out on the growth

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Speaker 3: side by Chinese reopening. We've had a couple of segnals

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Speaker 3: manufacturing PMI in the last week. Some company earnings indicate

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Speaker 3: that maybe the reopening and this boom we might get

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Speaker 3: this year is a little bit of a head fake.

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Speaker 3: Where do you come down on that?

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Speaker 6: Now, Well, the Chinese restart, the reopening has been is

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Speaker 6: likely going to be very domestic focused. You see consumers

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Speaker 6: spending more and travels during the past bank holiday week

439
00:21:28,920 --> 00:21:31,960
Speaker 6: has been a very strong, So consumer is going to

440
00:21:31,960 --> 00:21:36,280
Speaker 6: play a big role in this restart, which potentially limits

441
00:21:36,920 --> 00:21:39,920
Speaker 6: the magnitude to which actually can come to the rescue

442
00:21:40,040 --> 00:21:45,159
Speaker 6: of developed market economy and the recession. FOTOLED. We're still

443
00:21:45,600 --> 00:21:48,320
Speaker 6: of the view that Chinese growth can clog above six

444
00:21:48,359 --> 00:21:51,119
Speaker 6: percent for this year, but we're also still of the

445
00:21:51,200 --> 00:21:54,880
Speaker 6: view that in the US we're likely heading into recession

446
00:21:54,920 --> 00:21:57,719
Speaker 6: second half of the year, especially as consumers starts to

447
00:21:57,800 --> 00:22:01,240
Speaker 6: kind of rundown on their savings offer and their spending

448
00:22:01,280 --> 00:22:02,600
Speaker 6: appetite is starting to store.

449
00:22:02,720 --> 00:22:05,280
Speaker 2: You're one of the most important Chinese voices in the

450
00:22:05,320 --> 00:22:08,280
Speaker 2: Western world right now with black Rock, with your prodigious

451
00:22:08,280 --> 00:22:11,800
Speaker 2: abilities in mathematics and the zeitgeist I see among corporate

452
00:22:11,880 --> 00:22:16,560
Speaker 2: officers is to expand off the Pacific rim Western China,

453
00:22:16,720 --> 00:22:19,920
Speaker 2: to not be in two cities or three cities, including Beijing,

454
00:22:20,480 --> 00:22:23,639
Speaker 2: but to move into five, six, seven cities. John mentioned

455
00:22:23,720 --> 00:22:27,119
Speaker 2: LVMH the other day. It's an example of this. Do

456
00:22:27,200 --> 00:22:29,880
Speaker 2: you perceive that there can be a three year, five year,

457
00:22:30,000 --> 00:22:35,080
Speaker 2: ten year expansion by Western companies into other China cities?

458
00:22:35,400 --> 00:22:38,800
Speaker 2: Are we always wedded to Hong Kong, Shanghai and Beijing.

459
00:22:39,600 --> 00:22:43,320
Speaker 6: I think when it comes to managing geopolitical risks and

460
00:22:43,400 --> 00:22:50,280
Speaker 6: diversifying geopolitical risks, I think it's really important to recognize

461
00:22:50,280 --> 00:22:54,800
Speaker 6: that the word today is more intertwined. It's more intertwined,

462
00:22:55,160 --> 00:22:58,560
Speaker 6: and the trade linkages are stronger as well. So no

463
00:22:58,640 --> 00:23:02,359
Speaker 6: longer can we just face dull political risk premier. We

464
00:23:02,440 --> 00:23:04,800
Speaker 6: have to kind of think about persistent risk premier as

465
00:23:04,840 --> 00:23:08,960
Speaker 6: we construct portfolios, and when it comes to China risks

466
00:23:09,320 --> 00:23:13,000
Speaker 6: and spreading that out both for investors and corporations, I

467
00:23:13,000 --> 00:23:15,280
Speaker 6: think there is a certain direction of travel.

468
00:23:15,359 --> 00:23:17,760
Speaker 3: Certainly, welly, this is wonderful. It's got to say it.

469
00:23:17,760 --> 00:23:19,480
Speaker 3: It always says here in New York City, Well leave

470
00:23:19,520 --> 00:23:20,640
Speaker 3: blank Rolt, thank you very much.

471
00:23:31,440 --> 00:23:32,720
Speaker 1: Let's switch to Apple here.

472
00:23:33,280 --> 00:23:36,720
Speaker 2: Twenty eight percent per year return over the last ten

473
00:23:36,800 --> 00:23:39,679
Speaker 2: years is different than the banks. Thomas fourteen knows us

474
00:23:39,720 --> 00:23:44,440
Speaker 2: his senior research analyst Da Davidson's on this afternoon's festivities. Tom,

475
00:23:44,480 --> 00:23:47,119
Speaker 2: I know there's lots of strategic ideas out there as well.

476
00:23:47,440 --> 00:23:49,000
Speaker 1: I went back on the Bloomberg folks.

477
00:23:49,040 --> 00:23:52,800
Speaker 2: So FA's screen on the Bloomberg is just absolutely stunning

478
00:23:53,400 --> 00:23:58,440
Speaker 2: and the shares taken in their Intel like except Apple.

479
00:23:58,240 --> 00:23:59,080
Speaker 1: Is minting money.

480
00:23:59,119 --> 00:24:02,320
Speaker 2: I'm like fifteen years ago when Intel wasn't and the

481
00:24:02,400 --> 00:24:05,320
Speaker 2: share buybacks over the last number of years have been

482
00:24:05,359 --> 00:24:06,600
Speaker 2: absolutely extraordinary.

483
00:24:06,760 --> 00:24:08,840
Speaker 1: Are they going to drop a bombshell.

484
00:24:08,320 --> 00:24:11,680
Speaker 2: Today on use of cash on dividend and further new

485
00:24:11,720 --> 00:24:12,639
Speaker 2: share buybacks?

486
00:24:13,320 --> 00:24:14,960
Speaker 10: I think it's going to be a reminder that Apple

487
00:24:15,040 --> 00:24:17,800
Speaker 10: generates a ton of free cash flow and if you're

488
00:24:17,840 --> 00:24:20,120
Speaker 10: not going to buy the stock and Warren Buck it's

489
00:24:20,160 --> 00:24:21,000
Speaker 10: not going to buy the stock.

490
00:24:21,400 --> 00:24:24,560
Speaker 11: Apple's going to buy the stock. So I expect.

491
00:24:24,320 --> 00:24:28,840
Speaker 10: Another increase in their share repurchase plan. When you couple

492
00:24:28,920 --> 00:24:31,560
Speaker 10: that with their dividend, the dividend yields still quite modest.

493
00:24:31,920 --> 00:24:34,680
Speaker 10: Are they returning a lot of that free cash alow

494
00:24:34,760 --> 00:24:37,800
Speaker 10: to generate back to shareholders? And I think that's contributing

495
00:24:37,840 --> 00:24:40,040
Speaker 10: to the strong performance for the stock.

496
00:24:40,800 --> 00:24:42,840
Speaker 1: What's your glide path on revenue.

497
00:24:42,880 --> 00:24:44,399
Speaker 2: I know they had a couple of years ago a

498
00:24:44,400 --> 00:24:48,280
Speaker 2: big pandemic boom, everybody had to buy a computer at home.

499
00:24:48,320 --> 00:24:49,520
Speaker 1: Maybe they were giving them out.

500
00:24:49,440 --> 00:24:53,199
Speaker 2: At First Republic Bank, But what is a single digit

501
00:24:53,320 --> 00:24:55,640
Speaker 2: revenue glide path of Apple forward?

502
00:24:56,560 --> 00:24:59,320
Speaker 10: So if you think about Apple on a near term basis,

503
00:24:59,560 --> 00:25:02,679
Speaker 10: they should benefit from the reopening of China, the end

504
00:25:02,760 --> 00:25:05,840
Speaker 10: of the Chinese government COVID zero policy to the extent

505
00:25:05,880 --> 00:25:08,760
Speaker 10: that ten percent of their sales are to Chinese consumers.

506
00:25:09,400 --> 00:25:12,400
Speaker 10: They have seen some softness in some of their economically

507
00:25:12,480 --> 00:25:17,280
Speaker 10: sensitive revenue, including advertising, think of it as advertising for

508
00:25:17,280 --> 00:25:21,119
Speaker 10: app downloads, especially in mobile gaming. But there's recent to

509
00:25:21,160 --> 00:25:25,359
Speaker 10: expect that as the economy improves and on the strength

510
00:25:25,480 --> 00:25:30,240
Speaker 10: continue strength of the iPhone on the five G network upgrade,

511
00:25:30,520 --> 00:25:33,200
Speaker 10: that Apple may be able to sustain double digit top

512
00:25:33,200 --> 00:25:33,840
Speaker 10: line growth.

513
00:25:34,080 --> 00:25:35,960
Speaker 11: The good news is that there's.

514
00:25:35,840 --> 00:25:39,840
Speaker 10: Easing of a very significant headwind in FX to the

515
00:25:39,880 --> 00:25:42,959
Speaker 10: extent of the dollar weekend materially versus pound the year

516
00:25:43,000 --> 00:25:46,000
Speaker 10: on the Japanese yen in the March quarter versus December reporter,

517
00:25:46,720 --> 00:25:49,399
Speaker 10: So there's reasonably optimistic that revenue growth can improve.

518
00:25:49,440 --> 00:25:52,840
Speaker 5: Going from here, Tom, We've written some stories that talk

519
00:25:52,880 --> 00:25:55,880
Speaker 5: about the stealth move away from China, away from production

520
00:25:55,960 --> 00:25:58,360
Speaker 5: in China, and away from just in general, how big

521
00:25:58,359 --> 00:26:01,360
Speaker 5: the Apple footprint is there. Are you expecting to hear

522
00:26:01,400 --> 00:26:05,520
Speaker 5: anything about costs incurred on that transition away from the

523
00:26:05,520 --> 00:26:07,080
Speaker 5: second largest economy in the world.

524
00:26:08,320 --> 00:26:11,800
Speaker 10: The answer is yes. And Tim Cook is an amazing CEO.

525
00:26:12,000 --> 00:26:14,200
Speaker 10: I refer to him as CEO by day and diplomat

526
00:26:14,240 --> 00:26:16,639
Speaker 10: by night. But he has a challenge here to the

527
00:26:16,680 --> 00:26:20,760
Speaker 10: extent that he has to broaden his supply chain and

528
00:26:20,840 --> 00:26:24,639
Speaker 10: move out of China to some degree. The good news

529
00:26:24,720 --> 00:26:26,920
Speaker 10: is that as he expands into India, he kind of

530
00:26:26,920 --> 00:26:29,520
Speaker 10: has the footprint of what he did in China, or sorry,

531
00:26:29,560 --> 00:26:31,639
Speaker 10: the game plan of what he did in China and

532
00:26:31,720 --> 00:26:34,359
Speaker 10: mirror that for India. But yes, I think they have

533
00:26:34,440 --> 00:26:38,280
Speaker 10: to more than stealthily diversify their supply chain so they're

534
00:26:38,359 --> 00:26:39,440
Speaker 10: less dependent on China.

535
00:26:39,840 --> 00:26:41,959
Speaker 5: And I think that's going to be a challenge, especially

536
00:26:41,960 --> 00:26:44,199
Speaker 5: at a time when companies seem to be rewarded for

537
00:26:44,240 --> 00:26:47,400
Speaker 5: saying chat, GPT or artificial intelligence, and it's very difficult

538
00:26:47,520 --> 00:26:50,560
Speaker 5: to talk about these high high fallutant ideas when it's

539
00:26:50,560 --> 00:26:52,919
Speaker 5: just nuts and bolts moving things around the world and

540
00:26:52,920 --> 00:26:55,679
Speaker 5: trying to put things together. Is there anything in the

541
00:26:55,760 --> 00:26:58,639
Speaker 5: latest hot trend that Apple can hang on to for

542
00:26:58,760 --> 00:27:01,360
Speaker 5: future growth or are they kind of tied to an

543
00:27:01,400 --> 00:27:04,399
Speaker 5: old economy kind of reality that's very much tied in

544
00:27:04,400 --> 00:27:05,080
Speaker 5: the physical world.

545
00:27:06,000 --> 00:27:06,200
Speaker 11: Yeah.

546
00:27:06,240 --> 00:27:11,080
Speaker 10: So Tim Cook last quarter talked about AI as being a.

547
00:27:10,640 --> 00:27:13,480
Speaker 11: Horizontal technology, not a vertical one.

548
00:27:13,760 --> 00:27:15,960
Speaker 10: So when you think about Apple and AI, they're using

549
00:27:16,000 --> 00:27:17,920
Speaker 10: AI on many levels.

550
00:27:18,119 --> 00:27:20,880
Speaker 11: I think of Siri as an example, and I think

551
00:27:20,880 --> 00:27:21,840
Speaker 11: that what you're going.

552
00:27:21,680 --> 00:27:25,119
Speaker 10: To see is that I'm of the belief that longer

553
00:27:25,200 --> 00:27:29,639
Speaker 10: term they could totally create a car versus just having

554
00:27:29,720 --> 00:27:32,320
Speaker 10: kind of the consumer facing operating system in the car

555
00:27:32,359 --> 00:27:35,000
Speaker 10: with CarPlay. That would be leveraging a lot of our

556
00:27:35,160 --> 00:27:38,800
Speaker 10: artificial intelligence. Depending on your view of you know, the

557
00:27:38,840 --> 00:27:42,160
Speaker 10: metaverse and I'm in a reality and virtuality, there's opportunities

558
00:27:42,160 --> 00:27:45,600
Speaker 10: there as well. I think Apple is quietly using artificial

559
00:27:45,640 --> 00:27:50,240
Speaker 10: intelligence on many levels. Microsoft's better at pr Apple, I

560
00:27:50,280 --> 00:27:52,440
Speaker 10: would arguse better at technology.

561
00:27:52,280 --> 00:27:55,880
Speaker 3: Some that them there. That is not the first time

562
00:27:55,920 --> 00:27:59,760
Speaker 3: I've heard that. Are you suggesting pretty obviously the youth

563
00:27:59,800 --> 00:28:02,520
Speaker 3: think that the company that we're all looking at for

564
00:28:02,600 --> 00:28:05,040
Speaker 3: some kind of AI revolution. It's just the one that's

565
00:28:05,040 --> 00:28:06,639
Speaker 3: doing a better p on job right now.

566
00:28:08,359 --> 00:28:09,640
Speaker 11: I absolutely feel that way.

567
00:28:09,800 --> 00:28:12,760
Speaker 10: Although it is hard to debate who's better at PR

568
00:28:13,600 --> 00:28:14,800
Speaker 10: Apple versus anybody.

569
00:28:15,240 --> 00:28:16,800
Speaker 11: I mean, Apple is amazing at PR.

570
00:28:17,320 --> 00:28:20,120
Speaker 10: Yes, I love the belief that when it comes to AI,

571
00:28:20,320 --> 00:28:25,280
Speaker 10: when you compare Microsoft and Apple and Google, Microsoft's doing

572
00:28:25,280 --> 00:28:26,399
Speaker 10: the best job in PR.

573
00:28:27,840 --> 00:28:29,520
Speaker 2: I didn't think we were going to have this conversation.

574
00:28:29,600 --> 00:28:32,440
Speaker 2: That's brilliant, John, Thanks for bringing that up. Tom Forte.

575
00:28:32,520 --> 00:28:34,760
Speaker 2: What's the glide path and the chip? I always go

576
00:28:34,920 --> 00:28:38,720
Speaker 2: back to the A series of chips. Is there room

577
00:28:38,800 --> 00:28:42,760
Speaker 2: for improvement to evermore amaze us with their chip development

578
00:28:42,920 --> 00:28:45,320
Speaker 2: over the next two or three generations?

579
00:28:46,160 --> 00:28:46,920
Speaker 11: The answer is yes.

580
00:28:47,120 --> 00:28:49,440
Speaker 10: The beauty of Apple is the next device is always

581
00:28:49,520 --> 00:28:52,080
Speaker 10: the fastest and the best. And I think that when

582
00:28:52,120 --> 00:28:54,400
Speaker 10: you saw them take some of their chip production and

583
00:28:54,520 --> 00:28:58,440
Speaker 10: chip design in house, that enables them going back to

584
00:28:58,480 --> 00:29:01,640
Speaker 10: PR to promote how this product's better and to get

585
00:29:01,680 --> 00:29:02,440
Speaker 10: us up grade.

586
00:29:02,600 --> 00:29:04,800
Speaker 11: So yes, I think the glide path is a good one.

587
00:29:04,800 --> 00:29:05,000
Speaker 6: There.

588
00:29:05,240 --> 00:29:07,040
Speaker 3: I tell Gret to catch out, thank you, sir. Some

589
00:29:07,160 --> 00:29:09,520
Speaker 3: forty that if the idivisinc.

590
00:29:09,200 --> 00:29:13,080
Speaker 2: Subscribe to the Bloomberg Surveillance Podcast on Apple, Spotify, and

591
00:29:13,200 --> 00:29:17,400
Speaker 2: anywhere else you get your podcasts. Listen live every weekday,

592
00:29:17,680 --> 00:29:21,160
Speaker 2: starting at seven am Eastern. I'm Bloomberg dot Com, the

593
00:29:21,280 --> 00:29:25,800
Speaker 2: iHeartRadio app, tune In, and the Bloomberg Business app. You

594
00:29:25,840 --> 00:29:29,880
Speaker 2: can watch us live on Bloomberg Television and always I'm

595
00:29:29,920 --> 00:29:31,000
Speaker 2: the Bloomberg Terminal.

596
00:29:31,400 --> 00:29:35,600
Speaker 1: Thanks for listening. I'm Tom Keen, and this is Bloomberg