Speaker 1: This is the Bloomberg Surveillance Podcast.
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Speaker 3: Coatraining it down to join this now port filio manager
Speaker 3: at Franklin Mitchell Seriestina. Can we start that the difference
Speaker 3: in the inflation that the eurosone is experiencing right now
Speaker 3: and that we are home in the United States. Is
Speaker 3: there a big difference from your perspective.
Speaker 4: We need to think about what's generating the inflation in
Speaker 4: the Eurozone region and what has been generating it. And
Speaker 4: the war in Ukraine has really not come to light
Speaker 4: for such a long period of time, but that's really
Speaker 4: what is reflected in those European inflation numbers. It's the
Speaker 4: fact that someone cut off the gas supply and we
Speaker 4: need to replace that gas, and that is the inflation
Speaker 4: that people are dealing with. But we keep talking about it,
Speaker 4: and I think it's so important. It's the reaction of
Speaker 4: the governments that we have been very very positive upon
Speaker 4: in terms of that incremental help that they're providing to
Speaker 4: their citizens. And I think that that is where there's
Speaker 4: that disconnect, is that the population is actually quite happy
Speaker 4: because they're getting support and they're getting help, so they're
Speaker 4: not protesting in the streets.
Speaker 2: What's fascinating to me, and this came up at the
Speaker 2: meetings of the IMF, and we have Reguard John When
Speaker 2: is Leguard like in an hour? Thankfully five, it's going
Speaker 2: to be here in she's speaking a different language to
Speaker 2: a different culture and fabric. And I wonder, within all
Speaker 2: your study by university, all the work you've done in equities,
Speaker 2: are we at a point where we can say they've
Speaker 2: gone beyond eurosclerosis and that they have a financial structure
Speaker 2: more like us, more Anglo Saxon, if you will, than
Speaker 2: what we knew when we were studying this.
Speaker 4: It's trying to pansitioning. I think that the bond market
Speaker 4: in the Eurozone is still not as robust as the
Speaker 4: bond market that we see in the United States. And
Speaker 4: what does that mean is that your companies don't go
Speaker 4: into bankruptcy that is driven by the bondholders and the
Speaker 4: breaching of those covenants because the debt is held in
Speaker 4: the banks, and the banks tend to be wanting to
Speaker 4: work with their customers on a longer period of time.
Speaker 4: So even though you've had that transition, it's not being
Speaker 4: a really noticeable one. But look, they're data dependent. I mean,
Speaker 4: who does not want to hear the fact that the
Speaker 4: people running the ECB are looking at the data and
Speaker 4: they're being informed by the data, and they're saying that,
Speaker 4: you know, the core inflation number is still high. It's
Speaker 4: at five point six percent on a core basis. That's
Speaker 4: significantly above two. We're not talking the difference between two
Speaker 4: and three. We're talking you're multiple points higher. And they
Speaker 4: need to I think forcefully was the word, but they
Speaker 4: need to really push that number down.
Speaker 5: So we haven't seen it it yet. Data dependency is
Speaker 5: a key phrase on the show where you're going to
Speaker 5: have an alarm go off and then we'll say, well,
Speaker 5: what exactly do you mean by that?
Speaker 6: Right?
Speaker 5: And it means something different for everybody. For right now,
Speaker 5: the Federal Reserve, it means a Senior Loan Officer survey
Speaker 5: and perhaps what happens with respect to two regional banks
Speaker 5: in Europe? Is it just core inflation? Is that the
Speaker 5: pre eminent data dependency that we're looking at.
Speaker 4: I think that they're looking at multiple of factors. They're
Speaker 4: looking at what's happening in spreads in the periphery and
Speaker 4: we saw that about a year ago where you saw
Speaker 4: that blowout and spreads in Italy and the ECB reacted,
Speaker 4: So that's one area of data they're looking at. They
Speaker 4: are looking at inflation. They're also looking at Eurozone in
Speaker 4: your employment metrics because one of the mechanisms for your
Speaker 4: inflation it needs to be wager dross adjustment because people
Speaker 4: need to get that to be able to cope with it.
Speaker 4: And so they're looking at whether or not those higher
Speaker 4: wages are causing employees to be laid off. So there's
Speaker 4: a lot of different factors they're looking at.
Speaker 3: Katrina, thank you, thank you, jumping on into the studio
Speaker 3: and catching up with a thank t. Don't think that
Speaker 3: Franklin Mitchell on the l likes to say CP decision.
Speaker 1: Right now.
Speaker 2: Stephen Raschudo joins is Steve Rashudo's chief economis at Mizuo,
Speaker 2: and yes it is on the American economy. But Steven,
Speaker 2: I got to start with the EU here and the
Speaker 2: challenges that Madame Leguard faces. The idea here is the
Speaker 2: animal spirit of the United States, our technical superiority.
Speaker 1: Say Apple earnings this afternoon is one.
Speaker 2: Example, gives us a certain as Ned Phelps of Columbia
Speaker 2: would say, dynamism. Does Europe have the dynamism to have
Speaker 2: a higher interest rate regime? Well, part of the problem
Speaker 2: that they face is is all the conditions that you
Speaker 2: just laid out. But in addition, there is a demographic issue,
Speaker 2: and there is a wage subsidy issue, which certainly adds
Speaker 2: to the whole concept of the whole eurosclerosis discussion that
Speaker 2: we had been having for years about Europe. And I
Speaker 2: think Europe is aging rapidly and they're finding a way
Speaker 2: not to keep their best educated people on the sidelines
Speaker 2: in a very comfortable lifestyle.
Speaker 1: At least.
Speaker 2: I want to note the eual craters here. I mean,
Speaker 2: this is widely anticipated by John Ferrell, the ear craters.
Speaker 1: As I would say on a radio, do a one.
Speaker 5: Ten twenty one, yeah to one one exactly here this
Speaker 5: is what I'm watching. Actually, it's exactly the chart that
Speaker 5: I have up, not just because I'm waiting for it
Speaker 5: to break out of the one ten range, but.
Speaker 1: Steve to be proven correct.
Speaker 5: I'm curious. I don't know what correct would mean for
Speaker 5: me at this point, but I will I'm curious about whether, Steve,
Speaker 5: you think people have overplayed the Europe's strength story, the
Speaker 5: ability to withstand both higher rates and consistent growth. That
Speaker 5: was sort of the consensus heading into this meeting, and
Speaker 5: then all of a sudden they took the lesser of
Speaker 5: the two options with the ECB today, and then in
Speaker 5: the US you see that the data is still strong.
Speaker 5: Does this underscore something that is important?
Speaker 7: Well, I think there is that measure, and I think
Speaker 7: when you're looking at the oil numbers, just I know
Speaker 7: people are talking about a fat finger mistake in terms
Speaker 7: of the client in oil, but I think what you're
Speaker 7: seeing is globally around the world, you're not seeing the
Speaker 7: kind of resilience. You're not seeing it coming out of
Speaker 7: the Chinese opening, You're not seeing it coming out of Europe,
Speaker 7: and I think, yeah, there's a greater potential for Europe
Speaker 7: to run into resistance. Especially I heard one of your
Speaker 7: commentators talking earlier today about the fact that Europe has
Speaker 7: a much closer connection in terms of its mortgage environment
Speaker 7: relative to the interest rate environment than we do in
Speaker 7: the United States because we have fixed rate mortgages. They
Speaker 7: have adjustable rate mortgage and that result is they have
Speaker 7: a bigger economic impact from what's going on.
Speaker 5: Well, let's build on that, because I was wondering whether
Speaker 5: their mortgage situation is akin to the regional banking situation
Speaker 5: in the US. You need the nodes of stress that
Speaker 5: are emerging are distinct depending on what kind of capital
Speaker 5: markets each region has. Do you think that the mortgage
Speaker 5: issue in Europe could become the new regional banking crisis
Speaker 5: in terms of people unable to pay for their monthly bills.
Speaker 1: Yeah.
Speaker 7: Without getting into the specifics of it, I think at
Speaker 7: this particular juncture, I think you're probably okay. And one
Speaker 7: of the reasons for it is because of the social
Speaker 7: safety net that's created in Europe. But I think in
Speaker 7: addition to that, you're in an environment where you know,
Speaker 7: people in Europe are quicker to adjust their spending as
Speaker 7: a result of this, So I think you know you're
Speaker 7: looking at a potential downturn in the economy relative to
Speaker 7: the strength everyone was looking for am I going to
Speaker 7: say it's going to be a deeper, significant downturn at
Speaker 7: this particular juncture.
Speaker 1: I can't make that.
Speaker 7: Call, but I do think it adds to the growth
Speaker 7: to the recession call forecast, as the regional bank problem
Speaker 7: adds to the recession forecast here. And if you look
Speaker 7: at all the data we've gotten out this week, you know,
Speaker 7: get much of its March data, some of it is
Speaker 7: April data.
Speaker 1: It's all strong.
Speaker 7: Even when you look at the claims number this morning,
Speaker 7: two forty two, between two fifty and between two hundred
Speaker 7: and two fifty, you're not in a recession that's residual.
Speaker 7: You've got to get into that two fifty to three
Speaker 7: are to start saying, okay, it's a really shallow recession.
Speaker 7: And then you keep on going up from there. And
Speaker 7: then you look at claim continuing claims they dropped again.
Speaker 7: So you know, we don't have that labor market issue
Speaker 7: that I think a lot of people are concerned about.
Speaker 2: Yet, if you just joining us on radio on television,
Speaker 2: Stephen Shooto of MISSOI where this we could go for
Speaker 2: three hours with them with the experience of the American economy.
Speaker 2: Let's turn to America right now, I want you to
Speaker 2: dovetail in with your colleague dominant Constum's idea of a
Speaker 2: FED with monetary policy but with other stuff, including the
Speaker 2: banking crisis, becoming a constanm states super restrictive. How close
Speaker 2: are we to reshoot out super restrictive?
Speaker 8: You know?
Speaker 7: I mean, I think the Federal Reserve has a way
Speaker 7: out of this that would be very, very simple, and
Speaker 7: I think one of the things that they should do
Speaker 7: immediately is end quantitative tightening. Part of the problem in
Speaker 7: the overall scenario for the outlook for the US economy
Speaker 7: is the fact that the Federal Reserve is taking down
Speaker 7: its balance sheet. And the Fed seems to believe taking
Speaker 7: down its balance sheet will not lead douart or dollar
Speaker 7: to taking down reserves. It is taking down reserves, and
Speaker 7: the net result is that's amplifying the problems. So the
Speaker 7: Federal Reserve, you know, this is the second time they've
Speaker 7: attempted to do both an interest rate increase and a
Speaker 7: quantitative tightening, and they've blown it both times.
Speaker 2: Okay, but is this like a British austerity? The United
Speaker 2: Kingdom buried itself with some philosophical twentieth century austerity a
Speaker 2: number of years ago. Do we have an austere Jerome Powell.
Speaker 7: Well, I think the Federal Reserve is overplaying its hand
Speaker 7: by using both quantitative tightening and interest rate policy at
Speaker 7: the same time. They should separate the two. They should
Speaker 7: use one at a time, and they should recognize that
Speaker 7: largely when you go into a quantitative easing standpoint, you
Speaker 7: do it and you assume it is permanent because you've
Speaker 7: done it because you're afraid of deflation. Okay, this concept
Speaker 7: that it's equivalent to an interest rate in reduction is wrong.
Speaker 1: We're in a free reserve environment.
Speaker 5: Building on that. Just over in Europe, when we are
Speaker 5: about six minutes from the press conference with Christine Legard,
Speaker 5: who heads the ECB, one person saying and Maria today,
Speaker 5: I'll bringing us this that the most key point for
Speaker 5: the press conference will be that they are ending reinvestment
Speaker 5: of the APP basically one of their main bond purchasing
Speaker 5: acid per programs. And this was sort of a nod
Speaker 5: to the Hawks to basically say, Okay, we are going
Speaker 5: to get rid of this program more quickly, even though
Speaker 5: we're not going to raise rates by fifty basis points.
Speaker 5: What are you looking for in terms of what Christine
Speaker 5: Legard has to say about this.
Speaker 7: Again, I think they're going to go down the same
Speaker 7: path that we've gone down. There is this misconception that
Speaker 7: what you put in you can take out. When you're
Speaker 7: looking at the reserves in the system, the bank's balance
Speaker 7: sheet expands to the level of reserves that are provided,
Speaker 7: and it's harder to shrink the balance sheet than it
Speaker 7: is to expand the balance sheet. And this is why
Speaker 7: the FED thinks, well, if we put it on all
Speaker 7: the automatic pilot, we read it, let it run in
Speaker 7: the background, everything's fine. Okay, that's fine to some extent,
Speaker 7: but you're also raising interest rates. So the reality is
Speaker 7: separate the two. Leave them as separate policies because they
Speaker 7: are distinctly separate policies guided for very distinctly different things.
Speaker 7: So I think what the FED should do and I
Speaker 7: think what the ECB should do is leave one alone,
Speaker 7: do one and then come back to the other. The
Speaker 7: ECB so far has only focused on one. The FED
Speaker 7: was doing both at the same time. We've gotten into
Speaker 7: a problem with less taking out of the system now
Speaker 7: than we did in twenty eighteen. In twenty nineteen.
Speaker 2: Don't be a stranger Stephen Raushudo where US was MISSOI
Speaker 2: just a terrific team between Steve Rushudo and Dominique.
Speaker 1: Constant joining us.
Speaker 2: Now our reporter Matthew Monks after removed markets and truly
Speaker 2: moved all of banking markets last night. Matthew, congratulations on
Speaker 2: your reporting as simple as I can. In the April
Speaker 2: twenty fifth statement by the leadership of pac West, they
Speaker 2: say that credit dynamics are steady. I found that really, really,
Speaker 2: really important. What are the credit metrics they have? Is
Speaker 2: it real estate on Rodeo Drive? What do they actually
Speaker 2: own away from the deposits.
Speaker 9: They have a lot of commercial real estate, so that's
Speaker 9: like multifamily apartment loans. They have a lot of business
Speaker 9: loans like sover bawling credit lines to business is they
Speaker 9: have a venture capital lending business.
Speaker 8: The important thing to understand here this is not a credit.
Speaker 9: Quality issue, uh not yet at least it's it's it's
Speaker 9: an interest rate issue, which means that these loans are
Speaker 9: no longer you know, worth what they were when they
Speaker 9: wrote them. They're you know, their market value is below par,
Speaker 9: but you know they're they're they're assuming that they all
Speaker 9: get paid back. You know they will be worth whole eventually,
Speaker 9: but it's really about the interest rate and the credit quality.
Speaker 8: Is it's holding steady, which is different than the last crisis.
Speaker 3: So Matt, let's talk about these strategic options, go through
Speaker 3: them one by one. What is on the table here
Speaker 3: and where you think the priority lies for leadership of
Speaker 3: this bank.
Speaker 9: So the ideal solution here would be some kind of
Speaker 9: UH rescue merger with another larger institution. It's it's it's
Speaker 9: a great franchise in California. There's a lot of people
Speaker 9: that be interested in expanding California. But the issue, like
Speaker 9: I said, it goes back to this kind of interest
Speaker 9: rate risk and those loans. Since they're not worth what
Speaker 9: they used to be, any potential buyer is going to
Speaker 9: have to take a substantial hit right out the gate
Speaker 9: marking down those loans, which would create a loss. So
Speaker 9: it makes it really really hard for someone to buy them.
Speaker 9: So obviously that would be the first priority for them,
Speaker 9: is to find a merger parting.
Speaker 8: But just getting someone to take that it would be
Speaker 8: an issue.
Speaker 5: Bet, we just saw the playbook with this, right, I mean,
Speaker 5: we just saw the idea that basically you just wait
Speaker 5: for the for the FDIC to come in and give
Speaker 5: you some sort of loan loss agreement and then all
Speaker 5: of a sudden it's a feasible purchase. Why is this
Speaker 5: not just going to end up in the same place.
Speaker 9: I don't know yet. If you can, I don't know.
Speaker 9: I'm trying to get a head wrapt around of this.
Speaker 1: Well.
Speaker 9: Now there is one possible reason. Now, this is a
Speaker 9: much smaller institution than First Republic. It's much smaller than
Speaker 9: a Silicon Valley bank. So potentially, you know, a bank
Speaker 9: could kind of step up in and eat a loss
Speaker 9: and make it worth their while.
Speaker 8: But it's kind of hard.
Speaker 9: To argue with, you know, getting a sweetheart deal from
Speaker 9: the FDIC.
Speaker 8: I guess, but it's all still to be determined. Matt.
Speaker 5: I don't want you to tip your hand, but I
Speaker 5: know that you speak with a lot of people in
Speaker 5: the world dealmaking. How much chatter is there about additional
Speaker 5: m and a about additional kinds of tie ups in
Speaker 5: the banking sector, perhaps under less distressed kinds of circumstances,
Speaker 5: to get ahead of this type of thing.
Speaker 8: I think everything's dead right now for the reason that
Speaker 8: I mentioned.
Speaker 9: I think long term, you're going to see a lot
Speaker 9: of consolidation, but right now everything is just kind of
Speaker 9: off the table, especially when you see that TD deal
Speaker 9: graveling this morning. If you're a large institution, how are
Speaker 9: you going to take that risk that it's going to
Speaker 9: get shot down? These deals take nine months close to
Speaker 9: begin with. Now you're going to do a deal and
Speaker 9: it's just going to be open ended. So no, I mean,
Speaker 9: I hate to say it, but unless it's kind of
Speaker 9: forced or distressed bank, m and A right now is dead.
Speaker 2: I mean, I don't want you to play sell side
Speaker 2: analysts here. That's not the Bloomberg way, Matthew Monks. But
Speaker 2: in your reporting, even if you have deposit stability from
Speaker 2: thirty five billion down to twenty eight billion, is the
Speaker 2: other side of the ledgers so diminished mark the market
Speaker 2: that they're at a net capital negative right now?
Speaker 1: I mean, is back west. I don't think zero capital.
Speaker 8: No, I don't think so. I don't think they're in solving.
Speaker 9: And then everybody that I was talking to last night,
Speaker 9: you know, wasn't indicating that they're solving. I mean, it's
Speaker 9: it's it's it's about investors in shorts selling down these
Speaker 9: banks and just being merciless Uh, all the institutional investors
Speaker 9: have led. You're not really seeing bargain investors kind of
Speaker 9: get into the stock. It's really it's just it's just
Speaker 9: investors sentiment that's just hammering these banks. I mean, the
Speaker 9: three larger banks that failed before these were really incredibly
Speaker 9: problematic banks with the one hundred billion of troubled assets
Speaker 9: on their balance sheets.
Speaker 8: It's it's not the case here.
Speaker 9: This is really it's actually it's a it's actually really
Speaker 9: nice franchise in pretty decent shape.
Speaker 8: It's just getting pummeled humbled bank investors.
Speaker 3: The deposit profile is so different compared to sleep and
Speaker 3: we can put some numbers on that with these. We
Speaker 3: did that a little bit earlier from a reporter's perspective
Speaker 3: for you, Are you focused on that? Are we focused
Speaker 3: on the right thing when we sit here and say
Speaker 3: depositive stabilized, which is something that bank the communicy?
Speaker 9: And yeah, absolutely, And I'm going back to the point
Speaker 9: that so I think eighty percent or so of their
Speaker 9: deposits are ensured that that that liquidity is not just
Speaker 9: going to run off in a heartbeat. And these you know,
Speaker 9: and these are these are insured kind of retail and
Speaker 9: commercial deposits. Uh, I don't think that we're seeing a
Speaker 9: run on them.
Speaker 8: So yeah, I'm absolutely focused on that.
Speaker 9: That's why I keep putting this message out here that
Speaker 9: it's it's a different situation than some of these other institutions.
Speaker 5: One of the listeners of the program had an amazing question,
Speaker 5: which is, essentially, what is what you're saying that the
Speaker 5: Fed has to cut rates to get bank consolidation to
Speaker 5: take place? Is that kind of what people are waiting for,
Speaker 5: that opportunity for perhaps a balance sheet that makes a
Speaker 5: little bit more sense.
Speaker 9: Yeah, well, I mean people are waiting for maybe the
Speaker 9: government to raise the deposit insurance cap. That's one thing
Speaker 9: that can kind of just stabilize thing and then maybe
Speaker 9: create stability for m and a federal reserve, you know,
Speaker 9: sluming its role when it comes into your straights. Yeah,
Speaker 9: at this point, the private market is definitely waiting for
Speaker 9: some kind of guidance from the government to stable life things,
Speaker 9: to foster consolidation one way or the other.
Speaker 3: Hey, matt one for the catch up with this tremendous reporting.
Speaker 3: Matt let's talk against so before the week is out,
Speaker 3: Thank you, sir. Matthew Monkster on the latest story with
Speaker 3: pack Web. Do you want to get to around the
Speaker 3: table right now? Whaley, Global Chief investment Strategist A black
Speaker 3: Rock Whaley, Let's talk about what Tom's discussing and build
Speaker 3: on it. We've had the rate shock, are you looking
Speaker 3: for some kind of credit shock to follow?
Speaker 6: We are expecting a version of credit tightening and crunch
Speaker 6: to come through to do some of the output destruction
Speaker 6: work for the fact, which is why we have now
Speaker 6: entered the beginning of the pause face. They signaled pause yesterday.
Speaker 6: We're expecting we're getting close to pick, if not at peak.
Speaker 6: But more importantly from the meeting yesterday is that they
Speaker 6: continue to consistently reiterate no for this year and markets
Speaker 6: upricing in three cards for this year, and that this
Speaker 6: connect is going to be a source of further market volatility.
Speaker 2: If I look at three months ten spread out one
Speaker 2: hundred and ninety three basis points, I can state I've
Speaker 2: never seen in a textbook. I've never thought about it.
Speaker 2: It never was back thirty years. It's a three standard
Speaker 2: deviation move, totally unprecedented. In your note, you talk about
Speaker 2: short term government paper. What will short term government paper
Speaker 2: do when in some form the three month ten year
Speaker 2: differential cracks.
Speaker 6: Well, we expect a short term government paper to give
Speaker 6: you income which we haven't had in fixed income for
Speaker 6: a very very long time. And that is notwithstanding the
Speaker 6: debt ceiling uncertainty. And that is notwithstanding this dispersion, this huge,
Speaker 6: huge kind of discrepancy in terms of yields that you
Speaker 6: get in three months versus ten years if you hold
Speaker 6: it out for maturity, some of that uncertainty also kind
Speaker 6: of washes away. The curve extremely inverted, is so inverted
Speaker 6: that we think the next movie is for ten year
Speaker 6: yields to do to come back up and curve to
Speaker 6: steepen from those extremely inverted inverted levels, which is why
Speaker 6: we long the front end, but we are less constructive
Speaker 6: on the long end of the curve.
Speaker 4: Well, DIDJ.
Speaker 5: Powell give you confidence that they had under control a
Speaker 5: sense of how deep some of the banking fissures go?
Speaker 6: Can he give anyone confidence that is at its juncture?
Speaker 6: Seeing that it's still early days, One thing I would
Speaker 6: say the all in terms of what's playing out in
Speaker 6: the banking sector is that we don't think this is
Speaker 6: a banking specific, systematic, systemic type of crisis. We think
Speaker 6: that this is just another expression of financial cracks appearing
Speaker 6: in response to the fastest ray high cycle since the eighties.
Speaker 6: Arguably what happened in the UK last September with the
Speaker 6: LDI guilt yield spike volatility episode was another expression of
Speaker 6: this financial cracks appearing. We know that as we fight
Speaker 6: inflation in a word shaped by supply cost of fighting
Speaker 6: inflation is higher and cracks would appear and it would
Speaker 6: carry economic cost. And that's starting to come.
Speaker 5: What's the next progression in this cascade of cracks that
Speaker 5: you see, and it's the only policy response that can
Speaker 5: really address this rate cuts or.
Speaker 6: Provision of liquidity. They have been very swift with that
Speaker 6: to start with, but now the boundary is getting blurred
Speaker 6: a little bit through the transmission channel of credit tidening.
Speaker 6: So which is why we're we think that we're basically
Speaker 6: at peak rate unless inflation surprises on the upside because
Speaker 6: of this huge uncertainty in terms of how big the
Speaker 6: credit crunch is likely going to be, and it's still
Speaker 6: early days to quantify precisely.
Speaker 3: Can we turn to Tom's big focus. At the moment,
Speaker 3: we thought we'd all be bailed out on the growth
Speaker 3: side by Chinese reopening. We've had a couple of segnals
Speaker 3: manufacturing PMI in the last week. Some company earnings indicate
Speaker 3: that maybe the reopening and this boom we might get
Speaker 3: this year is a little bit of a head fake.
Speaker 3: Where do you come down on that?
Speaker 6: Now, Well, the Chinese restart, the reopening has been is
Speaker 6: likely going to be very domestic focused. You see consumers
Speaker 6: spending more and travels during the past bank holiday week
Speaker 6: has been a very strong, So consumer is going to
Speaker 6: play a big role in this restart, which potentially limits
Speaker 6: the magnitude to which actually can come to the rescue
Speaker 6: of developed market economy and the recession. FOTOLED. We're still
Speaker 6: of the view that Chinese growth can clog above six
Speaker 6: percent for this year, but we're also still of the
Speaker 6: view that in the US we're likely heading into recession
Speaker 6: second half of the year, especially as consumers starts to
Speaker 6: kind of rundown on their savings offer and their spending
Speaker 6: appetite is starting to store.
Speaker 2: You're one of the most important Chinese voices in the
Speaker 2: Western world right now with black Rock, with your prodigious
Speaker 2: abilities in mathematics and the zeitgeist I see among corporate
Speaker 2: officers is to expand off the Pacific rim Western China,
Speaker 2: to not be in two cities or three cities, including Beijing,
Speaker 2: but to move into five, six, seven cities. John mentioned
Speaker 2: LVMH the other day. It's an example of this. Do
Speaker 2: you perceive that there can be a three year, five year,
Speaker 2: ten year expansion by Western companies into other China cities?
Speaker 2: Are we always wedded to Hong Kong, Shanghai and Beijing.
Speaker 6: I think when it comes to managing geopolitical risks and
Speaker 6: diversifying geopolitical risks, I think it's really important to recognize
Speaker 6: that the word today is more intertwined. It's more intertwined,
Speaker 6: and the trade linkages are stronger as well. So no
Speaker 6: longer can we just face dull political risk premier. We
Speaker 6: have to kind of think about persistent risk premier as
Speaker 6: we construct portfolios, and when it comes to China risks
Speaker 6: and spreading that out both for investors and corporations, I
Speaker 6: think there is a certain direction of travel.
Speaker 3: Certainly, welly, this is wonderful. It's got to say it.
Speaker 3: It always says here in New York City, Well leave
Speaker 3: blank Rolt, thank you very much.
Speaker 1: Let's switch to Apple here.
Speaker 2: Twenty eight percent per year return over the last ten
Speaker 2: years is different than the banks. Thomas fourteen knows us
Speaker 2: his senior research analyst Da Davidson's on this afternoon's festivities. Tom,
Speaker 2: I know there's lots of strategic ideas out there as well.
Speaker 1: I went back on the Bloomberg folks.
Speaker 2: So FA's screen on the Bloomberg is just absolutely stunning
Speaker 2: and the shares taken in their Intel like except Apple.
Speaker 1: Is minting money.
Speaker 2: I'm like fifteen years ago when Intel wasn't and the
Speaker 2: share buybacks over the last number of years have been
Speaker 2: absolutely extraordinary.
Speaker 1: Are they going to drop a bombshell.
Speaker 2: Today on use of cash on dividend and further new
Speaker 2: share buybacks?
Speaker 10: I think it's going to be a reminder that Apple
Speaker 10: generates a ton of free cash flow and if you're
Speaker 10: not going to buy the stock and Warren Buck it's
Speaker 10: not going to buy the stock.
Speaker 11: Apple's going to buy the stock. So I expect.
Speaker 10: Another increase in their share repurchase plan. When you couple
Speaker 10: that with their dividend, the dividend yields still quite modest.
Speaker 10: Are they returning a lot of that free cash alow
Speaker 10: to generate back to shareholders? And I think that's contributing
Speaker 10: to the strong performance for the stock.
Speaker 1: What's your glide path on revenue.
Speaker 2: I know they had a couple of years ago a
Speaker 2: big pandemic boom, everybody had to buy a computer at home.
Speaker 1: Maybe they were giving them out.
Speaker 2: At First Republic Bank, But what is a single digit
Speaker 2: revenue glide path of Apple forward?
Speaker 10: So if you think about Apple on a near term basis,
Speaker 10: they should benefit from the reopening of China, the end
Speaker 10: of the Chinese government COVID zero policy to the extent
Speaker 10: that ten percent of their sales are to Chinese consumers.
Speaker 10: They have seen some softness in some of their economically
Speaker 10: sensitive revenue, including advertising, think of it as advertising for
Speaker 10: app downloads, especially in mobile gaming. But there's recent to
Speaker 10: expect that as the economy improves and on the strength
Speaker 10: continue strength of the iPhone on the five G network upgrade,
Speaker 10: that Apple may be able to sustain double digit top
Speaker 10: line growth.
Speaker 11: The good news is that there's.
Speaker 10: Easing of a very significant headwind in FX to the
Speaker 10: extent of the dollar weekend materially versus pound the year
Speaker 10: on the Japanese yen in the March quarter versus December reporter,
Speaker 10: So there's reasonably optimistic that revenue growth can improve.
Speaker 5: Going from here, Tom, We've written some stories that talk
Speaker 5: about the stealth move away from China, away from production
Speaker 5: in China, and away from just in general, how big
Speaker 5: the Apple footprint is there. Are you expecting to hear
Speaker 5: anything about costs incurred on that transition away from the
Speaker 5: second largest economy in the world.
Speaker 10: The answer is yes. And Tim Cook is an amazing CEO.
Speaker 10: I refer to him as CEO by day and diplomat
Speaker 10: by night. But he has a challenge here to the
Speaker 10: extent that he has to broaden his supply chain and
Speaker 10: move out of China to some degree. The good news
Speaker 10: is that as he expands into India, he kind of
Speaker 10: has the footprint of what he did in China, or sorry,
Speaker 10: the game plan of what he did in China and
Speaker 10: mirror that for India. But yes, I think they have
Speaker 10: to more than stealthily diversify their supply chain so they're
Speaker 10: less dependent on China.
Speaker 5: And I think that's going to be a challenge, especially
Speaker 5: at a time when companies seem to be rewarded for
Speaker 5: saying chat, GPT or artificial intelligence, and it's very difficult
Speaker 5: to talk about these high high fallutant ideas when it's
Speaker 5: just nuts and bolts moving things around the world and
Speaker 5: trying to put things together. Is there anything in the
Speaker 5: latest hot trend that Apple can hang on to for
Speaker 5: future growth or are they kind of tied to an
Speaker 5: old economy kind of reality that's very much tied in
Speaker 5: the physical world.
Speaker 11: Yeah.
Speaker 10: So Tim Cook last quarter talked about AI as being a.
Speaker 11: Horizontal technology, not a vertical one.
Speaker 10: So when you think about Apple and AI, they're using
Speaker 10: AI on many levels.
Speaker 11: I think of Siri as an example, and I think
Speaker 11: that what you're going.
Speaker 10: To see is that I'm of the belief that longer
Speaker 10: term they could totally create a car versus just having
Speaker 10: kind of the consumer facing operating system in the car
Speaker 10: with CarPlay. That would be leveraging a lot of our
Speaker 10: artificial intelligence. Depending on your view of you know, the
Speaker 10: metaverse and I'm in a reality and virtuality, there's opportunities
Speaker 10: there as well. I think Apple is quietly using artificial
Speaker 10: intelligence on many levels. Microsoft's better at pr Apple, I
Speaker 10: would arguse better at technology.
Speaker 3: Some that them there. That is not the first time
Speaker 3: I've heard that. Are you suggesting pretty obviously the youth
Speaker 3: think that the company that we're all looking at for
Speaker 3: some kind of AI revolution. It's just the one that's
Speaker 3: doing a better p on job right now.
Speaker 11: I absolutely feel that way.
Speaker 10: Although it is hard to debate who's better at PR
Speaker 10: Apple versus anybody.
Speaker 11: I mean, Apple is amazing at PR.
Speaker 10: Yes, I love the belief that when it comes to AI,
Speaker 10: when you compare Microsoft and Apple and Google, Microsoft's doing
Speaker 10: the best job in PR.
Speaker 2: I didn't think we were going to have this conversation.
Speaker 2: That's brilliant, John, Thanks for bringing that up. Tom Forte.
Speaker 2: What's the glide path and the chip? I always go
Speaker 2: back to the A series of chips. Is there room
Speaker 2: for improvement to evermore amaze us with their chip development
Speaker 2: over the next two or three generations?
Speaker 11: The answer is yes.
Speaker 10: The beauty of Apple is the next device is always
Speaker 10: the fastest and the best. And I think that when
Speaker 10: you saw them take some of their chip production and
Speaker 10: chip design in house, that enables them going back to
Speaker 10: PR to promote how this product's better and to get
Speaker 10: us up grade.
Speaker 11: So yes, I think the glide path is a good one.
Speaker 6: There.
Speaker 3: I tell Gret to catch out, thank you, sir. Some
Speaker 3: forty that if the idivisinc.
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Speaker 1: Thanks for listening. I'm Tom Keen, and this is Bloomberg