Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller. Every business day we bring
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
Speaker 1: with essential market moving news. Find the Bloomberg Markets podcast
Speaker 1: called Apple Podcast or wherever you listen to podcasts, and
Speaker 1: at Bloomberg dot com slash podcast. Folks, this is going
Speaker 1: to be an interesting week for You're supposed to say
Speaker 1: good stuff when John Tucker has done. You're supposed to
Speaker 1: always say good stuff, Good stuff, John Tucker, good stuff,
Speaker 1: Justina does it? Oh my gosh, okay um. Moving on
Speaker 1: from John Tucker, also good stuff. On the Techer Innings front,
Speaker 1: We're gonna get Netflix later this week. We're gonna get
Speaker 1: a lot of MidCap names as well. And who better
Speaker 1: to dive into what to expect and all the jazz
Speaker 1: around these tech companies right now than our very own
Speaker 1: Bloomberg Technology senior analysts on Grana and man Deep sing
Speaker 1: A lot to digest here ONAG. I want to start
Speaker 1: with you on the big tech names here, because to
Speaker 1: have a ainable equity market rally, you have to have
Speaker 1: your Apples, your Microsoft's, on your side. Why aren't they
Speaker 1: right now? So the big question is what's going to
Speaker 1: be guidance for the rest of the year. Um, we
Speaker 1: all know that things are slowing down in enterprise to expending.
Speaker 1: Cloud is going to slow down. PC sales are bad.
Speaker 1: We even expect enterprise you know course software to start decelerating.
Speaker 1: But the question is, you know how much of that
Speaker 1: is already baked into the stock price. So I think
Speaker 1: guidance is going to be extremely critical when we go
Speaker 1: onto the next owning season from all these vendors, hang
Speaker 1: on when are they coming out with earnings? Microsoft's next week,
Speaker 1: Apples the week after that, and Apple is going to
Speaker 1: be very different as well because of supply chain you
Speaker 1: know issues we have seen that they may miss on
Speaker 1: the iPhone side. So the question really is how's the
Speaker 1: buy side going to treat that, because you know, in
Speaker 1: our view, whatever we lose in this quarter, we're gonna
Speaker 1: gain back in the next quarter. Mandeep, what are you
Speaker 1: looking for in the companies you I can never sort
Speaker 1: out which companies You guys cover what you do social
Speaker 1: media and like the internet stuff? More consumer tech, say
Speaker 1: more enterprise tech. So consumer tech is very different enterprise tech.
Speaker 1: Is a code word for what's enterprise tech actually means
Speaker 1: just business to business stuff. Got it. Okay, so you
Speaker 1: have Alphabet, you have Meta, Uh, Uber, Airbnb? Are they
Speaker 1: all coming out next week or in the next two weeks?
Speaker 1: And uh, Look, I think when I say it, and
Speaker 1: I mentioned this before on your show, that there was
Speaker 1: a massive pull forward when it comes to a lot
Speaker 1: of consumer tech companies during COVID times. We had a
Speaker 1: period where they are resetting the comps. Next year, the
Speaker 1: comps are going to be easier. The problem for a
Speaker 1: company like Alphabet is they're operating profit grew hud so
Speaker 1: they went from forty billion inter operating profit to eight billion.
Speaker 1: Now that is the sort of comp I mean, it
Speaker 1: will take them probably two years to reset that. So
Speaker 1: they pull forward two years of operating profit growth in
Speaker 1: one year during that COVID time, and I think that
Speaker 1: is a challenge for someone like Alphabet to an extent
Speaker 1: Meta as well. But when you say pull forward, that
Speaker 1: means they took it from two and three and put
Speaker 1: it in one. Is it really the case? I mean,
Speaker 1: are the the revenue they get from ads? Right? For
Speaker 1: the most part ad spending. It's not like companies that
Speaker 1: we're spending a lot in are gonna not spend in three.
Speaker 1: So you have a confluence of negative factors right now.
Speaker 1: Notably the Apple I d f A changes. That was
Speaker 1: a ten billion dollar drag on Meta's revenue for two
Speaker 1: same thing. It's not going to dissipate anytime soon. Then
Speaker 1: AD pricing in general is coming down because we are
Speaker 1: headed for slower growth or probably a recession. So during
Speaker 1: times like this, ad pricing compresses. It will bounce back,
Speaker 1: but it's very cyclical. And then businesses in general, small businesses,
Speaker 1: which is the bulk of Meta's ads spent, they are
Speaker 1: pulling back again a slow growth times. And that's what
Speaker 1: I mean by pull forward because during the COVID phase,
Speaker 1: Meadows revenue grew almost average. The reason why that happened
Speaker 1: is small businesses did very well. It was all online.
Speaker 1: They were spending a lot of money on ads to
Speaker 1: acquire customers. Well, you're running into tough comps. Plus, businesses
Speaker 1: are pulling back because ad spending is the easiest thing
Speaker 1: to pull back on when times are tough. So UM
Speaker 1: HONORAG we were talking earlier. There's a story in the
Speaker 1: Bloomberg about UM executives at Davos. Their expectations are for
Speaker 1: horrendous and awful recession. But that's because the survey was
Speaker 1: done in October and November. Right in December and January,
Speaker 1: we've turned a lot more positive. Um is that the
Speaker 1: case for these companies as well. So typically what happens is,
Speaker 1: you know, take spending is sometimes driven by the sentiment
Speaker 1: that we see in the NASTAC how the NASTAC performs.
Speaker 1: Now I did this correlation many many years ago, but
Speaker 1: if you look at it just on the spending side
Speaker 1: of it, last five years have been phenomenal for software spending.
Speaker 1: You know, the top twenty software companies grew at an
Speaker 1: average in that time frame. So it's going to be
Speaker 1: very difficult to come up with that level of performance
Speaker 1: again this year. Now, our big thesis is that whatever
Speaker 1: we lose this year, you know, we will recover it
Speaker 1: the next year or the year after, depending on how
Speaker 1: long this slowdown is. And and partially the reason why
Speaker 1: we think is, you know, we think there are still
Speaker 1: a lot of very old systems out there that need
Speaker 1: to be upgraded. I mean point in time, you know, Southwest,
Speaker 1: the f a A, all those things, I mean legacy,
Speaker 1: it T spending dominates total I T spending. So all
Speaker 1: those companies slowly and slowly need to upgrade their systems,
Speaker 1: which is a bull case for software, but perhaps not
Speaker 1: in three Well, that's exactly where I want to go.
Speaker 1: I think we had me and Deep on Bloomberous Valance
Speaker 1: radio months ago. I remember you coming up with a
Speaker 1: stat uh and it was something like in the next
Speaker 1: ten years. I think it's like, I can't remember, was
Speaker 1: billions or trillions? It was like four or five billion
Speaker 1: or trillion, I can't remember. I know those are different
Speaker 1: numbers UM spending on cloud infrastructure. So I'm wondering. And
Speaker 1: that's something you're hearing from these bank earnings as well.
Speaker 1: That sure, some of these compensation expenses are coming down,
Speaker 1: but the tech expenses are coming up. How long does
Speaker 1: that bowl case or that tail when A was just
Speaker 1: talking about take to actually play out. Well, I would
Speaker 1: say there are certain things that are secular in nature
Speaker 1: in this market. Cloud spending is one of them, and
Speaker 1: that when when these secular trends play out, they play
Speaker 1: out ten twenty years, It's gonna take years before we
Speaker 1: are fully migrated to cloud. And plus there is a
Speaker 1: lot of new innovation going on a lot of AI.
Speaker 1: You know, machine learning is being done on cloud. These
Speaker 1: are I mean very expensive workloades to run Chat GPT's
Speaker 1: waiting to see would bring that up a one month
Speaker 1: bill of jack chief. It would be way above then
Speaker 1: how much a traditional it costs to run. So that's
Speaker 1: where I think cloud infrastructure is a real secular tail wind.
Speaker 1: And look, there are certain structural headwinds for a lot
Speaker 1: of these companies. And that's where you're gonna pick winners
Speaker 1: and losers is which ones are exposed to the circular
Speaker 1: trends and which ones aren't. So let's go near term
Speaker 1: the man deep in the next few weeks when we
Speaker 1: get some of these earnings roll out, who's gonna get
Speaker 1: it right, who's gonna get it wrong? I think you've
Speaker 1: seen a lot of negative revisions already. So a name
Speaker 1: like Snapchat has seen top line come down, estimates come
Speaker 1: down by about consensus numbers are down a lot, same
Speaker 1: thing for a lot of other small caps like Roudblocks
Speaker 1: now with large caps, Google estimates are down ten percent.
Speaker 1: That doesn't mean they're gonna crush it or the you know,
Speaker 1: the sentiment will be positive after the report, So that's
Speaker 1: where you have to really match how far the expectations
Speaker 1: have come down. They haven't come down, and uh like
Speaker 1: for a name like Airbnb. Now, I do think there
Speaker 1: was a pope forward even with airbnbs growth because of reopening,
Speaker 1: it lasted two years. Guess what there will be a
Speaker 1: slowdown period after that, and I think that's where they're exposed.
Speaker 1: We've been waiting to hear about this a lot in
Speaker 1: the last six months as while we started this an
Speaker 1: Apple and Microsoft as well at this slowdown is already here.
Speaker 1: To what extent are we going to see more pain
Speaker 1: in the first quarter or is this is so the
Speaker 1: way we look at it right now, the estimates look fair.
Speaker 1: We don't see a bigger downdraft on that, which is
Speaker 1: why I said guidance going into the next quarter or
Speaker 1: next this earning is going to be very critical. If
Speaker 1: the count these companies are income, they come report and
Speaker 1: able to match the expectations of the buy side on
Speaker 1: the south side, and then you could see them rivers
Speaker 1: you know, the trend of the stock prices going downwards. However,
Speaker 1: if they come back and say, you know, things are
Speaker 1: really getting even worse, then you have another leg down.
Speaker 1: But one of the big things that I've said is,
Speaker 1: you know, for us, the big you know, I'm not
Speaker 1: truly concerned about the length of the cloud cycle or
Speaker 1: the funding behind it that I'm very happy or very
Speaker 1: comfortable about it. But but I do not know that
Speaker 1: where the ten year is going to be by the
Speaker 1: end of the year. If the ten year is around
Speaker 1: where it is, then tech stocks should be fine. But
Speaker 1: if it starts to go up inflation creeps back again,
Speaker 1: then tech is going to have a horrendous second half.
Speaker 1: So it's there is a lot that's tied up with
Speaker 1: the interest rates rather than just the earning side operating business.
Speaker 1: What are the typical valuations that you see on the
Speaker 1: enterprise side, So it depends on who you're looking at,
Speaker 1: and you know, you look at somebody like a Microsoft
Speaker 1: eighteen nineteen times. You know, a couple of years ago
Speaker 1: it was thirty times earnings. But that all the all
Speaker 1: the you could say, the squeeze and the valuation has
Speaker 1: to do with the with the ten year climbing up
Speaker 1: quite a bit. You could say the same thing about
Speaker 1: Apple apples. Now in eighteen nineteen times it used to
Speaker 1: be over thirty times for for a while. So if
Speaker 1: ten year keeps on going up, that number keeps on
Speaker 1: coming down. I mean that's really where we are at
Speaker 1: this point. Sorry, men Deep, you what kind of valuations
Speaker 1: do you see or does it matter? And the companies
Speaker 1: you cover because they don't necessarily make profits, well yes
Speaker 1: that is a factor. But for a name like Alphabet,
Speaker 1: you know you have to ask yourself when will they
Speaker 1: grow operating profit? Because that is going to determine the
Speaker 1: floor in terms of valuation. Right now, the market isn't clear.
Speaker 1: They aren't believing the consensus numbers that they can grow
Speaker 1: operating profit even low singles did. If they prove that,
Speaker 1: I think that may be very well. All right, Man
Speaker 1: Deep Sing Senior Analysts Technology at Bloomberg Intelligence. Honoragu Raga,
Speaker 1: also at Tech Analysts, Bloomberg Intelligence, Thanks very much, always
Speaker 1: great your round table. Speaking of four twenty, we are
Speaker 1: going to talk about weed right now. Chris Violas, the
Speaker 1: CEO of Blaze, joins us to talk about technology platform
Speaker 1: that they that they operate um or or at least
Speaker 1: get to businesses to operate in order to sell uh
Speaker 1: marijuana products. And I think it's such a fascinating story.
Speaker 1: We cover this a lot in this program because it's
Speaker 1: like we're watching the beginning of an industry, you know,
Speaker 1: the end of prohibition, and we can see the kind
Speaker 1: of revenue that this generates, not just for the businesses,
Speaker 1: but also for states. We recently covered this right the
Speaker 1: very well, the first the first one in New York.
Speaker 1: UM and I believe they use Blaze technology. Chris, let's
Speaker 1: get over Chris right now, Chris Viola's CEO Blaze. Tell
Speaker 1: us about your product, what what what do you offer
Speaker 1: that's helping this budding industry. Man. Well, thank you, Creety,
Speaker 1: thanks for having me on. I'm really excited to be here.
Speaker 1: But to get to the point, Blaze is a retail
Speaker 1: point of soap platform really empowering about sixteen percent of
Speaker 1: North America dispensaries today. So anything from inventory control to
Speaker 1: checking out and actually facilitating that transaction to the compliance
Speaker 1: that goes on behind it, that's all Blaze powering these
Speaker 1: beautiful retailers that are doing such work, including Housing Works. Yeah.
Speaker 1: Housing Works is of course the charity that opened the
Speaker 1: first marijuana dispensary, recreational dispensary in New York, and there
Speaker 1: are I think twenty three other states where marijuana is legal, um,
Speaker 1: but it's not federally and that presents a problem for
Speaker 1: these retailers in terms of taking credit cards, in terms
Speaker 1: of you know, the payment point systems, how does how
Speaker 1: does that work? How do you kind of get around
Speaker 1: the federal law. Yeah, it's obviously there's a conflict there.
Speaker 1: So when it comes to these payment types, really there's
Speaker 1: only a few options we have. UM. As with anything
Speaker 1: we do, we want to be as open and transparent
Speaker 1: and complying as possible. So credit cards are off the table.
Speaker 1: We don't touch that except for in Canada where it
Speaker 1: is federally legal. But when we're talking about the US,
Speaker 1: we really only have two options at this point. Obviously
Speaker 1: we can take cash. I guess three options. That's one.
Speaker 1: The second would be a c H So you know,
Speaker 1: this is really likened too when you go on to
Speaker 1: then though, when you connect your bank account um and
Speaker 1: start to send money either directly to a person or
Speaker 1: directly to another business. We can certainly facilitate that today.
Speaker 1: That's a direct to direct type of transaction. And then
Speaker 1: the second is our Blaze pay program, which is the
Speaker 1: pin debit based solution where the user, the consumer go
Speaker 1: ahead and insert their card with a chip, entering their
Speaker 1: pin number, and then from there we can directly transact
Speaker 1: against that specific bank account. So how does that work?
Speaker 1: More specifically, I noticed that at Empire, at the Empire
Speaker 1: Cannabis Club, if you ring up a hundred thirty five dollars, right,
Speaker 1: they'll debit you for one forty and then actually give
Speaker 1: you the five dollars and change. I don't know what's
Speaker 1: going on there, So that's a that's a different solution
Speaker 1: than what we like to to use here at Blaze.
Speaker 1: That is called cashless a t M. And essentially what
Speaker 1: they're doing with that specific solution is are actually turning
Speaker 1: that debit terminal into what we call an a a
Speaker 1: t M. And there's your round up, right, each time
Speaker 1: you withdraw from an ATM machine, it's got to be
Speaker 1: specific denominations. In this case, you know by by five,
Speaker 1: so by one forty you'll get five dollars back on
Speaker 1: that transaction. That being said, um, why that solution is functional,
Speaker 1: it's not our what we consider to be the most
Speaker 1: optimal solution requires that to spend. Sure, you carry more
Speaker 1: cash on hand to facilitate the cash back. UM, but
Speaker 1: it is relatively straightforward the same concept of a direct
Speaker 1: withdrawal from that bank, So it is an option there.
Speaker 1: So then when you're looking at the long term for
Speaker 1: you for your own company, what kind of timeline are
Speaker 1: you looking at where you don't have to have these
Speaker 1: workarounds when it comes to payments. A pretty great question.
Speaker 1: I wish I had that magic ball, m But at
Speaker 1: the end of the day, we feel that with such
Speaker 1: explosive growth in this industry, we're all trying to be compliant,
Speaker 1: both the operators and the service providers that that obviously
Speaker 1: service them. So my hope is in the next you know,
Speaker 1: three or four years, UM, we we see some movement.
Speaker 1: Obviously there's a talks from the Safe Banking Act obviously
Speaker 1: not going through this last quarter, but in general we
Speaker 1: are hopeful. Um. We really feel like Canada's also, you know,
Speaker 1: set the stage in terms of normalizing that the payment systems.
Speaker 1: So we're hopeful. Um. That being said, we still have
Speaker 1: a long way to go, and I wouldn't say we
Speaker 1: have a direct line of site just yet. But does
Speaker 1: it annoy you that we haven't gotten safe banking or
Speaker 1: is it actually better for your business? Because hear me
Speaker 1: out well, or maybe you know this is clear to you.
Speaker 1: The longer it doesn't pass, the more these dispensaries need
Speaker 1: you and you get to kind of dig your heels
Speaker 1: in in terms of market share. Yeah, look, it's a
Speaker 1: great question. Obviously we're balancing both the business ablaze as
Speaker 1: well supporting our retailers. At the end of the day,
Speaker 1: though this business was started by myself and then a
Speaker 1: few other founders were formal operators, so you know, our
Speaker 1: ethos series really to enable those retailers and make sure
Speaker 1: that as successful as possible. So I do hope you
Speaker 1: can reduce the cash I do hope we can uh
Speaker 1: reduce some of the work around. So yes, while that
Speaker 1: may not might not help our margins directly, I think
Speaker 1: it's the right thing for the industry and the right
Speaker 1: thing to really move this forward. Um you see anywhere
Speaker 1: outside of cannabis, folks being able to use Apple Pay
Speaker 1: and some of these really cool techniques to transact and
Speaker 1: obviously reduce that friction at checkout. That is really our
Speaker 1: main goal here is to help enable retailers to sell
Speaker 1: more and part of that's reducing the friction wherever the
Speaker 1: consumer wants to check out and whatever they want to
Speaker 1: check out with. So what kind of opposition are are
Speaker 1: you facing right now? I mean on your day to
Speaker 1: day how much pushback are you really getting UM with
Speaker 1: regards to the payment solutions or just competit the payments socritions. Yeah,
Speaker 1: not not much. I mean, look, these operators understand that
Speaker 1: they're in a difficult situation. It's really about finding that
Speaker 1: local banking provider that first off, go ahead and have
Speaker 1: a depository account with you and be able to to
Speaker 1: just facilitating well day to day banking needs, but at
Speaker 1: the same time UM being able to supply not just
Speaker 1: the payment side, but we also Ablaze Capital, which is
Speaker 1: an aventory finance and solutions. So we understand there's a
Speaker 1: lot of barriers for these for these retailers. So wherever
Speaker 1: we can use our economies of scale and you know,
Speaker 1: our FI plus dispensaries to help benefit and bring a
Speaker 1: solution forward, we obviously want to do that. So I
Speaker 1: would say between us and the and the retailers is
Speaker 1: not much friction. UM. They're looking for help and so
Speaker 1: whatever we can do to provide them with some assistance,
Speaker 1: I mean, they're usually pretty open to it. Any plans
Speaker 1: for an IPO what's the capital structure look like. Yeah,
Speaker 1: I know we're private today. UM have raised this in
Speaker 1: or nineteen million across the board, all through um VC
Speaker 1: type of funding. UM. But you know, as with everybody
Speaker 1: in this economy, we're really focused on profitability, and so
Speaker 1: we do a blinding site this year to profitability and
Speaker 1: we want to control our future. And so when the
Speaker 1: markets do turn, UM, do you turn around and look
Speaker 1: upward for and I on the positive, you know, it's
Speaker 1: definitely something that we're not going to rule out. But
Speaker 1: at this point, you know, I'd say it's been a
Speaker 1: benefit for us to stay private. Thank you to you
Speaker 1: next to you on our plan? All right, Chris, thanks
Speaker 1: so much for joining us. Fascinating stuff. Chris violis there,
Speaker 1: CEO of Blaze. They help cannabis dispensaries sell more WED
Speaker 1: Let's bring in our guests right now to talk about
Speaker 1: what's going on in these markets, a lot of it
Speaker 1: dictated by bank earnings. We've just seen the final of
Speaker 1: the Big six UM report. Brent Shooty joins US chief
Speaker 1: investment strategists from Northwestern Mutual UH chief investment officer, sorry
Speaker 1: from Northwestern Mutual, as well as Alice and Williams, Senior
Speaker 1: Global Banks and Asset Managers analysts from Bloomberg Intelligence. Brent,
Speaker 1: let me first ask you your take on the bank
Speaker 1: earnings UM Goldman Sachs falling by the most since well
Speaker 1: in a year, I guess today after missing UM revenue estimates.
Speaker 1: How do you see this batch of bank earnings changing
Speaker 1: your strategy or informing your strategy. Yeah, I don't think
Speaker 1: it's changing it too much. I mean, to me, the
Speaker 1: macro so what's happening in the global economy matters much
Speaker 1: much more than earnings, not to say that they're not important.
Speaker 1: They do kind of represent who's gonna win and who's
Speaker 1: going to lose from a relative perspective, But overall, the
Speaker 1: most important thing right now is where is the economy headed?
Speaker 1: In three where's inflation headed? And what is the FED
Speaker 1: going to do? And I think that the better tone
Speaker 1: that you've had to the start of the year is
Speaker 1: because you are seeing inflation come down and certainly expectations
Speaker 1: of FED future tightening is coming down against the backdrop
Speaker 1: of an economy that hasn't yet fallen into recession. I
Speaker 1: think that's where you're seeing optimism. Alison hop On in
Speaker 1: here because as Matt pointed out, the what feels like
Speaker 1: the driving story at least for the TAO is going
Speaker 1: to be those bank earnings. How much of what we've
Speaker 1: gotten from them is a sector specific story as opposed
Speaker 1: to a macroeconomic store and both. I mean they're going
Speaker 1: in completely different directions, right, Morgan Stanley is up seven. Yeah,
Speaker 1: I think the news today is a little bit more
Speaker 1: company specific UM. And to your point, Matt, it is
Speaker 1: interesting the economy and performance, and that is because Goldman
Speaker 1: Sachs reporting a comprey show which is UH the highest
Speaker 1: in several years. UH. Solomon had warned that the coast
Speaker 1: to compete was not coming in UM as much as
Speaker 1: would be expected UM, but perhaps the results were even
Speaker 1: more dramatic than we expected in terms of the increase
Speaker 1: in comp comp was down for the year, but only
Speaker 1: something like while revenue is down, and so I think
Speaker 1: comp and head count that's that's really the story of Goldman.
Speaker 1: Provision for credit costs, which is a broad MACO macro
Speaker 1: economic indicator, was a bit worse. I'll come back to
Speaker 1: that in one second. For Morgan Stanley, it was really
Speaker 1: the wealth business, which is the crown jewel for that
Speaker 1: company out performing if you will, um and and sort
Speaker 1: of negative expectations coming into the quarter. Net interest income
Speaker 1: for which we heard about last week. I don't know
Speaker 1: if I would call that macro. I mean, it is
Speaker 1: tied to monetary policy, but not interesting come coming in
Speaker 1: softer for most of the biggest lenders, and that's really
Speaker 1: just due to the costs of their deposits rising. Think
Speaker 1: of that, as their costs of good sold rates are
Speaker 1: going up. They've gotten the benefit. Now they have to
Speaker 1: start passing some of that onto customers. Morgan Stanley's not
Speaker 1: interest income did hold up a little bit better. That
Speaker 1: feels pretty macro. I mean the broader theme we've been
Speaker 1: talking about with banks CEOs for years. I was stationed
Speaker 1: in Germany for the past six years, and they really
Speaker 1: complained about the lack of net interest income and low rates.
Speaker 1: I mean, zerp or Nerve was really problematic for these banks. Sprent.
Speaker 1: You know, it's a point that I think is really interesting.
Speaker 1: We can get kind of back to business as usual
Speaker 1: now that we get away from extraordinary monetary policy. Does
Speaker 1: that mean something to you? Absolutely? I mean, I mean
Speaker 1: to me, I still think we're going to have a recession.
Speaker 1: This year, and so you know, I do think that
Speaker 1: the fet is you know, intently focused on the labor
Speaker 1: market and not going to stop until they actually see
Speaker 1: the labor market crack, which I guess, I don't know
Speaker 1: if it's good or bad. I think it's probably closer
Speaker 1: than further away. But certainly, the the large rate hikes
Speaker 1: are a thing of the past, and I think they're
Speaker 1: gonna start coming down. Uh. And if you think about
Speaker 1: the last couple of years, I mean, we had maximum
Speaker 1: policy to the upside, and then I think last year
Speaker 1: was maximum policy to the downside. I think this is
Speaker 1: a bit of a transition year where we slow the
Speaker 1: hikes and hopefully stop the hikes when that labor market
Speaker 1: does crack. Um. But certainly I think I think from
Speaker 1: a volatility standpoint, that will bring down volatility, especially towards
Speaker 1: the end of the year, when we finally see that, yes,
Speaker 1: we are likely to have a recession, but it will
Speaker 1: be short, mild, and uneven. So you mentioned macro back
Speaker 1: and forth. Some sectors will win, some sectors will lose. Uh.
Speaker 1: And I think the other side of this is better
Speaker 1: days ahead. But certainly, until we get to that point,
Speaker 1: I think you're gonna see a back and forth volatility perspective,
Speaker 1: but not as much as it was last year when
Speaker 1: the FED was at certainly on the elevator up on
Speaker 1: the rate hike cycle. Provisions. Alison, you said, you get
Speaker 1: back to I think this is well for me. I'm
Speaker 1: watching very closely to see how barish these banks are
Speaker 1: in terms of their recession forecast. Can you read that?
Speaker 1: Can you read that into big low and lost provisions? Generally,
Speaker 1: the provisions that we've seen a lot of the grow,
Speaker 1: A lot of the provisions has been due to loan
Speaker 1: growth because card is the seasonally strongest in the fourth quarter,
Speaker 1: we saw balances. It's also the highest charge of rates,
Speaker 1: so that generally portends to have somewhat higher provisions we
Speaker 1: have seen. I would say that the banks in general
Speaker 1: have signaled some weakening of an economic outlook, but nothing dramatic.
Speaker 1: City Group saying on Friday that they were reserving to
Speaker 1: sort of a five to five point one percent unemployment rate,
Speaker 1: so um some positioning there in terms of UH and
Speaker 1: giving you some detail around around their outlook. Imagine a
Speaker 1: five and a half percent unemployment rate, well five to
Speaker 1: five point one percent, five but still um and Uh,
Speaker 1: so I think that, and and JP Morgan has said,
Speaker 1: you know that five to six percent unemployment would be
Speaker 1: five to six billion of reserve building for them. They
Speaker 1: did reserve build reserves by about one point four billion
Speaker 1: this quarter. About one billion was that was consumer. That
Speaker 1: relates to some of the growth that I mentioned. Um,
Speaker 1: but they said that part of the other part of
Speaker 1: that is marking to market towards those you know, other expectations,
Speaker 1: just as we're seeing some weakening. So not calling for
Speaker 1: that yet, but just reserving towards that. So let's let's
Speaker 1: fold in what what Brent was just talking about when
Speaker 1: it comes to what the sector as a whole is
Speaker 1: trading off of. Is it really taking its que I
Speaker 1: mean naturally from the brown market, but is it taking
Speaker 1: its que from something like uh the two stents bread
Speaker 1: for example, and then compressed margins in that direction, or
Speaker 1: is it taking its cue from say cap yields as
Speaker 1: a result of FED cuts priced into the market. What
Speaker 1: what does the stock trade off of the stocks tend
Speaker 1: to trade off of tues tends that's not really the
Speaker 1: yield curve that impacts that's that most meaningful to their earnings,
Speaker 1: but that tends to be the biggest UM indicator for
Speaker 1: the stocks. I think in general, when they've been reacting
Speaker 1: to earnings, it has been the initial reaction has been
Speaker 1: to the net interest income. We talked a little bit
Speaker 1: about some of the reactions UM today. I do think
Speaker 1: that in the months ahead, really the focus is on
Speaker 1: unemployment and credit costs. Even though these banks will argue
Speaker 1: and part of the reason why they talk about how
Speaker 1: their reserves is just show look we have, like are
Speaker 1: the pre tax pre provision profits so profit before these
Speaker 1: losses is so strong, it's well covered. UM capital is
Speaker 1: very strong. They've built that up. UM, it's still uncertain,
Speaker 1: and it's hard for bank stocks to outperform as you're
Speaker 1: sort of going into things. They need to sort of
Speaker 1: see the other side or see things getting better. Brent,
Speaker 1: how does the China reopening or the better than expect
Speaker 1: to numbers out of Europe influence your your position? I mean,
Speaker 1: have you gotten less bearish in the last few months
Speaker 1: because it seems like others have have shifted. Yeah. I
Speaker 1: mean I've been optimistic because inflation is coming down a
Speaker 1: certainly trying to reopening to put up our pressure on commodities.
Speaker 1: But I think in general the US, you are seeing
Speaker 1: inflation pull back, and I don't know if people have
Speaker 1: made enough of this, but if you look at all
Speaker 1: in CP I uh less shelter, So the part that's
Speaker 1: lagging the it's actually negative over the last six months,
Speaker 1: and so you're starting to see that inflation come down,
Speaker 1: which to me is still the most important variable that's
Speaker 1: out there. I think it accelerates, but as I mentioned before,
Speaker 1: I do think you're going to kind of shift to
Speaker 1: recession worries because I do think you're going to start
Speaker 1: seeing the labor market crack just a bit. But tying
Speaker 1: it into what was just said, I think the other
Speaker 1: side of this is nearer rather than further away, because
Speaker 1: I think inflation will fall quite a bit, which will
Speaker 1: allow the Federal Reserve to potentially pivot if they need to,
Speaker 1: to keep any such recession short and mild, which I
Speaker 1: think is the most important variable for anybody's outlook. How
Speaker 1: How deep do you think the recession is, how long
Speaker 1: do you think it lasts? And I don't stilln't think
Speaker 1: it's either deep or long, which informs kind of a
Speaker 1: positive outlook towards the back half of the year, which
Speaker 1: unfortunately I think is consensus, but certainly I think still
Speaker 1: likely given that I think inflation is starting to create her.
Speaker 1: But to be cleared, you don't expect the FED to
Speaker 1: cut rates this year, do you. This is where I'm
Speaker 1: not I'm not for sure. I mean this is where
Speaker 1: I think it's more important that I think they'll be
Speaker 1: able to pause and then if they need to to
Speaker 1: keep any recessions from being deeper, they will be able
Speaker 1: to cut rates because inflation expectations are actually right where
Speaker 1: they want them. I find it ironic that we came
Speaker 1: into this time pere. I think people forget that the
Speaker 1: FED was trying to get inflation expectations up and the
Speaker 1: five to ten year universe missions at three percent, that
Speaker 1: is exactly where it was when times are more normal,
Speaker 1: not the past five or six years. We're worried about deflation.
Speaker 1: So this is where I think that that needs to
Speaker 1: cut our stop. All right, Brent Shooty from Northwestern Mutual.
Speaker 1: Alice Williams from Blue Word Intelligence, thanks very much for
Speaker 1: joining us. This is Bloomberg. Let's bring in Ira Jersey
Speaker 1: right now, Bloomberg Chief rates correspondent for Bloomberg Intelligence. Ira, Uh,
Speaker 1: what do you make of the change in. UM, I
Speaker 1: guess perception we've gone from we just heard Dennis Gartman
Speaker 1: say bearish to at least mildly bullish, and we've changed
Speaker 1: our expectations a bit for the FED as well. We've
Speaker 1: even had FED speakers come out and say, you know what,
Speaker 1: twenty is cool in February. Yeah, we've I was expecting
Speaker 1: a downshift in after the December meeting. Actually, you know,
Speaker 1: the FED and FED speakers have been talking about the
Speaker 1: fact that they need to kind of calibrate where ultimately
Speaker 1: the FED FUNDRAI is going to end up. And I
Speaker 1: think we are nearing that point. You know, then markets
Speaker 1: certainly pricing for you know, two maybe three more um,
Speaker 1: three more hikes of twenty five bases points. So so
Speaker 1: so it's not a big surprise. I think that they're
Speaker 1: going to go twenty five in at the February meeting. UM.
Speaker 1: You know, today's price action is interesting in and of
Speaker 1: itself because initially we were, um, we were initially bear stepening,
Speaker 1: and now we're bull stepening. So so two year yields,
Speaker 1: you know, have rallied quite a lot in in over
Speaker 1: the last couple of hours, and UH, in particular after
Speaker 1: that Empire survey. It's like the lack of news is
Speaker 1: just pushing the market around quite a lot. That's exactly
Speaker 1: what I want to ask you about that Empire survey.
Speaker 1: It was like the worst since May, the worst data
Speaker 1: going back to I think the global financial crisis as well,
Speaker 1: that coming from a camera Cris on our Markets Live
Speaker 1: blog as well. But do we really need to take
Speaker 1: stock in that data set? Yeah, I'm I'm not sure.
Speaker 1: I think that a lot of the volatility we're seeing
Speaker 1: as position based, and you just have people who don't
Speaker 1: want to take big positions one way or the other,
Speaker 1: so you wind up seeing outside moves even when you
Speaker 1: get you know, data that is kind of second tier.
Speaker 1: I mean, i'd say that the Empire Survey typically doesn't
Speaker 1: move the treasury market more than a basis point or
Speaker 1: two um after its release. But but I do think, yes,
Speaker 1: it was very weak. You saw the inflation components, so
Speaker 1: the price is paid and the prices receives component um
Speaker 1: falls significantly. But but as someone noted to me earlier today, um,
Speaker 1: we had this this head fake in uh the Empire
Speaker 1: Survey last September as well, and and things just bounced
Speaker 1: right back. So so I don't know if we can
Speaker 1: take a lot out of this one number, but that
Speaker 1: seems to be one of the big drivers of the
Speaker 1: market at least today, so Irah. Matt Miller, in addition
Speaker 1: to buying one ticket for himself and one ticket for
Speaker 1: his motorcycle in Europe, also says, you know, look, the
Speaker 1: Federal Reserve is going to be the bigger meeting um
Speaker 1: next to the e c B in about two weeks time.
Speaker 1: But Ira, can I take the flip side on that?
Speaker 1: Is it fair to say that maybe the e c
Speaker 1: B is kind of the bigger spotlight right now? Well,
Speaker 1: I think I think they're almost equally as important, and
Speaker 1: certainly from a market follow hilogy standpoint, I think that
Speaker 1: the pick you can't pick your favorite child. Come on, well,
Speaker 1: I mean, the Fed's my favorite child. I mean us
Speaker 1: right strategists. But um, but but I think the ECB
Speaker 1: is is a little bit more doubtful. I think at
Speaker 1: this point, Um, it's mostly baked in the cards that
Speaker 1: that the Fed's gonna go five. And you look at
Speaker 1: the market pricing right now and it's it's more or
Speaker 1: less twenty five with a small chance of fifty um.
Speaker 1: Whereas the e c b people just aren't sure not
Speaker 1: only you know, how quickly they're going to go, but
Speaker 1: how high they're actually going to ultimately hike. And and
Speaker 1: I think the um there's a lot of uncertainty around
Speaker 1: around Europe because their economy is much weaker than the
Speaker 1: US economy, but their inflation continues to run much higher
Speaker 1: than the U S and than U S inflation. So
Speaker 1: so I think there's just a lot more doubt around
Speaker 1: what's going on in Europe, and that's going to generate
Speaker 1: more volatility, um you know, not only in things like
Speaker 1: German bombs and the periphery, but also in also in
Speaker 1: global developed market rates. So here and even Japan and
Speaker 1: Japan is an interesting interesting well, I mean they got
Speaker 1: to be the most interesting, um you know, if not
Speaker 1: the most biggest mover. Yeah, so huge, huge mover relative right, Matt.
Speaker 1: Because one of the things that remember that the job
Speaker 1: the Bank of Japan had been doing is buying ten
Speaker 1: year Japanese government bonds at ten basis points, right, So,
Speaker 1: so they didn't let it float, and then they let
Speaker 1: it float a little bit more up to basis points.
Speaker 1: Now it's fifty basis points and right now, as of
Speaker 1: overnight um ten year Japanese government bonds actually are trading
Speaker 1: above half percent, above fifty basis points, and that means
Speaker 1: that that the Bank of Japan is going to have
Speaker 1: to intervene and come in and buy more bonds. But
Speaker 1: there's a lot of talk they're going to get rid
Speaker 1: of that buying program altogether, and that could even generate
Speaker 1: even more about what happens then, I because you know,
Speaker 1: the rate spen above fifty basis points for three of
Speaker 1: the last four trading sessions, not including today, and so
Speaker 1: I guess four out of five now, and they've bought
Speaker 1: more than a hundred billion dollars worth of jgbs in
Speaker 1: the last four sessions. So what happens if they just
Speaker 1: let go? Yeah? So I think that you wind up seeing,
Speaker 1: you know, maybe something not that similar to what happened
Speaker 1: in UH in the guilt market UH last year, where
Speaker 1: you wind up seeing maybe a fourty or fifty basis
Speaker 1: points sell off in a hurry in ten year tenure
Speaker 1: Japanese notes. But but interestingly, I think, and and look,
Speaker 1: I'm not an expert on the Japanese government bond market,
Speaker 1: but what I what I do know and what I
Speaker 1: have seen, is that thirty year Japanese government bond yields
Speaker 1: have gone up significantly because that's not what the Bank
Speaker 1: of Japan was targeting, and they haven't been buying that sector.
Speaker 1: So anyone who needed to hedge long term interest rate
Speaker 1: risk was selling thirty years. So I think you could
Speaker 1: have this weird dynamic where thirty year Japanese yields might
Speaker 1: actually rally a little bit as people start selling more
Speaker 1: ten years, and you can actually see the ten year
Speaker 1: thirty year curve actually actually flattened quite a lot, with
Speaker 1: the ten year sector really underperforming on that curve, and
Speaker 1: and that will generate volatility globally. Now I think ultimately
Speaker 1: in the US it might be worth ten or fifteen
Speaker 1: basis points in the tenure. But we'll but but but
Speaker 1: that will stabilize and we'll focus on domestic issues here.
Speaker 1: Ira Jersey, our chief US rate Strategies for Bluebery Intelligence.
Speaker 1: Thanks very much for joining us. Thanks for listening to
Speaker 1: the Bloomberg Markets podcast. You can subscribe and listen to
Speaker 1: interviews with Apple Podcasts or whatever podcast platform you prefer.
Speaker 1: I'm Matt Miller. I'm on Twitter at Matt Miller. Yet
Speaker 1: on Fall Sweeney, I'm on Twitter at pt Sweeney. Before
Speaker 1: the podcast, you can always catch us worldwide at Bloomberg
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