WEBVTT - Disney Earnings Breakdown and Sticky Inflation Concerns 0:00:02.400 --> 0:00:06.760 Bloomberg Audio Studios, Podcasts, radio News. 0:00:11.800 --> 0:00:14.880 This is the Bloomberg Surveillance Podcast. I'm Paul Sweeney along 0:00:14.880 --> 0:00:17.240 with Tom Keene. Join us each day for insight from 0:00:17.239 --> 0:00:20.760 the best in economics, geopolitics, finance, and investment. You can 0:00:20.800 --> 0:00:24.439 also watch the show live on YouTube. Visit the Bloomberg 0:00:24.480 --> 0:00:27.760 Podcast channel on YouTube to see the show weekday mornings 0:00:27.760 --> 0:00:30.400 from seven to ten Eastern Remarked Global headquarters in New 0:00:30.480 --> 0:00:33.720 York City. Subscribe to the podcast on Apple, Spotify, or 0:00:33.760 --> 0:00:36.800 anywhere else you listen, and as always on Bloomberg Radio, 0:00:36.840 --> 0:00:39.720 the Bloomberg Terminal, and the Bloomberg Business app. Ken Leone 0:00:40.200 --> 0:00:45.479 Research Director CFR joints us here Ken, what do you 0:00:45.560 --> 0:00:48.440 make of the results from Mickey Mouse and Friends. 0:00:50.000 --> 0:00:52.840 Great to be with you, and this was a good 0:00:52.920 --> 0:00:57.440 block and Tackle quarter. It showed progression on the broader 0:00:57.560 --> 0:01:02.280 financial metrics of reducing costs and getting to their target 0:01:02.320 --> 0:01:04.960 this year of eight billion dollars of free cash flow. 0:01:05.400 --> 0:01:09.120 So there's financial discipline at Disney. But of course, as 0:01:09.200 --> 0:01:13.040 you've noted, there's a lot of moving parts, and ultimately 0:01:13.600 --> 0:01:18.280 what investors would like to see is growth that can 0:01:18.319 --> 0:01:25.480 get through this transition of linear networks. Declining, streaming businesses increasing, 0:01:25.959 --> 0:01:27.640 but how profitable will they be? 0:01:28.160 --> 0:01:29.880 How profitable do you think they're going to be? 0:01:31.040 --> 0:01:35.840 It's going to take time. Streaming is a very competitive business. 0:01:36.440 --> 0:01:40.360 Unlike other subscriber businesses of the past, like cable TV 0:01:40.600 --> 0:01:44.600 or even wireless, you have very high churn. Disney at 0:01:44.680 --> 0:01:49.160 least is discipline on the programming and content spending, which 0:01:49.200 --> 0:01:53.520 has come down significantly and in many cases pivoting their 0:01:53.560 --> 0:01:57.680 spend to sports from general entertainment. But I think the 0:01:57.760 --> 0:02:00.840 jury is still out there, and what we didn't see 0:02:00.840 --> 0:02:04.720 in the release today is yeah, the magic is there, 0:02:04.800 --> 0:02:08.400 but what investors want to see is how is Disney 0:02:08.480 --> 0:02:13.079 executing on a technology platform not just US or Global? 0:02:13.639 --> 0:02:19.120 Is there an AI component to their technology plans? And 0:02:19.240 --> 0:02:22.160 you know what, Netflix is doing that and they're there. 0:02:22.360 --> 0:02:24.800 So if you're going to be great at streaming, you 0:02:24.880 --> 0:02:26.200 have to be like Netflix. 0:02:27.320 --> 0:02:29.800 Ken, I guess you know, one of the challenges for 0:02:29.919 --> 0:02:33.000 the Walt Disney Company and pretty much most of the 0:02:33.000 --> 0:02:36.840 traditional media companies is just kind of that linear TV 0:02:37.240 --> 0:02:43.000 broadcast cable television business. And Disney reported, you know, weaker 0:02:43.080 --> 0:02:46.920 result sales fell about eight percent in the quarter. How 0:02:46.919 --> 0:02:49.320 do you think these traditional media companies kind of manage 0:02:49.880 --> 0:02:52.560 the longer term decline of those businesses. 0:02:54.120 --> 0:02:56.520 So what we're seeing, and it's a great question. And 0:02:56.560 --> 0:02:58.840 if we were all in business class, this would be 0:02:58.880 --> 0:03:02.280 a classic where you have a mature to declining business 0:03:02.360 --> 0:03:06.200 but it's still throwing off lots of cash trying to 0:03:06.240 --> 0:03:11.680 reinvest that and new growing businesses that hopefully have good 0:03:11.760 --> 0:03:15.320 business models. And I think what we're seeing is because 0:03:15.360 --> 0:03:20.880 of digitalization of advertising, that shift problem linear or legacy 0:03:20.960 --> 0:03:26.040 networks broadcasts to streaming is happening much faster. So that's 0:03:26.040 --> 0:03:26.680 a problem. 0:03:27.200 --> 0:03:30.480 You know, Paul, you are recovering media investment banker, right, 0:03:30.639 --> 0:03:33.480 I mean I've heard about the death of linear forever. Yeah, 0:03:33.720 --> 0:03:36.640 So I mean, what do you think makes this time different? 0:03:36.640 --> 0:03:37.520 When you look at the outset? 0:03:37.600 --> 0:03:40.560 What makes this time different is simply the revenue stream 0:03:40.640 --> 0:03:44.280 which really supported television for the last thirty forty years 0:03:44.400 --> 0:03:47.840 was subscribers from cable television and satellite TV, and that 0:03:47.880 --> 0:03:51.880 subscription revenue offset to decline in advertising revenue as advertising 0:03:51.920 --> 0:03:55.360 revenue went to different places, first cable and then did digital. 0:03:55.640 --> 0:03:57.720 Now that subscriber revenue is going away because of the 0:03:57.720 --> 0:04:01.360 cord cutting. So now you really have nothing to lean against, 0:04:01.560 --> 0:04:03.400 and that's what I guess most of the media companies 0:04:03.440 --> 0:04:06.400 are kind of dealing with with their linear networks. So, Ken, 0:04:06.440 --> 0:04:09.400 I mean, if you're the Walt Disney company here, one 0:04:09.440 --> 0:04:14.200 of the things is the studio. I mean, the Walt 0:04:14.200 --> 0:04:17.880 Disney Film studio dominated Hollywood for the last fifteen twenty 0:04:17.960 --> 0:04:19.880 years thanks to the Star Wars and the marvel and 0:04:19.920 --> 0:04:22.599 all the Pixars and all that kind of stuff. The 0:04:22.680 --> 0:04:24.839 studio kind of stumbled over the last four or five 0:04:24.920 --> 0:04:26.640 years and maybe people are getting a little bit tired 0:04:26.640 --> 0:04:28.240 of some of the titles in the franchises. 0:04:28.600 --> 0:04:29.640 What do you need to be good? 0:04:29.880 --> 0:04:32.240 I'll go see it, just be good exactly. Okay, well, 0:04:32.240 --> 0:04:34.240 there you go. So what do you think the strategy 0:04:34.320 --> 0:04:34.960 is there? 0:04:35.040 --> 0:04:39.159 Ken, So we need to say better performance not only 0:04:39.200 --> 0:04:43.080 from Disney, but also the industry. And really, when you 0:04:43.080 --> 0:04:47.719 look at global box office X China, it's running twenty 0:04:47.760 --> 0:04:53.160 twenty five percent below where we were pre pandemic levels. Additionally, 0:04:53.839 --> 0:04:58.320 when you look at movies, you always go to the sequels, 0:04:58.360 --> 0:05:02.440 the ones that can break in large audiences, but sometimes 0:05:02.440 --> 0:05:06.680 they're flops and they're very costly. So I think theatrical 0:05:06.920 --> 0:05:10.320 which for Disney feeds not only into film, but it 0:05:10.400 --> 0:05:13.120 feeds into the genre of their parks. 0:05:14.040 --> 0:05:15.239 You know, it's a big deal. 0:05:15.760 --> 0:05:18.880 And I think when we look at what Bob Iger 0:05:18.920 --> 0:05:22.599 wants to do there, he has talented people now now 0:05:22.680 --> 0:05:26.080 running those businesses. But even if you've got a big hit, 0:05:26.480 --> 0:05:29.120 you know, you look at paramount with top Gun Maverick 0:05:29.520 --> 0:05:33.640 over a year ago, it has not that much impact 0:05:33.760 --> 0:05:37.400 on the stock or what analysts think in terms of 0:05:37.720 --> 0:05:41.039 the fundamental outlook of a company. So it's important, but 0:05:41.440 --> 0:05:44.400 you know, it's kind of stirs the pot, but it's 0:05:44.440 --> 0:05:46.880 really you know, let's not forget we haven't had a 0:05:46.920 --> 0:05:51.159 conversation today why where many investors are in Disney is 0:05:51.200 --> 0:05:54.800 for experience or for the parks and having these durable 0:05:54.880 --> 0:05:59.520 businesses where they have less competition versus some of the 0:05:59.560 --> 0:06:03.680 problems they have in entertainment, whether it be filmed or 0:06:03.800 --> 0:06:07.279 be streaming. So let's not forget about the parks because 0:06:07.320 --> 0:06:09.200 that's really the core of their stability. 0:06:09.560 --> 0:06:12.400 I mean, let's be honest, guys, Maverick had an issue 0:06:12.400 --> 0:06:15.120 because Barbie. I mean, that's what really happened. Barbie trumps 0:06:15.600 --> 0:06:19.560 Tom Cruise. Let's call it, as you mentioned something earlier, 0:06:19.560 --> 0:06:21.279 and I wonder how that's going to tie into the 0:06:21.279 --> 0:06:23.920 parks experience. But also you mentioned in terms of streaming, 0:06:23.920 --> 0:06:27.680 and that's the AI component. How would AI help Disney 0:06:27.680 --> 0:06:28.880 do all the things you just said? 0:06:31.120 --> 0:06:34.520 There is incredible work that I'm sure Disney is doing 0:06:35.160 --> 0:06:40.440 to be competitive and on part too great companies, whether 0:06:40.520 --> 0:06:47.200 they be Amazon, Meta, Google, or Netflix. So it's an 0:06:47.360 --> 0:06:52.520 enormous effort on the technology side to have intelligence for personalization, 0:06:53.000 --> 0:06:56.400 and I think AI will play a role in personalization 0:06:56.680 --> 0:07:02.000 of subscriber viewership, but they can't tell that message because 0:07:02.000 --> 0:07:06.080 they're playing multi year catch up to the companies I've mentioned. 0:07:06.320 --> 0:07:08.800 So it's a big deal right now. It's a competitive 0:07:08.880 --> 0:07:12.800 weakness for the traditional entertainment companies. You have to remember 0:07:12.840 --> 0:07:16.760 Netflix has been at this for well over ten fifteen years, 0:07:17.080 --> 0:07:20.880 and of course the names like Amazon with AWS, they're 0:07:20.920 --> 0:07:24.160 in the lynch pin with AI. So that will get 0:07:24.200 --> 0:07:28.280 the stock up more than it's interesting. In my earnings note, 0:07:28.320 --> 0:07:31.800 I said maybe we'll get a profitability in streaming this 0:07:31.880 --> 0:07:34.640 quarter instead of the fourth quarter. We did, but it 0:07:34.720 --> 0:07:37.200 was small, so you know, we have to see what's 0:07:37.320 --> 0:07:40.120 next for Disney and coming quarters. 0:07:40.600 --> 0:07:42.160 All right, Ken, Thanks so much for joining us. 0:07:42.160 --> 0:07:45.119 Really appreciate that as always, Ken Leam, he's a director 0:07:45.160 --> 0:07:48.400 of research at c f r A Research. 0:07:48.440 --> 0:07:49.080 We appreciate it. 0:08:00.600 --> 0:08:02.440 Let's check in over our next guest here, Steve Iceman, 0:08:02.520 --> 0:08:04.480 senior portfolio manager at Newburger Berman. 0:08:04.800 --> 0:08:05.480 All right, I'm. 0:08:05.360 --> 0:08:08.240 Looking at I guess Steve, you're on the Odd Lots 0:08:08.400 --> 0:08:12.560 podcast recently and you said that you are bullish on 0:08:12.640 --> 0:08:16.000 stocks that gain from artificial intelligence power needs. 0:08:16.720 --> 0:08:17.400 What does that mean? 0:08:18.400 --> 0:08:20.640 Well, good question, Thank you. 0:08:20.880 --> 0:08:22.920 I'm front running Alex because Alex is our energy. 0:08:23.120 --> 0:08:28.280 The current the current GPUs use about three times more 0:08:28.320 --> 0:08:32.719 electricity than your typical CPU. So the grid in the 0:08:32.800 --> 0:08:37.520 United States has been under pressure now for years. You know, 0:08:37.800 --> 0:08:42.040 utilities keep increasing their cap bax budgets, and now you've 0:08:42.040 --> 0:08:44.480 put an entire new pressure on the on the grid. 0:08:44.920 --> 0:08:47.920 So whatever money is being spent on the grid is 0:08:47.960 --> 0:08:50.600 going to keep going up, probably for the next ten years. 0:08:51.240 --> 0:08:53.760 So just to give you just one stock for example, 0:08:53.800 --> 0:08:56.920 you know, when utilities announce that they're increasing their cap 0:08:56.920 --> 0:09:00.280 bax budgets, utilities don't actually do anything. You know. What 0:09:00.320 --> 0:09:01.920 they do is they send you electricity and send you 0:09:01.960 --> 0:09:05.360 a build. But in terms of construction, that's sun by 0:09:05.360 --> 0:09:09.000 a company called Quanta, which is the largest engineering construction 0:09:09.080 --> 0:09:11.679 company for utilities. So the only thing I would tell 0:09:11.720 --> 0:09:15.480 you is that every time the CEO gets on the 0:09:15.600 --> 0:09:18.040 quarterly conference call, he just looks happier. 0:09:19.480 --> 0:09:22.800 That's fair. Yes, if you demand's gonna. 0:09:22.600 --> 0:09:24.920 Growup by it has no to do with himself. He 0:09:25.440 --> 0:09:28.040 can't satisfy all of the demands. So that's just just 0:09:28.120 --> 0:09:30.600 one example. But there are other companies that benefit as well. 0:09:30.600 --> 0:09:32.600 But that I look, I think there are three major 0:09:32.679 --> 0:09:39.000 themes of our time, AI, infrastructure, and crypto, and I 0:09:39.040 --> 0:09:40.560 believe in the first two and I don't believe in 0:09:40.559 --> 0:09:40.880 the third. 0:09:41.400 --> 0:09:44.240 So just for framing here, I mean, you really made 0:09:44.320 --> 0:09:47.960 your name through the housing crisis and betting against housing 0:09:48.000 --> 0:09:51.200 dead back in two thousand and eight. You're portrayed in 0:09:51.240 --> 0:09:53.079 the Big short film by Steve Carelling. 0:09:53.160 --> 0:09:54.800 You had to bring that up, but okay. 0:09:54.640 --> 0:09:57.760 I did, But just to give context, if our viewers 0:09:57.840 --> 0:10:00.400 or listeners don't know, like you have a history of betting, 0:10:01.080 --> 0:10:05.280 having contrarian bets that pay off big time. Yes, what 0:10:05.320 --> 0:10:07.600 would be that contrarian bet? Out of the three things 0:10:07.640 --> 0:10:09.920 you just said, what's that big contrarian bet? 0:10:11.080 --> 0:10:13.080 I don't have a contrarian bet here. I mean I 0:10:13.080 --> 0:10:13.800 don't like crypto. 0:10:14.000 --> 0:10:15.319 I like in crypto feels contrarian. 0:10:15.440 --> 0:10:17.400 Well, it's contrarian, and that says that I don't believe 0:10:17.400 --> 0:10:19.760 in it. I think the whole thesis behind it is wrong. 0:10:19.920 --> 0:10:24.199 But you know, shortening a cult when there's no when 0:10:24.200 --> 0:10:27.160 there's no data to prove that it's wrong, because a 0:10:27.200 --> 0:10:29.360 death wish, you know. So what do I mean by that? 0:10:29.679 --> 0:10:32.720 So when you when I bet against subprime mortgages, every 0:10:32.760 --> 0:10:38.199 month securitizations produce data. They give every single credit quality 0:10:38.320 --> 0:10:40.559 data possible, so every month you could check it. 0:10:41.400 --> 0:10:42.000 You could look at it. 0:10:42.280 --> 0:10:44.080 Every month you looked at the fact and that and 0:10:44.120 --> 0:10:47.360 that fact credit quality was the major determinant of the 0:10:47.480 --> 0:10:50.959 value of subprime mortgage paper. So you had a data 0:10:50.960 --> 0:10:56.280 point every month, a massive data dump. Crypto trades on ether. 0:10:57.360 --> 0:11:00.600 You know what is a trade The thesis that crypto 0:11:01.240 --> 0:11:04.079 of crypto is that it's a hedge against fear currency, 0:11:04.160 --> 0:11:06.760 so it's like digital gold. But it doesn't trade like that. 0:11:06.920 --> 0:11:11.520 It trades in perfect correlation with NASDAC, so it trades 0:11:11.520 --> 0:11:14.240 against its own thesis. So what data point is there 0:11:14.320 --> 0:11:18.480 to show that crypto is wrong. I mean, if the 0:11:18.520 --> 0:11:21.920 deficit came down, it's not relevant because that's not how 0:11:21.920 --> 0:11:25.800 it trades anyway. So there's nothing to do. What's your 0:11:25.800 --> 0:11:26.600 macro call here? 0:11:26.600 --> 0:11:28.559 I mean, there's a lot of folks in the marketplace saying, 0:11:29.320 --> 0:11:32.000 you know, this Federal Reserve is going to cut rates 0:11:32.000 --> 0:11:34.360 in twenty twenty four, maybe not as many times as 0:11:34.400 --> 0:11:37.360 we originally thought, maybe not as much as we originally thought, 0:11:37.360 --> 0:11:40.040 but that this economy is in good shape, but still 0:11:40.040 --> 0:11:41.319 there might be some rate cuts here. 0:11:41.400 --> 0:11:44.400 Is that kind of the backdrop that's for you? Or 0:11:44.520 --> 0:11:45.199 how do you think about it? 0:11:45.280 --> 0:11:46.600 I mean, the why I think about it is that 0:11:47.040 --> 0:11:49.120 Powell is a dove. He has always been a dove. 0:11:49.360 --> 0:11:53.360 Raising rates was completely against his nature. He wants to 0:11:53.360 --> 0:11:57.000 cut rates because he always wants to cut rates. The 0:11:57.120 --> 0:11:59.760 data is not completely in his favor. So maybe they 0:11:59.760 --> 0:12:03.800 cut once. Do I think they should cut it all? 0:12:04.760 --> 0:12:07.720 I would personally, I would wait, but trust me, nobody 0:12:07.760 --> 0:12:08.320 consults me. 0:12:08.760 --> 0:12:10.559 No one consults us either. It's very fair. 0:12:10.800 --> 0:12:14.440 So I think they'll probably cut once. It's my guess. 0:12:15.280 --> 0:12:17.640 So does that affect so the thesis that you have, 0:12:17.760 --> 0:12:21.520 like at the infrastructure, the power demand and AI general 0:12:21.679 --> 0:12:24.880 and AI in general, does what the Fed does. 0:12:25.600 --> 0:12:27.120 It's irrelevant, irrelevant. 0:12:27.600 --> 0:12:31.880 Does it change how you play those themes or of timing? 0:12:31.960 --> 0:12:35.640 Okay, I mean this is how what I think credit 0:12:35.720 --> 0:12:38.560 quality in the United States is fine other than office 0:12:38.600 --> 0:12:40.920 real estate, and office real estate is not big enough 0:12:41.040 --> 0:12:43.640 to sink the economy. It's a problem. It's a regional problem. 0:12:43.679 --> 0:12:49.559 It's a regional bank problem. It's some investors problem. If 0:12:49.600 --> 0:12:55.080 consumers not over levered, the housing market is not in fuego, 0:12:56.840 --> 0:12:59.400 there's a shortage of housing. So all the all the 0:12:59.679 --> 0:13:02.679 and the financial system of the United States has never 0:13:02.679 --> 0:13:07.280 been this healthy in anyone's lifetime period. So all the 0:13:07.320 --> 0:13:10.040 things that existed prior to two thousand and eight don't 0:13:10.080 --> 0:13:13.480 exist today. You have a very dynamic economy with some 0:13:13.600 --> 0:13:19.040 very very powerful themes. The Fed cutting or not cutting 0:13:19.080 --> 0:13:21.600 rate makes headlines for a couple of days. But when 0:13:21.640 --> 0:13:23.680 you think about it, if the FED cuts rates once 0:13:23.840 --> 0:13:26.600 or twice or no, no times, I mean the end 0:13:26.600 --> 0:13:29.360 of the day, who cares. It's it's it's the minimis 0:13:29.360 --> 0:13:31.800 it's not. I mean the Fed raising rates five hundred 0:13:31.840 --> 0:13:35.560 bases points Yep, that got that got everybody's attention. The 0:13:35.600 --> 0:13:38.200 FED cutting rates twenty five basis points or fifty basis 0:13:38.200 --> 0:13:41.280 points and then stopping like like everybody get a life. 0:13:41.360 --> 0:13:42.719 Right, all right? 0:13:42.840 --> 0:13:45.360 In terms of getting a life on AI, a lot 0:13:45.400 --> 0:13:47.800 of well, I'll just speak for myself. I'm trying to 0:13:47.800 --> 0:13:50.040 figure out how much of this AI stuff and I'm 0:13:50.040 --> 0:13:53.320 putting in air quotes here for our listeners. Is incremental 0:13:53.440 --> 0:13:56.200 tech spending or is it just taking some money from 0:13:56.440 --> 0:13:58.559 it or other tech budgets and putting it to. 0:13:58.520 --> 0:14:01.120 It depends on which subsector talking. Okay, So if you're 0:14:01.120 --> 0:14:04.079 talking about the semiconductor sector, where it's video or a 0:14:04.240 --> 0:14:08.120 m D, it's it's massively incremental, you know. If you're 0:14:08.160 --> 0:14:14.400 talking about overall tech spending at this point, not clear. 0:14:14.559 --> 0:14:18.440 What's what is pretty clear is that companies like some 0:14:18.559 --> 0:14:23.040 of the IT consulting companies have no revenue growth because 0:14:23.040 --> 0:14:29.600 it's taking Peter to PayPal. So and software unclear, So 0:14:29.760 --> 0:14:31.600 it's it's only very clear in hardware. 0:14:33.120 --> 0:14:38.120 Let's overlay the presidential election with these thesis. 0:14:36.880 --> 0:14:39.000 The thesis. 0:14:39.080 --> 0:14:43.480 Thesis is plural and okay, it's important. I took Latin 0:14:43.520 --> 0:14:43.880 from the. 0:14:43.960 --> 0:14:46.440 CS, but this is a thes THECS. 0:14:46.720 --> 0:14:50.200 Okay, So what is your prediction for the election, and 0:14:50.560 --> 0:14:52.400 how does that impact because a lot of what you're 0:14:52.440 --> 0:14:54.480 talking about is driven by fiscal policy. 0:14:55.800 --> 0:14:58.520 Okay, so let's let's backtrack for a second. So, first 0:14:58.520 --> 0:15:01.720 of all, caveat whatever I'm about to say. I am 0:15:01.760 --> 0:15:04.360 not speaking for Newburger Barman. I'm speaking just for myself 0:15:04.360 --> 0:15:07.080 because I don't want to get into trouble. So it's 0:15:07.120 --> 0:15:11.040 May seventh, We're how many months? Five months? Six months 0:15:11.080 --> 0:15:14.160 from the election, very f and as far as I'm concerned, 0:15:14.400 --> 0:15:17.720 the election is baked. It's done, which is and Trump's 0:15:17.720 --> 0:15:20.280 gonna win, and I think he'll win every single swing state, 0:15:20.640 --> 0:15:23.440 and this is how it's going to play. So at 0:15:23.440 --> 0:15:26.840 this point, the protesters and what I'm about to say 0:15:26.880 --> 0:15:28.520 has nothing to do with who I'm going to vote for, 0:15:28.600 --> 0:15:35.800 what my predilections are. This is just pure analysis. The 0:15:35.840 --> 0:15:39.040 protesters on the college campuses have rapidly become the face 0:15:39.080 --> 0:15:43.000 of the Democratic Party, not completely, but that will be 0:15:43.040 --> 0:15:46.440 solidified because I am one hundred percent sure that in 0:15:46.520 --> 0:15:51.440 August at the Democratic Convention in Chicago, Irony, when you 0:15:51.440 --> 0:15:54.040 think about nineteen sixty eight, they will all be protesting 0:15:54.080 --> 0:15:57.000 there and they'll be screaming and yelling, and they'll be 0:15:57.040 --> 0:15:59.560 screaming and yelling a lot of things that are anti American, 0:16:00.120 --> 0:16:03.360 and the country is going to be appolled, and at 0:16:03.360 --> 0:16:05.240 that point it will be very very clear that Trump 0:16:05.280 --> 0:16:08.440 will win. But as far as I'm concerned, this reminds 0:16:08.440 --> 0:16:10.640 me a little bit of August two thousand and seven. 0:16:10.760 --> 0:16:13.520 If you look back at the financial crisis, the crisis 0:16:13.560 --> 0:16:16.720 took place in the fall of eight, but in August 0:16:16.720 --> 0:16:20.040 of seven, subprime paper had collapsed. The crisis was baked 0:16:20.360 --> 0:16:24.040 in August of seven. The rest was just an inevitable play. 0:16:25.360 --> 0:16:27.240 So I kind of feel about like that about the 0:16:27.240 --> 0:16:29.520 presidential lecture right now. It's baked, but the only people 0:16:29.560 --> 0:16:30.480 who don't know the voters. 0:16:30.720 --> 0:16:32.520 All right, We'll see how that plays out in the 0:16:32.560 --> 0:16:34.360 market life. Steve Iisman, thank you so much for joining. 0:16:34.440 --> 0:16:38.040 Steve Heisman is a senior portfolio manager at Newburger Berman. 0:16:38.120 --> 0:16:39.040 Joining us live here in our. 0:16:38.960 --> 0:16:46.400 Bloomberg Interactive Brokers studio. Let's see where this economy is 0:16:46.440 --> 0:16:49.120 going here. Francis Donald's going to help us out with that. 0:16:49.200 --> 0:16:52.200 Chief econmerce at Manual Life Investment Management. Francis, thanks so 0:16:52.280 --> 0:16:55.040 much for joining us here. I know I'm not really 0:16:55.080 --> 0:16:57.000 sure where the market is here in terms of this 0:16:57.040 --> 0:16:59.560 Federal reserve for a while there, we started out with 0:16:59.600 --> 0:17:02.760 a lot of cuts factored into the market, then fewer 0:17:02.800 --> 0:17:05.040 and fewer and fewer, and then there's even talk of 0:17:05.080 --> 0:17:08.399 a rate hike. Maybe that seems to be off the 0:17:08.480 --> 0:17:10.440 table here. I'd love to get a sense of how 0:17:10.440 --> 0:17:12.560 you folks at Manual Life are thinking about our feder 0:17:12.640 --> 0:17:15.320 reserve and kind of how they're thinking about this economy. 0:17:16.760 --> 0:17:19.280 You mentioned two words earlier. We have two words too. 0:17:19.480 --> 0:17:24.200 FED cuts are gonna come later, but then much faster 0:17:24.560 --> 0:17:27.800 than this market has been pricing in now. We've already 0:17:27.880 --> 0:17:31.000 been seeing that later to a certain extent. And let's 0:17:31.040 --> 0:17:34.119 just simply because we do expect the labor market in 0:17:34.160 --> 0:17:37.879 particular to decline, we do expect inflation to decline. But 0:17:37.920 --> 0:17:41.160 we have a few more months before the data we'll 0:17:41.160 --> 0:17:44.800 give the FED permission to begin this easing cycle. What 0:17:44.840 --> 0:17:47.720 we haven't bought into is that this would be like 0:17:47.760 --> 0:17:50.680 a two or three or done situation, that these would 0:17:50.680 --> 0:17:53.600 be insurance cuts. We believe we are heading into a 0:17:53.640 --> 0:17:58.000 proper downturn that will require a proper easing cycle, and frankly, 0:17:58.080 --> 0:18:00.879 that call is this just you know, some insurance cuts 0:18:00.880 --> 0:18:03.720 on the margin or are we going to see a 0:18:03.720 --> 0:18:07.520 average historical easing cycle is far more important than do 0:18:07.560 --> 0:18:10.720 they go in June, September, or even December in our. 0:18:10.720 --> 0:18:13.480 View, So your two words are later and faster. Basically, 0:18:13.880 --> 0:18:16.199 what gives you the confidence that we will see a 0:18:16.240 --> 0:18:17.800 material downturn. 0:18:18.680 --> 0:18:22.840 Leading economic indicators, So just about everything in the labor 0:18:22.840 --> 0:18:25.959 market that explains where we are in the labor cycle 0:18:26.400 --> 0:18:28.560 is pointing to a deterioration. Now, we're not calling for 0:18:28.600 --> 0:18:30.080 the end of the world. We're not saying it's a 0:18:30.080 --> 0:18:33.520 big crisis, calling for two quarters of negative GDP. Q 0:18:33.600 --> 0:18:36.360 three and Q four could be Q four and Q one. 0:18:36.840 --> 0:18:39.200 Well know, as we get closer to it, we've got 0:18:39.960 --> 0:18:43.479 business Employment Development data, nine million companies telling us there 0:18:43.520 --> 0:18:46.440 were job losses last year. Household employment has been flat, 0:18:46.800 --> 0:18:51.600 Temporary employment really good, leading indicator flashing recessions. Average weekly 0:18:51.640 --> 0:18:53.639 hours worked in the economy, just how many hours are 0:18:53.640 --> 0:18:56.240 people working comes back to pre COVID levels. Quit rates 0:18:56.280 --> 0:19:00.400 are dropping. Surveys from PMIS to small businesses say we're 0:19:00.480 --> 0:19:03.120 just not hiring as much anymore. I mean, I tell 0:19:03.160 --> 0:19:05.840 my team, you know, we've been calling for a recession 0:19:05.880 --> 0:19:08.200 for a while. It's been later than we expected. But 0:19:08.240 --> 0:19:10.159 I say, every day, come in to work, look at 0:19:10.160 --> 0:19:12.600 the data, and just ignore your past call. What does 0:19:12.640 --> 0:19:15.199 it tell you? Tells you re late cycle, and the 0:19:15.200 --> 0:19:17.800 odds of a downturn are much higher than the odds 0:19:17.800 --> 0:19:18.720 of a reacceleration. 0:19:18.880 --> 0:19:21.200 From this point, we're hearing a similar type of commentary 0:19:21.200 --> 0:19:22.760 coming out of the Walt Disney Company. I'm reading the 0:19:22.800 --> 0:19:27.480 research react from Bloomberg Intelligence Keith wrong Anathen Disney commentary 0:19:27.560 --> 0:19:30.520 on a normalization of demand that the theme parks will 0:19:30.560 --> 0:19:32.880 weigh on sentiment. Even after the segment posted a solid 0:19:32.920 --> 0:19:35.399 twelve percent operating income in fiscal Q two, guidance for 0:19:35.480 --> 0:19:39.199 the parks in Q three is weak with no growth, 0:19:39.920 --> 0:19:42.880 suggesting for your estimates might be at risk. 0:19:43.000 --> 0:19:43.760 So there's an. 0:19:43.720 --> 0:19:47.480 Example, Francis of you know, at data point suggesting maybe 0:19:47.480 --> 0:19:51.280 the consumer's strength is kind of waning. Here is that 0:19:51.320 --> 0:19:53.600 where you think you might see it from the consumer 0:19:53.840 --> 0:19:55.760 per se, you're likely. 0:19:55.600 --> 0:19:58.280 To see it across businesses and consumers, because that's how 0:19:58.440 --> 0:20:01.880 raid hikes work. The average time between the first rate 0:20:01.960 --> 0:20:05.280 hike and its impact on businesses and consumers is two years, 0:20:05.680 --> 0:20:08.119 so we're not exiting the period in which rate hikes 0:20:08.160 --> 0:20:12.080 become really impactful in the economy. We are entering that period. 0:20:12.200 --> 0:20:14.919 The mistake was in thinking that we'd see the impact 0:20:15.000 --> 0:20:18.080 earlier because of how fast and intense the rate hikes came. 0:20:18.400 --> 0:20:20.960 We're just entering that period. This is old fashioned economics. 0:20:21.000 --> 0:20:24.119 When money costs more to borrow, you borrow less of 0:20:24.119 --> 0:20:28.040 it and you invest less of it. Consumers can borrow less, 0:20:28.080 --> 0:20:29.960 they can spend less. Now we'll say there's a really 0:20:29.960 --> 0:20:32.040 important component here, which is that we are seeing a 0:20:32.080 --> 0:20:36.320 big bifurcation amongst both businesses and consumers. The spread between 0:20:36.320 --> 0:20:39.920 CEO confidence and small business confidence largest that we've seen 0:20:39.960 --> 0:20:43.320 in this data history. And for consumers, high income consumers 0:20:43.320 --> 0:20:45.959 they feel everything is fine. Why because they're benefiting from 0:20:46.040 --> 0:20:48.920 higher rates and a good stock market. Low end consumers 0:20:49.160 --> 0:20:51.960 telling a different story. So I love a good quality 0:20:52.040 --> 0:20:54.480 stock picker, even as a macro strategist. In this type 0:20:54.520 --> 0:20:57.080 of environment, it's going to be a little bit trickier 0:20:57.080 --> 0:20:59.640 than just looking at the aggregate. There's some elements underneath 0:20:59.680 --> 0:21:01.640 the surface that are telling slightly different stories. 0:21:01.720 --> 0:21:03.919 Well, I think that's such an interesting point too, especially 0:21:04.000 --> 0:21:07.000 as the high income consumers also have those low mortgage 0:21:07.080 --> 0:21:09.399 rates right, so they're also benefiting from that lower end 0:21:09.400 --> 0:21:13.040 consumers may not be owners at all. So I guess 0:21:13.040 --> 0:21:14.480 my question is, and this where it kind of ties 0:21:14.520 --> 0:21:18.639 to Disney also, is this a real retrenchment or just 0:21:19.040 --> 0:21:22.280 we had so much spending, we had so much safe 0:21:22.320 --> 0:21:24.720 theme park attendants. If we use Disney as the example 0:21:24.920 --> 0:21:28.000 and we're just moving off that high level, is there 0:21:28.000 --> 0:21:29.040 a distinction to be made? 0:21:29.960 --> 0:21:33.040 So I love this question. Are we just heading towards 0:21:33.080 --> 0:21:36.159 a normalization? Is effectively what I think about. If you 0:21:36.200 --> 0:21:39.000 look at the year over year charts, most of them 0:21:39.040 --> 0:21:42.080 signal this is a really strong contraction. Things like the 0:21:42.119 --> 0:21:44.639 Sam rule or a lot of things showing the unemployment 0:21:44.720 --> 0:21:47.200