Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best and economics, geopolitics, finance and investment.
Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and
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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App. Henri Out
Speaker 1: a trace with us right now director of Economic Policy
Speaker 1: Research if out of Partners, but far more political economic
Speaker 1: policy as well. When an election starts five hundred and
Speaker 1: sixty days out, Henrietta, what's the gridlock look like? What
Speaker 1: is the new gridlock after the election is engaged?
Speaker 2: The new gridlock is, basically, we get this debt ceiling
Speaker 2: past us, hopefully in the next month or two, and
Speaker 2: then we move pretty much exclusively to and there will
Speaker 2: be a focus on trying to craft a bipartisan bill,
Speaker 2: any attempt to differentiate the Republicans from the Democrats on
Speaker 2: that front, and I suspect they'll both be job owning
Speaker 2: about what could come on the China front, including Tariff's
Speaker 2: investment restrictions. Heading into seven that's what will.
Speaker 1: Be, so that'll be the legislative debate. But does China
Speaker 1: fold into election results? The maxim I've always heard is
Speaker 1: that domestic issues are far more important in an election dash.
Speaker 1: Does China play into the election dash?
Speaker 3: I think so.
Speaker 2: You have nearly eighty percent of the US population who
Speaker 2: believes that China is something of an enemy to the
Speaker 2: United States, so it's a very popular boogeyman. I think
Speaker 2: you have to question what the underlying macroeconomic data is
Speaker 2: going to look like.
Speaker 3: What's unemployment?
Speaker 2: You know, if it's still in the three and a
Speaker 2: half even four percent range, it's not going to be
Speaker 2: that striking topic like it has been in years past
Speaker 2: and we were at eight nine to ten percent. If
Speaker 2: inflation has come down and it similarly is not in
Speaker 2: the eight nine to ten percent range, you're going to
Speaker 2: have an opportunity to focus on foreign policy because domestic
Speaker 2: politics or domestic economic policy data will have a cooler temperature.
Speaker 2: It will be big enough to occupy headlines every single day,
Speaker 2: so you can have an opening for China to be
Speaker 2: a conversation.
Speaker 4: A lot of shift right now when it comes to geopolitics,
Speaker 4: a lot of shift when it comes to economics, and
Speaker 4: there's not a lot of shift. When it comes to
Speaker 4: the most likely matchup for the twenty twenty four election,
Speaker 4: it is President Biden.
Speaker 5: He is in the running.
Speaker 4: That is what he said earlier this morning with the
Speaker 4: official announcement, and former President Trump.
Speaker 5: This is the likely matchup.
Speaker 4: What does that say to you that it's the two
Speaker 4: known entities going at it again.
Speaker 3: You know, it's really interesting.
Speaker 2: I'm trying to find a great way to say this,
Speaker 2: but as an analyst, you know, we're always looking for
Speaker 2: some sort of nuance or edge to share with clients
Speaker 2: and help them have a little bit of extra juice
Speaker 2: going into any kind of a.
Speaker 3: Big event like this.
Speaker 2: But realistically, we have a pretty solid run rate to
Speaker 2: work with Democrats the midterm elections in twenty eighteen by
Speaker 2: an overwhelming majority. Democrats won the twenty twenty presidential election,
Speaker 2: picking up Arizona and Nevada, Georgia even we won the
Speaker 2: special elections in Georgia twice, and then in twenty twenty
Speaker 2: two ran in a super high inflationary environment coming out
Speaker 2: of the pandemic in a race that Democrats had no
Speaker 2: business winning, and the minority party lost in the most
Speaker 2: epic blowout since the nineteen thirties.
Speaker 3: So it's really difficult to.
Speaker 2: Try to find a rationale for not knowing the outcome
Speaker 2: of the twenty twenty four presidential election cycle. We've seen
Speaker 2: this fight literally four times now and each one ends
Speaker 2: the same way. So it's difficult to find a way
Speaker 2: to explain or convince anybody, including my own brain, about
Speaker 2: how you can see Republicans win in this environment with
Speaker 2: the same candidate.
Speaker 4: How much is this Democrats winning and how much is
Speaker 4: this Republicans losing with respect to where the balance of
Speaker 4: power is in that party.
Speaker 2: I would definitely look at the key states. I mean,
Speaker 2: all our clients know, and y'all know, it doesn't matter
Speaker 2: what the national data is. It's really about key states
Speaker 2: and the electoral College. So look at Arizona, look at Pennsylvania.
Speaker 2: In those states, Joe Biden is ahead by four points
Speaker 2: one point, and that's the outcome.
Speaker 3: Of the cycle.
Speaker 2: So you might have some scenarios where certain states are
Speaker 2: going more aggressively for Trump, but mostly it's going to
Speaker 2: be a national referendum in key states against the Republican
Speaker 2: caucus and their policies.
Speaker 1: Henry and I've brought up twice today a question of
Speaker 1: progresses or liberals within the Democratic Party. I mean, in
Speaker 1: the republican concept. There's this idea Republican in name only.
Speaker 1: Is Joe Biden a Democrat in name only?
Speaker 2: I think that if you were to pull a Bernie
Speaker 2: Sanders or some of his supporters, they would say things
Speaker 2: along those lines. But it's really difficult to look at
Speaker 2: the track record and see a one point nine trillion
Speaker 2: dollar Cares Act bill passed in the first month of
Speaker 2: his administration, the Chips Act, which was bipartisan by Parson,
Speaker 2: infrastructure bill, and then the Inflation Reduction Act. There is establishment, democratic,
Speaker 2: democratic and name only agenda items like Chips and the
Speaker 2: but then there's also those progressive items green energy tax
Speaker 2: credits that are very expansive. And then obviously the one
Speaker 2: point I joined down the COVID relief bill, which had
Speaker 2: a lot of progressive agenda items in there.
Speaker 1: So you can make thank you so much, Henry out
Speaker 1: Tre's director of economic policy Vada Partners. There. We have
Speaker 1: a wonderful guest with it that John's going to bring in.
Speaker 1: But you know, John, it's going to be important. Newburger.
Speaker 1: Berman is going to focus today on the four pm
Speaker 1: earnings Thursday. On the four pm earnings tomorrow, every set
Speaker 1: there will be shifted from financial media over to Manchester
Speaker 1: City will not be watching Meta earnings tomorrow. How big
Speaker 1: a game is that tomorrow that's going to constract Global Walls.
Speaker 6: Told, this is six pointer? Don't we schouse epic? It's
Speaker 6: a six pointer? How big is this for Arsenal? For
Speaker 6: the gunners?
Speaker 7: It's huge. I was at Hibury when I was four,
Speaker 7: so I have a you really, I really was. My
Speaker 7: dad was teaching at the London School of Economics and
Speaker 7: he dragged me along to Hibury and I'm super excited
Speaker 7: about Wednesday. So we'll have the three broombroog screens going
Speaker 7: and one will have the matron and the rest will
Speaker 7: have Meta.
Speaker 6: I had to say to Tom on Friday when they
Speaker 6: were throwing the game against Southampton away. I said, Tom,
Speaker 6: you need to understand the phrase bottling it? Are they
Speaker 6: bottling it?
Speaker 7: They choking a little. It's tough to lead the whole
Speaker 7: year from the front, and it's been remarkable and we'll
Speaker 7: we'll know tomorrow. We'll know tomorrow.
Speaker 6: Top of the league Arsenal going up against Manchester City,
Speaker 6: the top two the face down tomorrow, so you won't
Speaker 6: be watching meta earning, so I imagine you'll be looking at
Speaker 6: Google and Microsoft a little bit later. These tech names
Speaker 6: have had massive moves here today. Lisa talked about meta
Speaker 6: of something like seventy to eighty percent so far in
Speaker 6: twenty twenty three. Are you expecting the numbers to validate
Speaker 6: the moves?
Speaker 7: I think the two stories this afternoon will be a
Speaker 7: little different. Microsoft's are going to be all about Azure
Speaker 7: and the enterprise slowing and the large enterprise companies have
Speaker 7: all kind of looked at their cloud spend and decided
Speaker 7: to rationalize a little bit. But then on Microsoft, it's
Speaker 7: going to be telling the long, long term story around
Speaker 7: open Ai and their forty nine percent investment there. We've
Speaker 7: done the math on some of that. The maths not easy.
Speaker 7: You know, the AI market will be over a trillion
Speaker 7: dollar market in by twenty thirty and Microsoft's magnificently positioned
Speaker 7: there and can add at least maybe twenty percent to
Speaker 7: their top line over the next five to six years.
Speaker 7: So I think Microsoft is going to be You're going
Speaker 7: to look through the valley to the next peak, so
Speaker 7: to speak, kind of ignore the shorter term headwinds and
Speaker 7: focus more on the longer term opportunity. Where Google, I
Speaker 7: think it's they haven't provided the sizzle that Microsoft has
Speaker 7: as as relates to open AI, So I think there
Speaker 7: we're looking for a lot of clarity around their longer
Speaker 7: term strategy. I think they magnificently position there as well.
Speaker 7: But unlike Microsoft, we're going to be thinking through efficiency
Speaker 7: and optimization as it relates to their to their cost structure.
Speaker 7: They sell at two vastly different valuations. The point I'd
Speaker 7: make maybe more generally about technology that maybe sometimes gets
Speaker 7: gets lost. The by and large, the resiliency you've seen
Speaker 7: in earnings out of the index, so to speak, is
Speaker 7: because these businesses have magnificent income statement flexibility. And the
Speaker 7: challenge with the financial companies is they they don't have
Speaker 7: income statement flexibility. They are tied by their balance sheets.
Speaker 7: And so I am quite optimistic that the very large
Speaker 7: index contributors will will deliver earnings that are high quality
Speaker 7: and they're protecting they're protecting their cash flows. This year
Speaker 7: the market shifted, as you know, from rev you to
Speaker 7: what matters, which is cash in the.
Speaker 4: Bank, which they have magnificently displayed.
Speaker 5: Will open AI be the new blockchain.
Speaker 4: I mean, basically, have we already fully priced in just
Speaker 4: saying chat GPT and then seeing your stock sore.
Speaker 7: I don't think we have, and we certainly haven't at Microsoft,
Speaker 7: and we certainly haven't at Google because Google sells it
Speaker 7: ten times EV to enterprise value. That is not evaluation.
Speaker 7: That suggests a lot of good news is priced in.
Speaker 7: I like the analogy to the to blockchain. We think
Speaker 7: the efficiency opportunity for people that adopt AI is two
Speaker 7: x on the margin line relative to the blockchain. So
Speaker 7: we're talking If you thought blockchain was a was a
Speaker 7: two hundred basis points improvement to efficiency for companies adopting it,
Speaker 7: we think open ai is probably five hundred basis points.
Speaker 7: Think through the efficiency of that, and think through the productivity.
Speaker 1: I want to focus on your courage to own a
Speaker 1: few things on a big were down. I believe twenty
Speaker 1: four percent last year in one portfolio, and maybe that
Speaker 1: was a little worse than others because you had big
Speaker 1: tech owning. I want to talk about the street. Focus
Speaker 1: on that these stocks are too big, too dominant, and
Speaker 1: people are diversifying away. Peter Lynch called it diversification in general.
Speaker 1: Are people diversifying away where they should own more of
Speaker 1: big tech.
Speaker 7: It's it's a big question. We have the growth strategy,
Speaker 7: a large cup growth strategy that was down twenty four
Speaker 7: percent last year. We felt great relative to the large
Speaker 7: cap growth indices. I think it proved out the high quality,
Speaker 7: defense and nature of how we proceed with growth. I
Speaker 7: think I gave you the analogy with with with Microsoft.
Speaker 7: He as a company that can add you know, twenty
Speaker 7: to city billion dollars to their revenues over the next
Speaker 7: five years, and they're running at two hundred billion dollars
Speaker 7: of revenue today. I don't know many companies that that
Speaker 7: and operate at that scale with that type of opportunity.
Speaker 7: And I think when you think through when you think
Speaker 7: through Google, the challenge there is going to be can
Speaker 7: It's a little bit of the innovator's dilemma. Can they
Speaker 7: can they understand the threat that AI provides to their
Speaker 7: core search business, which is kind of a ninety two
Speaker 7: percent monopoly business while capturing the opportunity of AI. Not
Speaker 7: different to how Netflix kind of attack themselves as they
Speaker 7: went from you know, physical delivery of content to digital
Speaker 7: and you've got a factor in valuation. Look in this environment,
Speaker 7: I think you've got to quality up. You've got to
Speaker 7: own income statement flexibility, you've got to be mindful of
Speaker 7: the balance sheet, and you've got to own businesses that
Speaker 7: if the tide was to go out, you feel really
Speaker 7: good about their next three to five year positioning. And
Speaker 7: I think you just find that today in the large
Speaker 7: companies that are that are going to be massive beneficiaries
Speaker 7: of all the compute spans. And that's going to take
Speaker 7: place with AI. Microsoft magnificently positioned, so is Google, so
Speaker 7: is Amazon, so is Meta. These folks own the largest
Speaker 7: computers in the world, and they're going to rent them
Speaker 7: out to everyone else, and everyone else is going to
Speaker 7: enjoy a five hundred basis point margin improvement over time.
Speaker 7: And that's going to be very good for for for
Speaker 7: the economy. It's going to come with lots of headwinds,
Speaker 7: no doubt, lots of regulatory scrutiny for sure. But but
Speaker 7: but net net, it's it's it's it's it's massive.
Speaker 6: I didn't hear around VMH or as up in quality.
Speaker 6: That's all we're hearing about Europe, luxury players, all of
Speaker 6: that good stuff. Then why you're not there?
Speaker 7: I think I mean we we're not there necessarily with
Speaker 7: that specific wonderful high end retail them. My wife's there
Speaker 7: in shades spades. We were recently in Europe and there
Speaker 7: is a currency heads, you know, currency of trash, so
Speaker 7: to speak. So I'm familiar with the power of that brand.
Speaker 7: They've bought a remarkable company. They've got to go through, uh,
Speaker 7: you know, they've got to figure out which of the
Speaker 7: five favorite kids are are going to run on the show.
Speaker 7: But I think this morning from Pepsi and McDonald's, you
Speaker 7: saw what quality and innovation and convenience and value delivered.
Speaker 1: Charles character can segue from Lewis Wooten.
Speaker 7: I know less about McDonald's from both all of that,
Speaker 7: but it's just quality and and so.
Speaker 5: McDonald's in the.
Speaker 7: It's a function of who the consumer is. I mean,
Speaker 7: the consumer of McDonald's ses tremendous value, as does as
Speaker 7: does the LVMH customer in a different way.
Speaker 1: You were acclaimed on Whole Foods. Amazon. Whole Foods is
Speaker 1: now thrown on a towel. They're going to go low price,
Speaker 1: lower price. Is it going to work?
Speaker 7: I don't know if they're going to do that precisely
Speaker 7: in your honor was back there on Saturday, just buying
Speaker 7: a few things for dinner. Look, they have made wholesome
Speaker 7: food affordable for all of America. You know what gets
Speaker 7: lost with Amazon is they now have relationships with three
Speaker 7: thousand local producers. That's way up from when Whole Foods
Speaker 7: was a standalone company. And if you're a prime member,
Speaker 7: you're getting value with Whole.
Speaker 6: I don't know about you, but when I go into Whole
Speaker 6: Foods to get dinner, I could have bought ms scaff.
Speaker 7: It's not perfectly cheap, but it hasn't It hasn't come
Speaker 7: down that much relative to fifteen seconds you pay for quality.
Speaker 6: Do you miss Highbury?
Speaker 7: I do miss Highbury And I haven't yet been to Emirates.
Speaker 6: Into the Amates a couple of times, and my.
Speaker 7: Guess is the seating at the Emirates is a little
Speaker 7: bit no comfortable.
Speaker 6: Those old stadiums I think a Fenway and Boston. Just
Speaker 6: the romance of it.
Speaker 1: It's great.
Speaker 6: I wish that kept them.
Speaker 1: Can talk to mister Levy. Canter's got you mass to.
Speaker 6: Help him parachute in and parachuting and sports. I'm not sure,
Speaker 6: but as a quality right now, something well that's.
Speaker 8: A thank you everyone.
Speaker 1: Right now in banking, and surely expert on is Christopher
Speaker 1: Merinack JOINSUS director of Research Jenny Montgomery Scott Philadelphia and
Speaker 1: in Atlanta this morning. Christopher, you know you and I
Speaker 1: do the same thing when you get the Key Friette
Speaker 1: Bank Index out of twenty two banks, and it's real simple.
Speaker 1: Were the latest tobacco? They're priced back to nineteen ninety eight.
Speaker 1: How many others are there like FRC? Do you do
Speaker 1: you look at them as a discreet disaster or is
Speaker 1: there enough of them out there to affect something like
Speaker 1: the twenty two banks and the KBW index.
Speaker 9: I think First Republic stands on its own, Tom, I
Speaker 9: really think that it's at once opportunity. Unfortunately that was
Speaker 9: hit by friendly fire and they have really struggled clearly
Speaker 9: for the quarter. Deposits worse than we thought. As you said,
Speaker 9: I think the conference call did not go well. I
Speaker 9: think the market didn't like the lack of questions, and
Speaker 9: I think there's real changes the company has to make.
Speaker 1: The answer is combinations. The basic thing we've had is
Speaker 1: four thousand banks, whether it's twenty two larger regionals or not.
Speaker 1: When do we start to see the mergers that are
Speaker 1: just to have to come.
Speaker 9: Well for First Republic, it could happen very soon. I
Speaker 9: mean they need to do something. They either need to
Speaker 9: strength the balance you do, they need to find a buyer.
Speaker 9: They're going to have to raise capital either way. So
Speaker 9: if they sell the company, that avoids that, but they're
Speaker 9: going to have to take action as soon as today.
Speaker 9: I'm not sure they can wait a whole lot longer.
Speaker 4: Christopher, who would want to buy a firm like this
Speaker 4: when they can get the deposits some other way and
Speaker 4: they're taking all the liabilities.
Speaker 9: Well, there could be the attitude that you want the
Speaker 9: wealth management business and the clients that they have, even
Speaker 9: though they did lose advisors precipitously towards the end of
Speaker 9: March and also here in April. I think trying to
Speaker 9: get that business would be very attractive to a Goldman, Sachs,
Speaker 9: to Morgan Stanley, to perhaps even JP Morgan. You'd have
Speaker 9: to have some regulatory relief if you're JPM to get
Speaker 9: that done from an asset perspective, but it's not impossible.
Speaker 9: But certainly I think the wealth management business would be
Speaker 9: the ticket that would be most attractive here.
Speaker 4: I was struck this morning, Christopher, when I came in
Speaker 4: that all the other regional banks are being punished as well.
Speaker 4: It's not just First Republic, it's even those that have
Speaker 4: reported earnings and came in better than people we feared,
Speaker 4: whether it was Western Alliance, whether it was Zions, whether
Speaker 4: it was any of the others.
Speaker 5: Still they are lower. What does that tell you about
Speaker 5: what is going on there?
Speaker 4: But also more broadly about sentiment, Well, banks are leverage vehicles.
Speaker 9: They work off of trust, and I think the confidence
Speaker 9: and trust has slipped with the First Republic news, and
Speaker 9: I think we just have to get through this air
Speaker 9: pocket today and this week. Most of these companies are
Speaker 9: very strong on capital, They have liquidity. They simply have
Speaker 9: question marks with the confidence given the deposit run that
Speaker 9: happened in the system in March, and so we're still
Speaker 9: kind of working through that. Think of it as a
Speaker 9: lou and the patient's not completely healed yet. I do
Speaker 9: think that banks have to consider raising capital just to
Speaker 9: show that they can. It would be a sign of confidence.
Speaker 9: That to me is where this ultimately goes. Maybe we're
Speaker 9: another six or eight weeks away from that, but I
Speaker 9: think that's the answer to the problem.
Speaker 6: And christ I think we've all forgotten this happened at
Speaker 6: the very end of the first quarter in the month
Speaker 6: of March, and I'm trying to work out what that
Speaker 6: might mean for profits coming forward from here Q two,
Speaker 6: Q three, Q four. What do you think that's going
Speaker 6: to look like?
Speaker 9: So for First Republic, I think it's a break even
Speaker 9: at best, because if you reset their funding costs again
Speaker 9: in the second quarter, it definitely takes away a lot
Speaker 9: of the profitability. We also think they have to strength
Speaker 9: the balance sheet, and that obviously hurts the revenue side.
Speaker 9: If you sell securities, sell loans, etc.
Speaker 3: And then capital of course.
Speaker 9: Comes under pressure as you're going to have to sell
Speaker 9: those assets at a loss. So that definitely puts pressure
Speaker 9: on the revenue line and the earnings for sure. But
Speaker 9: I think there's a case for the company to break even.
Speaker 9: It's just a challenge to execute. And I think the
Speaker 9: thing that we worry about is that this is a
Speaker 9: company that has been a growth oriented company, not one
Speaker 9: man's for profitability.
Speaker 3: They haven't had a.
Speaker 9: Quarter above a one percent hour away since twenty sixteen.
Speaker 9: It's just not been in their DNA. They've been a
Speaker 9: growth oriented bank, and it's a it's a very hard
Speaker 9: pivot for them to do.
Speaker 6: Does that mean they need new dataship?
Speaker 3: Not sure about the leadership.
Speaker 9: I think it's a change in mindset.
Speaker 3: I think that they can do this if they.
Speaker 9: Change from a growth company into a profit company and
Speaker 9: make that immediate. I don't think it's impossible, but it
Speaker 9: is a mindset change that would be relatively vague in
Speaker 9: their history.
Speaker 6: Listen, months changed, Tom forced on them after the events
Speaker 6: of the Last Stand a few weeks.
Speaker 1: You know, I'm thinking Johnavan to Charles Dickens novel eighteen
Speaker 1: thirty England, where the banks were not growth vehicles.
Speaker 6: I'm not sure to regulate to one banks to be
Speaker 6: growth vehicles anyway.
Speaker 1: I at leasta get out to surveillance, Cork, I'm going
Speaker 1: to need it to protect the innocent here. I think
Speaker 1: it's it's what I would say is the zombies are
Speaker 1: going to get rolled up. How many First Republics are
Speaker 1: out there is an important question.
Speaker 6: I've seen people refer to this bank as a zombie.
Speaker 6: I'm not going to reselves yesterday, Chris, thanks to that.
Speaker 6: Good to catch up, Chris Famronak. There of Jenny Montgomery Scott.
Speaker 1: As we lean forward with Charles Canter here of Newburger Berman,
Speaker 1: we do better with RBC Capital Markets. Rishi Jaluia. Now
Speaker 1: he's a software equity analyst, forget about it, expert on Microsoft.
Speaker 1: Here we go, folks on the big stock you don't own.
Speaker 1: Rishi twenty six percent per year total return over the
Speaker 1: last ten years. The free cash flow blowout pre pandemic
Speaker 1: is absolutely stunning. I mean, the cash flow growth out
Speaker 1: five years to a model twenty twenty four is off
Speaker 1: the chart. Is the story priced into the stock now
Speaker 1: or will there be constructive surprises forward?
Speaker 8: Yeah?
Speaker 10: Thanks so much for having me. You know, I think
Speaker 10: the big story around Microsoft is if we put maybe
Speaker 10: the near term macro aside.
Speaker 3: Is really AI.
Speaker 10: And as we've outlined, we really think the opportunity with
Speaker 10: generative AI for Microsoft is a call option on the stock.
Speaker 3: It is not priced in today.
Speaker 10: We actually needed to make money off Microsoft stock apps
Speaker 10: in any AI story. But really that's where you gets
Speaker 10: legive growth up and I do not think that's priced in.
Speaker 10: You know, if you think about all the different ways
Speaker 10: throughout Microsoft's portfolio that can that it can benefit from
Speaker 10: generative AI, be it in Azure, from their agreement with
Speaker 10: open Ai, be it competitively with the Microsoft through sixty
Speaker 10: five suite, and the integration of co pilot throughout, be
Speaker 10: it in their security, be it in GitHub. I think
Speaker 10: there's so many ways Microsoft can benefit from generative AI,
Speaker 10: and I think that's the next leg of growth up.
Speaker 1: Here, Risha, I want to go to that. Okay, the
Speaker 1: free casual in numbers, folks is thirty eight billion dollars
Speaker 1: pre pandemic, and they went out to seventy three billion
Speaker 1: dollars modeled off for two twenty four. That's the existing
Speaker 1: company with two hundred thousand employees. Rishie explain how AI
Speaker 1: is different than other new things, the bright, shiny new concept,
Speaker 1: and that it's a call option on Microsoft that has
Speaker 1: real durability.
Speaker 3: Yeah.
Speaker 10: I mean, look, this is the fourth big technological change
Speaker 10: in my lifetime, right, going back to the Internet, going
Speaker 10: back to mobility, the cloud, and now AI. And I
Speaker 10: know we've been talking about AI for so long, but
Speaker 10: chat GPT was that watershed moment that gets AI widespread
Speaker 10: throughout the ecosystem. This is like when Netscape for the
Speaker 10: Internet came out, or the iPhone for mobility, and that
Speaker 10: is where we really think this has so much potential
Speaker 10: not just for revenue, but to your point on the
Speaker 10: bottom line, for free cash flow for Microsoft, that we
Speaker 10: can see that number continue to move up. And because
Speaker 10: of Microsoft's first mover advantage, because of how far ahead
Speaker 10: of others open AI is, and because of how quickly
Speaker 10: every other company is having to move to have a
Speaker 10: generative AI strategy, we believe Microsoft will be an outside
Speaker 10: beneficiary of that.
Speaker 3: And if you look out throughout the entire.
Speaker 10: Portfolio of Microsoft's products, all the growth rates will be
Speaker 10: significantly different. Everyone's going to be talking about as your
Speaker 10: growth rates, and you know, it seems it's realistic to
Speaker 10: me that that's going to accelerate to probably twenty percent
Speaker 10: growth over the coming quarters. But if once you start
Speaker 10: layering in the benefits from generative AI, because this is
Speaker 10: so much more resource intensive, not to mention, you'll probably
Speaker 10: have an entire trillion dollar economy built on open AI,
Speaker 10: just like you had a trillion dollar economy with the
Speaker 10: iPhone and a trillion dollar economy with AWUS.
Speaker 3: I think that as your number goes back above thirty.
Speaker 4: Percent growth, Rishie, how much smaller can some of these
Speaker 4: big tech companies be on a headcount level based on
Speaker 4: some of the efficiencies that everyone keeps talking about with
Speaker 4: artificial intelligence.
Speaker 3: Yeah, I think that's a great question.
Speaker 10: I would say, you know, number one, for Microsoft, I
Speaker 10: think in contrast to a lot of the other big
Speaker 10: tech they didn't over hire at the same rate. I
Speaker 10: know they have done a riff. Some of that was
Speaker 10: eliminating under performing employees, some of that was actual cost
Speaker 10: savings and reallocating of employees. But I'd say Microsoft maybe
Speaker 10: had more responsible hiring practices and a lot of other
Speaker 10: big tech companies that have had to do significantly bigger riffs,
Speaker 10: And if you benchmark.
Speaker 3: Their employee efficiency relative to other companies enterprise software, they
Speaker 3: were very high even prior to the riff.
Speaker 10: Now, in terms of the cost savings from generator AI,
Speaker 10: I think that's a big open ended question. You know,
Speaker 10: we can talk about innovation and what general AI brings there,
Speaker 10: but there is also It makes developers significantly more effective,
Speaker 10: it makes marketers more effective, salespeople more effective, and I
Speaker 10: wouldn't be surprised if we could see a company be
Speaker 10: able to get away with significantly lower headcount.
Speaker 3: I'm talking double digit, right, ten.
Speaker 10: Percent plus lower headcount as a result of really embracing
Speaker 10: and leveraging generative AI on the back end. You know,
Speaker 10: that's maybe more of a three year story than a
Speaker 10: near term one. But absolutely every company I talked to
Speaker 10: is trying to use generative AI for greater operational efficiency, efficiency,
Speaker 10: and then I think the terminal margins across enterprise software
Speaker 10: and really across big tech has to be a higher
Speaker 10: long term now because of this, just.
Speaker 4: Real quick here, Who's going to win the generative AI game?
Speaker 4: Will it be Google or will it be Microsoft?
Speaker 10: Yeah, it's it's early to tell, but I think Microsoft
Speaker 10: has such a huge lead from their early investment in
Speaker 10: open ai, from the fact that open ai is an
Speaker 10: arms length transaction. You look at the advantages you have
Speaker 10: in chat, GPT versus all the other systems out there,
Speaker 10: including Bard and Claude and any others that have been
Speaker 10: out there, I think Microsoft has a huge advantage.
Speaker 3: It is theirs to lose.
Speaker 6: Richie Great to get your perspective on a case story.
Speaker 6: A little bit later on this afternoon, Ritchie Delury of VOMBIEC.
Speaker 1: Joining us.
Speaker 10: Now.
Speaker 1: The gentleman from Auburn, Paul Jacobson joins his chief financial
Speaker 1: officer at General motors. Paul drive the Hummer EV. It
Speaker 1: clocks in at eighty five thousand dollars marked up to
Speaker 1: the proper Paul Jacobson level. It's maybe, oh one hundred
Speaker 1: and four ninety five thousand, whatever it is. The answer is,
Speaker 1: you boosted the range on a nine thousand pound vehicle?
Speaker 1: Does America want that? Is there real demonstrable evidence that
Speaker 1: Broad America wants to drive EV?
Speaker 11: Well, Good morning, Tom and Lisa and John, Thanks so
Speaker 11: so much for having me. First of all, let me
Speaker 11: say thanks to the GM team for an excellent quarter
Speaker 11: and the confidence that we have going into the year.
Speaker 11: You know, when we're looking at EV's you know, we
Speaker 11: have really strong demand for everything that we've produced so far,
Speaker 11: and when you look at the order back logs and
Speaker 11: the ramp up of cell capacity, we feel good about
Speaker 11: our ability to ratchet up production to meet that demand.
Speaker 11: But you know, consumers are speaking with their commitments to us,
Speaker 11: and we feel good about the products, the vehicles that
Speaker 11: we're producing. The Hummer EV is just a great vehicle
Speaker 11: engineered by our team. Here we go and customers can't
Speaker 11: get it fast enough.
Speaker 1: You know, I look at this, Paul, and it is
Speaker 1: unit and price. Mister Musk is playing with price, it
Speaker 1: seems like on a weekly basis at Tesla. How I
Speaker 1: was talking to our David Welch in Detroit, it's real simple.
Speaker 1: How do you adapt to Tesla's price strategy. Is it
Speaker 1: something you react to, is it something you ignore.
Speaker 11: So we've actually been very consistent with our pricing on
Speaker 11: our evs, and that's really a function of the demand
Speaker 11: that we've seen for them. So, you know, there's been
Speaker 11: a lot of industry noise around pricing all across the world,
Speaker 11: and it's something that we've been very consistent with our
Speaker 11: strategy and it's one that consumers are responding to over
Speaker 11: the long term. Obviously, we've got a competitor that is
Speaker 11: posting really strong results, really strong margins. We need to
Speaker 11: make sure that we lower our costs, especially our structural costs,
Speaker 11: and we're aggressively getting after that. We announced a two
Speaker 11: billion dollar program today. We're talking about being at the
Speaker 11: high end of that range in twenty twenty three, getting
Speaker 11: about a billion dollars out this year, with the other
Speaker 11: billion to follow next year. And it's just the first
Speaker 11: step in the process of making sure that we're competitive
Speaker 11: for the next generation.
Speaker 5: Does cost savings mean mean layoffs.
Speaker 11: We're actually not doing any layoffs, Lisa. So we at
Speaker 11: the end of the day, we had a voluntary severance program.
Speaker 11: We had over five thousand of our colleagues opt either
Speaker 11: to retire or to move on, and that alone is
Speaker 11: going to save us about a billion dollars in the
Speaker 11: run rate, and that's something that we think we can
Speaker 11: manage through and hit our goals on our two billion
Speaker 11: dollar program.
Speaker 4: You reported a full year expectations, Paul, that exceeded what
Speaker 4: a lot of people were anticipating. How much does this
Speaker 4: hinge on North America and not on China? How much
Speaker 4: is this completely independent of an international story?
Speaker 5: And very much us focused.
Speaker 11: Well, the bulk of our business is obviously in our
Speaker 11: North America segment, and we had a really strong quarter there.
Speaker 11: Pricing is still up as we see, wholesale prices are
Speaker 11: still lapping the increases we had last year that we
Speaker 11: put through as a result of the higher input costs,
Speaker 11: and demand still remained strong. So our volumes were up
Speaker 11: about four percent, our inventories were flat, and I think
Speaker 11: the team's doing a very good job of managing through that.
Speaker 11: We've planned for the year and We alluded to this
Speaker 11: and our guidance at the beginning of the year that
Speaker 11: we were assuming a fifteen million unit market here in
Speaker 11: the US, and we came in slightly above that. But
Speaker 11: we've got some cushion built in in case we see
Speaker 11: demand start to fall off in our expectations. But when
Speaker 11: you look at our first quarter out performance and the
Speaker 11: confidence of our cost reduction plan, we felt comfortable raising
Speaker 11: the guide. Now, China obviously a very competitive they're still
Speaker 11: coming out of coming out of COVID, and we see
Speaker 11: demand covering, but it's also an incredibly competitive market. The
Speaker 11: team there has done a great job. We were able
Speaker 11: to maintain profitability in Q one, but we think second
Speaker 11: quarter is going to be a little bit challenging and
Speaker 11: then we start to see some improvement in the back half.
Speaker 3: Of the year.
Speaker 4: Given how exposed you are to the US market, Paul,
Speaker 4: what is your concern level in terms of tightening credit.
Speaker 4: We talk all about smaller banks and restricting credit on
Speaker 4: the margins, in particular when it comes to auto lending.
Speaker 5: Are you seeing that already? How aware are you of that?
Speaker 11: We haven't seen that affecting our consumers and our customers,
Speaker 11: and you know We obviously have a captive financing arm
Speaker 11: through GM Financial. Their credit statistics we look at them
Speaker 11: every week and they're still they're still quite strong. We've
Speaker 11: seen a little bit of normalization but really back to
Speaker 11: kind of pre COVID levels, but nothing that we've seen
Speaker 11: that gives us any area of concern right now for
Speaker 11: our consumers.
Speaker 1: Paul, You've got a familiarity with Auburn, Alabama, and I
Speaker 1: see in Auburn there's sixty two public charging stations, but
Speaker 1: only six are free EV charging stations. Does General Motors
Speaker 1: have to provide leadership and set up a grid of
Speaker 1: electric charging stations across America?
Speaker 11: So this is an area that we we got out
Speaker 11: to an early start on TOM as we started to
Speaker 11: build out that network, and we think it's an important
Speaker 11: piece for EV adoption across the country for sure. But
Speaker 11: we committed about seven hundred and fifty dollars to a
Speaker 11: multi pronged charging strategy. The leading piece of it was
Speaker 11: a partnership with Pilot Flying JA to help increase the
Speaker 11: interstate system for road trip charging across the board. But
Speaker 11: we also partner with our dealers in local communities to
Speaker 11: locate chargers for those families that may not have one
Speaker 11: in their home, and really we feel like we need
Speaker 11: to provide solutions for everyone across the board. But you know,
Speaker 11: paid charging is actually something that's I've found as far
Speaker 11: more economical than even filling up your car with gas.
Speaker 11: So it's something that ultimately we're committed to.
Speaker 1: What are you to do in the dividend, I'm absolutely fair,
Speaker 1: I've been talking about use of cash right now. I
Speaker 1: got a gross yield to one percent. I'm not even
Speaker 1: sure what dividend growth is. Describe the five year dividend
Speaker 1: growth forward for General Motors.
Speaker 11: So we look at our dividend as an important part
Speaker 11: of our capital allocation priorities. You know, the first one
Speaker 11: is obviously investing in the business. We have a lot
Speaker 11: of capital that we are investing for the transformation, eleven
Speaker 11: to thirteen billion dollars this year alone. But we're still
Speaker 11: generating really sizeable amounts of free cash, and that's a
Speaker 11: testament to both the team as well as the demand
Speaker 11: for our products across the board. This past quarter, we
Speaker 11: repurchased about three hundred and sixty five million dollars of
Speaker 11: stock while also early retiring one point five billion dollars
Speaker 11: of debt, so taking care of the balance sheet, being
Speaker 11: prudent with our capital across the board and a dividend
Speaker 11: is a part of that. But we also are actively
Speaker 11: using share repurchases as a tool to return capital to shareholders.
Speaker 6: Have you noticed how much more comfortable CFOs not to
Speaker 6: when they beaten Rice?
Speaker 12: Have you noticed that it is his voice change? Okay, yeah,
Speaker 12: it's common, Jacobson. Thank you, say for sure, General Mode CFO.
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