Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside
Speaker 1: my co host Matt Miller.
Speaker 2: Every business day, we bring you interviews from CEOs, market pros,
Speaker 2: and Bloomberg experts, along with essential market moving news.
Speaker 1: Find the Bloomberg Markets podcast called Apple Podcasts or wherever
Speaker 1: you listen to podcasts, and at Bloomberg dot com slash podcast.
Speaker 1: All right, so let's start with you on a rog Microsoft.
Speaker 3: I don't know.
Speaker 1: I thought it was a good quarter. I'm you know,
Speaker 1: if there's dips, you know, five or a PM, I'd
Speaker 1: be buying the dips here. What did you take away
Speaker 1: from Microsoft? Stocks had a rip this year.
Speaker 4: I think that's what it is. It's had to rip,
Speaker 4: and people are just digesting the news. I think it
Speaker 4: was a good quota, as you said, But people, I
Speaker 4: think had unrealistic expectations that the AI Will Cloades, is
Speaker 4: going to blad out the cloud number, which I think
Speaker 4: will happen over the next twelve to twenty four months,
Speaker 4: but it's not immediate. It's just going to take some time.
Speaker 5: Well, in terms of things that are going to take
Speaker 5: some time, I feel like that also applies to the
Speaker 5: AI play with Alphabet Google. What are you thinking, Mendep
Speaker 5: when it comes to whether that AI chatter is going
Speaker 5: to translate into actual money for Alphabet.
Speaker 6: Well, so the good thing for Alphabet was yesterday the
Speaker 6: expectations were somewhat muted around search and YouTube, and what
Speaker 6: they showed was this business is as resilient as it
Speaker 6: can be, even in an environment where at pricing is
Speaker 6: still facing some headwinds. But I think what Alphabet showed
Speaker 6: yesterday is one they are able to keep the engagement,
Speaker 6: so concerns around chat GPT eating their lunch were overblown.
Speaker 6: And then on the cloud side, it was a pretty
Speaker 6: strong number. Twenty eight percent growth, thirty two billion dollar
Speaker 6: run rate for cloud. That's pretty impressive. And now cloud
Speaker 6: business is not a drag on profitability as it was
Speaker 6: last year. So I think Netnet, I mean they're kind
Speaker 6: of optimizing the cost side of the equation. Ruth Pett
Speaker 6: actually was elevated into the president role. And look, I
Speaker 6: think once you start to see a bound cyclical rebound
Speaker 6: in AD spending, you will see double digit EPs growth
Speaker 6: in this name and they can compound for the next four.
Speaker 7: Or five years.
Speaker 1: All right, So let me ask us either both of
Speaker 1: you guys, I want to hear from Matt Miller tells
Speaker 1: me chat GPT bing is like awesome and that Google
Speaker 1: doesn't have a chance. What do you guys think about that?
Speaker 6: Well, last night they showed the search revenue grew a
Speaker 6: robust five percent.
Speaker 1: So okay, when I was covering Google, if they put
Speaker 1: a five percent print up, we take them out to
Speaker 1: the woodshed. Now you're telling me it's robust.
Speaker 6: And YouTube premium that was the real standout. So YouTube
Speaker 6: ad revenue grew four point five percent, Premium, which is
Speaker 6: incorporated in their other segment, grew twenty four percent. Compare
Speaker 6: that to a Netflix and Spotify. I mean they are
Speaker 6: having all sorts of issues which earned raising prices. In
Speaker 6: the case of YouTube, this is like YouTube premium is
Speaker 6: almost an eight to ten billion dollar revenue business growing
Speaker 6: high teens. So they are taking share of when it
Speaker 6: comes to streaming, and it's a higher margin business than
Speaker 6: Netflix because this is all usually generated content.
Speaker 1: Full disclosure, Bloomberg Markets is on YouTube, all right, So, honor,
Speaker 1: what does Microsoft say about chat GPT bing? Is it
Speaker 1: a thing?
Speaker 4: So for Microsoft, search revenue declining and going to be
Speaker 4: weak next quarter? And LinkedIn, which is based on advertising
Speaker 4: declining and going to be weak next quarter.
Speaker 1: So Google really and Snap had some weak numbers too.
Speaker 6: So social media ad pricing continues to be weak. We'll
Speaker 6: find out from Meta if that is the case, or
Speaker 6: Snap is uh, you know, a standout in terms of
Speaker 6: the weakness. But I think Search we know has the
Speaker 6: highest ry when it comes to ad spend, and in
Speaker 6: the case of Google, clearly the ad pricing was much
Speaker 6: stronger than others.
Speaker 5: So is there a potential read through of the ad
Speaker 5: Snap numbers on advertising to Meta or is Meta such
Speaker 5: a BMT that you can't reach.
Speaker 6: I'm in the camp that Meta's ad pricing numbers will
Speaker 6: also be bad. Meta is doing well in terms of
Speaker 6: cost cutting and they obviously are the scale player when
Speaker 6: it comes to social media, but this will still be
Speaker 6: a weak ad pricing environment for Meta as well. I
Speaker 6: think Reels maybe a bright spot, given they have talked
Speaker 6: so much about you know, competing with TikTok and threads.
Speaker 6: I mean, we'll find out more about it. I think
Speaker 6: they're going to pair back on their reality labs ambitions.
Speaker 6: The whole Meta Worse thing that was a big drag
Speaker 6: last year, but it's still when you compare Meta Story.
Speaker 6: It's a combination of four of their most prominent apps,
Speaker 6: and the Blue app, which is about forty billion rund
Speaker 6: rate in our view, is still declining and that is
Speaker 6: a tough way to fill. When it comes to the
Speaker 6: top line.
Speaker 1: Meta stock up one hundred and forty eight percent year
Speaker 1: to date. Wow up another one and a half percent today.
Speaker 1: Go figure? All right on rob you talk, I know
Speaker 1: you and Mandeep and the tech team have put together
Speaker 1: this seminal report on AI.
Speaker 8: How do I find it?
Speaker 1: On the Bloomberg terminal?
Speaker 6: You can go to iet Internet dashboard and.
Speaker 1: That's where it is. Okay, So that is a seminar report.
Speaker 1: If you want to know what AI is and whether
Speaker 1: it's a scam or a croc or whether it's real
Speaker 1: like Dani's from Webrosecurities says, you can go there and
Speaker 1: check it out. So BI space, I n ET you
Speaker 1: find that report there anorak. When you talk to institutional investors,
Speaker 1: how are they playing? First of all, how do they
Speaker 1: view AI? Is it a seminal event in tech? And
Speaker 1: if so, how do they play it?
Speaker 4: I mean from our side, in the software side, it
Speaker 4: is the cloud providers that can really benefit from this
Speaker 4: because you have to build those applications in the fastest
Speaker 4: processing environment, and that can only be on the cloud.
Speaker 4: Right now, Microsoft has an advantage because of its open
Speaker 4: EI relationship. We think Amazon will catch up over the
Speaker 4: next six to twelve months. We think Google's already there
Speaker 4: with their products. These three companies will benefit more than
Speaker 4: anybody else on the software.
Speaker 5: Well, I know that you know this, but I love
Speaker 5: the funny quotes from Earning's calls. I'm just going to
Speaker 5: repeat it for our audience, the AWS CEO said yesterday,
Speaker 5: kind of taking a shot at Microsoft. It's interesting that
Speaker 5: somebody who's not running their own models, like Microsoft, which
Speaker 5: outsource to open AI, would argue that they've got such
Speaker 5: deep expertise in this area. What do you make of
Speaker 5: a comment like that.
Speaker 4: See, but for the first time, Amazon's feeling the heat.
Speaker 4: They haven't felt that in like what last ten, twelve,
Speaker 4: fifteen years.
Speaker 5: They now have a petition.
Speaker 4: They have a massive competition now with Microsoft because they
Speaker 4: are coming up with products on a monthly basis. The
Speaker 4: pace at which they are coming up with add ons
Speaker 4: to their code products such as off is get Love.
Speaker 4: I mean, it's just it's just remarkable how that's happening. So,
Speaker 4: I mean they have to be feeling pressure at this point.
Speaker 4: I think there's a little bit of that. I think
Speaker 4: Amazon Web Service is going to be weak next quarter
Speaker 4: next week when they report, and let's see what he says.
Speaker 1: Then all right, men, deep the ride sharing biz. What
Speaker 1: are we going to hear from the Ubers and the
Speaker 1: lift of the world. And again I am agnostic between
Speaker 1: the two. Whatever's got the lowest price, That's how I go.
Speaker 6: I mean, so far, the story is Uber is taking
Speaker 6: market share. Lift has lowered prices to reclaim that share.
Speaker 6: But we know this is a scale business and there
Speaker 6: is a big focus on profitability this year. So clearly
Speaker 6: Uber is in a much better situation. The delivery side,
Speaker 6: I think will continue to be a drag on their
Speaker 6: overall free cash flow and the CFO transition. I think
Speaker 6: that was the other big news with Uber, so something
Speaker 6: that I think investors want to know more about.
Speaker 5: Will those third party partnerships be a tailwind for them
Speaker 5: heading into earnings for it with Domino's.
Speaker 6: Yeah, yeah, I think, Look, if everyone realizes that they
Speaker 6: have the traffic when it comes to you know, people
Speaker 6: looking for a meal or ride Uber is the go
Speaker 6: to place. It's a verb, and so every big chain
Speaker 6: right now is looking to partner with them just to
Speaker 6: be on the platform. Dominos is still doing their own delivery,
Speaker 6: so they're not bank and so that is what was interesting.
Speaker 6: They're just using them as a customer acquisition channel for
Speaker 6: people who are ordering online.
Speaker 8: I just don't get it.
Speaker 1: Over the last five years, Uber's compound and a return,
Speaker 1: it's been about flat okay, lift compoundent and your return
Speaker 1: over the last five years negative thirty percent is all
Speaker 1: because of Uber Eats, which I don't do, by the way.
Speaker 1: I think there's the charges they put on for like
Speaker 1: a twenty dollars PiZZ is ridiculous.
Speaker 6: But it's a tough business. I mean, three sided marketplace.
Speaker 6: It's a low gross margin business. You just can't change
Speaker 6: the margin profile of the business. And on top of it,
Speaker 6: it's so hard to maintain a supply. I mean, the
Speaker 6: supply is constantly turning.
Speaker 5: And in New York you've got Curb as well, which
Speaker 5: is the cheapest by far. It's the taxi hailing app.
Speaker 5: So I know that's a very niche market.
Speaker 1: But walk around the corner and get a slice. I
Speaker 1: mean what's the big deal? On a rock ran and
Speaker 1: man Deep Singh senior tech analysts, they lead our technology
Speaker 1: research covered how many analysts do you guys have around
Speaker 1: the world and all that stuff, like twenty in the
Speaker 1: tech team and the tech team we got twenty people
Speaker 1: doing nothing but the tech space based in the US,
Speaker 1: based in London, based in Hong Kong and other parts
Speaker 1: of Asia. So we got the tech space covered. Check
Speaker 1: it out. Man Deep Singh on a rock run a
Speaker 1: senior analysts. We're kind of running that business for us,
Speaker 1: and we appreciate that.
Speaker 3: You're listening to the team. Ken's are live program Bloomberg
Speaker 3: Markets weekdays at ten am Eastern on Bloomberg dot com,
Speaker 3: the iHeartRadio app and the Bloomberg Business app, or listen
Speaker 3: on demand wherever you get your podcasts.
Speaker 1: All right, I n go, it gets you the Bloomberg
Speaker 1: Index browser. I look at the Bloomberg US agg total
Speaker 1: return value UNHEEDGED. It's up two percent this year, so
Speaker 1: the bond people are doing a little bit better than
Speaker 1: the last year, which was the disaster. And I look
Speaker 1: at the Bloomberg US Corporate high Yield total return that's
Speaker 1: up six point five percent, so again some nice returns
Speaker 1: into fixed income businesses this year after a dismal twenty
Speaker 1: twenty two. Had you play it well? One of the
Speaker 1: ways is through you can do some ETFs kids. Johanna
Speaker 1: Gayegos joins us. She's a co founder of bond Blocks
Speaker 1: that is an ETF biz that focuses on the fix
Speaker 1: income business. Joanna joins us here in our Bloomberg Interactive
Speaker 1: Broker studio. So, Joanna, where are you seeing kind of
Speaker 1: opportunities in fixed income this year after again a very
Speaker 1: tough twenty twenty two for that that sector.
Speaker 9: Yeah, I think in context of twenty twenty two and
Speaker 9: the returns here today you just mentioned, like those are
Speaker 9: returns of broad indexes in fixed income AG and obviously
Speaker 9: high yields and investment grade, and what we're trying, I
Speaker 9: really want investors to do and encourage them to do.
Speaker 9: And I think what bond Blocks is all about is
Speaker 9: look across the full spectrum of fixed income opportunities to
Speaker 9: cross asset classes, and in particular look a little further
Speaker 9: down the credit spectrum all the way up into high yield.
Speaker 9: And that's because there's a lot of difference across the
Speaker 9: credit space in sectors and in ratings categories, and right
Speaker 9: now with yields the way they have progressed and they're
Speaker 9: going to continue to progress for the rest of twenty
Speaker 9: twenty three, and the resilience we've seen in these corporations
Speaker 9: balance sheets. You know, you're being compensated very well for
Speaker 9: taking on this risk. You have a lot of income
Speaker 9: to cushion any potential downturns, and you know you you
Speaker 9: should consider going even you know, as far down, you know,
Speaker 9: the high starting with triple starting with triple reinvestment grade
Speaker 9: down to triple C and high yield.
Speaker 7: You really need to take a look.
Speaker 9: At those spaces because I think there's a lot of
Speaker 9: strength there and you know, you know, so far through
Speaker 9: all of this twenty twenty three, I don't think investors
Speaker 9: are paying too much attention.
Speaker 5: Thenization And how are you thinking about longer duration and
Speaker 5: the calculation in terms of how much positioning to do
Speaker 5: around longer duration?
Speaker 9: Yeah, so I think the important thing for longer durations,
Speaker 9: if you're taking very long duration, you're thinking that something
Speaker 9: is going to turn with the economy, and that you
Speaker 9: know you're positioning yourself for that event.
Speaker 7: The way we see duration is that it's a.
Speaker 9: Really important, precise tool that you should be managing, and
Speaker 9: you should be careful of how it is existing in
Speaker 9: your portfolio because it represents all the interest rate risk
Speaker 9: in your portfolio. So the way we think about it
Speaker 9: is across a whole spectrum of duration. So we would
Speaker 9: recommend that people along this.
Speaker 7: Path start adjusting their duration as we get more and
Speaker 7: more information.
Speaker 9: I mean, what people have been doing in our duration
Speaker 9: products to date is they've been you know, buying the
Speaker 9: short side of the curve and you know, reducing their
Speaker 9: duration as much as possible. I think they've really been
Speaker 9: doing that as a cash alternative, though not really taking
Speaker 9: an investment view. And so you know, here we are.
Speaker 9: Our view is that it's unlikely that there's going to
Speaker 9: be a recession in twenty twenty three, but we have
Speaker 9: the tools that allow you to express that view.
Speaker 1: So where are you seeing your clients or where you're
Speaker 1: seeing the funds flows across your products?
Speaker 3: Right now?
Speaker 1: Where are people because I mean you could go to
Speaker 1: a piece of two your paper and get four point
Speaker 1: nine percent just sitting in a two your treasury. Where
Speaker 1: are you seeing kind of some of the fun flows.
Speaker 9: Yeah, so we're still we're seeing a lot of flows
Speaker 9: in the shorter.
Speaker 7: End because people are still positioning themselves with those risk
Speaker 7: free yields.
Speaker 9: I mean, again, I encouraging our investors to look further
Speaker 9: out on either duration spectrum or the credit on the
Speaker 9: credit spectrum. But we've also started to see couple trades
Speaker 9: across the treasury curve and the belly of the curve
Speaker 9: five seven and a few long trades. So there's a
Speaker 9: there's there's some there's some notion. There's still you know,
Speaker 9: overall in ETFs, Treasury ETFs, government ETFs are still you
Speaker 9: know close except for July, we're sixty percent of flows
Speaker 9: in ETF in ETF fixing and flow, so people aren't
Speaker 9: really stepping into that risk yet.
Speaker 1: What's what what's in your high yield ETF products? What
Speaker 1: are what's typically in that ETF.
Speaker 9: Yeah, So what's different again back to comparing us to
Speaker 9: a broad based index, whether it's investment grade or high
Speaker 9: yield or even the AG, is that we've cut up
Speaker 9: the exposures in high yield in particular into ratings categories
Speaker 9: and also sector category. And what you know is really
Speaker 9: fascinating is like you can really play some of.
Speaker 7: These views that you guys talk about every day, like.
Speaker 9: If you want, you know, the most balance sheet strength
Speaker 9: that or with the lowest default risk right now, that
Speaker 9: would be the XBB product, right, so it's the first,
Speaker 9: you know, the first frawway into high yield.
Speaker 7: That's the first the highest level of.
Speaker 9: Rating in high yield.
Speaker 7: If you really think that.
Speaker 9: The infant session isn't coming and you're gonna avoid it
Speaker 9: in twenty twenty three, which is what I think, Yeah,
Speaker 9: you should consider looking at the triple C product. It's
Speaker 9: yielding a lot, the default rate isn't above normal averages,
Speaker 9: and you know, if you even just it's not about
Speaker 9: like going all in, but it's about maybe adding some
Speaker 9: of that exposure into your portfolio just to improve your results.
Speaker 9: Another you've talked about it in the previous session of it,
Speaker 9: like consumer cyclicals and high yield is the best performing
Speaker 9: sector in high yield. So it's telling you obvious that's
Speaker 9: the strength of consumer.
Speaker 7: But in our energy.
Speaker 9: Sector, product is also a way to play a really
Speaker 9: strong balance sheet and high quality because of what's developing
Speaker 9: you know, through through through the markets. There so the
Speaker 9: dispersion amongst the sectors and just the seven sectors.
Speaker 7: That we have is over five hundred basis points.
Speaker 9: The best performing is close to nine percent, which is
Speaker 9: consumer cyclicals. The worst performing is technology and telecom, and
Speaker 9: it's it's it's.
Speaker 7: Just about three or four percent, So five.
Speaker 9: Hundred basis point difference. There's a lot of opportunity that
Speaker 9: you know, people should be considering as we still see
Speaker 9: this resilience and you know, we're getting closer and closer
Speaker 9: than a twenty twenty three.
Speaker 5: Yeah, this consumer resilience ticker is so interesting. I have
Speaker 5: it up on my terminal right now. It looks like
Speaker 5: you are having a great year in that space. What
Speaker 5: are what are kind of the specifics that go into that,
Speaker 5: because I'm I'm fascinated and kind of the continued strength
Speaker 5: of the consumer. So I'm curious about the calculation.
Speaker 9: Yeah, it's the same type of categorization you see in
Speaker 9: equity sector products. It's it's a group of issuers in
Speaker 9: that sector, consumer cyclicals. And so what it represents is
Speaker 9: all of all of the debt in our high yield
Speaker 9: products are representing those firms ability to cover their interest,
Speaker 9: their their their balance sheets, their revenues, and how well
Speaker 9: they're paying their debt. And so you know, as the
Speaker 9: default rates are again maintain for like historical.
Speaker 7: Averages this year, spreads are actually.
Speaker 9: Tightening across the category, and high yield not widening. So
Speaker 9: there's a lot to like consider that. You know, whatever
Speaker 9: category it is. If you're an energy producer, if you're
Speaker 9: an energy company, that's what's in our energy sector. So
Speaker 9: you're benefiting from the You're benefiting from the characteristics of
Speaker 9: those sectors, plus the characteristics of individual issuers and the
Speaker 9: resilience and the health of the fundamentals that are there.
Speaker 8: All right.
Speaker 1: We always love talking to Joanna and Joanna Go Diego's
Speaker 1: co founder of bond Blocks. They do the ETF thing,
Speaker 1: but they do the ETF thing with that fixing comes focused,
Speaker 1: so we don't talk about that maybe as much as
Speaker 1: you sure, So it's great checking in with Joanna occasionally.
Speaker 3: You're listening to the tape Cat's are live program Bloomberg
Speaker 3: Markets weekdays at ten am Eastern on Bloomberg Radio, the
Speaker 3: tune in app, Bloomberg dot Com, and the Bloomberg Business App.
Speaker 3: You can also listen live on Amazon Alexa from our
Speaker 3: flagship New York station, Just say Alexa play Bloomberg eleven thirty.
Speaker 1: Let's Go right to our next guest, Alex Chaloff. That
Speaker 1: is a jailer for Cheliff Showoff, Sholoff, shooff. Okay, I'm
Speaker 1: on that.
Speaker 8: Put your shawl on, you take your shawl off.
Speaker 1: There we go boom.
Speaker 5: I like a smart guy, because where did he get
Speaker 5: his mba usc best university in the world.
Speaker 1: We go right on, right on, man, I like it.
Speaker 5: I like it, Alex she We've got a duke guy
Speaker 5: in the room.
Speaker 1: CIO of Bernstein Private Wealth. That's a good name on
Speaker 1: this street, Bernstein, Alex. We got a fed day today.
Speaker 1: We make a big deal of it here at Bloomberg.
Speaker 1: What are you looking for here? What are you telling
Speaker 1: your clients here? As it relates to our Frederick Reserve
Speaker 1: and it's impact on the market.
Speaker 8: No surprises this afternoon they raised twenty five Palll is
Speaker 8: extremely hawkish in his comments. Market doesn't like it, but
Speaker 8: that's reality. And then we move on. It's all about
Speaker 8: September twenty.
Speaker 5: And as you know, J. Powell has to be hawkish
Speaker 5: and he's going to be. But sometimes you get a
Speaker 5: tiny slip up in his comments and he reveals a
Speaker 5: little dubbishness. Are you anticipating that?
Speaker 8: I think the last few meetings he has, we haven't
Speaker 8: seen the slip up or intentional or otherwise. Our view
Speaker 8: is that he is very deliberate in his language. It's
Speaker 8: like a free lunch. There's no cost to him being hawkish.
Speaker 8: It doesn't cost, it doesn't grow the balance sheet, it
Speaker 8: doesn't change the economy. He can do it. And if
Speaker 8: all the harm is is that he moves rist acids down,
Speaker 8: that's okay. So I think he's he'll be very disciplined,
Speaker 8: very intentional in his language.
Speaker 1: Well, I mean, the risk I see out there is
Speaker 1: he's going to push this economy through recession. Who wants that.
Speaker 1: I've taken recession off the table personally, but he could
Speaker 1: push it right into Recessionho wants that he could. But
Speaker 1: our house view is that off landing is highly likely.
Speaker 1: It's largely on the back or almost entirely on the
Speaker 1: back today of the strength and the labor market which
Speaker 1: will flow through to the consumer. You know, you have
Speaker 1: an unemployment rate which for all intents and purposes is
Speaker 1: effectively zero. Anyone that wants a job can find a job.
Speaker 1: You've got twenty five to fifty four year olds eighty.
Speaker 8: One percent employed. That's a thirty year high. You've got
Speaker 8: wage growth finally tipping back to positive. So our view
Speaker 8: is that the strength and labor is strong enough to
Speaker 8: push us through. And look, if this is it, if
Speaker 8: this is a hike some hawkish dialogue and then a pause,
Speaker 8: or we get the same thing in September, we're through.
Speaker 8: So we are very close to the end of this,
Speaker 8: so we're optimistic about it.
Speaker 5: What's your timeline on a soft landing.
Speaker 8: It's going to be over, they'll tell you when it's over. Okay, right,
Speaker 8: It's going to be one of these things where in
Speaker 8: a year they'll say, oh, guess what, we were zero
Speaker 8: point one or maybe even had one quarter of negative GDP,
Speaker 8: but that's it. But it'll be a two thousand and
Speaker 8: end of twenty event where they talk about twenty three
Speaker 8: and Q one twenty four.
Speaker 5: Do you think there's a potential then of us getting
Speaker 5: to that soft landing but the consumer still feeling like
Speaker 5: inflation is just as bad as it has been.
Speaker 8: I think that's a reality. The good news is that
Speaker 8: household balance sheets continue to be strong, and you get
Speaker 8: some wage growth that continues to grow on itself. I
Speaker 8: think the compounding effect will make things easier. You've already
Speaker 8: seen some pullback in some of the blowout areas of inflation.
Speaker 8: Used cars has come to airline prices have come down,
Speaker 8: so they've been isolated, but they're starting to happen. So
Speaker 8: our view is that inflation isn't going away. It's not
Speaker 8: going to zero overnight, and it's not as if we'll
Speaker 8: be in a deflationary period. So you're not going to
Speaker 8: go fly Los Angeles to New York for one hundred
Speaker 8: and ninety nine bucks anymore. That's just the reality. But
Speaker 8: as far as year over year changes, those will be
Speaker 8: certainly less extreme.
Speaker 7: All right.
Speaker 1: So given that kind of backtrop, what are you telling
Speaker 1: your Burnsteain private wealth management clients to do here? How
Speaker 1: much risk are you putting on the table for them?
Speaker 8: There's two main themes that we're focused on. One is
Speaker 8: extend duration. Don't be afraid of the bond.
Speaker 1: More duration.
Speaker 8: You got iteration, Okay, it's cash, you've been nice, I'm
Speaker 8: get two year cash. In short term. We had a thing. Okay,
Speaker 8: it was okay, okay, but now we've got to move on.
Speaker 8: It's not you, it's me. So we're breaking up with
Speaker 8: cash and money markets and looking at extending duration. I
Speaker 8: think you're going to clip the coupon while you wait
Speaker 8: for the FED to be done. If we get an
Speaker 8: equity market sell off, and everyone who thinks soft landing
Speaker 8: is wrong, guess what. Bonds are way more protective than
Speaker 8: something in money markets in short and next year our view,
Speaker 8: when they start cutting, you'll pick up price appreciation. So
Speaker 8: we might be early, but I'm okay. I'd rather be
Speaker 8: early than wait here, and I think we're just on time,
Speaker 8: by the way. That's theme one. Theme two is private
Speaker 8: markets take advantage of the dislocation that's occurred in the
Speaker 8: private markets and start to put money to work. That's
Speaker 8: probably a three year theme, but it's happening right now.
Speaker 8: Some really interesting opportunities in privates.
Speaker 1: So how do you get how do you do that?
Speaker 1: How do you play the private markets?
Speaker 8: I think you're paid, especially in real estate. I think
Speaker 8: you want to say this is interesting, but this is
Speaker 8: probably a Q one twenty four start date, So continue
Speaker 8: to watch, maybe for a selective deal here or there.
Speaker 8: It's interesting, but on a wholesale fashion, I wait till
Speaker 8: next year. Private debt very interesting today. There's a lot
Speaker 8: of different ways that you can access that market with
Speaker 8: fresh capital, both for original originations, new originations as well
Speaker 8: as secondary purchases. That's a big juicy part of the market.
Speaker 8: And then I think in private equity it's just start
Speaker 8: to dip your toe and engage in other people's mistakes
Speaker 8: over the next two to three years. So whether you
Speaker 8: do that through primaries they're taking advantage of a reset
Speaker 8: and evaluation market, whether you do that through secondaries that
Speaker 8: are buying other people's mistakes and taking advantage of some
Speaker 8: real motivation to sell. Like, there's a number of different
Speaker 8: ways you can play it.
Speaker 5: Are you still seeing a lot of dry powder out there?
Speaker 8: Huge? Huge? I mean, the only thing that I would
Speaker 8: say is you're starting to see institutional LPs that took
Speaker 8: off twenty twenty three because their portfolios were upside down
Speaker 8: with liquid versus illiquid. They've signaled to the market, we're
Speaker 8: probably going to take twenty four off as well. So
Speaker 8: big institutions walking away from the market, you still have
Speaker 8: sovereign wealth guys they've they're not stopping at all and
Speaker 8: in fact not turning that dial up. But then the
Speaker 8: ultra high net worth, you know, the Bernstein client is
Speaker 8: looking at allocating to private markets, in a greater degree
Speaker 8: to a greater degree than they have in the past.
Speaker 8: So I think you'll have that balance. It'll be a
Speaker 8: different it'll be a mix shift of who's the owner,
Speaker 8: but yes, lots of dry powder.
Speaker 1: How about the hedge fund allocation? What are you guys
Speaker 1: suggesting for your clients in terms of hedge funds?
Speaker 8: It really depends on what you're trying to accomplish. I
Speaker 8: think hedge funds as a blanket category people have had
Speaker 8: to revisit, and for good reason. Returns there were disappointing
Speaker 8: in twenty fifteen, sixteen twenty and eighteen nineteen. Some of
Speaker 8: them weren't protective during COVID. But for someone that has
Speaker 8: a big equity exposure where they don't want to give
Speaker 8: that up, but they want something to neutralize it, that's
Speaker 8: where hedge funds play a role.
Speaker 5: And I have to ask my favorite question here at
Speaker 5: Bloomberg the AI play. Are you getting any questions about it?
Speaker 5: Are you hearing a lot more skepticism because of the
Speaker 5: wealth level of your clients.
Speaker 8: I think our clients are, so the answer is yes,
Speaker 8: people are asking about AI. Bernstein has done tremendous research
Speaker 8: on the topic and have published on it and a
Speaker 8: number of different venues. But the questions our clients are
Speaker 8: asking more about the productivity. The change in the labor
Speaker 8: market will just destroy jobs in the next ten years.
Speaker 8: Will my grandchild graduating college in twenty twenty five, are
Speaker 8: they gonna have a job. That's where people are focused on,
Speaker 8: And our view is these things take a long time
Speaker 8: to play out. Will likely have some productivity gains that
Speaker 8: will be additive to the overall economy, but there's some
Speaker 8: things that just can't be replaced. So I tell them
Speaker 8: what I tell my own kids, my teenagers. Find something
Speaker 8: to do that a robot can't do, and if you
Speaker 8: focus on that, you're going to be okay.
Speaker 1: Thin'd be okay. What are some of the things you're
Speaker 1: suggesting your clients stay away from at this point.
Speaker 8: I think, you know, commodities are tricky, You've just got
Speaker 8: to be careful there. I don't know if that's a
Speaker 8: stay away from. I think that's an area. I think
Speaker 8: the shorter term, as I said, we're breaking up with
Speaker 8: short term fixed income, So I don't think there's, you know,
Speaker 8: some bomb that's going to go off in the treasury market,
Speaker 8: and the zero to two's but you know that you're
Speaker 8: gonna give up. You're gonna wake up in three years
Speaker 8: and regret having owned anything in short duration through this cycle.
Speaker 8: Other than that, it's it's this is look, this has
Speaker 8: been a wild market. It's like the rally. That's like
Speaker 8: a non rally, and so it doesn't feel maybe to
Speaker 8: everyone that it is a rally. But you know, we
Speaker 8: called the bottom in October. We wrote a note to
Speaker 8: our clients in October of last year to say, the
Speaker 8: next bowl market has begun, and it has.
Speaker 1: Do you think the market's a little too far over
Speaker 1: at skis here? With again, the market's moved up, you know,
Speaker 1: thirty percent off of that low.
Speaker 8: I think you're spot on, especially with what's going to
Speaker 8: happen with earnings. You know, you had a negative earnings
Speaker 8: in fourth quarter, a negative earnings in first quarter. Our expectation.
Speaker 8: I think we're right on the market of a negative
Speaker 8: eight percent earning. So this is the real you know,
Speaker 8: nuclear winter in the earning cycle for the S and P.
Speaker 8: And if you look at where the SMP levels are,
Speaker 8: you know where we were before this morning five percent
Speaker 8: away from an all time high. That there's a disconnect there.
Speaker 8: So yeah, we're you know, people talk about the magnificent seven. Yep,
Speaker 8: we talk about the forgotten four ninety three. And that's
Speaker 8: where the interesting opportunity could be. In the next chapter, where.
Speaker 5: Are you seeing the most opportunity within the smaller caps
Speaker 5: that's being ignored right now?
Speaker 8: Small caps are really interesting. I mean, the growth part
Speaker 8: of that market has exploded, having a terrific year. The
Speaker 8: more value, which is really bank small cap value on
Speaker 8: a look through basis are basically financials, and we know
Speaker 8: what's happened there over the spring and the stress around
Speaker 8: bank failures. So I think small cap as an overall
Speaker 8: allocation still makes sense. It should be a smaller part
Speaker 8: of the portfolio, but I'd rather play that as an
Speaker 8: asset class than try to find a name or two.
Speaker 8: You can be active, and we are in the small
Speaker 8: cap space, but I don't think you want to be
Speaker 8: concentrated in any way, shape or form.
Speaker 1: Just thirty seconds left energy kind of people. I don't
Speaker 1: think you can really agree on what to do with
Speaker 1: the energy trade. Are you guys still long energy? Because
Speaker 1: it had an't good run over the last several years.
Speaker 8: We've been selective in LPG and frankly had the right name.
Speaker 8: So feel really good about our exposure. But you know,
Speaker 8: long term, a lot of questions around the energy platform
Speaker 8: and the infrastructure, the cost of debt. It's heavily levered
Speaker 8: as a space, so just be cautious, all right.
Speaker 1: Alex Shallaff, thanks so much for joining us. Alex Shalloff,
Speaker 1: he's a CIO of Bernstein Wealth, our private wealth.
Speaker 3: You're listening to the team. Ken's are live program Bloomberg
Speaker 3: Markets weekdays at ten am Eastern on Bloomberg dot com,
Speaker 3: the iHeartRadio app and the Bloomberg Business app, or listen
Speaker 3: on demand wherever you get your podcasts.
Speaker 1: Bank news continues to hit the tape. We had some
Speaker 1: earnings out, we had some buyback information out. Let's bring
Speaker 1: in Alison Williams. She's a senior analyst for Bloomberg to
Speaker 1: tel Intelligence covering all the global banks and al so,
Speaker 1: let's start with Deutsche Bank. They had some earnings today.
Speaker 1: What's the takeaway for the German lender.
Speaker 10: I think the takeaway was that core trends are pretty good,
Speaker 10: similar to what we saw at the US banks. That
Speaker 10: net interest income is holding up better than expected. So
Speaker 10: obviously we're different rate regimes, but that is the key
Speaker 10: positive and especially true for Deutsche Bank. You know, trading,
Speaker 10: which is the biggest part of their business, fell ten percent,
Speaker 10: so that doesn't sound heroic, but it's better than the
Speaker 10: fifteen to twenty percent view that they've had in June,
Speaker 10: and they have an outlook that that should be improving
Speaker 10: in the second half. But their corporate bank and private bank,
Speaker 10: which are there more stable recurring revenue businesses, also doing better,
Speaker 10: increasing their share of the overall top line. So investors
Speaker 10: like that core cost cutting coming in line. They're delivering
Speaker 10: on their efficiencies. Investors like that. What investors don't like,
Speaker 10: I would presume was a negative for me at least,
Speaker 10: is the fact that their non recurring costs coming in higher.
Speaker 10: So we're structuring legal costs that we've heard a lot
Speaker 10: about and severance, so this is something that we've seen
Speaker 10: at most of the US banks. City and Morgan Stanley
Speaker 10: had relatively bigger charges, but we know that there's job cuts.
Speaker 10: The severance costs come today but should help the second
Speaker 10: half profit. And then finally buybacks, which they had actually
Speaker 10: announced last night, so it's a smaller it's a four
Speaker 10: hundred and fifty million buy back. It's about two percent
Speaker 10: of their market cap. That that's no way in comparison
Speaker 10: to you look at Wells Fargo, who also had an
Speaker 10: announcement last night thirty billion program eighteen percent of the
Speaker 10: market cap, although that will be over some period of time.
Speaker 5: I want to transition stateside and talk about PacWest, which
Speaker 5: was up by thirty percent earlier today now up by
Speaker 5: twenty seven percent on that news that it'll be sold
Speaker 5: off to Bank of California. Talk us through that deal
Speaker 5: and why the market is responding so positively to both
Speaker 5: of those names.
Speaker 10: I mean, I think, you know, to some extent, just
Speaker 10: getting some resolution to some of the issues that we
Speaker 10: saw in March. And PacWest was, you know, certainly one
Speaker 10: of the banks that investors have been watching, and I
Speaker 10: would say that you know, the fact that that deal
Speaker 10: will get done, and the fact that across the industry broadly,
Speaker 10: we're seeing deposits stablise, the cost of deposit pricing going
Speaker 10: up in the quarter, but generally the outlook more favorable
Speaker 10: is giving a lift to all the banks.
Speaker 1: Allison, you talk to us men mentioned the Wells Fargo
Speaker 1: buyback thirty billion dollars eighteen percent of the outstanding. That
Speaker 1: is that is size. Of course, what does that say
Speaker 1: about the regulator's view of the big US banks? You
Speaker 1: know now that they're allowing them to return some capital
Speaker 1: to shareholders.
Speaker 10: So I think Wells Fargo is a little bit of
Speaker 10: an exception. Uh, you know, certainly the regulators are allowing
Speaker 10: them you know today, but tomorrow we do get these
Speaker 10: Basil three endgame rules, and so that's going to be
Speaker 10: sort of another kink in terms of raising capital requirements
Speaker 10: for these banks, for Wells Fargo in particular, because they
Speaker 10: do have such sizeable excess they and again it's a
Speaker 10: thirty billion, but it's not necessarily today, so it's over
Speaker 10: a specific timeframe. But the Basil three endgame rooms are
Speaker 10: are thought to be a little bit more punitive on
Speaker 10: the trading side of things. That's a smaller business for
Speaker 10: Wells Fargo.
Speaker 5: And moving to back to the regionals again, are you
Speaker 5: anticipating that the regional bank rally that we're seeing today
Speaker 5: because of the PacWest move is not something that's going
Speaker 5: to be a little bit short lived or are we
Speaker 5: seeing more success to come for some of those regional names.
Speaker 10: Well, I think, you know, going back to my comments
Speaker 10: on you know, the deposit stabilization and just sort of
Speaker 10: moving past the issue in March, right, So that that
Speaker 10: was really where the dramatic underperformance came from these banks.
Speaker 10: First was the fear, and then was just the recognition that,
Speaker 10: you know, beyond the fear of deposit flight at a
Speaker 10: few specific banks, there was this broad fear about the
Speaker 10: cost of deposits rising those deposit outflows, that migration is
Speaker 10: expected to continue, but not certainly not at the fear
Speaker 10: full place that we saw at March. We saw that
Speaker 10: things were much more stable in the second quarter, and
Speaker 10: then you know, the outlook from the banks is that
Speaker 10: that you know, will continue to look better. Of course,
Speaker 10: part of that is predicated on rate cuts from the
Speaker 10: FED that are built into the curve in the coming quarters,
Speaker 10: so monetary policy will continue to.
Speaker 8: Play a role.
Speaker 1: Allison, talk to us about this Basil three rules that
Speaker 1: you referenced, pretending like we know nothing about what they are,
Speaker 1: so tell us what they are and why they're important
Speaker 1: for the big banks.
Speaker 10: So first, it's just the name endgame. I mean, can
Speaker 10: we finally just get the final set of rules that
Speaker 10: we'll be dealing with. You know, the Basil three imputent
Speaker 10: implementation has been you know, the guidelines and the rules.
Speaker 10: This has been going on since the financial crisis, so
Speaker 10: well over a decade in terms of regulators aim to
Speaker 10: make the banks safer. And so this last set of rules,
Speaker 10: which is really the US regulators you know, view on implementation.
Speaker 10: It'll be good to get the final set of rules.
Speaker 10: I would say that our regulatory and policy experts n BI,
Speaker 10: we are expecting, uh, you know, that there will be
Speaker 10: increased requirements across the biggest banks. Regulators have sort of
Speaker 10: broadcasts that that could add like a two percentage point
Speaker 10: increase to their capital ratios. This will be the proposal
Speaker 10: that we get tomorrow. It might not become finalized until
Speaker 10: perhaps a year from now, and then there'll be a
Speaker 10: cuple blow of yours basing period. So the banks it
Speaker 10: certainly have enough you know, money that they're generating in
Speaker 10: terms of internal capital to meet these guidelines over any
Speaker 10: such time period. But obviously it's it's a negative because
Speaker 10: it'll lower returns. That's how investors look at the profitability
Speaker 10: of these banks. But you know the other side of
Speaker 10: that is that they are safer and more sound, and
Speaker 10: so perhaps that could help the multiples.
Speaker 1: All right, Alison, Thanks as always for joining us and
Speaker 1: giving us your analysis and expertise on the global banking space.
Speaker 1: Alison Williams, senior Global Banks analysts for Bloomberg Intelligence, joining
Speaker 1: us on the phone there again. Wells Fargo big stock
Speaker 1: buy back thirty billion dollars. That's good news for Wells
Speaker 1: Fargo shareholders. Deutsche Bank putting up some numbers as alis
Speaker 1: and said, we're, you know, generally pretty solid in a
Speaker 1: tough environment for a bank that's had its challenges over
Speaker 1: the years.
Speaker 2: Thanks for listening to the Bloomberg Markets podcast. You can
Speaker 2: subscribe and listen to interviews of Apple Podcasts or whatever
Speaker 2: podcast platform you prefer. I'm Matt Miller. I'm on Twitter
Speaker 2: at Matt Miller nineteen seventy three.
Speaker 1: And I'm Faull Sweeney. I'm on Twitter at pt Sweeney.
Speaker 1: Before the podcast, you can always catch us worldwide at
Speaker 1: Bloomberg Radio.