WEBVTT - Netflix Transition Talk has Arrived 0:00:02.920 --> 0:00:10.719 Bloomberg Audio Studios, Podcasts, radio news. This is Bloomberg Business 0:00:10.720 --> 0:00:13.960 Wait inside from the reporters and editors who bring you 0:00:14.000 --> 0:00:18.360 America's most trusted business magazine, plus global business, finance and 0:00:18.400 --> 0:00:22.880 tech news. The Bloomberg Business Week Podcast with Carol Messer 0:00:23.040 --> 0:00:25.800 and Tim Stenebeck from Bloomberg Radio. 0:00:27.480 --> 0:00:30.000 Sharees of Netflix, you know that they're dropping. They're down 0:00:30.000 --> 0:00:32.479 about eight point three percent, the most in two years. 0:00:32.720 --> 0:00:36.160 Sharer started tumbling last night, the trade continuing lower into 0:00:36.240 --> 0:00:39.240 today's trade, following a week forecast for revenue at the 0:00:39.240 --> 0:00:41.960 company and a warning that the streaming giant will stop 0:00:41.960 --> 0:00:45.360 reporting subscriber numbers in twenty twenty five. You saw that 0:00:45.400 --> 0:00:47.080 as soon as it crossed last night, You're like, that's 0:00:47.120 --> 0:00:47.600 a big deal. 0:00:47.720 --> 0:00:49.879 It's a really big deal. I mean, less data. That 0:00:49.960 --> 0:00:52.519 is not something that investors want, it's not something that 0:00:52.600 --> 0:00:56.480 analysts want. All of that really overshadowing an otherwise strong 0:00:56.520 --> 0:00:58.040 start to the year. It's best start to a year 0:00:58.120 --> 0:00:59.760 going all the way back to twenty twenty and a 0:01:00.000 --> 0:01:04.679 blockbuster gaining subscribers in the last period. But subscriber gains, Carol, 0:01:04.760 --> 0:01:06.720 the company said, will be lower in this period. 0:01:06.760 --> 0:01:08.560 All right, So let's get to the interview. He was 0:01:08.560 --> 0:01:11.400 a bear on Netflix for years until he wasn't with 0:01:11.480 --> 0:01:14.440 us as Michael Pactor, Managing Director and entertainment analyst at 0:01:14.440 --> 0:01:18.280 Wedbush Securities. He's out there in Long Beach, California. Michael, 0:01:18.319 --> 0:01:20.319 let's just go to it down more than eight percent, 0:01:20.360 --> 0:01:24.080 that's selloff justified in your view, it is. 0:01:24.200 --> 0:01:28.400 I mean, I think Tim said something that probably isn't right. 0:01:29.200 --> 0:01:32.720 As an analyst, I prefer no information. It actually allows 0:01:33.520 --> 0:01:36.039 it allows, it allows me to share my insights and 0:01:36.080 --> 0:01:37.680 investors actually value them more. 0:01:38.640 --> 0:01:39.160 Well said. 0:01:40.480 --> 0:01:43.640 And the truth is, you know, this stock was valued 0:01:43.720 --> 0:01:48.240 for twenty years on subscriber growth, and that's all people 0:01:48.240 --> 0:01:50.040 cared about. You know, if you kind of remember, and 0:01:50.080 --> 0:01:51.640 I know you guys were in great school, but the 0:01:52.000 --> 0:01:54.520 dot com boom, all we cared about was the number 0:01:54.520 --> 0:01:57.960 of email accounts or the number of users. And that's 0:01:58.080 --> 0:02:03.160 true of Netflix from nineteen ninety seven until effectively yesterday. 0:02:03.960 --> 0:02:06.920 And what the company is now doing is acknowledging that 0:02:07.000 --> 0:02:10.560 it's no longer a super high growth company, but it 0:02:10.639 --> 0:02:13.920 is remarkably profitable. And so you know, we have to 0:02:13.960 --> 0:02:17.120 transition to looking at them as a low growth company 0:02:17.160 --> 0:02:20.080 with lots and lots of profit, and I think that 0:02:20.160 --> 0:02:24.000 what investors are missing today is that the spend on 0:02:24.200 --> 0:02:27.639 content is likely going to be steady. State there's you know, 0:02:27.720 --> 0:02:30.800 if you're spending seventeen billion a year on content at 0:02:30.800 --> 0:02:33.200 two hundred and seventy million users, do you really need 0:02:33.240 --> 0:02:36.480 to spend ten percent more at three hundred million users? Like? No, 0:02:36.720 --> 0:02:39.680 they have plenty of content, So the leverage from even 0:02:39.760 --> 0:02:42.440 modest growth is going to be massive, and the cash 0:02:42.440 --> 0:02:44.919 flow number is going to get giant. So yes, I 0:02:44.960 --> 0:02:47.359 think it's worth seven twenty five. I think the sell 0:02:47.400 --> 0:02:50.280 off is overdone. But people are disappointed because they've they've 0:02:50.320 --> 0:02:53.480 been trained to value these guys based on subscriber growth. 0:02:53.520 --> 0:02:56.799 But Michael doesn't sound like you're that disappointed that you're 0:02:56.840 --> 0:02:59.560 not going to get those subscriber numbers anymore, because you're 0:02:59.560 --> 0:03:01.360 thinking that this company needs to be valued in a 0:03:01.360 --> 0:03:01.880 different way. 0:03:02.919 --> 0:03:05.720 That's exactly right. And you know, Harvard Business School wrote 0:03:05.720 --> 0:03:09.639 a case about my valuation of Netflix, and I've been 0:03:09.680 --> 0:03:13.280 saying this for ten years. It wasn't sustainable as a 0:03:13.360 --> 0:03:17.560 high growth, low profit company. It had to transition to 0:03:17.639 --> 0:03:21.640 a low growth, immensely profitable company. They started to do 0:03:21.680 --> 0:03:24.080 that in twenty twenty two, and that's when we upgraded 0:03:24.160 --> 0:03:27.320 May of twenty two. And you know I said it 0:03:27.360 --> 0:03:29.840 then and I'm saying that now. They just had to 0:03:29.880 --> 0:03:33.200 complete the transition and acknowledge this is how we should 0:03:33.200 --> 0:03:35.640 look at them. We don't look at Facebook as a 0:03:35.680 --> 0:03:38.840 high growth user company. We look at as a high 0:03:38.880 --> 0:03:41.920 growth profit company. We don't look at Google as you know, 0:03:41.960 --> 0:03:44.400 adding users. We don't care at all. We just cared 0:03:44.400 --> 0:03:47.480 that they find better ways to monetize. Netflix has done that. 0:03:48.000 --> 0:03:50.800 They found better ways to monetize. The two big things 0:03:50.800 --> 0:03:54.200 are the ad tier, which not only grows revenue through 0:03:54.280 --> 0:03:58.680 higher revenue per thousand ads I'm sorry for thousand views, 0:03:59.080 --> 0:04:03.560 but also allows them to bring in lower, lower income 0:04:03.880 --> 0:04:07.400 customers and also allows them to retain people who are 0:04:07.440 --> 0:04:11.000 churning out. And then the second is password crack down 0:04:11.040 --> 0:04:13.880 no sharing. That means I'm going to pay more when 0:04:13.920 --> 0:04:16.160 my kids move out. I'm going to buy my kids 0:04:16.400 --> 0:04:19.360 seven dollars ninety nine cent subscriptions rather than make them 0:04:19.400 --> 0:04:23.080 pay themselves at fifteen forty nine. So these two things 0:04:23.200 --> 0:04:26.440 at a lot of revenue, and that's where we should 0:04:26.440 --> 0:04:28.359 really start looking at and mean we should start thinking 0:04:28.360 --> 0:04:31.480 about Netflix, says growing revenue? Who cares how many users 0:04:31.480 --> 0:04:31.719 they have? 0:04:33.279 --> 0:04:35.320 Let me ask you something and forgive me because I'm 0:04:35.320 --> 0:04:37.240 going to go in a tangent. But Tim knows that 0:04:37.320 --> 0:04:39.320 kind of test it Apple. Do you feel the same 0:04:39.360 --> 0:04:41.960 way about Apple that maybe it's a lower growth company, 0:04:41.960 --> 0:04:43.720 but it still sells a whole heck of a lot 0:04:43.760 --> 0:04:44.279 of stuff. 0:04:45.480 --> 0:04:47.960 Yeah, I mean I don't cover Apple. My colleague Dan 0:04:48.000 --> 0:04:50.400 i'ves does, but yes, you know, you sell five hundred 0:04:50.400 --> 0:04:53.000 million or nine hundred million phones a year. Do you 0:04:53.120 --> 0:04:56.279 really care as long as all those people use every 0:04:56.360 --> 0:04:59.039 app and they're paying in the app store, like, you 0:04:59.040 --> 0:05:01.359 don't care at all. So you know, the app store 0:05:01.400 --> 0:05:04.440 revenue is the part that's really growing. In the warranty 0:05:04.520 --> 0:05:08.040 revenue and all the service income from those guys and 0:05:08.120 --> 0:05:10.799 all the accessories. So if you have nine hundred million 0:05:10.800 --> 0:05:13.479 phones out there, they have more. You can sell nine 0:05:13.520 --> 0:05:17.200 hundred million AirPods. So people start thinking about the basket size. 0:05:17.360 --> 0:05:19.680 So yes, Amazon, same thing. Do we know how many 0:05:19.760 --> 0:05:23.680 users Amazon has? We don't care. I mean I personally 0:05:23.680 --> 0:05:26.440 went from one item a month to three items a 0:05:26.560 --> 0:05:30.640 day Amazon, and we all are doing that, so we 0:05:30.680 --> 0:05:34.039 all get it. We understand that Amazon just starts to 0:05:34.040 --> 0:05:36.920 replace all physical retail and we don't care if there 0:05:36.920 --> 0:05:39.479 are more users. Same with Apple, we don't care if 0:05:39.520 --> 0:05:42.240 there are more users as long as those people buy more. 0:05:42.839 --> 0:05:44.920 I love what you're saying. It's interesting, but it's like 0:05:44.960 --> 0:05:47.800 a total rethink about how we value these companies, or 0:05:47.839 --> 0:05:50.080 certainly how we report on these companies. Do we get 0:05:50.080 --> 0:05:53.400 to that point? Is the analyst investment community going to 0:05:53.520 --> 0:05:55.160 go there at some point? 0:05:55.279 --> 0:05:58.800 Well, they're there on every one of the you know, 0:05:58.880 --> 0:06:03.279 the big top ten companies except for Netflix and probably 0:06:03.360 --> 0:06:06.960 for Tesla and probably for Nvidia, every other company Microsoft, Like, 0:06:07.040 --> 0:06:10.800 nobody thinks Microsoft is growing users. They just think Microsoft 0:06:10.839 --> 0:06:14.279 is growing the way they monetize users. Nobody thinks Amazon 0:06:14.360 --> 0:06:17.919 is growing users, or Apple or Google. So no, I 0:06:17.920 --> 0:06:22.000 think that every large tech company, every quarter trillion dollar 0:06:22.120 --> 0:06:25.400 company or bigger, we should start thinking about them as 0:06:25.640 --> 0:06:29.279 achieving steady state users but figuring out how to grow 0:06:29.320 --> 0:06:31.719 basket size. And that's where Netflix. 0:06:31.320 --> 0:06:31.839 Is right now. 0:06:31.960 --> 0:06:34.560 Okay, Michael, I want to talk about these different levers 0:06:34.560 --> 0:06:38.560 that that Netflix has to use to increase revenue. I 0:06:38.560 --> 0:06:40.560 want to talk prices here. I mean, how much room 0:06:40.600 --> 0:06:45.920 does Netflix have especially in markets where it's really fully penetrated, 0:06:45.960 --> 0:06:49.120 like the United States, to actually raise prices. 0:06:49.880 --> 0:06:52.360 Well, I think that you're going to see streaming competition 0:06:52.600 --> 0:06:55.440 kind of drop by the wayside. You know, let's see 0:06:55.440 --> 0:06:58.680 what the new owners of Paramount choose to do. Sony's 0:06:58.720 --> 0:07:00.880 not going to be able to suffer through through big 0:07:00.920 --> 0:07:05.279 losses on Paramount Plus, so I don't know yet. Disney 0:07:05.320 --> 0:07:07.720 is not going to take losses forever. They'll flail for 0:07:07.760 --> 0:07:12.320 a bit. But as Disney pulls ESPN onto a standalone 0:07:12.360 --> 0:07:14.800 streaming service, they're going to realize that's a huge mistake. 0:07:14.880 --> 0:07:19.000 Peacock is unsustainable. So truthfully, I'd say people will probably 0:07:19.040 --> 0:07:23.000 pay about twenty bucks a month. Where the average user 0:07:23.160 --> 0:07:27.320 on Netflix consumes sixty five hours a month of content 0:07:27.880 --> 0:07:30.720 that's worth twenty bucks. I mean, that just doesn't turn 0:07:30.760 --> 0:07:34.000 out to be very expensive thirty cents an hour, so 0:07:34.080 --> 0:07:36.520 I think twenty they can get to. I think on 0:07:36.600 --> 0:07:39.600 the ad tier they could probably get to something like 0:07:39.760 --> 0:07:43.120 six ads per hour at forty bucks per thousand, and 0:07:43.360 --> 0:07:46.840 that means you're talking about twenty dollars or so per 0:07:46.840 --> 0:07:49.080 month just in ad revenue. So I could see the 0:07:49.120 --> 0:07:52.679 average revenue going up and this passwords sharing crackdown also 0:07:52.720 --> 0:07:54.800 is going to take that number above twenty. So I 0:07:54.800 --> 0:07:58.040 think twenty dollars per user is at least in the 0:07:58.120 --> 0:08:01.520 US and Canada is pretty realistic. Cut that in half 0:08:01.760 --> 0:08:04.120 probably for Europe, and then cut it in half again 0:08:04.680 --> 0:08:07.400 for rest of the world. You know, so again twenty 0:08:07.480 --> 0:08:10.320 bucks here, ten bucks Europe, five bucks rest a world. 0:08:10.520 --> 0:08:12.320 But I think they're going to get there. I really do. 0:08:12.680 --> 0:08:15.000 In terms of addam, you obviously like it. You as 0:08:15.040 --> 0:08:16.920 we mentioned, your twelve month price target of seven to 0:08:16.920 --> 0:08:19.880 twenty five thirty percent upside roughly from where we are. 0:08:20.520 --> 0:08:22.360 What are the problems? What are the risks? Though? With 0:08:22.440 --> 0:08:24.960 the Netflix story, I mean, nothing's ever perfect, except of 0:08:24.960 --> 0:08:26.880 course my co host right other thise. 0:08:27.840 --> 0:08:32.160 They're arrogance is probably their biggest their biggest adversary. They 0:08:32.280 --> 0:08:35.000 don't seem to think that they need the analyst community. 0:08:35.120 --> 0:08:38.080 So probably half the people who cover the stock could 0:08:38.080 --> 0:08:41.640 not explain to you what I just explained. They don't 0:08:41.640 --> 0:08:44.880 have analyst days, you know. They sent out something for 0:08:44.920 --> 0:08:48.280 the upfront meetings and they told my team we can 0:08:48.320 --> 0:08:50.640 send one person. We said, can we send me and 0:08:50.679 --> 0:08:55.840 my co analysts? And they said nope, only one, they're jerks. 0:08:56.640 --> 0:09:00.360 They don't seem to have any interest in hearing journal 0:09:00.400 --> 0:09:02.960 views about anything they're doing, so their game strategy is 0:09:03.000 --> 0:09:07.800 just idiotic. And again a very large shareholder Netflix told 0:09:07.800 --> 0:09:09.920 them they should talk to me about games. I was 0:09:09.920 --> 0:09:14.400 copied on the email introduction and theyed, they just don't care, 0:09:14.800 --> 0:09:17.360 so they think they know everything. You can watch their 0:09:17.400 --> 0:09:20.680 earnings call. Look at Greg Peters and Ted Sarandos. They 0:09:20.760 --> 0:09:24.719 are the two smartest people ever born. Like watch the 0:09:24.880 --> 0:09:27.920 having the earnings interview. You can tell they are. They're 0:09:27.920 --> 0:09:30.040 the smartest people ever born. So they don't need to 0:09:30.040 --> 0:09:32.560 hear from other people. That's their biggest, biggest probley. 0:09:32.720 --> 0:09:34.440 Yeah, in some context too. I mean you have been 0:09:34.480 --> 0:09:37.280 covering gaming for years too, so perhaps that's why you 0:09:37.320 --> 0:09:40.240 know some people recommend that you should talk to those 0:09:40.280 --> 0:09:41.959 folks about games. I'm wondering if that changes just in 0:09:41.960 --> 0:09:43.640 the last thirty seconds that we have with you, Michael, 0:09:43.840 --> 0:09:46.679 Does that change at all now that increasingly you argue 0:09:46.720 --> 0:09:48.440 they're viewed as a value stock, will they start to 0:09:48.440 --> 0:09:49.320 open up a little more. 0:09:50.520 --> 0:09:53.520 I don't think so. I think your first point that 0:09:53.960 --> 0:09:57.400 they're becoming more opaque, this has been their formula for success. 0:09:57.480 --> 0:10:02.360 They have consistent we lowered the number of data points 0:10:02.400 --> 0:10:05.040 that they provide to investors for the last fifteen years. 0:10:05.280 --> 0:10:07.920 This is their DNA, So no, I don't think so, all. 0:10:07.920 --> 0:10:10.680 Right, So appreciate your time today, Michael, have a great week. 0:10:10.679 --> 0:10:14.360 And Michael Pacter, Managing director and entertainment analyst at Webush Securities, 0:10:14.440 --> 0:10:17.360 joining us from Long Beach, California'm looking at shares of 0:10:17.400 --> 0:10:20.640 Netflix tim Dad about nine percent here, so pretty much 0:10:20.679 --> 0:10:22.880 hovering near their lows of the session, down the most 0:10:23.000 --> 0:10:25.120 in about two years, so certainly one of the laggards 0:10:25.120 --> 0:10:25.600 we're seeing. 0:10:27.720 --> 0:10:31.240 You're listening to the Bloomberg Business Week podcast. Catch us 0:10:31.280 --> 0:10:34.520 Live weekday afternoons from two to five pm Eastern Listen 0:10:34.559 --> 0:10:36.719 on Apple car Play and then brought auto with a 0:10:36.720 --> 0:10:42.080 Bloomberg Business app or watch us Live on YouTube Listen. 0:10:42.120 --> 0:10:44.200 We're focusing a lot on the equity trade today, but 0:10:44.320 --> 0:10:46.640 really what we've talked so much about throughout the week, 0:10:46.640 --> 0:10:49.559 and the reason that we've seen some volatility creep in 0:10:50.160 --> 0:10:52.439 once again on the side of US stocks and certainly 0:10:52.880 --> 0:10:55.400 putting pressure we're seeing that in the week overall, is 0:10:55.440 --> 0:10:57.960 that what we've seen Tim overall this week when it 0:10:58.000 --> 0:10:59.480 comes to US rates. 0:10:59.760 --> 0:11:02.120 Yeah, Yeah, US rates have shot higher Carol in fact, 0:11:02.400 --> 0:11:05.160 yields on the tenure this week, moving to levels not 0:11:05.360 --> 0:11:08.520 seen this year all the way going back to November 0:11:08.600 --> 0:11:11.160 of twenty twenty two. So certainly has to do a 0:11:11.200 --> 0:11:13.000 little bit with the way that people are thinking about 0:11:13.040 --> 0:11:14.160 the path of the Federal Reserve. 0:11:14.280 --> 0:11:17.000 Yeah, exactly. So it's kind of like TikTok, TikTok, everybody, 0:11:17.040 --> 0:11:20.079 because that is the sound of the Federal Reserve basically 0:11:20.120 --> 0:11:22.560 resetting the clock when it comes to what they want 0:11:22.600 --> 0:11:25.600 to do with interest rate cuts, putting them off longer 0:11:25.800 --> 0:11:28.880 as we know. Chicago Fed Bank President Austin Goolsby among 0:11:28.960 --> 0:11:31.240 the latest too way in today saying the US Central 0:11:31.280 --> 0:11:33.520 Bank team needs some more time. 0:11:33.480 --> 0:11:35.600 Writing about all of this. In a week two when 0:11:35.600 --> 0:11:37.800 we heard from Fed Chair J Powell, who confirmed we 0:11:37.840 --> 0:11:41.559 are indeed, yes, higher for longer on rates. Is Bloomberg 0:11:41.640 --> 0:11:45.240 News Federal Reserve and Economics reporter Katerina Sariva in our 0:11:45.360 --> 0:11:49.200 Houston bureau. Katerina, a great piece that really ties together 0:11:49.320 --> 0:11:52.120 kind of everything that we heard this week with Powell, 0:11:52.160 --> 0:11:55.439 the moves on rates, we know, the drill, the FED 0:11:55.640 --> 0:11:58.800 data dependent and yet Fed Chair J. Powell is cementing 0:11:58.840 --> 0:12:01.360 the message this week that led to the reset of 0:12:01.400 --> 0:12:04.120 the clock cutting rates. As you write, why do you 0:12:04.120 --> 0:12:06.600 think there was a significant shift this week when we 0:12:06.720 --> 0:12:08.800 heard from a lot of FED speakers in recent weeks 0:12:08.800 --> 0:12:11.240 that yes, that data has indeed come in a little 0:12:11.280 --> 0:12:11.960 hotter than we like. 0:12:13.480 --> 0:12:16.560 Yeah, well, I think, you know, as they say, it 0:12:16.559 --> 0:12:20.160 ain't over to the fat ladies things. I think in 0:12:20.240 --> 0:12:23.440 this case, you know, people are really looking for that 0:12:23.559 --> 0:12:26.520 guidance from the top, and I think especially getting it 0:12:26.559 --> 0:12:29.400 from the chair is a clear indication that this is 0:12:29.480 --> 0:12:33.800 kind of you know, we're now seeing a shift and 0:12:33.840 --> 0:12:36.840 it's kind of has broad support. You know, we've, as 0:12:36.880 --> 0:12:40.280 you mentioned, heard it from various FED officials, but now 0:12:40.320 --> 0:12:43.080 also from the chair, and you know, importantly we also 0:12:43.120 --> 0:12:46.280 heard it from the Vice chair earlier this week, and 0:12:46.400 --> 0:12:49.920 you've heard similar sentiments from John Williams, the president of 0:12:49.920 --> 0:12:53.360 the New York FED. So that's kind of your FOMC 0:12:53.559 --> 0:12:55.760 troika as they like to call it. So you know, 0:12:55.800 --> 0:12:58.240 the leadership is saying it, the others are saying it. 0:12:58.360 --> 0:13:00.560 So so now we can be sure that this is 0:13:00.640 --> 0:13:01.760 kind of the path forward. 0:13:01.880 --> 0:13:04.280 It's like in a household, you know, depending upon parents, 0:13:04.400 --> 0:13:06.680 like one is sometimes more strict. So it's like, you know, 0:13:07.080 --> 0:13:08.840 well mom said this or dad said this, Like it 0:13:08.880 --> 0:13:09.720 just holds a different way. 0:13:09.840 --> 0:13:10.360 We know that. 0:13:10.800 --> 0:13:13.600 I'm not saying one sex or the other. Whowell this 0:13:13.679 --> 0:13:17.040 kiss Jay Powell is just I don't know, he's both, 0:13:17.040 --> 0:13:20.080 I guess right. But having said that, it was significant 0:13:20.120 --> 0:13:22.760 to have him kind of finally get on board with 0:13:22.800 --> 0:13:24.800 this idea that, yeah, maybe we are going to stay 0:13:24.840 --> 0:13:27.320 higher for longer. Having said that, I do feel like 0:13:27.320 --> 0:13:29.520 there's still a little bit of a drum beat among 0:13:29.559 --> 0:13:32.520 Fed officials Keterina that was still going to get a 0:13:32.640 --> 0:13:35.360 rate cut this year, and I feel like market folks 0:13:35.400 --> 0:13:38.359 that we talked to say, yeah, probably after the elections 0:13:38.440 --> 0:13:41.320 is kind of what we're thinking. Has a rate cut 0:13:41.360 --> 0:13:43.679 by the Fed and FED official has been ruled out completely? 0:13:45.080 --> 0:13:46.880 No, I don't think so at all. I think they 0:13:47.040 --> 0:13:49.760 very much would like to cut rates this year. And 0:13:50.000 --> 0:13:53.120 they're also concerned about, you know, what will start to 0:13:53.160 --> 0:13:55.320 happen on the labor market side of things if they 0:13:55.400 --> 0:13:59.240 keep rates you know, too high or high for a 0:13:59.280 --> 0:14:02.560 long time, so they're being very cautious. I think they 0:14:02.600 --> 0:14:06.160 would like to cut rates. I think you see you know, 0:14:06.200 --> 0:14:09.280 this reaction we're seeing in markets is maybe kind of 0:14:10.400 --> 0:14:14.400 a bit more extreme than where FED officials are, right. 0:14:14.520 --> 0:14:18.320 I think you're seeing now just two odds of two 0:14:18.400 --> 0:14:21.240 rate cuts this year. People push it, keeping pushing it 0:14:21.240 --> 0:14:25.200 out farther and farther. Some banks now saying that, you know, 0:14:25.240 --> 0:14:27.400 we might not get any rate cuts at all. But 0:14:27.840 --> 0:14:31.920 I think for the Fed, you know, the latest forecast 0:14:31.960 --> 0:14:35.160 we have from them is for three cuts that you know, 0:14:35.200 --> 0:14:37.680 we we'll have to see in June whether that holds up, 0:14:37.760 --> 0:14:39.600 but I think they want. 0:14:39.480 --> 0:14:41.520 To see a cut. A couple of things that struck 0:14:41.560 --> 0:14:43.720 me in your story, and this one in particular, because 0:14:43.720 --> 0:14:45.880 we're starting to hear from people saying, and we have 0:14:45.920 --> 0:14:47.720 actually for a while no rate cuts this year, and 0:14:47.760 --> 0:14:50.400 maybe we get a rate increase. You write in the story, 0:14:50.400 --> 0:14:54.520 FED officials are increasingly voicing concern high borrowing costs may 0:14:54.640 --> 0:14:58.240 not be doing enough work to rain and demand, increasing 0:14:58.280 --> 0:15:00.920 anxiety among investors in analys that the Central Bank may 0:15:00.920 --> 0:15:04.480 need to actually raise interest rates further. It's interesting how 0:15:04.480 --> 0:15:07.080 the narrative has changed. I feel, like Katerine, in such 0:15:07.080 --> 0:15:10.760 a short period of time, you know what guidance at 0:15:10.800 --> 0:15:13.920 all or commentary have we gotten really that we can 0:15:13.960 --> 0:15:15.360 kind of hang our hat on when it comes to 0:15:15.400 --> 0:15:17.320 FED officials about a rate increase. 0:15:18.720 --> 0:15:22.239 So first of all, it's not that many Fed officials 0:15:22.240 --> 0:15:24.400 that have kind of opened the door to this, but 0:15:24.480 --> 0:15:28.400 a few of them have maintained throughout this whole process, 0:15:28.440 --> 0:15:30.960 you know, from when they started holding rates in July, 0:15:31.560 --> 0:15:34.680 that another rate increase is not off the table. I mean, 0:15:34.800 --> 0:15:38.920 you've even heard Powell say this. So I think they 0:15:38.960 --> 0:15:42.440 want to keep options open. They've seen what can happen 0:15:42.680 --> 0:15:47.000 when they tie themselves down too much to one to 0:15:47.080 --> 0:15:50.760 one policy course, and it's not good. So they want 0:15:50.760 --> 0:15:54.440 to keep options open. But it's still a very kind of, 0:15:55.320 --> 0:15:57.760 you know, fringe idea, if you want to call it that. 0:15:57.920 --> 0:16:03.640 It's kind of the last option for them. So I 0:16:03.680 --> 0:16:06.800 think it's still pretty out there in terms of the 0:16:06.880 --> 0:16:10.040 chances for that, but they're keeping the door open. 0:16:09.920 --> 0:16:12.440 So okay, keeping the door open. It's fringe. It's sort 0:16:12.440 --> 0:16:14.880 of an out there option the way that you describe 0:16:14.880 --> 0:16:19.520 the idea of potentially raising rates this year. Further, I wonder, though, 0:16:19.960 --> 0:16:24.200 what data you might have to see for you to 0:16:24.240 --> 0:16:27.080 start saying that that idea is no longer fringe, or 0:16:27.120 --> 0:16:29.840 we hear from more FED officials that Okay, we might 0:16:29.840 --> 0:16:32.240 need to open the door a little wider on this. 0:16:33.640 --> 0:16:36.760 Yeah. I mean, I think the inflation data is going 0:16:36.840 --> 0:16:41.400 to be you know, really hotly watched from now on, 0:16:41.520 --> 0:16:43.840 and I mean it has been already, but I think 0:16:43.840 --> 0:16:47.640 if we continue to see prints that are disappointing, that 0:16:47.720 --> 0:16:50.600 are just kind of flatlining or even going up from 0:16:50.640 --> 0:16:53.640 where we are right now, that's going to really increase 0:16:53.760 --> 0:16:57.680 concern of that. And then I think other demand activity, 0:16:57.800 --> 0:17:00.520 right if you see that using that we saw in 0:17:00.560 --> 0:17:03.360 the first few months of this year in financial market, 0:17:03.480 --> 0:17:06.359 so if you see uh, you know, the stock market 0:17:06.400 --> 0:17:10.840 going up again, maybe treasury yields falling a bit from 0:17:11.000 --> 0:17:14.440 from these higher levels now, uh, you know, that could 0:17:14.440 --> 0:17:18.400 cause concern. And then some of this consumer data, right, 0:17:18.520 --> 0:17:22.600 like the labor market strength, if that just continues unadult traded, 0:17:23.560 --> 0:17:28.160 if you see consumer spending and retail sales data that 0:17:28.240 --> 0:17:31.240 continue to come in really strong as it has the 0:17:31.280 --> 0:17:34.400 past month or so, you know, all of that will 0:17:34.480 --> 0:17:37.399 kind of add to this picture of the economy isn't 0:17:37.440 --> 0:17:40.640 slowing as we would like, and it's going to take 0:17:40.720 --> 0:17:44.359 more action from US, US being the Fed, not me, 0:17:44.960 --> 0:17:47.280 but it's you know that it would take more action 0:17:47.400 --> 0:17:50.520 from the FED to to really slow things down. 0:17:50.640 --> 0:17:53.800 Well, Katerina, we had Matt Bosler on our program yesterday 0:17:53.840 --> 0:17:56.120 and he pointed out in a great piece in Bloomberg 0:17:56.160 --> 0:17:59.240 Business Week about how increasingly we're starting to see a 0:17:59.320 --> 0:18:02.399 larger and larger portion of inflation data made up of 0:18:02.680 --> 0:18:05.480 rents going up, not necessarily across the country, but in 0:18:05.480 --> 0:18:09.080 certain hotspots around the United States. Given that the Fed's 0:18:09.160 --> 0:18:12.639 tools that it has, our Lunt instruments, how does it 0:18:12.680 --> 0:18:15.520 get that part in control when all it can do 0:18:15.680 --> 0:18:18.520 is you know, focus on this dual mandate. 0:18:19.680 --> 0:18:22.119 Yeah, I mean, it's a really interesting question, and this 0:18:22.280 --> 0:18:25.920 is something that Chicago FED President Austin Goldsby has been 0:18:25.960 --> 0:18:28.600 talking about. How if you look at the kind of 0:18:28.640 --> 0:18:34.720 different big components of inflation, goods, services, and housing, the 0:18:34.760 --> 0:18:38.800 one that really hasn't slowed down much is housing inflation. 0:18:39.960 --> 0:18:42.800 And so that's concerning. But as Matt pointed out in 0:18:42.880 --> 0:18:47.200 his peace, that does have some kind of geographic differences, 0:18:47.320 --> 0:18:50.119 right You're seeing flowdowns in the south and in the West, 0:18:50.160 --> 0:18:53.600 but not in the Northeast. So I mean, I think 0:18:53.640 --> 0:18:56.359 for them, for the FED, what that means is just 0:18:56.520 --> 0:19:00.760 keeping rates higher for longer or potentially raising rates to 0:19:01.320 --> 0:19:03.399 try to slow it down. I mean, it is a 0:19:03.560 --> 0:19:06.520 very blunt instrument, and I think that's why at the 0:19:06.560 --> 0:19:09.679 beginning of this tightening cycle, people were really concerned that 0:19:09.720 --> 0:19:12.240 we were going to have to see a recession because 0:19:12.280 --> 0:19:15.080 demand was just so strong, and in things like the 0:19:15.160 --> 0:19:19.040 housing market, where you have so many other forces at play. 0:19:19.119 --> 0:19:21.840 Right we have a huge supply issue in this country, 0:19:22.320 --> 0:19:25.439 So it's really kind of tough to move that needle 0:19:25.840 --> 0:19:28.840 when you just have the reality of not enough housing 0:19:28.960 --> 0:19:31.080 for the number of people we have in this country. 0:19:31.640 --> 0:19:34.879 So I think if we don't see more progress on 0:19:34.920 --> 0:19:37.720 that front, it is going to kind of bring back 0:19:37.760 --> 0:19:40.159 some of those questions about, you know, are we really 0:19:40.200 --> 0:19:42.320 just going to have to break things a little bit 0:19:42.520 --> 0:19:45.840 or cause more pain to fully bring down inflation. 0:19:45.920 --> 0:19:47.720 Well, and Katerine, as you guys point out or you 0:19:47.760 --> 0:19:49.560 point out in your story, I mean the idea that 0:19:49.560 --> 0:19:51.879 that you know, the things that folks are worried about 0:19:51.880 --> 0:19:53.480 is that it takes so little to kind of stimulate 0:19:53.480 --> 0:19:55.760 the economy. Right now, I think we're all shocked, you know, 0:19:55.840 --> 0:19:58.679 as growth estimates can be being kicked higher here in 0:19:58.720 --> 0:20:02.280 the United states from the eye about global growth, and 0:20:02.400 --> 0:20:04.560 you know, we keep having folks on especially in the 0:20:04.560 --> 0:20:07.600 investment universe, are saying like the US is doing well 0:20:07.640 --> 0:20:11.159 compared to a lot of other markets, especially developed markets 0:20:11.200 --> 0:20:14.080 around the world, when you look at their economic outlook, 0:20:14.400 --> 0:20:17.639 so you know, better growth doesn't take lot, you know, 0:20:17.720 --> 0:20:20.440 much to stimulate. You've got to be worried about sparking 0:20:20.440 --> 0:20:22.439 inflation again. And that's kind of where the FED is, 0:20:22.480 --> 0:20:24.800 and I'm assuming at this point they're going to want 0:20:24.840 --> 0:20:28.640 to see two to three to four you know trend 0:20:29.320 --> 0:20:31.600 you know, trending lower when it comes to inflation before 0:20:31.600 --> 0:20:34.439