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Speaker 2: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside
Speaker 2: my co host Matt Miller.
Speaker 1: Every business day we bring you interviews from CEOs, market pros,
Speaker 1: and Bloomberg experts, along with essential market moven news.
Speaker 2: Find the Bloomberg Markets Podcast called Apple Podcasts or wherever
Speaker 2: you listen to podcasts, and at Bloomberg dot Com Slash podcast.
Speaker 2: Let's flip gears. Let's head back to the geopolitics of
Speaker 2: it all impact it has on the market. You know,
Speaker 2: the news coming out of Israel that I'm reading out
Speaker 2: on the Bloomberg kerminal Here Israel and Hamas agreed to
Speaker 2: her short truce for hostage release. Agrees to free fifty hostages,
Speaker 2: possibly more in days ahead. The deal would mark the
Speaker 2: first lull in the war since the attacks on October seventh.
Speaker 2: So I guess if nothing else, that in and of
Speaker 2: itself is probably some good news. Bobby Ghost joins is
Speaker 2: he's an editor with Bloomberg Opinion. He joins his life
Speaker 2: here in our New York studio. Bobby, I mean, just
Speaker 2: to me, it feels like good news, maybe a little
Speaker 2: bit of thawing here. How do you read it?
Speaker 3: I wouldn't go quite so far as to say that
Speaker 3: there's a thought it is good news. Okay, Look, it's
Speaker 3: great news for the hostages and their families. It gives
Speaker 3: ordinary civilians in Gaza a break from the bombing. It's
Speaker 3: a cessation of hostilities for fort days. And Israel is
Speaker 3: already saying Prime Minisnetnya, who's already saying, moment that ends,
Speaker 3: we go back to bombing Gus, we go back to fighting.
Speaker 3: So there's you know, it's not really a thaw. It's
Speaker 3: a deal that was struck in Katar with very strong
Speaker 3: pressure from the United States on all parties to make
Speaker 3: this happen, and we should thank God for small mercies,
Speaker 3: as they say, and as I said, for the people
Speaker 3: who are benefiting the most from this deal, the mercies
Speaker 3: are not small.
Speaker 4: They're quite absolutely.
Speaker 5: Yeah, we're seeing fifty hostages from Gaza will be freed
Speaker 5: and the release of one hundred and fifty Palestinians who
Speaker 5: are in Israeli jails at the moment. But tell us fabi,
Speaker 5: because this is exactly what Israel has not wanted, in
Speaker 5: the sense that any pause is a chance for Hamas
Speaker 5: to regroup, get the military operations back together. I mean,
Speaker 5: this is that something to be feared then that there
Speaker 5: could really be maybe an escalation in the violence after this.
Speaker 3: I think it's I think this is why it's taken
Speaker 3: this long for the truth to happen. Israel had to
Speaker 3: be absolutely certain that the chances of Hamas regrouping and
Speaker 3: rearming we were as small as possible. If I mean,
Speaker 3: there's always that possibility. But Israel would not have made
Speaker 3: this deal if it didn't have a high degree of
Speaker 3: confidence that it can prevent that from happening, or it
Speaker 3: can manage how much Hamas rearms. Presumably this means it
Speaker 3: will be paying much closer attention to the borders, much
Speaker 3: closer attention to those tunnels through Egypt to make sure
Speaker 3: that Hamas does not get and it has already brought
Speaker 3: so much damage on Hamas infrastructure that there must be
Speaker 3: a high degree of confidence that you know, Hamas's arms
Speaker 3: making facilities in Gaza City, for instance, will be will
Speaker 3: not easily be revived.
Speaker 2: That's kind of where I wanted to go, because I
Speaker 2: know that the stated objective of Israel is to destroy
Speaker 2: Hamas and its leadership. How do you define that? How
Speaker 2: do you know when it's happened? If I kind of
Speaker 2: fear it's like the drug cartel, tick out one kingpin
Speaker 2: and then the next person just rises right up again.
Speaker 3: Yeah, this is not and they're not fighting a conventional military.
Speaker 3: This is a terrorist group. And you know, the leadership
Speaker 3: can change and has changed as well, has a long
Speaker 3: history of taking out top Hamas leaders. The thing just
Speaker 3: keeps coming back. And you also have to remember that
Speaker 3: in the process of trying to eliminate Hamas in this way,
Speaker 3: it's also creating the circumstances the for Hamas to be
Speaker 3: able to recruit. You've got sure hundreds of thousands of
Speaker 3: young Palestinians in Gaza and elsewhere who are outraged by
Speaker 3: what they see, and a small proportion of that population
Speaker 3: will be more amenable to joining Hamas now, shall we say,
Speaker 3: than there were before. So it's you know, this is
Speaker 3: not this is not the kind of war where where
Speaker 3: which ends with people signing an armistice and making a
Speaker 3: peace deal. And that's been the problem. The Biden administration
Speaker 3: has said consistently from the beginning that they've been asking
Speaker 3: the Israelis to define what victory looks like and explain
Speaker 3: what happens the day after, and until now, the Israelis
Speaker 3: have not provided that information. They've not communicated it in
Speaker 3: private to the Biden administration. They certainly have not communicated
Speaker 3: it publicly.
Speaker 5: And of course whatever that timeline may be as well,
Speaker 5: is probably pretty daunting to think of, Like the task ahead,
Speaker 5: how long that may take makes me wonder if there
Speaker 5: could be perhaps the need for more cease fires in
Speaker 5: the time to get to that endpoint.
Speaker 3: Yeah, So we'll see if this one works and everybody
Speaker 3: shows good faith, and that then hopefully creates the circumstances
Speaker 3: for another one down the line, and another one, and
Speaker 3: maybe this is the kind of conflict where, because everyone
Speaker 3: is so painted into their own corners and the opposite
Speaker 3: ends of the room, that the advances that can only
Speaker 3: be incremental. It might be that this is the only way, slow, painful,
Speaker 3: deadly as it is, this might be the only way
Speaker 3: we begin to move towards some kind of resolution.
Speaker 2: Is there a scenario where Israel does not end up
Speaker 2: occupying Gaza? I can't think of a scenario where they
Speaker 2: don't to preserve the piece. I mean, does a UN
Speaker 2: player role? I mean, what do we think about the
Speaker 2: day after?
Speaker 3: Well, so here's the thing. Now, Israel has a signal
Speaker 3: that it is willing to do that in order to
Speaker 3: make sure Hamas does not come back. But this is
Speaker 3: not a popular idea among Israelis. For a start. Israelis
Speaker 3: don't want an occupation of Gaza because they know what
Speaker 3: that will entail, not just in terms of costs, but
Speaker 3: also the risks that come with that. Nobody else wants
Speaker 3: to do that. Nobody else wants to perform that role.
Speaker 3: I don't think any Western peacekeepers would have credibility there.
Speaker 3: The United Nations will eventually have to play a role,
Speaker 3: but until now, you know, Secret General gu terrorists has
Speaker 3: been sort of saying, look, we're not this is not
Speaker 3: going to become a protectorate of the United Nations. The
Speaker 3: Arab countries, who would logically be part of the biggest
Speaker 3: part of any peacekeeping effort. Their view is why should
Speaker 3: we clean up Israel's mess. This can't become a thing
Speaker 3: where you go in and bomb Palestine or parts of
Speaker 3: Palestinian territories to smithereens and expect us to come and
Speaker 3: clean it up for you afterwards. So there's going to
Speaker 3: be a lot of reluctance. The crucial question for everybody
Speaker 3: is peacekeeping toward what end? If there is a clear
Speaker 3: path after the fighting is over for a two state solution,
Speaker 3: then I can see and their sort of cost iron
Speaker 3: guarantees to that. Then I can see the Arab states
Speaker 3: saying all right, we will take some of this responsibility
Speaker 3: if there is a clear path that this never happens again.
Speaker 2: All right, So on that two state solution, who is
Speaker 2: the biggest impediment to that actually happening at this point?
Speaker 3: I mean, there's so many impediments, and at different times
Speaker 3: their you know, their relative weight changes, but Israel is
Speaker 3: an impediment. The current administration Israel. The coalition government that
Speaker 3: Benjamin Ettania who has put together has no interest in
Speaker 3: a two states solution. Many of his partners have openly
Speaker 3: said that's not what they want, that they will oppose it.
Speaker 3: The Palaestine authority, which is deeply corrupt, deeply completely inept,
Speaker 3: and has not dared to test its popularity with an
Speaker 3: election in years and years and years. They are an impediment.
Speaker 3: And of course Hamas and hamas is enablers is Iran
Speaker 3: is a very big part of the piece problem too.
Speaker 3: So yeah, the problem a problem, this intractable and this complicated.
Speaker 3: There are lots of people who have to share the blame.
Speaker 5: Just really quickly. Hear Bobby in our last thirty if
Speaker 5: you could just explain to us what this second stage
Speaker 5: could look like with a possible extension to free more hostages.
Speaker 3: Well, so there's some talk that after these fifty, if
Speaker 3: Hamas continues to release hostages in a sort of steady
Speaker 3: set of ten and day fifteen a day, then there's
Speaker 3: some hope that the cessation of hostility the truth can
Speaker 3: be extended again. This is something we should all hope
Speaker 3: for and keep our fingers crossed. It it happens, but
Speaker 3: we'll believe it when it happens.
Speaker 2: Yeah, absolutely, all right, Bobby, thank you so much for
Speaker 2: joining us.
Speaker 6: Bobby go.
Speaker 2: She's a calmnist for Bloomberg Opinion, has got a tremendous
Speaker 2: amount of experience in international affairs reporting, certainly in that
Speaker 2: part of the world over there in the Middle East.
Speaker 2: We appreciate getting a few minutes of his time. Here.
Speaker 6: You're listening to the tenth Can't Live program Bloomberg Markets
Speaker 6: weekdays at ten am Eastern on Bloomberg dot Com, the
Speaker 6: iHeartRadio app and the Bloomberg Business App, or listen on
Speaker 6: demand wherever you get your podcast.
Speaker 2: All right, let's around table this open AI. I'm gonna
Speaker 2: call it a debacle, and that's editorializing, but that's just
Speaker 2: it just seems to me. It's a debacle, and I
Speaker 2: think Silicon Valley should be embarrassed by what's happened over
Speaker 2: the last four or five days. But we're gonna bring
Speaker 2: some smart people who analyze this stuff much better than
Speaker 2: I do. Man deep Seeing, he's a senior tech Analystrom
Speaker 2: Bloomberg Intelligence Ed Ludlow Bloomberg Technology hosts out in San Francisco,
Speaker 2: so that he has to take some of the blank
Speaker 2: He's part of the culture out there.
Speaker 5: Ed.
Speaker 2: I mean, I guess we have Sam Altman going back
Speaker 2: to open AI. I guess that's good news. The next
Speaker 2: question I think most people have is who's going to
Speaker 2: be on this board and will it be an effective board?
Speaker 7: Yeah?
Speaker 8: Yeah, I mean the mechanics of it are that Brett Taylor,
Speaker 8: who was once the Coco of Salesforce, but he's I
Speaker 8: guess he's more famous for being the chairman of Twitter
Speaker 8: that's sold to Elon Musk, is taking a board seat.
Speaker 8: Then you have Larry Summers, well known to this program,
Speaker 8: this network. Reminder that Larry Summers is a pay contributor
Speaker 8: to Bloomberg Television. I'm supposed to say that, and then
Speaker 8: beyond that, The news for me is that and this
Speaker 8: is you know, we've covered the ins and outs of
Speaker 8: the negotiation pretty closely, right, guys that I know that
Speaker 8: Sam Altman and Greg Brockman were pushing really hard to
Speaker 8: get at least temporary board seats in this whole thing,
Speaker 8: but they didn't. So this thing's far from settled. The
Speaker 8: reason I'm late, and I apologize for that, is I
Speaker 8: was on the phone with the source who's involved in
Speaker 8: all of this, and Sam Altman goes back. Most people
Speaker 8: get what they wanted, but it ain't the end of
Speaker 8: the story. There's a lot we still have to find out.
Speaker 5: Well, you know, I would like to bring in Man
Speaker 5: Deep here because this has been, as Paul said, very
Speaker 5: chaotic four or five days. And for those of us
Speaker 5: who are maybe just joining Man Deep, if you could
Speaker 5: take us back to when Sam Alman was suddenly ousted
Speaker 5: from open Ai. Again, I don't think we have really
Speaker 5: a reason yet as to why that happened, but maybe
Speaker 5: if you could give us a timeline of what has
Speaker 5: transpired from them to now.
Speaker 4: Well, I mean clearly, you know, it was a shocker
Speaker 4: to everyone in terms of the way he was outid
Speaker 4: and there wasn't any transparency around the reasons. In fact,
Speaker 4: when they made the three new board member announcement today
Speaker 4: they said there will be an independent investigation. So clearly
Speaker 4: there's a lot to unpack. As Ed was alluding to,
Speaker 4: but look for a company like OpenAI that has a
Speaker 4: convoluted structure. So last week they I think it came
Speaker 4: into focus that they have a profit structure within a
Speaker 4: nonprofit and now we are trying to you know, make
Speaker 4: sense of what would a good governance structure look like.
Speaker 4: We have three board members. We know, this is pretty
Speaker 4: unusual the CEO not being on the board. So if
Speaker 4: Sam is going back to be the CEO and he's
Speaker 4: not on the board, who the other board members are?
Speaker 4: There is so much to you know, talk about here,
Speaker 4: and this is not the way it's going to pan out.
Speaker 4: I mean, the reason why no one cared until last
Speaker 4: week is because you know, open Aye was a startup
Speaker 4: and you know it had the backing of Microsoft, so
Speaker 4: corporate governance wasn't as big of a focus. But the
Speaker 4: way he was ousted, it's like, this is so unusual,
Speaker 4: and I'm sure a lot of the startups are thinking
Speaker 4: about their corporate structure now, you know, and their backers,
Speaker 4: the vcs and the early investors.
Speaker 2: Ed, what are you hearing from your sources out there
Speaker 2: as to maybe the value the impact on the value
Speaker 2: of this company here that's been really impacted negatively and
Speaker 2: how so.
Speaker 8: I love this question for me. This is the question
Speaker 8: because the story of the last five days is that
Speaker 8: open aiyes valuation, which right now, based on a transaction
Speaker 8: we can get into that's pending, is eighty six billion dollars.
Speaker 8: I reported a couple of months ago. Revenue has a
Speaker 8: run rate of about a billion dollar for this year
Speaker 8: billion dollars of sales, eighty six billion dollar valuation.
Speaker 5: Wow.
Speaker 8: And the basics of this for the audience listening all
Speaker 8: around the world is we care because open ai is
Speaker 8: the leading AI startup. Let's just accept that as a baseline.
Speaker 8: What we learned is that its value is intimately tied
Speaker 8: to the intellectual capital that's there. In other words, Sam Altman,
Speaker 8: Greg Brockman, and the seven hundred and sixty eight other
Speaker 8: people that work there, all of them started a mutiny
Speaker 8: to try and bring Sam back. They were successful, but
Speaker 8: there was a real threat that all seven hundred and
Speaker 8: seventy employees would just resign, They would just leave. Then
Speaker 8: what are you left with? A very large building in
Speaker 8: downtown San Francisco with incredible compute costs and no one
Speaker 8: in it. That's the way to frame it, right, I
Speaker 8: don't think that that's unreasonable. And sources this morning and
Speaker 8: keep phoning me and saying that's the story like on paper.
Speaker 8: You know the people behind this, there aren't that many
Speaker 8: of them, And I think, yeah, sorry, guys, you know
Speaker 8: I jump in, but for me, that's that's the kind
Speaker 8: of key point.
Speaker 5: Yeah, No, I think that's spot on. And I mean, Mandy,
Speaker 5: maybe you can help us, like, you know, break down
Speaker 5: this math a little bit here. As you know, as
Speaker 5: we're just hearing that we've got one billion in revenue
Speaker 5: to an eighty six billion valuation, I mean my head
Speaker 5: is spinning. What does that make sense to you?
Speaker 4: Well, so look at you know, all the startups and
Speaker 4: you can go back in time in terms of, you know,
Speaker 4: the companies that have ridden these technology waves. There is
Speaker 4: that promise. Okay, if you have a breakthrough technology, investors
Speaker 4: don't really focus that much on the revenue that you
Speaker 4: have right now, but the potential.
Speaker 2: And in the works problem.
Speaker 4: Well, I think this is different. Opening Eye does have
Speaker 4: an intellectual property and they are foundational. I mean think
Speaker 4: of Nvidia, right, they are foundational to what is going
Speaker 4: on in AI with their chips. Well, this is another
Speaker 4: foundational element in terms of you know, a lot of
Speaker 4: companies are standardizing on open Eeye's base model and they
Speaker 4: have embedded it in their tech stack. Everything is happening
Speaker 4: on top of what Opening Eye is offering at the baseline.
Speaker 4: In terms of a large anglid model. But now I
Speaker 4: think it puts doubts in the mind because think of
Speaker 4: operating system like Windows operating system was the standard on
Speaker 4: which all these applications were built. Opening Eye had that
Speaker 4: kind of aura, and suddenly that has put doubts and
Speaker 4: that's why there was this high valuation. So I'm not
Speaker 4: surprised by the evaluation, but the chain of events has
Speaker 4: kind of put doubts in people's mind right now.
Speaker 2: Hey, ed to be honest, before this, I really didn't
Speaker 2: know who Sam Altman was, and I certainly wasn't aware
Speaker 2: of the kind of the presence he really does command
Speaker 2: within a tech space and within Silicon Valley. How do
Speaker 2: you think, I mean, where does he go from here?
Speaker 2: I mean, it seems like he's gonna be the focus
Speaker 2: of now I'm gonna pay attention to whatever he says
Speaker 2: and does going forward. I mean, his role in all
Speaker 2: of this, it's taken a much higher profile.
Speaker 7: Yeah.
Speaker 8: Look, Sam Altman is a serial entrepreneur, a serial founder.
Speaker 8: He has been a name out here in Silicon Valley
Speaker 8: for some time. He has really been thrust to prominence
Speaker 8: as open Ai became the face of AI. You know,
Speaker 8: that's the reality of it. In the last year, you know,
Speaker 8: he's just beloved by the open Ai staff. You know,
Speaker 8: I'm not exaggerating. Almost the entirety of open aas entire
Speaker 8: company threatened to resign if he was not brought back.
Speaker 8: The investors love him. The investors were adamant that he
Speaker 8: came back, and that they were behind the scenes trying
Speaker 8: to do that, including Microsoft. Right Satya Nadella, the Microsoft CEO,
Speaker 8: was a real peace broker in all of this. We understand.
Speaker 8: And yet this is why I say that this story
Speaker 8: is not finished. There will be an independent investigation as
Speaker 8: to why the board fired him in the first place.
Speaker 8: We have got no idea, to be frank, why they
Speaker 8: did that. I just, you know, without being self serving,
Speaker 8: I did report on Saturday as an example, that he
Speaker 8: was out there weeks, within the last few weeks raising
Speaker 8: almost one hundred billion dollars for a new chip company
Speaker 8: to take on Nvidia make custom silicon for training AI models.
Speaker 8: One hundred billion dollars from a standing start. That's the
Speaker 8: kind of command he has, and the investors, like SoftBank,
Speaker 8: move battle La, they were willing to jump in.
Speaker 4: I mean, the one thing I would point out is
Speaker 4: you know, whenever a founder gets more attention than the company,
Speaker 4: that's never a good thing. If you go back in time,
Speaker 4: you know, the focus is just on the founder and
Speaker 4: what he's doing that hasn't been viewed very well by
Speaker 4: the investors. And if they are thinking about doing an IPO,
Speaker 4: that's the last thing you want is the founder getting
Speaker 4: all the focus and taking you know, the focus away
Speaker 4: from the core product, which is the large acred model
Speaker 4: they have developed.
Speaker 5: Could say it sounds like another sam perhaps of fts.
Speaker 2: Ed love, thank you so much for joining us, Ed Lolo.
Speaker 2: He's in our San Francisco office. He is embedded in
Speaker 2: that Silicon Valley space. And then man Deep Singh, he's
Speaker 2: our senior technology analysts here at Bloomberg Intelligence. He's seen
Speaker 2: it all. He's seen the tech come and go, he's
Speaker 2: seen the tech mobiles come and go. So we appreciate
Speaker 2: getting their perspective. So it seems like it's quieting down
Speaker 2: there in Silicon Valley in Open AI. And now we'll
Speaker 2: just see how it's kind of fleshes out the board
Speaker 2: and some governance issues and some ownership and you know,
Speaker 2: but I guess the last fridays it's kind of like
Speaker 2: a do over, so we'll keep on top of that.
Speaker 6: You're listening to the tape. Cat's are live program Bloomberg
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Speaker 2: Street Kumark. He's the president of Street Kumar Global Strategies,
Speaker 2: former Chief Global Strategists and Chairman Asset Allocation Commitie at
Speaker 2: TCW Group. A little asset manager out there in LA.
Speaker 2: But the highlight on his extensive resume for me for
Speaker 2: your senior vice president at Drexel Burnham Lambert. Those folks,
Speaker 2: they were slinging it back in Maybe they were slinging
Speaker 2: it back in the day, folks, Shwi, thanks so much
Speaker 2: for joining us. You're based out in LA, but we're
Speaker 2: in New York, so we appreciate you. You coming in here
Speaker 2: to our New York studio. Talk to us about how
Speaker 2: you viewed twenty twenty three. We're closing out a pretty
Speaker 2: decent year here for most you know, most markets here
Speaker 2: closing out twenty twenty three, and how are you thinking
Speaker 2: about twenty twenty four.
Speaker 7: Paul, great questions, and I think twenty twenty three we
Speaker 7: had expected by now to be in recession, which is
Speaker 7: not come yep. The labor market is very strong, the
Speaker 7: consumer spending is very strong. I think what was underestimated
Speaker 7: was the extent of stimulus that was in the system,
Speaker 7: both in terms of the fiscal stimulus, which came from
Speaker 7: the final months of the Trump administration first few months
Speaker 7: of the Biden administration. And don't forget the balance sheet
Speaker 7: of the Federal Reserve doubled from bloated levels from the
Speaker 7: beginning of COVID to the beginning of twenty twenty two.
Speaker 7: And we had zero interest rates for a long period
Speaker 7: of fact, so everybody loaded up. And one and a
Speaker 7: half years later after the tightening began, I think we
Speaker 7: are still not back yet. But the point I make
Speaker 7: and I say to my clients is that recession is
Speaker 7: something that has been postponed, but it's been delayed, but
Speaker 7: it's not denied. So I think we are still going
Speaker 7: to see signs of a recession. And what is me
Speaker 7: the most is as you have interest rates, having risen
Speaker 7: and the balance sheet of the FED is still being tightened.
Speaker 7: It did not pause, and when the two of them
Speaker 7: go together, that there is something that's going to break
Speaker 7: in the system in the first half of twenty twenty four.
Speaker 5: So how do you then distinguish between what a lot
Speaker 5: of people will say right now are signs that we're
Speaker 5: heading towards soft landing, and that you're in the camp
Speaker 5: here that recession is so possibility.
Speaker 7: Yeah, I do not believe in soft landing, Molly, and
Speaker 7: I would think that when you look at what has
Speaker 7: happened in past history, it all looks very nice until
Speaker 7: the thing gets out of control. It happened with two
Speaker 7: thousand and seven, and toward the end of the year
Speaker 7: we had the FED Chairman Ben Bernanke say to us
Speaker 7: that the subprime mortgage situation was just a fifty two
Speaker 7: hundred billion dollar problem. We found out in the next year,
Speaker 7: two thousand and eight, it was just a terrible situation,
Speaker 7: not just a minor problem. Same thing happened in nineteen
Speaker 7: ninety eight when you had long term capital management, a
Speaker 7: small hedge fund which was never going to fail because
Speaker 7: two Nobel Prize winners.
Speaker 2: Ran its rank you.
Speaker 7: And it was done again with no leverage, it was thought,
Speaker 7: but then they had enormous amount of leverage and a
Speaker 7: lot of risk and it failed as well. So it
Speaker 7: is all I like to say that it is all
Speaker 7: lit up till it darkens, the opposite of what we
Speaker 7: normally say.
Speaker 2: Is there some event out there that you're concerned? Could
Speaker 2: be that long term capital management moment, or could be
Speaker 2: the subprime issue for in two thousand and seven two thousand,
Speaker 2: Is there something after that concerns you in terms of catalysts.
Speaker 7: Paul, I have a few candidates. One is I had
Speaker 7: said before the March regional banking crisis that might be
Speaker 7: a credit event, but we survived that it was a
Speaker 7: credit event. The next one, my top candidate is a
Speaker 7: bigger banking institution, maybe an institution which is medium sized,
Speaker 7: and why do they suffer. They suffer because they loaded
Speaker 7: up on long dated bonds when Jerome Powell told us
Speaker 7: inflation is going to be transitory. So in that case,
Speaker 7: I should buy ten year treasuries to two percent because
Speaker 7: I'm expecting it to go to one percent. Right it didn't.
Speaker 7: It went the other way. So that's one candidate.
Speaker 5: Commercip have already happened though by now if that were
Speaker 5: to blow up, you know, similar to the small banks
Speaker 5: that we saw in March.
Speaker 7: Not yet, Molly, And I'll tell you why I think
Speaker 7: it hasn't happened yet. If you look at the bank numbers,
Speaker 7: the deposits with the US banking system has been steadily
Speaker 7: going down, the delinquency rate is starting to pick up,
Speaker 7: and the balance sheet is being reduced. As far as
Speaker 7: the FED is concerned. When you put them all together,
Speaker 7: suddenly something clicks. It doesn't happen gradually, so which is
Speaker 7: why I think, timing wise, I would look for the
Speaker 7: first quarter of twenty twenty four is when something breaks again.
Speaker 7: So we talked about commercial real estate is the third.
Speaker 7: You can also have again a crunch on the credit side,
Speaker 7: which is already taking place. My final candidate is the
Speaker 7: repeat of what happened in the United Kingdom September October
Speaker 7: of twenty twenty two. Bond eels rise a lot. There
Speaker 7: it was the guilt eels, and here we are talking
Speaker 7: about treasury eels and pension funds incur huge losses. They
Speaker 7: have not done well into of general performance, and that
Speaker 7: situation worsens and puts pressure on the FED.
Speaker 2: One of the things as we think about this economy
Speaker 2: in a hard landing soft landing recession is the labor market.
Speaker 2: We got some more labor data today. Initial JAMAS claims
Speaker 2: came in at two hundred and nine thousand, below expectations,
Speaker 2: less than we saw last month. I mean, this labor
Speaker 2: market seems to defy most logic in how robust it is.
Speaker 2: What do you make of the US labor market.
Speaker 7: Yes, the labor market so far has been very robust,
Speaker 7: and I think the reason that has been the case
Speaker 7: once again traces back to the amount of stimulus. There
Speaker 7: is so much money that you were able to give,
Speaker 7: and also the shortage of labor which took place due
Speaker 7: to COVID with one part of the working force typically
Speaker 7: the wives who stayed behind to provide childcare, that in
Speaker 7: turn reduce the workforce. I think we are just coming
Speaker 7: back to it. But if you look at the layoff numbers, Paul,
Speaker 7: you're seeing that after a period of very strong now
Speaker 7: despite today's initial jobless claims, the unemployment has started to rise. Yep,
Speaker 7: and they don't. Once again, it doesn't rise gradually, and
Speaker 7: history tells you that when it rises, it just surges suddenly,
Speaker 7: and I wouldn't be surprised to see that happen in
Speaker 7: the next two to three months.
Speaker 5: So let's go back to these stimulus payments, because there
Speaker 5: right now is such a debate in economic circles of
Speaker 5: how much excess savings the consumer has. I feel like
Speaker 5: I see a different report on this every day that
Speaker 5: savings are dwindling, there's nothing left. Another one will say
Speaker 5: there's more than we really thought, and that's what's giving
Speaker 5: the consumer still a lot of gas right now to
Speaker 5: keep spending. And same with like the on the credit
Speaker 5: side as well. You mentioned delinquencies are picking up, and
Speaker 5: we've seen credit card balances getting higher, but as a
Speaker 5: share of total deposit's still very low. So how do
Speaker 5: you assess right now these conflicting messages about the health
Speaker 5: of the consumer.
Speaker 7: That's again a very timely question, and I would answer you,
Speaker 7: Molly by saying that while the aggregate numbers in terms
Speaker 7: of delinquency, the aggregate numbers still seem really benign. There
Speaker 7: is a difference across income groups, meaning the numbers are
Speaker 7: showing recently that even the consumer spending, a good chunk
Speaker 7: of the increase is coming from the highest one or
Speaker 7: ten percent maximum in terms of the income groups, and
Speaker 7: the lower income groups are actually cutting back delinquency wise.
Speaker 7: The credit card delinquencies are the first to show up.
Speaker 7: And the reason is it is easy for you not
Speaker 7: to pay. You don't have to go and ask anybody
Speaker 7: to give you a loan, and so that is starting
Speaker 7: to happen the next If it starts to happen also
Speaker 7: in terms of what happens to the payments to the banks,
Speaker 7: then I would be even more concerned. But it is
Speaker 7: already happening with low middle income groups. It's not happening
Speaker 7: yet with the high income groups.
Speaker 2: Hey, Swebaut thirty seconds left a lot of geopolitical issues
Speaker 2: out there for you know, investors to deal with. How
Speaker 2: concerned are you with again the Middle East in Ukraine
Speaker 2: and what that means for maybe the global economy.
Speaker 7: I'm concerned again to reply to you very quickly, Paul,
Speaker 7: that I'm concerned mostly from an economic side. What happens
Speaker 7: to inflation? Okay, And yes today we are seeing a
Speaker 7: big drop in oil prices. But if the Hamas Israel
Speaker 7: ceasefire doesn't happen, or if it does, if it breaks up,
Speaker 7: then you're talking about war escalating and that in turn
Speaker 7: would mean much higher oil prices. Oil prices are nothing
Speaker 7: or a huge problem, one extreme or the other. It
Speaker 7: either goes down or the oil price goes to one
Speaker 7: hundred and fifty dollars a battle, and that's a risk
Speaker 7: we run for the geopolitical situation.
Speaker 6: Absolutely.
Speaker 2: Shre thanks you so much for joining us. Shri Kumar.
Speaker 2: He's a president of Shri Kumar Global Strategies based somewhere
Speaker 2: in California and one of those beaches or something like that,
Speaker 2: but he's actually coming to the world capital, New York City,
Speaker 2: so we appreciate him coming into our Bloomberg Interactive Brokers studio.
Speaker 6: You're listening to the tape Can's are Live program Bloomberg
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Speaker 6: tune in app, Bloomberg dot Com, and the Bloomberg Business App.
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Speaker 6: flagship New York station Just say Alexa playing Bloomberg eleven thirty.
Speaker 2: Earnings Deer. They put out some numbers. I guess the
Speaker 2: beat current quarter results, but their guidance was very disappointing
Speaker 2: to the street. I see the stocks off about three
Speaker 2: and a half percent, but that's the high intra day
Speaker 2: high of the day, so it had been a lot
Speaker 2: lower earlier. Let's bring on the anasto follows this compedy
Speaker 2: Chris Chile, you know, he's the industrials analyst for Bloomberg Intelligence,
Speaker 2: joining us via zoom from Princeton, New Jersey. So Chris,
Speaker 2: talk to just about what we heard from your good
Speaker 2: friends at Deer.
Speaker 9: Fairly conservative guidance heading into the print, just given what
Speaker 9: we've seen with softer commodity prices, lower farm income, and
Speaker 9: I think it was pretty well anticipated that the cycle
Speaker 9: was turning, but this outlook is material below what we
Speaker 9: had anticipated. Deers projecting that income will drop to about
Speaker 9: eight point eight billion dollars at the midpoint next year.
Speaker 9: That implies roughly twenty eight twenty eight to fifty dollars
Speaker 9: in earnings, which is thirteen percent below the street. You know,
Speaker 9: commodity prices are still at historically high levels above long
Speaker 9: term averages, the edge of the fleet is still quite old,
Speaker 9: and farmer balance sheets are quite healthy, so we really
Speaker 9: see a more modest downturn. This really sets just a
Speaker 9: low bar and really an overly conservative outlook.
Speaker 5: Yeah, it looks like, you know, this sector here Chris
Speaker 5: is otherwise showing some other, you know, some other evidence
Speaker 5: of slowing. We saw that the rival over to Deer.
Speaker 5: CNH Industrial said that it's reducing salaried workers, that their
Speaker 5: equipment sales are slumping. In Corteva, which makes seeds, has
Speaker 5: also warned of a slow down in demand from farmers.
Speaker 5: So tell us you know the broader outlook of the
Speaker 5: farming sector right now and really why people should be
Speaker 5: paying attention.
Speaker 9: Yeah, I mean, we hit peak production this past year,
Speaker 9: so twenty twenty four will be a slower or lower
Speaker 9: growth year. This has been kind of well advertised by
Speaker 9: the pullback we've seen in commodity prices. CNH certainly cautioned
Speaker 9: when they reported that volumes will be down in twenty
Speaker 9: twenty four, and we actually saw a Deer reduced production
Speaker 9: too at their harvest Works factory in their fiscal four
Speaker 9: q In North America, inventory seem to be in good condition,
Speaker 9: but as you look globally Europe and particularly South America,
Speaker 9: they plan to underproduce retail demand next year, so further
Speaker 9: production cuts to come.
Speaker 2: What's the lead time? Like, tell to us about the
Speaker 2: cycle for a company like deer. I know it's a
Speaker 2: cyclical business and it's based upon farming, but just give
Speaker 2: us a describe as cycle for us.
Speaker 9: Yeah, I mean, ultimately they're driven by where crop prices
Speaker 9: are and that ultimately dictates farmer incomes. You know, we've
Speaker 9: had three very strong years here in North America. So
Speaker 9: we were roughly thirty percent above mid cycle in twenty
Speaker 9: twenty three, which was you know, pretty comparable to the
Speaker 9: twenty thirteen peak. So again it comes down to where
Speaker 9: crop prices are. They're still you know, supportive of making
Speaker 9: capital investments, just not at the level we had seen
Speaker 9: over the last two years.
Speaker 5: Tell us, Chris, about some other markets that are really
Speaker 5: important for the farming space that you know, Brazil probably
Speaker 5: being one of them, and maybe some other regions in
Speaker 5: the world that are really important when we're thinking about
Speaker 5: the outlook for farming.
Speaker 9: Yeah, if you think about the markets that matter most
Speaker 9: for deer, it's North America and it's Brazil. Those are
Speaker 9: the larger crop producing nations. They are more conducive to
Speaker 9: the larger high horsepower equipment, which which drives higher margins
Speaker 9: for deer. And ultimately it is corn, soybeans, and wheat.
Speaker 9: Those those are really move the needle.
Speaker 2: All right, Chris, I'm a farmer. I'm in Moline, Illinois.
Speaker 2: How often do I replace those big, big tractors that
Speaker 2: I love to drive to help me, you know, get
Speaker 2: my crops out of the ground.
Speaker 6: Yeah.
Speaker 9: So if you think about a piece of large farm equipment,
Speaker 9: you know, typically the useful life runs about fifteen years,
Speaker 9: but that includes a pretty robust trade cycle of four
Speaker 9: or five different users. You know, some of the larger
Speaker 9: operations we'll we'll swap out equipment more frequently, just given
Speaker 9: some of the technology and upgrades you know, really make
Speaker 9: farmers more productive and help lower some of the input costs.
Speaker 9: And combines, you know, tend to have a little bit
Speaker 9: shorter useful life, used a little bit more intensively, particularly
Speaker 9: down in regions like South America.
Speaker 2: So when I what's a combine? I gon to get
Speaker 2: one of us big combines that I see, you know
Speaker 2: with the big cabs and they got all the bells
Speaker 2: and whistles. What's that going to set me back?
Speaker 9: You're gonna have to break out the wallet, and you know,
Speaker 9: a large combine could run you know, close to all
Speaker 9: dollars with all the bells and whistles and the new technology.
Speaker 9: They are a large capital investment.
Speaker 2: And so I have to finance that, right, So if
Speaker 2: I got interest rates, they're no longer zero. So it's
Speaker 2: just like buying a car, isn't it's a lot more expensive.
Speaker 3: It is.
Speaker 9: But you know, interestingly enough, we've seen you know, higher
Speaker 9: interest rates, you know, to this point, really haven't had
Speaker 9: a detrimental impact on equipment sales. And I think a
Speaker 9: lot of that has to do with you know, crop
Speaker 9: prices were you know, historically elevated farm income. We set
Speaker 9: a record in twenty twenty two, so farmers have had
Speaker 9: a lot of money in their wallets, and we've actually
Speaker 9: seen a lot of farmers go out and buy equipment
Speaker 9: with cash, the exception being more at the smaller and
Speaker 9: more consumer driven products those had ten historically been a
Speaker 9: little bit more rate sensitive. That being said, now with
Speaker 9: the pullback and crop prices and lower farm incomes, you're
Speaker 9: starting to see some of that interest rates sensitivity deteriorate
Speaker 9: some of the buying power for the law larger operations.
Speaker 5: Let's go back to the deer earnings call that happened earlier. Today,
Speaker 5: management brought up labor costs a lot as mentioning that
Speaker 5: this is the largest inflationary item within their production bucket,
Speaker 5: and that a lot of it is contractual, mentioning that
Speaker 5: the labor contracts that they have in their factories have
Speaker 5: these scheduled step ups in the year. So is that
Speaker 5: saying that labor costs are going to get even more
Speaker 5: expensive for Deer?
Speaker 9: Yes, that being said, production costs we actually saw for
Speaker 9: the first time in three years this fiscal quarter turned
Speaker 9: into a tailwind. So while labor costs are going up,
Speaker 9: other costs are coming down, which is helping mitigate some
Speaker 9: of those higher and labor inflationary pressures. So net, they're
Speaker 9: anticipating twenty twenty four that production costs will actually be
Speaker 9: a tailwind.
Speaker 2: So how's the supply chain here? I mean, I know,
Speaker 2: for while they're like the automobile industry, you know, the
Speaker 2: industrial equipment guys couldn't get the chips, they couldn't get
Speaker 2: some of the parts they need to build these things,
Speaker 2: how is the supply chain these days?
Speaker 9: The supply base has you know, really normalized. It really
Speaker 9: is not a factor at this point anymore. There are
Speaker 9: pockets from time to time, but we've seen a normalized
Speaker 9: supply chain. I'd expect you get a little bit of
Speaker 9: tailwind some factory efficiencies as we move into next year.
Speaker 9: But it's normal course of business.
Speaker 5: A lot of times when we see companies set really
Speaker 5: low guidance. My initial reaction, and maybe this is just
Speaker 5: the cynical person in me, is thinking, oh, you know,
Speaker 5: setting the bar low so that they can what's that
Speaker 5: phrase to under expect to outperform?
Speaker 2: Yeah, under promise, over deliver.
Speaker 5: That there, thank you. I knew you would say everything
Speaker 5: is that? Is that, Chris? What you think is happening here?
Speaker 5: Or it really is as dire as Deer is making
Speaker 5: it out to be.
Speaker 9: No, I think that's exactly what's happening here. I think
Speaker 9: they set a very low bar, and I wouldn't be
Speaker 9: surprised to see beats and raises throughout the year. You know,
Speaker 9: we had an anticipated fairly conservative guidance just given some
Speaker 9: of the macro uncertainty, pharm economy uncertainty, so that was
Speaker 9: to be expected. But to see you know, double digit
Speaker 9: top line to crime declines across all businesses, pretty heavy
Speaker 9: decremental margins, you know, thirty five percent plus, that's more
Speaker 9: indicative of a more severe contraction. We just don't see
Speaker 9: that as a realistic scenario at this stage.
Speaker 2: I remember when Chris was young, he wasn't so cynical.
Speaker 2: He would take management's guidance at face value. But now
Speaker 2: he's calling him out, saying that maybe either kind of
Speaker 2: thrown in the kitchen sink here. That's that's a mark
Speaker 2: of a good analysts. He's become a great, great analyst
Speaker 2: for us. Chris Gielino, industrials analyst at Bloomberg Intelligence. He
Speaker 2: follows all the fun companies. I think like Deer. He
Speaker 2: gets a ride around on tractors and stuff like that.
Speaker 5: Is that part of the job.
Speaker 2: Oh yeah, you go to an analystate, you got to
Speaker 2: check out the merch so they take Yeah, it's okay. Yeah,
Speaker 2: so it's good stuff. They have good time. Now my
Speaker 2: job is better because I used to get to go
Speaker 2: to movie premieres for the Disney, go out on cruise
Speaker 2: ships with Disney and all that kind of fun stuff.
Speaker 5: And now you're here in the album here one of
Speaker 5: the biggest in person office proponents I've ever.
Speaker 2: Met, exactly, and I've thrown into talent that I've kind
Speaker 2: of figured it all out. My kids are saying forget
Speaker 2: about it. You've lost that fight.
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