Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene
Speaker 1: Jay Lee. We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. Why
Speaker 1: don't you get to free of beamish right now? On China, well,
Speaker 1: let's do that. She joins us from Pantheon and Economics. Freya,
Speaker 1: the Apple story looks like a China story. Is that
Speaker 1: the read across? Can I read across from Apple into
Speaker 1: China sort of consumer weakness or is it? Or is
Speaker 1: the Apple story just idiot syn critic it's got the
Speaker 1: wrong product or the wrong price point or whatever it is. No,
Speaker 1: I think this is a pretty kind of macroeconomic story here,
Speaker 1: although apples, so you can sort of you can read
Speaker 1: across in the opposite direction as well. But in this case, actually,
Speaker 1: all through last year, the headline retail sales um year
Speaker 1: over year prints were coming in a little bit quite
Speaker 1: significantly stronger than what the underlying data was telling us.
Speaker 1: And even those headline prints were deteriorating the way they
Speaker 1: have the way they published the data in China, you
Speaker 1: get the the underlying levels data, and that doesn't always
Speaker 1: match up with what you see flashing up with the
Speaker 1: year of a year kind of headline prints because supposedly
Speaker 1: those headlines are are adjusted for stampling distortions which occur
Speaker 1: because firms fall in and out of the of the sample.
Speaker 1: So if you have UM a lot of kind of
Speaker 1: smaller firms because it only includes the larger farms, if
Speaker 1: you have a lot of firms transitioning towards smaller firms
Speaker 1: because their revenue is is falling, then you get this
Speaker 1: big drop in the underlying value that the level of
Speaker 1: retail sales values. But you can extrapolate from that UM
Speaker 1: if you have that quantity of firms that are that
Speaker 1: are falling out of the sample, that there is a
Speaker 1: great deal of underlying weakness that wasn't really being reported
Speaker 1: in the in their headline figures there. So that's certainly
Speaker 1: from from the kind of the sales data was was there.
Speaker 1: When did the Chinese authorities respond? We saw a little
Speaker 1: step forward today increasing the number of banks that are
Speaker 1: eligible for the reserve requirements cuts. They can lend a
Speaker 1: little bit more money into the real economy. Do we
Speaker 1: get a bazooker from the Chinese authorities. I don't think
Speaker 1: we get a bazooker, because they still are very much
Speaker 1: up against um a new constraints that they haven't had previously.
Speaker 1: I'm one of those being the environmental constraints. So the
Speaker 1: kind of the industrial the old guard polluting industrial companies,
Speaker 1: they can't really they can't just ratchet up production there
Speaker 1: anymore because it's such a political issue to have to
Speaker 1: have clean air with these new environmental targets in place
Speaker 1: as well. UM, and those old guard firms that are
Speaker 1: the kind of the way in which that the authorities
Speaker 1: have been used to driving the economy. UM. They're also
Speaker 1: the over indebted firms as well, so they're they're cognizant
Speaker 1: of the kind of the the longer term outlook UM.
Speaker 1: And on top of that, we also have the to
Speaker 1: realize that China's current account surpluses has dissolved into into
Speaker 1: nothingness UM as a percentage of GDP it was it
Speaker 1: was kind of nowhere UM. And that means that they
Speaker 1: have limited space for for a fiscal kind of just
Speaker 1: at the limited timing. Guy, let me bring up this chart.
Speaker 1: I love this chart, folks. This is log China growth,
Speaker 1: and all you gotta know is a volatility of years
Speaker 1: ago the crisis obviously in the smoothness in the rollover
Speaker 1: in their GDP growth that we've seen in the last
Speaker 1: two or three even four years as well. What is
Speaker 1: the mood like on the ground in China away from
Speaker 1: the macro babble, away from the apple babble, what's the
Speaker 1: domestic economy and mood like right now? Freya Well, I
Speaker 1: think actually these kind of the lack of volatility that
Speaker 1: is quite kind of perplexing in the context of Chinese
Speaker 1: UM Chinese the listed data and also the kind of
Speaker 1: the price movements that we've seen PPI over the last
Speaker 1: few years that doesn't really reflect things that are going
Speaker 1: on on the ground. And actually you can tell that
Speaker 1: even from the from the data that the authorities published.
Speaker 1: If you look at the nominal GDP growth and then
Speaker 1: you kind of extrapolate what real GDP growth would be
Speaker 1: by compiling your own deflated then you do get a
Speaker 1: lot more volatility than than what is showing up in
Speaker 1: in the in the the kind of official headlines there.
Speaker 1: So I think actually that it's it's a lot weaker
Speaker 1: than we're saying wonderful for beams and short orders. Thank
Speaker 1: you so much for joining us some p I want
Speaker 1: to focus on Apple in the here and now I'm
Speaker 1: bringing wonderful wile lists and communications equipment analyst Walter, how
Speaker 1: didn't they see this coming? I mean, this is a
Speaker 1: huge miss in China. You know, Tim Cook did make
Speaker 1: reference to subsidies and upgrade rates and things like that
Speaker 1: and developed markets, and and that's certainly been an issue
Speaker 1: for a number of years, but there's really no evidence
Speaker 1: in the market about a this type of change in
Speaker 1: terms of subsidies and upgrade rates. So this is really,
Speaker 1: I think, primarily on the back of China, and it's
Speaker 1: a massive mess. So you're talking about consumers that just
Speaker 1: either can afford the phones. I mean, there could be
Speaker 1: some market share losses that are going on there, but
Speaker 1: really I think it's it's a it's a clear sign
Speaker 1: that there's major economic issues going on in China right now, Walter.
Speaker 1: Are our economists are saying it's much more a China
Speaker 1: economic issue? Are John Butler Blumberg Intelligence? I asked him
Speaker 1: the question. Let me ask you the same question as
Speaker 1: you mentioned the price of the phone in America, vast
Speaker 1: majority of people buy a monthly plan iPhone. Do they
Speaker 1: do that in China? Or do they have to come
Speaker 1: up with X number seven, eight hundred nine hundred dollars
Speaker 1: to buy the toy? I mean, I think it's unique
Speaker 1: in the US in terms of the payment plans and
Speaker 1: how long we've haund. There's some other developed markets that
Speaker 1: that have have adjusted to that. But in in in
Speaker 1: some of these other prepaid markets, you're expected to come
Speaker 1: up with um with a lot of money, right, But
Speaker 1: there's also trade ins right. And Cook talked about trade
Speaker 1: ins um yesterday as a way to offset this in
Speaker 1: his in his note to investors. But again that is
Speaker 1: not a new thing. Operators have offered trade in so
Speaker 1: that's not like that's going to change the market. The
Speaker 1: issue is, you know, people in China, I just don't
Speaker 1: have the money to pay for it for these phones,
Speaker 1: and to a much greater extent this year than any
Speaker 1: prior year. John Templeton, Sir John would say, shares are
Speaker 1: on sale today. Does Walter pisk load the boat here
Speaker 1: on a some of the parts analysis? Are you gonna
Speaker 1: wait for the debris to clear? At a hundred forty
Speaker 1: three dollars? The free cash flow yield is now ten percent,
Speaker 1: So and it's not like you have a company that's
Speaker 1: not gonna do anything without money. They're gonna use that
Speaker 1: free cash flow and the existing hundred and thirty billion
Speaker 1: of net cash that they have to buy the stock back.
Speaker 1: So even so, we had this before tom where where
Speaker 1: the company wasn't generating growth and net income, but they
Speaker 1: create they created the appearance of earnings growth by buying
Speaker 1: the stock back, And that's exactly what's gonna happen this
Speaker 1: year net income. You're not gonna have revenue growth this year.
Speaker 1: Your net income might be down because there's gonna be
Speaker 1: some margin pressure. There has to be when you have
Speaker 1: this much of a revenue um you know, offload. But
Speaker 1: you're gonna show some earnings growth, you know, relative to
Speaker 1: the market. And at a ten percent yield and discount
Speaker 1: to the overall market, I think it's a good value
Speaker 1: idea still at this level. So what's the multiple that
Speaker 1: this is going to try it out? Well, so what's
Speaker 1: the basic assumption for you? So right now is trading
Speaker 1: at this kind of in the market's like fourteen and
Speaker 1: a half time something like that. I mean, I think
Speaker 1: if they can return to growth. Even if you ripped
Speaker 1: China out of your numbers, it's still a company that
Speaker 1: could return to top line growth in the second half
Speaker 1: of the year, generating decent earnings growth. So if you're
Speaker 1: at parody with the market, that that can get you
Speaker 1: to two hundred bucks a share or one, which is
Speaker 1: our target. This is a cash machine. We always talk
Speaker 1: about the gross margins over Apple, but at thirty percent,
Speaker 1: I think that's the low end of the guidance range
Speaker 1: as well. Walter, have you got any basic assumptions and
Speaker 1: how have they changed in the last twenty four hours?
Speaker 1: Just on the margins. I mean, whenever you pull in
Speaker 1: revenue from a high margin product like that and you
Speaker 1: can't transfer your expenses, that's a company that spent a
Speaker 1: ton on has spent a ton on R and D
Speaker 1: with a lot of not many new products to show
Speaker 1: for it. You have to take your margins in. You
Speaker 1: just have to do in. Thirty percent is still a
Speaker 1: great number relative to other consumer electronic companies, but you
Speaker 1: have to pull in the gross margin. I think going forward,
Speaker 1: until you see some signs of stabilization and iPhone revenue,
Speaker 1: there's going to be some big complaints about the communication
Speaker 1: from this company over the last couple of months. World,
Speaker 1: So first it was a change of the communication of
Speaker 1: the guidance, and now it's the change of the items overrule.
Speaker 1: They told us they wouldn't give us the unit numbers
Speaker 1: and not to worry about that because things would still
Speaker 1: be okay. Are you scratching your head somewhat about what
Speaker 1: you've heard from this company over the last couple of
Speaker 1: months to something not add up to you? I mean, look,
Speaker 1: I think it's just a lack of experience of never
Speaker 1: having to deal with this type of a revenue missed before. Right,
Speaker 1: they haven't been through this and and you know whatever,
Speaker 1: more than a decade. Uh. It just doesn't also look
Speaker 1: good though, that sixty days or so ago you told
Speaker 1: people you're not going to report iPhone units and then surprise, surprise,
Speaker 1: it comes out that you're gonna miss your iPhone unit
Speaker 1: number by like more than ten million people. It just
Speaker 1: it doesn't look good. How do you respond then, is
Speaker 1: you know, a frontline cell side analyst to the idea
Speaker 1: that Tim Cook is reacting to President Trump's trade war?
Speaker 1: I mean that's not even your strategic three five or
Speaker 1: one week business plan. I mean the fact is Mr
Speaker 1: Trump has upset the trade in revenue generating Apple cart
Speaker 1: with American China, right It's possible to view it that way.
Speaker 1: I would look at it the opposite way, which is
Speaker 1: Apple is showing you the tough position that China is
Speaker 1: in right now, so that gives our president a tremendous
Speaker 1: amount of power in any trade war negotiation that he's
Speaker 1: going to have going forward. I'm not sure that Apple's
Speaker 1: miss is a result of the trade ward's reflective of
Speaker 1: what's going on. It may have been enhanced more, you know,
Speaker 1: in the recent weeks, but if anything, that's just showing
Speaker 1: you the position that child in right now. Do you
Speaker 1: have a meeting with Tim Cook at three pm this afternoon?
Speaker 1: Are you going to be in that meeting? Walter Um?
Speaker 1: They have ruined our abilities to situate at Manchester City
Speaker 1: Liverpool match today unfortunately, maybe they'll use Liverpool billion from
Speaker 1: Mr Head. What's the bt I G analyst and of
Speaker 1: course Liverpool fan as well. Well. It's it great to
Speaker 1: catch you, how with the business right now are Michael
Speaker 1: McKee with Robert Chaplan of Dallas. Thank you very much
Speaker 1: and good morning to our audience worldwide. On Bloomberg television
Speaker 1: and radio. Thank you for joining us. Happy, I'm not
Speaker 1: sure you look at the red on the screen there,
Speaker 1: I'm not sure how happy it is for investors. So
Speaker 1: I gotta start. There's only one question that matters to
Speaker 1: the markets. Has the correction but long enough, deep enough,
Speaker 1: severe enough that the FED has to react? Well? Uh,
Speaker 1: let me let me answer it this way. There's three
Speaker 1: big issues that I see reflected in the markets and
Speaker 1: are consistent with what I'm seeing in the economy and
Speaker 1: discussion of the context. Global growth decelerating um, interest sensitive
Speaker 1: and economically sensitive industries are showing weakness, and financial conditions
Speaker 1: have tightened. Uh, I mean credit spreads of widen. And
Speaker 1: I think those three issues, I'm sure affecting the markets,
Speaker 1: but they're also affecting my thinking about monetary policy. And uh,
Speaker 1: it's gonna take some time to see the depth and
Speaker 1: breadth of those three issues. But do you think the
Speaker 1: FED should go on hold for now? My own view
Speaker 1: is we should not take any further action on interest
Speaker 1: rates until these issues are resolved, for better or for worse.
Speaker 1: So I would be an advocate of taking no action.
Speaker 1: And you know, for example, in the first couple of
Speaker 1: quarters of this year. If you ask me my base case,
Speaker 1: my base case would be take no action at all.
Speaker 1: That could change if things improve. But my own view
Speaker 1: right now is we should be patient and give some
Speaker 1: time to this for the economy and to watch how
Speaker 1: this situation unfolds. What do you think the markets know
Speaker 1: something the Fed hasn't seen in terms of what's going
Speaker 1: to unfold this year? Uh, I don't know about that.
Speaker 1: I think we've been watching this very very carefully. I
Speaker 1: watched the markets very careful. Others that the FED watched
Speaker 1: this carefully. I think we've been trying to balance very
Speaker 1: tight labor market, strong consumer UH and trying to meet
Speaker 1: our dual mandate. But I think uh, I think it's
Speaker 1: critical in the job I'm in that you will pay
Speaker 1: very close attention to what the markets are saying. But
Speaker 1: it's important in that in what they tell us about
Speaker 1: what's going on in the economy. And also some of
Speaker 1: these market forces, including financial conditions, can spill over and
Speaker 1: tighten UH the economy and cause growth to slow, and
Speaker 1: it's critical that we are very attuned to it. Well,
Speaker 1: do you see that happening now? I think I think
Speaker 1: it may be happening now. Yes, I mean, credit spreads
Speaker 1: since October have widened pretty substantially. Haven't had a high
Speaker 1: yield issue UH for the last number of weeks, very
Speaker 1: little issuance, And I think it's suggests lack of access.
Speaker 1: I think his history has showing us and shows me
Speaker 1: that when you see that kind of action, it tends
Speaker 1: to if it's prolonged, could lead to is slowing in
Speaker 1: the economy. At the Dallas Fed, we've we've got an
Speaker 1: estimate for GDP growth for two thousand nineteen that is
Speaker 1: a little below two percent. You've been hearing me say
Speaker 1: old during two thousand eighteen, while eighteen would be strong.
Speaker 1: We think fiscal stimulus, the effect of it will wane
Speaker 1: into two thousand nineteen, the impact of the FEDS rate
Speaker 1: increases will take hold. UH. And so we expected some
Speaker 1: slowing in the nineteen I think that's slowing is even
Speaker 1: a little greater than we had expected. So I'm watching
Speaker 1: this very very carefully. We changed your forecast at all.
Speaker 1: Our GDP forecast for next year's come down a little bit.
Speaker 1: We were still close to two and you've heard me
Speaker 1: say before, it's been our view that by we'd be
Speaker 1: trending back down to potential about one in three quarters.
Speaker 1: But our nineteen forecast is has come down a little bit,
Speaker 1: and it's been affected by some of these issues. I
Speaker 1: just talked about global growth decelerating economically sensitive industries and
Speaker 1: what we see going on with credits for ads and
Speaker 1: the shape of the yield curve is another thing I
Speaker 1: watched very very carefully, and all those things are affecting
Speaker 1: our forecast. Is Apple telling you anything about the state
Speaker 1: of the US, Chinese or global economy? You know, we've
Speaker 1: talked for some time, We've been seen and I hear
Speaker 1: from context for the last number of months that Chinese
Speaker 1: growth has been somewhat weaker. It's masked by the fact
Speaker 1: that they tend to use leverage, investment in state owned enterprises,
Speaker 1: investment in infrastructure to meet their six and a half
Speaker 1: percent goal. That but a lot of the indicators I'm
Speaker 1: hearing from businesses tell me that Chinese growth has been weaker.
Speaker 1: So it doesn't surprise me that we're seeing more indications
Speaker 1: about weaker Chinese growth, and the trade tensions probably have
Speaker 1: exacerbated that. Was Apple the tip of the spirit, the
Speaker 1: beginning of the iceberg above the water. Are we going
Speaker 1: to see more CEOs coming out with warnings like this. Uh.
Speaker 1: I'm not going to comment on any specific company, but
Speaker 1: but what I hear from I talked about thirty c
Speaker 1: e O s a month, and what I'm hearing from
Speaker 1: them is there and some weakness in China. So it
Speaker 1: doesn't surprise me, uh that you're gonna see some further weakness.
Speaker 1: And I've been saying for some time, I don't think
Speaker 1: China can indefinitely keep using leverage to grow GDP. And
Speaker 1: also they're very dependent on trade. Uh, and I'm sure
Speaker 1: these trade tensions have had some effect. And the one
Speaker 1: comment I'd make, why does it matter to us? And
Speaker 1: the reason I watch it so carefully about of SMP
Speaker 1: five revenues come from outside the United States, So China
Speaker 1: growth slowing, We're unlikely to be immune for that. We
Speaker 1: might be immune to it for a time, but not indefinitely.
Speaker 1: It's likely to spill over into US growth. And that's
Speaker 1: what I'm watching very carefully. Okay, here college calling for
Speaker 1: a pause in a monetary policy action? What about the
Speaker 1: balance sheet? J Paul was pretty firm and saying it
Speaker 1: is news conference that that's going to keep running in
Speaker 1: the background. So there's a process for the balance sheet,
Speaker 1: which we it up and started in the fall of
Speaker 1: two thousand and seventeen. It's a it's a specific process
Speaker 1: where we let maturities laps. We're not selling securities, We're
Speaker 1: just not replacing maturities as they expire. My own view,
Speaker 1: and I've said this also to you several times, this
Speaker 1: is unprecedented. There's no textbook for exiting quantitative easing, UH
Speaker 1: and my own views. While there's a process in place,
Speaker 1: we should be very vigilant. I'm watching it very carefully
Speaker 1: and be very open if necessary to making adjustments in
Speaker 1: this balance sheet runoff if we need to. I'm not
Speaker 1: at that point yet, but I'm watching it very very carefully,
Speaker 1: and I think we should be very open minded about
Speaker 1: about making adjustments to that process if we need to,
Speaker 1: a lot of traders have been complaining in recent weeks
Speaker 1: that the balance sheet has caused the drying up of liquidity.
Speaker 1: Do you think that's fair or is it just a
Speaker 1: repricing of credit. There's a number of factors. I've spent
Speaker 1: about thirty years in the markets, as you know, UH,
Speaker 1: and and I watched very carefully, and we tracked trading
Speaker 1: volumes trading volumes today are lower than they were ten
Speaker 1: years ago. That's a part that was true even before
Speaker 1: the FEDS started to run off its balance sheet, and
Speaker 1: so um UH, the UH with a somewhat lack of
Speaker 1: liquidity in two way flows. My guess is the market's
Speaker 1: more sensitive to any reduction of central bank liquidity, and
Speaker 1: so it's just something we have to be aware of.
Speaker 1: But the point of there is I'm watching it very
Speaker 1: very carefully, and we ought to be very vigilant about
Speaker 1: monitoring this process. It's not been done before, and we
Speaker 1: should be learning from this process as unfolds. Well, how
Speaker 1: could you adjust the balance sheet runoff? I don't really
Speaker 1: want to speculate right now. We have we have a
Speaker 1: runoff rate between treasuries and mortgage backed securities about fifty
Speaker 1: billion dollars a month. UH. There are a number of
Speaker 1: things we could do in terms of caps or the pacing,
Speaker 1: but I don't I'm not there yet, and I don't
Speaker 1: even want to speculate on it other than to say
Speaker 1: we're watching it very very carefully, and I'm watching it
Speaker 1: very very carefully, and I think we ought to be
Speaker 1: You said we would go down to trend growth, maybe
Speaker 1: by the end of the year. But you also mentioned
Speaker 1: yield curve in version. Things you're watching. Have your recession
Speaker 1: fears risen at all? Uh, I've I've note a number
Speaker 1: of things. First of all, the weakness and what I'm
Speaker 1: talking about tightening and credit conditions, I think I'm very
Speaker 1: I note in particular that the two year yield is
Speaker 1: is now below the one year yield, which tells me
Speaker 1: at least the market is saying that they expect some
Speaker 1: sluggishness in nineteen, but even more sluggishness in UH and UM,
Speaker 1: and obviously the ten year rate in the two sixties
Speaker 1: tells me the outlook for growth is very sluggish. So
Speaker 1: I think the main thing I take from all that
Speaker 1: is it's critical that we take the right action at
Speaker 1: the FED during this period. There's a very critical time.
Speaker 1: We need to be very vigilant, we need to be
Speaker 1: on our toes, and I think patients is a critical
Speaker 1: tool we should be using during this period. We can
Speaker 1: get this right. But normalizing monetary policy, by the way,
Speaker 1: it was never going to be easy. For those who
Speaker 1: thought that the process of normalization was going to be easy,
Speaker 1: it's not, and we were destined to go through periods
Speaker 1: like this, but it's critical that we handle this the
Speaker 1: right way. A lot of investors come on our shows
Speaker 1: and say, at this point the FED has gone too far.
Speaker 1: You've already tightened too much. Is there a possibility they're right?
Speaker 1: You will know in hindsight. My guess is that when
Speaker 1: we look back a year or two years from now,
Speaker 1: we'll talk less about the fact that we're at two
Speaker 1: and a quarter to two and a half percent today
Speaker 1: and more about what the FED does from here. Um.
Speaker 1: I think that I think what we do in two
Speaker 1: thousand nineteen will turn out to be more significant than
Speaker 1: whether two and acquarter to two and a half is
Speaker 1: too far. And I'll remind people at a two percent
Speaker 1: inflation rate means real interest rates or a quarter to
Speaker 1: a half. Also, uh, my own view has been up
Speaker 1: to a few months ago, the FED doesn't need to
Speaker 1: be stimulating the economy. We're still, in my view, mildly
Speaker 1: or very modestly stimulative. We're not restrictive here. So my
Speaker 1: guess is it's gonna matter much more on what we
Speaker 1: do from here than anything we've done up to now.
Speaker 1: We're talking with Robert Kaplan. He's the president of the
Speaker 1: Dallas Federal Reserve banquet joining us for a New year
Speaker 1: interview this morning. UH. You look at the w I
Speaker 1: r P function on the Bloomberg calculates interest rate probabilities,
Speaker 1: and basically the markets have priced out any move for
Speaker 1: two thousand nineteen. In fact, there's more likelihood of a
Speaker 1: cut before the end of the year than another rate increase.
Speaker 1: Is that fair assumption in the markets? Uh? Market market
Speaker 1: expectations can change on a dime, Sentiment can change. I
Speaker 1: can just tell you my own view, which is UH,
Speaker 1: I would advocate we shouldn't be taking any further action
Speaker 1: until some of these uncertainties resolved themselves, and I think
Speaker 1: that could take several months. I'm open minded about what
Speaker 1: the timetable might be UH, and will be watching very
Speaker 1: very carefully. Has the idea of a cut even entered
Speaker 1: your discussions or mind? Yet? It hasn't entered my mind.
Speaker 1: I think my main UH, my main objective is just
Speaker 1: to be vigilant and be patient UH and monitoring the
Speaker 1: economy during during this period here for the next number
Speaker 1: of months. Inflation, in my judgment, is not running away
Speaker 1: from us. We're running about two. I think the structural
Speaker 1: forces of technology and to some extent globalization or having
Speaker 1: immuting effect on inflation. So we've got the luxury at
Speaker 1: the FED. We're very fortunate. We've got the luxury to
Speaker 1: be patient, and we ought to take advantage of that opportunity.
Speaker 1: You're the president of the Federal Reserve Bank of the
Speaker 1: oil patch. So with oil prices down, is this gonna
Speaker 1: be like two thousand and sixteen where investments only drives
Speaker 1: up and that hits the larger economy. Uh, My guess
Speaker 1: is probably won't go to that extent. But we've got
Speaker 1: a few things going on. Some of them are supply
Speaker 1: related and some are demand related. So US has produced
Speaker 1: more than people that expected. Uh. That's number one, that
Speaker 1: the shale uh and and permium has been much more
Speaker 1: prolific than people thought. Number Two, Saudi Arabia increase production
Speaker 1: as you know in other opaque countries, and then the
Speaker 1: US gave more waivers than we're expected for Iranian production.
Speaker 1: So that's the supply side that's created some excess supply.
Speaker 1: But the other thing that's going on in the price
Speaker 1: is people are worried about global deceleration, growth deceleration, and
Speaker 1: that's affecting the price. To this is as part of
Speaker 1: this is a demand story. UH. I think you'll see
Speaker 1: in the oil patch, because there's so many drilled and
Speaker 1: uncomplete but uncompleted wells, you'll see production still this year
Speaker 1: net increased by a million barrels a day plus. I
Speaker 1: think the issue will be if this lower prices go
Speaker 1: on for an extended period of time, you'll have some
Speaker 1: muting effect on capex and may effect. But our survey
Speaker 1: show and my discussions with contexts and just even at
Speaker 1: this boil price were above break even from most areas
Speaker 1: of the Permian basin. UH. Trump tweets government shutdown, trade wars.
Speaker 1: Does the dysfunction in Washington have any discernible impact on
Speaker 1: the economy yet, as far as you can see, I'm
Speaker 1: not going to comment on any any one of those
Speaker 1: as you as you probably won't surprise you. But I
Speaker 1: would say the general level of and certainty out there
Speaker 1: is very high. I talk to business people regularly, I'm
Speaker 1: a former business person, and I would say the level
Speaker 1: of uncertainty is very high. And UH, and I think
Speaker 1: when business people feel uncertain, it tends to have a
Speaker 1: chilling effect on capex, employment decisions. You know, UH, trade
Speaker 1: tensions are are an example, and part of that uncertainty. Also,
Speaker 1: I'm very aware of the fact that input costs for
Speaker 1: companies have gone up, pricing power is lower than it's
Speaker 1: been in my lifetime, and so there's tends to be
Speaker 1: a margin squeeze going on. All the creates uncertainty, which
Speaker 1: tends to cause businesses to be more careful about making
Speaker 1: investment decisions. Where the President's tweets about the FED disgusted
Speaker 1: in any way overtly or indirectly at the December nineteenth meeting, yeah,
Speaker 1: I won't. I won't comment on that other than to say,
Speaker 1: which won't surprise you. The standard for the FED, which
Speaker 1: I'm confident will adhere to, is will will make decisions
Speaker 1: without regard to political influence or political considerations. And I'm
Speaker 1: very confident around the table that's the standard we're gonna uphold. Well,
Speaker 1: the President did tweet that if the impass over the
Speaker 1: government shutdown continues, he might close the southern border. As
Speaker 1: the FED official responsible for much of that southern border,
Speaker 1: what impact would that have? Well, Uh, the fact of
Speaker 1: the matter is our trade flows with Mexico are critical
Speaker 1: to US competitiveness or critical the US GDP Texas by
Speaker 1: the Way that is the largest exporting state in the country,
Speaker 1: but there's a whole swath of industries in the United
Speaker 1: States that use logistic sense supply chains across that border
Speaker 1: to improve their global competitiveness. It's critical the jobs and
Speaker 1: growth in the United States when you look ahead to
Speaker 1: two thousand nineteen. Uh, has your outlook changed in terms
Speaker 1: of whether you're worried about where we are? Uh? Do
Speaker 1: you think it can be managed? Can the FED bring
Speaker 1: us in for a soft landing. I'm hopeful that we can,
Speaker 1: but I think it's critical what we do now. Uh.
Speaker 1: You know, people ask me about the probability of recession
Speaker 1: and what I tell them, there'll be a recession someday.
Speaker 1: Our job at the FED is is maximum employment with
Speaker 1: price stability and to try to extend this expansion. And
Speaker 1: I think we have an opportunity, depend on what we
Speaker 1: do here in the next months, that we can handle
Speaker 1: this right where we can, we can achieve that dual mandate.
Speaker 1: But it's critical I think what we do here over
Speaker 1: the next several months. Robert Caplan, President of the Dallas FED,
Speaker 1: joining us on Bloomberg Television and Radio worldwide this morning.
Speaker 1: Thank you very much With Michael McKie, thank you so much,
Speaker 1: of course, Mr McKee, and the press conferences of Chairman
Speaker 1: Powell and here with the Dallas Ft President. Right at
Speaker 1: the end of that interview, John Farrell was really classic caplan.
Speaker 1: It's critical what we do now, and by we, I
Speaker 1: think it's fascinating. I know with Capinet's an openly what
Speaker 1: does President Trump do? What does Secretary of Minution do?
Speaker 1: What does Chairman Powell do in the set of decisions?
Speaker 1: And John what I really are there within his devilishness
Speaker 1: was a more data dependent fet to international relations in
Speaker 1: our first conversation this year. But James Stavrida is he
Speaker 1: is as a TuS Fletcher school uh, a former admal
Speaker 1: of the Navy with a nod An acquaintance to being
Speaker 1: on the boat, on the ship and also working with
Speaker 1: NATO as well. J Sevita's Happy New Year to you.
Speaker 1: As usual, you start strong with looking at the reading
Speaker 1: that needs to be done, and I love how you
Speaker 1: go to one of my favorite authors, Nathaniel Philbrick talking
Speaker 1: about the Battle of York Town and the value of allies.
Speaker 1: Does the Pentagon have any allies left? Yeah, they've been
Speaker 1: dropping like flies lately, Tom, but so far we do
Speaker 1: have allies, and we ought to remember that. And as
Speaker 1: we look back on that brilliant book by Nat Philbrick,
Speaker 1: good friend of mine, Um, we ought to recall that
Speaker 1: it was France, our ally, who stood with us and
Speaker 1: delivered our independence. And today the NATO Alliance is strong,
Speaker 1: Japan is strong, South Korea is strong. Ure a little
Speaker 1: pressure from this administration, but still a basic part of
Speaker 1: our foreign policy. Within the conversations you have, and it
Speaker 1: would be rude of me to say, have you spoken
Speaker 1: to Gentle Madison all that blogny, But the way that
Speaker 1: the General has been treated by the President, how does
Speaker 1: your Pentagon respond to that? As an institution? Um? Informally,
Speaker 1: there is enormous dismay in the Pentagon that somebody of
Speaker 1: the stature and the intellect and the quality of General
Speaker 1: Jim Mattis, whom I've known for decades, was summarily dismissed
Speaker 1: or quit, depending on whose version of events you follow. Officially, Tom,
Speaker 1: the Pentagon will continue to do what it always does.
Speaker 1: It will stand on a law and defend this country
Speaker 1: to the end. Ad mustefritis. And what if you could
Speaker 1: just sort of use your naval and strategic background in
Speaker 1: the context of China and a book that you have
Speaker 1: recommended called On Desperate Ground and what we should take
Speaker 1: away from reading this book by Hampton Sides about China
Speaker 1: and understanding them not only from a military and trade perspective,
Speaker 1: but from a political and cultural perspective. Yeah, terrific question.
Speaker 1: The book is about the Korean War, and it's a
Speaker 1: cautionary tale for modern times. Right. In other words, we
Speaker 1: know what a war on the Korean Peninsula would look like,
Speaker 1: hundreds of thousands, if not millions dead. That was before
Speaker 1: there were nuclear weapons involved. So a we ought to
Speaker 1: take the cautionary message and be we are to remember
Speaker 1: when China's back was pushed to the wall by MacArthur
Speaker 1: with U. S troops surging north. They responded, They responded hard,
Speaker 1: and they pushed us all the way back down that peninsula.
Speaker 1: We should not underestimate China's will in a military conflict.
Speaker 1: So I wouldn't say we're quite on desperate ground yet
Speaker 1: between the US and China, but skirmishes lead to wars.
Speaker 1: We need to be very cautious and careful and how
Speaker 1: we deal with China. So what is the scuttle but
Speaker 1: among your colleagues and other officials in an outside of
Speaker 1: the military about the future of the United States role
Speaker 1: in the Pacific. We need to remain engaged. To walk
Speaker 1: away from the Pacific takes us away from the economic
Speaker 1: engine of the Earth. On the other hand, we have
Speaker 1: got to find a modus vivendi with China. And I'm
Speaker 1: particularly concerned this week with the exchange of messages, if
Speaker 1: you will, between President G of China and President PSI
Speaker 1: of Taiwan in their New Year's messages, they went back
Speaker 1: and forth about unification. Uh, that could be a real
Speaker 1: flashpoint in that's been relatively quiet over the last decade.
Speaker 1: I of course identified you with Fletcher School, and of
Speaker 1: course you exited Tufson Fletcher School here after five years
Speaker 1: hurting cats known as a faculty, and I would love
Speaker 1: to know within the vogue of international relations, what was
Speaker 1: your biggest surprise for students within the international relations after
Speaker 1: five years? It Fletcher, it is so in now to
Speaker 1: do international relations. What's your message to students, undergraduates, graduates
Speaker 1: and their parents who want to pursue I are number
Speaker 1: one by far, is that international relations gives you an
Speaker 1: opportunity to serve to serve your country, uh conventionally in
Speaker 1: the military, but in the diplomatic corps, at the Central
Speaker 1: Intelligence Agency, UM in international business is a form of service,
Speaker 1: engaging globally provide service to the world. And I'll close
Speaker 1: by saying our students focused, in particular Tom on issues
Speaker 1: of equality globally in the environment. And it's very idealistic
Speaker 1: space for students to be in, and I think is
Speaker 1: a very powerful one in today's world. Jametro Vidas, thank
Speaker 1: you so much, greatly appreciate it. Writing for Bloomberg Opinion
Speaker 1: as well in the former UH NATO UH Supreme Allied Commander.
Speaker 1: Where is asking a good water with Bloomberg Intelligence? And
Speaker 1: this has to do with the processing of biotechnology. It's
Speaker 1: not about Leononager's bio camera, Morrison and Boyd for those
Speaker 1: of you have a certain vintage in organic chemistry. It's
Speaker 1: about the technology folding. It leads to Bristol Myers Celgene.
Speaker 1: Were you surprised at this acquisition of is it dinosaurs mating?
Speaker 1: Can you get get more sophisticated than that? I think
Speaker 1: a couple of investor friends of us putting very eloquently.
Speaker 1: Tomas is blind leading the blind Okay. I mean, look,
Speaker 1: this is this is um celgene was built on protein homeostasis,
Speaker 1: as you know UM but I think this is a
Speaker 1: very still You got to tell people what is protein
Speaker 1: HomeOS basically regulating the levels of different types of protein
Speaker 1: your body. And they found that that has a immunomodalityary response.
Speaker 1: He to stimulates or tones it down. So Selgian drugs
Speaker 1: and it's it's lifeblood has been built around this, but
Speaker 1: it was something that I think they kind of stumble
Speaker 1: upon um and we're still understanding about how this actually
Speaker 1: really works. And you know, recent literature that has come
Speaker 1: out of the last decade or so, it's interesting, but
Speaker 1: still hasn't led to the next There's no blockbuster there.
Speaker 1: I mean revelm it is, it's a massive drugs, but
Speaker 1: Revelment is already on the market right right with the
Speaker 1: follow ones. We've not seen a good following yet. You know,
Speaker 1: you're work in Western New York at are at Rochester
Speaker 1: Institute of Technology, and that of course means the University
Speaker 1: of Rochester next door in Strong Memorial Hospital. There's a
Speaker 1: million Strong Memorial hospitals out there. We're in the old days.
Speaker 1: You did research for big farmer companies to go right
Speaker 1: where pim Fox was, which is Blockbusters. Is there a
Speaker 1: desperation in this transaction because those nostalgic old days are over?
Speaker 1: I mean, I don't think the nostalgic all days are
Speaker 1: really over. There's still Blockbusters out there. But I think
Speaker 1: what the rationale for Bristol was that they had cash
Speaker 1: to deploy. And this is uh, you know Selgians right now,
Speaker 1: just business, very cash generative, and I think they will
Speaker 1: look at this is a financial They're buying a cash flow.
Speaker 1: Absolutely from a portfolio standpoint, we don't see a lot
Speaker 1: of actual sense of overlap. But the sensibility here. Do
Speaker 1: you sense any relief from Celgene shareholders that oh my goodness, thanks,
Speaker 1: Oh yeah, thank my lucky stars, someone is buying the company. Yeah.
Speaker 1: So one of the things we've been seeing lately is
Speaker 1: that the valuations of Celgen prior to this deal, already
Speaker 1: um factored in a potential early reblement generic earlier than
Speaker 1: anticipated um and assigning very little value to the pipeline investments.
Speaker 1: Were pretty much hate selling the stock exactly. Well, then,
Speaker 1: who affect this merger besides Morgan Stanley and m U
Speaker 1: f G are doing the financing of seventy four billion large.
Speaker 1: Did Bristol Myers go, we gotta do this or did
Speaker 1: Selgin go wow? Two thousand and eighteen was harsh, Let's go.
Speaker 1: I don't know. I mean, I think from Celgian management
Speaker 1: management perspective, which the company I actually cover, um, they
Speaker 1: were looking for an out and said the other well
Speaker 1: said the other alternative was that they had to deliver
Speaker 1: consistently on upcoming catalysts. And the last twelve eighteen months
Speaker 1: has shown that they sucked at that. I mean, pim
Speaker 1: you do all the fancy financial I'm just gonna point
Speaker 1: out twenty four thousand warm bodies at Bristol Myers SQUIB
Speaker 1: and Selgin has seventy, so just on an employee basis,
Speaker 1: it's one third one fourth. Besize ostika. When you look
Speaker 1: at Bristol Myers Squib, their drug up Divo, that's what
Speaker 1: really This is the immune harvesting, heart harnessing cancer drug.
Speaker 1: Right this is the one that is supposed to help
Speaker 1: your immune system fight cancer. How much of Bristol Myers
Speaker 1: Squib is based on that? Um? Right now? Bristol mines
Speaker 1: my colleagues, Sam Fizzeli CAUs that stuck. It's basically optival
Speaker 1: and eloquence are the two main products, and optivos the Yeah,
Speaker 1: it's it's a big, massive product for them. They need
Speaker 1: that to succeed and they want to do havething, but
Speaker 1: they also need Mirk not to come out with a
Speaker 1: rival drug. Well, mIRC already has right and and they
Speaker 1: lost the lead position to mark on that too. That's
Speaker 1: all you can. I ask a dumb question. Are these
Speaker 1: seventy thousand dollars a year drugs? I mean, all these
Speaker 1: fancy drugs were talking about it? These the one that
Speaker 1: are breaking people. Financial toxicity is a real concern today.
Speaker 1: Um we we we. In cancer, everyone talks about the
Speaker 1: side effects of chemo, but financial toxicy is something basically
Speaker 1: the patients have to sell their assets, take on loans
Speaker 1: if they can't afford the drugs. The drugs are amazing,
Speaker 1: don't get me wrong. And we've covered is that nausea
Speaker 1: immunotherapy is beautiful, but it comes at a big cost.
Speaker 1: The Selgen you have those drugs as well, or Selgon
Speaker 1: doing something that's cheaper, more accessible. Well, Revelment is a
Speaker 1: imminomodulatory drug. Um it's I wouldn't call it necessarily immunotherapy
Speaker 1: like the pd ones like that, like the optivo, the
Speaker 1: or the or the key Truda, but it also has
Speaker 1: other drugs that like like it's a cell therapy pipeline
Speaker 1: that it got from from Juno. That is that you're
Speaker 1: taking a T cell out of your body engineering and
Speaker 1: slapping back in. That's called car T cells. That's imminotherapy
Speaker 1: as well, and that's competition. That is a totally different
Speaker 1: ball game. But I mean, that's the stuff that's going
Speaker 1: for four d plus dollars for a single treatment, right,
Speaker 1: I mean, I think key Truda is somewhere around forty
Speaker 1: or fifty dollars, and it depends where it's sold in
Speaker 1: Australia and and and also depending on on the dosing
Speaker 1: it's it's around that. Like the melanoma treatment. Did you
Speaker 1: just say one treatment was four hundred dollars? Yeah? Can
Speaker 1: I ask a dumb question who pays for that? Patients
Speaker 1: who want a chance of a cure four hundred thousand dollars.
Speaker 1: It's a slow ramp up, but a competitor to sell
Speaker 1: jan which is Gilia. They bought this company called Kite
Speaker 1: and they were one of the first companies to launch
Speaker 1: a carti cell therapy on the market. That's what it
Speaker 1: goes for just on the phone, A thou dollars. What
Speaker 1: will their competitors do today? Everyone, you know, comparing to
Speaker 1: b m Y and you know, I'm so old, I
Speaker 1: think of old pharma. But how did the competitors respond
Speaker 1: to this transaction we saw this morning. That's a great
Speaker 1: question and the only good one of the days. I
Speaker 1: don't know. I mean because because now Bristol, this combined
Speaker 1: entity is going to compete against guilliads and Novati is
Speaker 1: a carti cell therapy. They're going to continue to compete
Speaker 1: against Merk on the pd ones and trying to unroash
Speaker 1: and As trying to on the pd ones and the
Speaker 1: other immino therapies like the antibodies. So this is gonna
Speaker 1: be an interesting company once all the dust settles. I
Speaker 1: think we did more jargon in this interview and in
Speaker 1: four minutes with the that we did. All right, well,
Speaker 1: I'm going to cancel out the jargon because I'm just
Speaker 1: going to mention truda. You may recall that former President
Speaker 1: Jimmy Carter was diagnosed with melanoma with cancer. This is
Speaker 1: the drug. He says that he took that saved his life.
Speaker 1: That's right. This is the promise of immunotherapy, both the
Speaker 1: traditional antibodies like k truda and optivo as well as
Speaker 1: the cart cell therapy is like um like Kimria and
Speaker 1: yes Carter uh. These drugs for the patient's way. It works.
Speaker 1: You have amazing survival that you have. It's it's unprecedented. Yeah. Well,
Speaker 1: I mean he was only diagnosed once the tumor had
Speaker 1: spread to his brain. Yeah, and I need even work
Speaker 1: then exactly say he knows everything about this is great.
Speaker 1: I learned a huge amount here. Artica Gouda Warden, I
Speaker 1: thank you so much. He's with Bloomberg Intelligence. Thanks for
Speaker 1: listening to the Bloomberg Surveillance podcast. Subscribe and listen to
Speaker 1: interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer.
Speaker 1: I'm on Twitter at Tom Keene before the podcast. You
Speaker 1: can always catch us worldwide. I'm Bloomberg Radio