WEBVTT - Bloomberg Surveillance TV: August 7, 2024 0:00:00.120 --> 0:00:06.800 Bloomberg Audio Studios, Podcasts, radio News. 0:00:11.640 --> 0:00:15.440 This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 0:00:15.480 --> 0:00:18.680 with Lisa Bromwitz and Amrie Hordern. Join us each day 0:00:18.720 --> 0:00:22.280 for insight from the best in markets, economics, and geopolitics 0:00:22.400 --> 0:00:24.920 from our global headquarters in New York City. We are 0:00:24.920 --> 0:00:27.680 live on Bloomberg Television weekday mornings from six to nine 0:00:27.720 --> 0:00:31.280 am Eastern. Subscribe to the podcast on Apple, Spotify or 0:00:31.320 --> 0:00:33.960 anywhere else you listen, and as always on the Bloomberg 0:00:34.040 --> 0:00:36.760 Terminal and the Bloomberg Business app. To weigh in on 0:00:36.800 --> 0:00:38.599 all of this, and please to say that we can 0:00:38.640 --> 0:00:41.080 catch up with the Disney CFO Hugh Johnston. She is 0:00:41.080 --> 0:00:43.519 wonderful to catch up with you, sir. As always, we've 0:00:43.560 --> 0:00:45.880 got to start with the price increases. First of all, 0:00:45.960 --> 0:00:47.280 it's on the minds of a lot of people I 0:00:47.320 --> 0:00:49.480 can tell you around this table as well, So let's 0:00:49.479 --> 0:00:51.520 get into it. We've heard from a lot of companies 0:00:51.600 --> 0:00:54.120 that have talked about a lot of pricing power and 0:00:54.240 --> 0:00:57.440 sliding sales. What have you seen in the streaming business 0:00:57.440 --> 0:01:00.480 that gives you confidence that you can hike prices without 0:01:00.560 --> 0:01:02.600 that delivering increase churn. 0:01:03.320 --> 0:01:05.320 Great, well, good morning, great to be with you all. 0:01:05.880 --> 0:01:09.240 Obviously, terrific quarter for us, and you all have mentioned 0:01:09.280 --> 0:01:12.680 the numbers a few times. The entertainment business is doing 0:01:12.800 --> 0:01:14.440 exceptionally well right now. 0:01:14.480 --> 0:01:17.360 We had the top movie in May, June and July 0:01:17.480 --> 0:01:17.919 and the. 0:01:17.760 --> 0:01:21.520 Form of Planet of the Apes Inside Out too and 0:01:21.560 --> 0:01:25.600 then now Deadpool. That's real value to the consumer. And 0:01:25.640 --> 0:01:27.920 as we think forward to what's going to be appearing 0:01:27.959 --> 0:01:31.280 on the streaming service, those three great motion pictures, the 0:01:31.319 --> 0:01:34.080 IP that we've produced ourselves are going to be on 0:01:34.120 --> 0:01:36.600 the streaming service, as well as an enormous number of 0:01:37.000 --> 0:01:40.840 Emmy nominated TV shows including Avid Elementary and The Bear, 0:01:41.880 --> 0:01:44.440 Only Murders in the Building, and of course Showgun. 0:01:44.240 --> 0:01:44.920 The huge hit. 0:01:45.440 --> 0:01:48.360 And when you deliver that much value to consumers, consumers 0:01:48.360 --> 0:01:50.880 are willing to pay a little bit more because frankly, 0:01:50.920 --> 0:01:53.160 they're getting so much back in terms of entertainment. 0:01:53.400 --> 0:01:55.400 You have got to say, I'm with your Showgun was awesome. 0:01:55.440 --> 0:01:57.520 I said that last time just to endorse it once again, 0:01:57.600 --> 0:01:59.919 one of my favorites of the last twelve months. Clearly, 0:02:00.120 --> 0:02:02.880 the streaming business is doing well, which opens the door 0:02:02.920 --> 0:02:05.480 to high prices. You can't say the same thing about 0:02:05.480 --> 0:02:07.920 the theme park business, just what is going on next 0:02:07.920 --> 0:02:08.040 to you. 0:02:09.480 --> 0:02:11.760 Yeah, So one of the things to keep in mind 0:02:11.880 --> 0:02:13.280 is the theme park's business. 0:02:13.320 --> 0:02:15.160 We have actually grew in the quarter. 0:02:15.280 --> 0:02:18.080 Revenue is up two percent, so we're not talking about 0:02:18.080 --> 0:02:21.680 a business that's going negative in terms of growth. Earnings 0:02:21.680 --> 0:02:24.000 were down a little bit because we had inflation, and 0:02:24.040 --> 0:02:27.280 we're making some investments back in the business. What we 0:02:27.320 --> 0:02:31.000 see happening more than anything is the lower income consumers 0:02:31.040 --> 0:02:33.760 are a little bit stressed and shaving a little bit 0:02:33.800 --> 0:02:36.760 off of their time at the park, and then higher 0:02:36.760 --> 0:02:39.760 income consumers are tending to travel overseas a little bit 0:02:39.760 --> 0:02:42.280 more right now. But given the strength of the ip 0:02:42.480 --> 0:02:44.400 that we have in the park, given the quality of 0:02:44.440 --> 0:02:47.639 the experience, when the consumer is soft, it tends to 0:02:47.720 --> 0:02:50.080 hit us late, it hits us a little bit less, 0:02:50.200 --> 0:02:52.360 and we tend to recover. Really, so we really just 0:02:52.400 --> 0:02:56.520 see this as a few quarters of slight perturbation in 0:02:56.560 --> 0:02:58.799 the numbers. Frankly, I think we're going to be right 0:02:58.840 --> 0:03:00.480 back as we get into the middle next year. 0:03:00.800 --> 0:03:03.480 One of the other complaints commonly hear with the consumer 0:03:03.600 --> 0:03:05.680 is about bundles, not that they're not good, but that 0:03:05.760 --> 0:03:08.560 there's just too many of them and it's given people fatigue. 0:03:08.600 --> 0:03:10.840 Do you think there needs to be some consolidation. Do 0:03:10.880 --> 0:03:13.000 you agree that there's just too many options right now? 0:03:14.280 --> 0:03:18.760 Well, consumers do seem to appreciate having a limited number 0:03:18.840 --> 0:03:21.160 of bundles. Now, what we've tried to do with our 0:03:21.160 --> 0:03:24.560 own offering is offer the individual pieces or if people 0:03:24.600 --> 0:03:26.919 want to get a discount by bundling, we're. 0:03:26.800 --> 0:03:29.880 Happy to do that. So that said, I think you 0:03:29.960 --> 0:03:30.560 do see. 0:03:30.360 --> 0:03:33.480 A trend where there's probably going to be a few 0:03:33.520 --> 0:03:36.360 big competitors in the marketplace and streaming as we see 0:03:36.440 --> 0:03:39.680 right now between Netflix, Amazon and ourselves, and then there'll 0:03:39.720 --> 0:03:41.840 be some smaller competitors out there and they'll have to 0:03:41.840 --> 0:03:44.280 decide how they're going to run their businesses. 0:03:44.400 --> 0:03:44.480 Well. 0:03:44.520 --> 0:03:46.960 Another huge draw of some of these is sports rights, 0:03:46.960 --> 0:03:49.440 and on this year, the NBA has had this very 0:03:49.440 --> 0:03:51.840 odd bidding war where you've come out on scathe but 0:03:51.880 --> 0:03:54.400 Warner Broods loses out. You have Amazon dot Com a 0:03:54.480 --> 0:03:56.840 new entrance in there. You have all these streamers coming 0:03:56.880 --> 0:03:59.680 in trying to get their hands on live sports events. 0:04:00.040 --> 0:04:02.640 Do you think this is a healthy or unhealthy development 0:04:02.640 --> 0:04:03.360 for the industry? 0:04:05.080 --> 0:04:09.080 Generally speaking, what you see is sort of the leagues 0:04:09.120 --> 0:04:12.000 are choosing to go with the big winners in all of. 0:04:11.960 --> 0:04:14.160 This, so they've obviously been with us. 0:04:14.360 --> 0:04:17.520 ESPN the third quarter had forty nine percent market share 0:04:17.560 --> 0:04:19.360 of sports viewing, which is. 0:04:19.279 --> 0:04:20.839 Obviously a terrific number. 0:04:20.920 --> 0:04:23.680 So we have the a package with the NBA, we'll 0:04:23.680 --> 0:04:27.280 have the NBA Finals for the next twelve years. Beyond that, 0:04:27.560 --> 0:04:30.320 I'd be speculating is to get into what their decision 0:04:30.320 --> 0:04:33.560 making process was, but I think in general they're quite 0:04:33.600 --> 0:04:36.040 pleased with what we've been able to do for them, 0:04:36.080 --> 0:04:38.560 and obviously we're happy with what they've been able to 0:04:38.600 --> 0:04:41.400 do for us. And you combine our NBA rights along 0:04:41.400 --> 0:04:44.920 with college football along with the NFL, we've locked up 0:04:45.120 --> 0:04:48.120 sort of the most important sports to us in terms 0:04:48.160 --> 0:04:51.760 of being big and quite popular for an extended period 0:04:51.800 --> 0:04:52.040 of time. 0:04:52.120 --> 0:04:53.480 So we feel good about where we sat. 0:04:53.760 --> 0:04:55.880 Hugh, I know there's a different price point whether or 0:04:55.880 --> 0:04:57.640 not you want to be an individual that has to 0:04:57.680 --> 0:05:02.440 sit through advertisements. Are you seeing uptick of political ads 0:05:02.680 --> 0:05:03.880 given the season we're in. 0:05:04.839 --> 0:05:08.040 No, we really haven't seen much in that regard, so 0:05:08.320 --> 0:05:12.440 I can't certainly say that, So do you. 0:05:12.440 --> 0:05:13.400 Expect that to happen? 0:05:13.480 --> 0:05:15.960 I mean, everyone says after Labor Day, this is when 0:05:16.000 --> 0:05:18.159 the campaigns are going to be in high gear up 0:05:18.200 --> 0:05:21.320 until November. Are you expecting an uptick of political ads 0:05:21.360 --> 0:05:23.120 on any of your streaming services? 0:05:23.520 --> 0:05:26.040 Yeah, it's a great question. I couldn't tell you the 0:05:26.120 --> 0:05:28.720 answer to that one. So what I can tell you 0:05:28.760 --> 0:05:32.320 more broadly is the advertising market right now is incredibly healthy. 0:05:32.960 --> 0:05:35.679 We grew advertising as a company eight percent in the quarter. 0:05:36.600 --> 0:05:39.799 Our upfronts for next year were quite successful. The upfronts 0:05:39.800 --> 0:05:42.919 were up five percent, and in addition to that, the 0:05:42.960 --> 0:05:46.400 streaming service saw a twenty percent increase in advertising in 0:05:46.640 --> 0:05:50.120 ESPN saw seventeen percent increase. So generally speaking, the ad 0:05:50.160 --> 0:05:53.239 market is healthy. The biggest place is that it's healthy 0:05:53.240 --> 0:05:55.280 are consumer and then technology. 0:05:55.680 --> 0:05:59.080 Are you concerned that consumers right now potentially are going 0:05:59.120 --> 0:06:01.840 to shrug off the price increases, because what we hear 0:06:01.839 --> 0:06:04.840 from a lot of companies is that we do see 0:06:04.880 --> 0:06:07.560 consumers trading down. Why do you think they're willing to 0:06:07.680 --> 0:06:09.559 pay for a higher price point? 0:06:10.400 --> 0:06:13.040 Well, I think the biggest reason is it's always important 0:06:13.040 --> 0:06:17.040 to focus on this. The consumer receives value and what 0:06:17.080 --> 0:06:20.799 they pay is price. And because we're delivering so much value, 0:06:20.839 --> 0:06:23.200 I mean really an enormous amount of value in terms 0:06:23.200 --> 0:06:25.880 of the hits that I just mentioned. But then in 0:06:25.920 --> 0:06:29.880 addition to that, the combination of Disney plus Hulu and 0:06:29.920 --> 0:06:32.240 then we're going to have an ESPN tile and ultimately 0:06:32.560 --> 0:06:36.200 ESPN flagship on our streaming service. That's a huge amount 0:06:36.240 --> 0:06:39.479 of value for consumers, and as they're allocating their entertainment dollars, 0:06:39.760 --> 0:06:41.599 I think they're going to view us as as a 0:06:41.600 --> 0:06:42.520 great place to put them. 0:06:42.600 --> 0:06:44.719 So you mentioned hurdu just how close are we to 0:06:44.720 --> 0:06:45.840 an agreement with comecast. 0:06:46.000 --> 0:06:46.479 Where are we? 0:06:47.400 --> 0:06:49.800 Yeah, we're in the middle of an arbitration right now, 0:06:50.120 --> 0:06:52.360 and as always I'm not going to comment on that 0:06:52.640 --> 0:06:55.719 on arbitration outcomes and all of that. My guess is 0:06:55.760 --> 0:06:57.880 it's going to take a little while, but ultimately we'll 0:06:57.880 --> 0:06:59.120 get to a good place for the Walt. 0:06:58.960 --> 0:07:01.680 Disney but it takes what the timeframe is here, what 0:07:01.800 --> 0:07:02.560 a little while is? 0:07:03.480 --> 0:07:06.080 Yeah, probably talking a matter of a few quarters, it'd 0:07:06.120 --> 0:07:09.360 be my guest. But that's just a guess. So take 0:07:09.360 --> 0:07:10.320 it as that well, just. 0:07:10.320 --> 0:07:11.760 To guess as one of the theme parks as well. 0:07:11.800 --> 0:07:13.080 I just want to know you down on that too. 0:07:13.120 --> 0:07:14.960 You talked about the middle of next year for the 0:07:14.960 --> 0:07:17.000 theme park business to be sort of bouncing back to 0:07:17.040 --> 0:07:19.760 where it was. The guidness has sort of shifted out here. 0:07:19.800 --> 0:07:22.120 What's the firm guidance coming from the company now, Because 0:07:22.120 --> 0:07:24.520 I remember it was going close to year end, we'd 0:07:24.560 --> 0:07:25.240 get that bounce. 0:07:25.280 --> 0:07:29.440 What happened, Yeah, the consumer came in a little bit softer, 0:07:29.520 --> 0:07:32.080 and it was really the consumers that I mentioned earlier. 0:07:32.520 --> 0:07:35.520 The lower income consumer is is choosing to spend a 0:07:35.520 --> 0:07:38.600 little bit less, and again the higher income consumer is 0:07:39.240 --> 0:07:42.680 doing more overseas and outside the US. But again I'll 0:07:42.680 --> 0:07:45.560 remind you we're still growing in that business. So it's 0:07:45.560 --> 0:07:48.360 not a question of the business has gotten way off track. 0:07:48.960 --> 0:07:50.920 It's just a little bit softer than it was before 0:07:50.960 --> 0:07:53.040 because we're seeing toward the end of the quarter we 0:07:53.080 --> 0:07:54.960 saw a few consumer trans You have. 0:07:54.960 --> 0:07:57.080 Quite a unique advantage point of course. You I used 0:07:57.120 --> 0:07:58.640 to talk to you when you were over at Pepsi 0:07:58.800 --> 0:08:01.040 during the pandemic. Coming out of the pandemic, you're now 0:08:01.040 --> 0:08:03.440 with Disney, so you have a very very unique view 0:08:03.480 --> 0:08:05.920 of where the consumer is. What gives you the confidence 0:08:05.960 --> 0:08:08.120 just looking at your dashboard that it bounces back, that 0:08:08.160 --> 0:08:10.360 it comes back. Where does that come from? 0:08:10.840 --> 0:08:14.760 I am more than anything. I do believe there's resilience 0:08:14.800 --> 0:08:18.040 in the US economy. Obviously, markets are very very sensitive 0:08:18.120 --> 0:08:20.560 right now and very fragile of you, as you all 0:08:20.640 --> 0:08:23.080 been talking about in terms of news. But I think 0:08:23.120 --> 0:08:25.160 the US economy is a little bit stronger than people 0:08:25.160 --> 0:08:27.520 are giving a credit for, and the consumer will come 0:08:27.560 --> 0:08:29.880 back as the economy continues to strengthen. 0:08:30.040 --> 0:08:32.960 Interesting, Hugh, appreciate your time as always, sir, Hugh Johnston. 0:08:33.000 --> 0:08:46.640 There the Disney CFO call data of rough MKM. Isn't 0:08:46.640 --> 0:08:49.240 waiting for that to draw conclusions, He says, bye, by 0:08:49.360 --> 0:08:50.080 soft landing. 0:08:50.520 --> 0:08:51.640 It was nice knowing you. 0:08:52.080 --> 0:08:54.120 We may be finally entering a bad news is bad 0:08:54.160 --> 0:08:57.240 news environment, with analysts double digit earnings expectations for the 0:08:57.240 --> 0:09:00.160 next twelve months looking increasingly out of sync with the 0:09:00.160 --> 0:09:02.480 evolution of the macro economy. 0:09:02.720 --> 0:09:04.240 Mike Data joins us now for more. 0:09:04.440 --> 0:09:06.280 Now, Mike, before we move on, I just want to 0:09:06.280 --> 0:09:10.600 explain something to our audience. That quote, the timestamp on 0:09:10.640 --> 0:09:14.440 that quote is really important. That wasn't on Friday, that 0:09:14.600 --> 0:09:17.760 wasn't on Monday. It wasn't in the last twenty four hours. 0:09:17.840 --> 0:09:22.480 That was last Tuesday, on July thirtieth. It pre dates, 0:09:22.960 --> 0:09:25.560 what we heard from the FED, what we saw in payrolls. 0:09:25.600 --> 0:09:27.040 I can see you're smart and you're feeling good, and 0:09:27.080 --> 0:09:29.199 you should be. Mike, can you tell me what you 0:09:29.240 --> 0:09:31.440 saw that was guiding that view of things before we 0:09:31.440 --> 0:09:33.360 saw it for ourselves on Friday? 0:09:34.200 --> 0:09:36.440 Yeah, thanks a lot, John, I really appreciate that. 0:09:37.440 --> 0:09:39.960 What we were seeing when we wrote that note was 0:09:40.000 --> 0:09:43.360 the Conference Board data for July. So this is survey 0:09:43.480 --> 0:09:47.280 based data that essentially asks people about their labor market 0:09:47.440 --> 0:09:51.679 perceptions and their current circumstances. In what we saw from 0:09:51.800 --> 0:09:54.880 that data in both June and July is that the 0:09:54.920 --> 0:09:59.240 present Situations index had tumbled about twenty index points from 0:09:59.280 --> 0:10:03.000 where it was one year earlier. Since the data goes 0:10:03.080 --> 0:10:06.880 back to nineteen eighty or so, we haven't seen anything 0:10:07.040 --> 0:10:11.440 like that, a move down like that, outside of actual recessions. 0:10:11.920 --> 0:10:15.920 And then, equally importantly, there's a spread between those saying 0:10:16.040 --> 0:10:18.960 jobs are hard to get and jobs are plentiful. That 0:10:19.080 --> 0:10:22.720 correlates very strongly with the unemployment rate, and that pushed 0:10:22.840 --> 0:10:26.439 to a new high for the year in July, and 0:10:26.600 --> 0:10:28.720 lo and behold, you know, we got another pop in 0:10:28.760 --> 0:10:33.480 the unemployment rate, But those trends were underway even before 0:10:33.520 --> 0:10:36.240 the July jobs data. So I think we need to 0:10:36.320 --> 0:10:39.480 consider that given that, you know, there's a debate about 0:10:39.520 --> 0:10:43.559 whether the data last Friday could be fluky. These trends 0:10:43.559 --> 0:10:47.480 have been underway, they're persisting, and you know our fear 0:10:47.520 --> 0:10:50.320 is that the soft landing could be slipping away. 0:10:50.760 --> 0:10:53.400 Does that also imply that the FED is just too 0:10:53.440 --> 0:10:55.920 far behind, that the data has already started to slip 0:10:56.040 --> 0:10:59.560 and they didn't go in July, therefore going in September, 0:10:59.640 --> 0:11:00.880 there's only so much they can do. 0:11:02.120 --> 0:11:03.640 Yeah, I think that's exactly right. 0:11:03.760 --> 0:11:06.800 I mean, if we've listened to fedchair Poul what he 0:11:06.880 --> 0:11:09.520 was talking about at the last FED press conference was 0:11:09.559 --> 0:11:12.719 this idea of a totality of the data, And if 0:11:12.720 --> 0:11:14.880 you look at a totality of the data, it really 0:11:14.920 --> 0:11:15.760 is a mixed picture. 0:11:15.880 --> 0:11:16.040 Right. 0:11:16.120 --> 0:11:19.640 GDP and jobs look okay, and some of the other 0:11:19.760 --> 0:11:22.000 data that I spoke about, some of the survey based 0:11:22.040 --> 0:11:25.360 measures and the move and the unemployment rate look more recessionary. 0:11:25.840 --> 0:11:28.760 And so this is why business cycles come to an end. 0:11:28.760 --> 0:11:30.800 When you're at an inflection point, it looks a little 0:11:30.840 --> 0:11:34.880 bit messy. It's not totally clear cut. So if policymakers 0:11:34.880 --> 0:11:38.240 are waiting for a completely obvious recession to slap them 0:11:38.320 --> 0:11:39.040 upside the head. 0:11:39.080 --> 0:11:40.679 Then they're going to be way behind the curve. 0:11:40.960 --> 0:11:42.520 Mike, you had a couple of triades. One was long 0:11:42.600 --> 0:11:46.319 duration inequities, it was focused on defensives. We've had a 0:11:46.320 --> 0:11:49.480 big reset in markets since since that call. 0:11:49.920 --> 0:11:52.320 Where are you now on where we should be in markets? 0:11:53.840 --> 0:11:57.240 Yeah, I think probably investors should still stick with the 0:11:57.280 --> 0:12:01.200 defensive categories for now. We've been an advocate of the 0:12:01.320 --> 0:12:04.920 utility sector since last fall. You know, really got smashed 0:12:04.920 --> 0:12:09.400 hard last year with long term interest rates rising so violently, 0:12:10.240 --> 0:12:12.440 up to five percent on the ten year, and so 0:12:12.520 --> 0:12:16.480 a substantial chunk of that has been reversed. I think 0:12:16.480 --> 0:12:17.920 we're going to have to be a little bit more 0:12:17.960 --> 0:12:21.000 patient for some of the cyclicals, even small caps. You know, 0:12:21.040 --> 0:12:23.840 the valuations have come way down relative to the overall 0:12:23.960 --> 0:12:26.560 s and P five hundred, So I do think there 0:12:26.600 --> 0:12:31.240 are some increasingly attractive areas here that are cyclical, but 0:12:31.400 --> 0:12:34.040 the business cycle matters a lot, and so you don't 0:12:34.040 --> 0:12:37.560 want to be too early there. Typically those areas are 0:12:37.559 --> 0:12:41.160 bottoming out as you move into like the middle part 0:12:41.160 --> 0:12:44.240 of a downturn. So I think for the cyclicals more patients. 0:12:44.520 --> 0:12:48.720 I would not be chasing large cap growth concerns here. 0:12:48.840 --> 0:12:52.640 The valuations going into this correction were super high. We've 0:12:52.640 --> 0:12:56.360 been using the phrase rarely seen and never sustained. So 0:12:56.400 --> 0:12:59.040 the forward pe on the infotech S and P five 0:12:59.120 --> 0:13:03.360 hundred infotech index was above thirty coming into this correction 0:13:03.480 --> 0:13:06.080 in mid July. That's even above where we were in 0:13:06.160 --> 0:13:09.200 late twenty one early twenty two before a big downdraft 0:13:09.200 --> 0:13:14.320 in the equity market led by infotech stocks. So my 0:13:14.480 --> 0:13:17.880 concern there is that the expectations are just way too high. 0:13:18.000 --> 0:13:21.640 I mean, overall earnings expectations growth for the S and 0:13:21.679 --> 0:13:24.640 P five hundred and now is thirteen percent over the 0:13:24.679 --> 0:13:28.320 next year. That looks totally out of kilter with all 0:13:28.400 --> 0:13:30.560 the other indicators that we look at, and certainly a 0:13:30.600 --> 0:13:34.400 slowing economy, if not recession. So you know, I think 0:13:34.440 --> 0:13:35.920 we're probably going to be in a bit of a 0:13:36.000 --> 0:13:39.960 volatility storm here for a while. So defensive categories I 0:13:40.000 --> 0:13:43.040 think makes sense to stick with for now. 0:13:43.200 --> 0:13:45.120 Mike great Co has quite to catch up, so we've 0:13:45.120 --> 0:13:46.800 got to talk long the next time. Michael Dado of 0:13:46.840 --> 0:13:58.520 rough M Camp, I want to send banks they not 0:13:58.640 --> 0:14:01.320 of stice. No, we are baby being Macro Associates making 0:14:01.360 --> 0:14:04.160 some headlines co writing a paper saying the Treasury is 0:14:04.200 --> 0:14:08.319 manipulating death issuance to boost the US economy. Treasury Secretary 0:14:08.360 --> 0:14:11.640 Jennet Yellen rejecting Repeating's arguments, saying it quote suggest a 0:14:11.720 --> 0:14:14.960 strategy that is intended to ease financial conditions, and I 0:14:14.960 --> 0:14:17.520 can assure you one hundred percent that there is no 0:14:17.720 --> 0:14:21.320 such strategy. Nor how jo just now for more, nor 0:14:21.360 --> 0:14:23.360 how wonderful to hear from you, sir. Let's just take 0:14:23.440 --> 0:14:25.480 it from the start, from the top. For the people 0:14:25.520 --> 0:14:27.960 that missed that and haven't read that paper the U 0:14:27.960 --> 0:14:29.640 co author and put out in the last couple of 0:14:29.640 --> 0:14:33.680 weeks activist Treasury issuance, just take the opportunity to explain 0:14:33.720 --> 0:14:35.800 to our audience what you're talking about. 0:14:37.720 --> 0:14:42.080 Well. Treasury usually instead management as what they call regular 0:14:42.120 --> 0:14:45.880 and predictable issurance, they say how many short term bills 0:14:46.120 --> 0:14:50.640 as opposed to coupon clipping bonds they are going to issue. 0:14:50.960 --> 0:14:53.120 In the past, the rule has been that not more 0:14:53.160 --> 0:14:57.040 than fifteen to twenty percent of the stock of that 0:14:57.200 --> 0:15:00.400 should be bills that are short term less with being 0:15:00.760 --> 0:15:03.320 medied in the long term. But since last year, the 0:15:03.400 --> 0:15:06.680 issues of short term bills has been something like the 0:15:06.760 --> 0:15:09.800 margin the flow of it something like sixty to seventy 0:15:09.840 --> 0:15:12.240 percent of the issues. So they have an issue much 0:15:12.360 --> 0:15:14.560 less of the long term bonds and more of the 0:15:14.600 --> 0:15:18.960 shorterm bonds. That like a backdoor version of quantity basing. 0:15:19.280 --> 0:15:22.640 Because it reduces the supply of long term bonds, it 0:15:22.680 --> 0:15:26.080 boosts the price and reduces the long term interest rates 0:15:26.120 --> 0:15:29.560 on ten year treasuries. We estimate that the amount of 0:15:29.600 --> 0:15:32.640 it has been such that is equivalent to a reduction 0:15:32.720 --> 0:15:36.040 of twenty five business points in ten year treasuries four 0:15:36.080 --> 0:15:39.200 one hundred business points reduction of the Fed funds rate 0:15:39.240 --> 0:15:42.280 by the Fed. So the Fed is trying to tighten 0:15:42.360 --> 0:15:46.240 financial condition to slow down the column inflation, to achieve 0:15:46.240 --> 0:15:49.400 a soft landing, while Treasure has been trying to ease 0:15:49.440 --> 0:15:52.400 financial conditions by trying to boost the economy. 0:15:52.680 --> 0:15:54.080 So that's what's been happening. 0:15:54.320 --> 0:15:56.440 No, rather say suggestion in the pace. So this is 0:15:56.480 --> 0:16:01.120 a deliberate political project. What gives you, what tells you 0:16:01.120 --> 0:16:03.360 that that's ultimately what they've been doing, and something of 0:16:03.400 --> 0:16:04.680 course that they deny. 0:16:06.440 --> 0:16:09.000 Well, first of all, they do admit that what they're 0:16:09.000 --> 0:16:12.560 doing as an impact on financial condition. They cannot deny that, 0:16:13.120 --> 0:16:16.760 But then the question is about the motivation. Now, Treasury 0:16:16.800 --> 0:16:19.440 traditional issues more of the shortened bills when there is 0:16:19.480 --> 0:16:24.400 a recession, a financial crisis, a liquidity shock, an episode 0:16:24.480 --> 0:16:28.200 like COVID, or other types of turmoil like a severe recession. 0:16:28.560 --> 0:16:31.400 That's normal and that happens. But believe in a time 0:16:31.400 --> 0:16:35.000 in which there is no financial crisis, growth is about potential. 0:16:35.360 --> 0:16:39.160 Inflation is still above target, and financial conditions are normal, 0:16:39.400 --> 0:16:43.320 and until recently effectively acid prices like the stock market 0:16:43.680 --> 0:16:46.200 where at all time high. So the question is why 0:16:46.200 --> 0:16:49.920 they're doing it at this time. And my explanation was 0:16:49.960 --> 0:16:53.280 the last summer when ten year Treasury went to five 0:16:53.320 --> 0:16:57.480 percent because suddenly the bond vigilantes globally woke up and 0:16:57.520 --> 0:17:01.200 realize that our deaths are large and associate enable. Treasury 0:17:01.280 --> 0:17:05.439 got nervous about it, and they decided to effectively afford 0:17:05.480 --> 0:17:08.800 a backdoor que by buying more of the bills and 0:17:09.400 --> 0:17:11.960 issue more of the bills and less of the long 0:17:12.040 --> 0:17:15.800 term months. And that is financial conditioned quite significantly. 0:17:16.119 --> 0:17:16.239 Now. 0:17:16.400 --> 0:17:20.080 The Treasury official that oversees debt issuance, Joshua Frost, had 0:17:20.080 --> 0:17:22.480 this to say. He said, the autumn slow down, added 0:17:22.520 --> 0:17:25.639 issuance of ten, twenty and thirty year securities amounted to 0:17:25.760 --> 0:17:30.160 roughly a one percent change. So how is that basically 0:17:30.200 --> 0:17:33.680 the Treasury knowingly trying to what it feels like, manipulate 0:17:33.720 --> 0:17:37.640 the markets or make financial conditions easier if it's only 0:17:37.720 --> 0:17:39.200 a one percent change. 0:17:41.000 --> 0:17:44.160 Well, what has happened is that the range of the 0:17:44.200 --> 0:17:50.000 stock of term bills was between fifteen and twenty. Right 0:17:50.000 --> 0:17:53.199 now it's significant above twenty. And the flow in the 0:17:53.240 --> 0:17:56.280 last few months has been something like sixty to seventy 0:17:56.359 --> 0:17:59.680 percent of the new issues being bills. And on top 0:17:59.720 --> 0:18:02.520 of it, now the Treasure is started even for our 0:18:02.560 --> 0:18:06.760 guidance fed style. They've been saying for the next few quarters, 0:18:06.760 --> 0:18:09.679 you can expect the disions of TA bills are going 0:18:09.760 --> 0:18:13.440 to be significant like in the last few months or quarters. 0:18:13.760 --> 0:18:16.040 That's a signal that this policy has gone in a 0:18:16.160 --> 0:18:20.440 very different direction from regular and predictable, very different from 0:18:20.480 --> 0:18:24.280 the norms that they choose themselves about fifteen to twenty percent, 0:18:24.560 --> 0:18:26.520 and it's continued to go in the same direction. 0:18:27.240 --> 0:18:29.520 Well, no real the way that it's the same of norms. 0:18:29.520 --> 0:18:31.480 And you kind of hinted at this that at every 0:18:31.520 --> 0:18:34.280 turning point. This is what the Treasury does, and not 0:18:34.359 --> 0:18:37.560 that it's a crisis. But the contention is that interest 0:18:37.640 --> 0:18:40.200 rates are coming down. That's why they issue more at 0:18:40.240 --> 0:18:43.080 a turning point because essentially interest rates come down. You 0:18:43.080 --> 0:18:44.880 don't want to lock in long term debt when it's 0:18:44.920 --> 0:18:48.200 going to come down later. So, putting politics aside, if 0:18:48.240 --> 0:18:50.919 you thought interest rates were coming down, isn't this the 0:18:51.000 --> 0:18:53.440 right policy? 0:18:53.520 --> 0:18:57.000 Well, first of all, the treasure is never trading rates, 0:18:57.200 --> 0:19:00.720 that's not their jobs. Secondly, the year curve until recently 0:19:00.920 --> 0:19:04.720 was significantly inverted. So by issuing bills that are boring 0:19:04.760 --> 0:19:08.840 at much more expensive rates than you would otherwise, the 0:19:08.920 --> 0:19:12.359 subject to refinancing risk and rollover risks. And we're seeing 0:19:12.400 --> 0:19:15.639 that there is episodes of market turmoil and we know 0:19:15.760 --> 0:19:17.919 that body years and not going to go back to 0:19:18.040 --> 0:19:23.400 zero one percent. There are fundamental reasons higher inflation, lower savings, 0:19:23.480 --> 0:19:27.800 more capects why they equalibrium long term real and nominal 0:19:27.880 --> 0:19:31.200 rate for long term treasury is probably closer to five percent, 0:19:31.440 --> 0:19:34.480 if not higher. So the right thing to do will 0:19:34.520 --> 0:19:37.760 be that to issue long term debt rather than border 0:19:37.760 --> 0:19:40.760 get much higher shorter debts. I don't believe right now 0:19:40.760 --> 0:19:43.359 there is an episode of risk of is going to 0:19:43.400 --> 0:19:46.760 be probably temporary years are slightly lower. But if you're 0:19:46.800 --> 0:19:49.120 looking at the midium term, given what's going to happen 0:19:49.160 --> 0:19:52.280 to the deficit. If Trump is elected, is going to 0:19:52.320 --> 0:19:55.520 have tariffs weekend, the dollar is going to have permanent 0:19:55.560 --> 0:19:59.680 tax cuts are not funded. All these things imply higher nominal. 0:19:59.480 --> 0:20:00.880 And long term interest rates. 0:20:00.960 --> 0:20:03.880 So this policy doesn't make sense. And fraserle is not 0:20:03.920 --> 0:20:06.720