Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
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Speaker 2: Terminal and the Bloomberg Business app. To weigh in on
Speaker 2: all of this, and please to say that we can
Speaker 2: catch up with the Disney CFO Hugh Johnston. She is
Speaker 2: wonderful to catch up with you, sir. As always, we've
Speaker 2: got to start with the price increases. First of all,
Speaker 2: it's on the minds of a lot of people I
Speaker 2: can tell you around this table as well, So let's
Speaker 2: get into it. We've heard from a lot of companies
Speaker 2: that have talked about a lot of pricing power and
Speaker 2: sliding sales. What have you seen in the streaming business
Speaker 2: that gives you confidence that you can hike prices without
Speaker 2: that delivering increase churn.
Speaker 1: Great, well, good morning, great to be with you all.
Speaker 3: Obviously, terrific quarter for us, and you all have mentioned
Speaker 3: the numbers a few times. The entertainment business is doing
Speaker 3: exceptionally well right now.
Speaker 1: We had the top movie in May, June and July
Speaker 1: and the.
Speaker 3: Form of Planet of the Apes Inside Out too and
Speaker 3: then now Deadpool. That's real value to the consumer. And
Speaker 3: as we think forward to what's going to be appearing
Speaker 3: on the streaming service, those three great motion pictures, the
Speaker 3: IP that we've produced ourselves are going to be on
Speaker 3: the streaming service, as well as an enormous number of
Speaker 3: Emmy nominated TV shows including Avid Elementary and The Bear,
Speaker 3: Only Murders in the Building, and of course Showgun.
Speaker 1: The huge hit.
Speaker 3: And when you deliver that much value to consumers, consumers
Speaker 3: are willing to pay a little bit more because frankly,
Speaker 3: they're getting so much back in terms of entertainment.
Speaker 2: You have got to say, I'm with your Showgun was awesome.
Speaker 2: I said that last time just to endorse it once again,
Speaker 2: one of my favorites of the last twelve months. Clearly,
Speaker 2: the streaming business is doing well, which opens the door
Speaker 2: to high prices. You can't say the same thing about
Speaker 2: the theme park business, just what is going on next
Speaker 2: to you.
Speaker 3: Yeah, So one of the things to keep in mind
Speaker 3: is the theme park's business.
Speaker 1: We have actually grew in the quarter.
Speaker 3: Revenue is up two percent, so we're not talking about
Speaker 3: a business that's going negative in terms of growth. Earnings
Speaker 3: were down a little bit because we had inflation, and
Speaker 3: we're making some investments back in the business. What we
Speaker 3: see happening more than anything is the lower income consumers
Speaker 3: are a little bit stressed and shaving a little bit
Speaker 3: off of their time at the park, and then higher
Speaker 3: income consumers are tending to travel overseas a little bit
Speaker 3: more right now. But given the strength of the ip
Speaker 3: that we have in the park, given the quality of
Speaker 3: the experience, when the consumer is soft, it tends to
Speaker 3: hit us late, it hits us a little bit less,
Speaker 3: and we tend to recover. Really, so we really just
Speaker 3: see this as a few quarters of slight perturbation in
Speaker 3: the numbers. Frankly, I think we're going to be right
Speaker 3: back as we get into the middle next year.
Speaker 4: One of the other complaints commonly hear with the consumer
Speaker 4: is about bundles, not that they're not good, but that
Speaker 4: there's just too many of them and it's given people fatigue.
Speaker 4: Do you think there needs to be some consolidation. Do
Speaker 4: you agree that there's just too many options right now?
Speaker 3: Well, consumers do seem to appreciate having a limited number
Speaker 3: of bundles. Now, what we've tried to do with our
Speaker 3: own offering is offer the individual pieces or if people
Speaker 3: want to get a discount by bundling, we're.
Speaker 1: Happy to do that. So that said, I think you
Speaker 1: do see.
Speaker 3: A trend where there's probably going to be a few
Speaker 3: big competitors in the marketplace and streaming as we see
Speaker 3: right now between Netflix, Amazon and ourselves, and then there'll
Speaker 3: be some smaller competitors out there and they'll have to
Speaker 3: decide how they're going to run their businesses.
Speaker 5: Well.
Speaker 4: Another huge draw of some of these is sports rights,
Speaker 4: and on this year, the NBA has had this very
Speaker 4: odd bidding war where you've come out on scathe but
Speaker 4: Warner Broods loses out. You have Amazon dot Com a
Speaker 4: new entrance in there. You have all these streamers coming
Speaker 4: in trying to get their hands on live sports events.
Speaker 4: Do you think this is a healthy or unhealthy development
Speaker 4: for the industry?
Speaker 3: Generally speaking, what you see is sort of the leagues
Speaker 3: are choosing to go with the big winners in all of.
Speaker 1: This, so they've obviously been with us.
Speaker 3: ESPN the third quarter had forty nine percent market share
Speaker 3: of sports viewing, which is.
Speaker 1: Obviously a terrific number.
Speaker 3: So we have the a package with the NBA, we'll
Speaker 3: have the NBA Finals for the next twelve years. Beyond that,
Speaker 3: I'd be speculating is to get into what their decision
Speaker 3: making process was, but I think in general they're quite
Speaker 3: pleased with what we've been able to do for them,
Speaker 3: and obviously we're happy with what they've been able to
Speaker 3: do for us. And you combine our NBA rights along
Speaker 3: with college football along with the NFL, we've locked up
Speaker 3: sort of the most important sports to us in terms
Speaker 3: of being big and quite popular for an extended period
Speaker 3: of time.
Speaker 1: So we feel good about where we sat.
Speaker 6: Hugh, I know there's a different price point whether or
Speaker 6: not you want to be an individual that has to
Speaker 6: sit through advertisements. Are you seeing uptick of political ads
Speaker 6: given the season we're in.
Speaker 3: No, we really haven't seen much in that regard, so
Speaker 3: I can't certainly say that, So do you.
Speaker 7: Expect that to happen?
Speaker 6: I mean, everyone says after Labor Day, this is when
Speaker 6: the campaigns are going to be in high gear up
Speaker 6: until November. Are you expecting an uptick of political ads
Speaker 6: on any of your streaming services?
Speaker 3: Yeah, it's a great question. I couldn't tell you the
Speaker 3: answer to that one. So what I can tell you
Speaker 3: more broadly is the advertising market right now is incredibly healthy.
Speaker 3: We grew advertising as a company eight percent in the quarter.
Speaker 3: Our upfronts for next year were quite successful. The upfronts
Speaker 3: were up five percent, and in addition to that, the
Speaker 3: streaming service saw a twenty percent increase in advertising in
Speaker 3: ESPN saw seventeen percent increase. So generally speaking, the ad
Speaker 3: market is healthy. The biggest place is that it's healthy
Speaker 3: are consumer and then technology.
Speaker 6: Are you concerned that consumers right now potentially are going
Speaker 6: to shrug off the price increases, because what we hear
Speaker 6: from a lot of companies is that we do see
Speaker 6: consumers trading down. Why do you think they're willing to
Speaker 6: pay for a higher price point?
Speaker 3: Well, I think the biggest reason is it's always important
Speaker 3: to focus on this. The consumer receives value and what
Speaker 3: they pay is price. And because we're delivering so much value,
Speaker 3: I mean really an enormous amount of value in terms
Speaker 3: of the hits that I just mentioned. But then in
Speaker 3: addition to that, the combination of Disney plus Hulu and
Speaker 3: then we're going to have an ESPN tile and ultimately
Speaker 3: ESPN flagship on our streaming service. That's a huge amount
Speaker 3: of value for consumers, and as they're allocating their entertainment dollars,
Speaker 3: I think they're going to view us as as a
Speaker 3: great place to put them.
Speaker 2: So you mentioned hurdu just how close are we to
Speaker 2: an agreement with comecast.
Speaker 7: Where are we?
Speaker 3: Yeah, we're in the middle of an arbitration right now,
Speaker 3: and as always I'm not going to comment on that
Speaker 3: on arbitration outcomes and all of that. My guess is
Speaker 3: it's going to take a little while, but ultimately we'll
Speaker 3: get to a good place for the Walt.
Speaker 2: Disney but it takes what the timeframe is here, what
Speaker 2: a little while is?
Speaker 3: Yeah, probably talking a matter of a few quarters, it'd
Speaker 3: be my guest. But that's just a guess. So take
Speaker 3: it as that well, just.
Speaker 2: To guess as one of the theme parks as well.
Speaker 2: I just want to know you down on that too.
Speaker 2: You talked about the middle of next year for the
Speaker 2: theme park business to be sort of bouncing back to
Speaker 2: where it was. The guidness has sort of shifted out here.
Speaker 2: What's the firm guidance coming from the company now, Because
Speaker 2: I remember it was going close to year end, we'd
Speaker 2: get that bounce.
Speaker 3: What happened, Yeah, the consumer came in a little bit softer,
Speaker 3: and it was really the consumers that I mentioned earlier.
Speaker 3: The lower income consumer is is choosing to spend a
Speaker 3: little bit less, and again the higher income consumer is
Speaker 3: doing more overseas and outside the US. But again I'll
Speaker 3: remind you we're still growing in that business. So it's
Speaker 3: not a question of the business has gotten way off track.
Speaker 3: It's just a little bit softer than it was before
Speaker 3: because we're seeing toward the end of the quarter we
Speaker 3: saw a few consumer trans You have.
Speaker 2: Quite a unique advantage point of course. You I used
Speaker 2: to talk to you when you were over at Pepsi
Speaker 2: during the pandemic. Coming out of the pandemic, you're now
Speaker 2: with Disney, so you have a very very unique view
Speaker 2: of where the consumer is. What gives you the confidence
Speaker 2: just looking at your dashboard that it bounces back, that
Speaker 2: it comes back. Where does that come from?
Speaker 3: I am more than anything. I do believe there's resilience
Speaker 3: in the US economy. Obviously, markets are very very sensitive
Speaker 3: right now and very fragile of you, as you all
Speaker 3: been talking about in terms of news. But I think
Speaker 3: the US economy is a little bit stronger than people
Speaker 3: are giving a credit for, and the consumer will come
Speaker 3: back as the economy continues to strengthen.
Speaker 2: Interesting, Hugh, appreciate your time as always, sir, Hugh Johnston.
Speaker 2: There the Disney CFO call data of rough MKM. Isn't
Speaker 2: waiting for that to draw conclusions, He says, bye, by
Speaker 2: soft landing.
Speaker 7: It was nice knowing you.
Speaker 2: We may be finally entering a bad news is bad
Speaker 2: news environment, with analysts double digit earnings expectations for the
Speaker 2: next twelve months looking increasingly out of sync with the
Speaker 2: evolution of the macro economy.
Speaker 7: Mike Data joins us now for more.
Speaker 2: Now, Mike, before we move on, I just want to
Speaker 2: explain something to our audience. That quote, the timestamp on
Speaker 2: that quote is really important. That wasn't on Friday, that
Speaker 2: wasn't on Monday. It wasn't in the last twenty four hours.
Speaker 2: That was last Tuesday, on July thirtieth. It pre dates,
Speaker 2: what we heard from the FED, what we saw in payrolls.
Speaker 2: I can see you're smart and you're feeling good, and
Speaker 2: you should be. Mike, can you tell me what you
Speaker 2: saw that was guiding that view of things before we
Speaker 2: saw it for ourselves on Friday?
Speaker 8: Yeah, thanks a lot, John, I really appreciate that.
Speaker 9: What we were seeing when we wrote that note was
Speaker 9: the Conference Board data for July. So this is survey
Speaker 9: based data that essentially asks people about their labor market
Speaker 9: perceptions and their current circumstances. In what we saw from
Speaker 9: that data in both June and July is that the
Speaker 9: present Situations index had tumbled about twenty index points from
Speaker 9: where it was one year earlier. Since the data goes
Speaker 9: back to nineteen eighty or so, we haven't seen anything
Speaker 9: like that, a move down like that, outside of actual recessions.
Speaker 9: And then, equally importantly, there's a spread between those saying
Speaker 9: jobs are hard to get and jobs are plentiful. That
Speaker 9: correlates very strongly with the unemployment rate, and that pushed
Speaker 9: to a new high for the year in July, and
Speaker 9: lo and behold, you know, we got another pop in
Speaker 9: the unemployment rate, But those trends were underway even before
Speaker 9: the July jobs data. So I think we need to
Speaker 9: consider that given that, you know, there's a debate about
Speaker 9: whether the data last Friday could be fluky. These trends
Speaker 9: have been underway, they're persisting, and you know our fear
Speaker 9: is that the soft landing could be slipping away.
Speaker 4: Does that also imply that the FED is just too
Speaker 4: far behind, that the data has already started to slip
Speaker 4: and they didn't go in July, therefore going in September,
Speaker 4: there's only so much they can do.
Speaker 8: Yeah, I think that's exactly right.
Speaker 9: I mean, if we've listened to fedchair Poul what he
Speaker 9: was talking about at the last FED press conference was
Speaker 9: this idea of a totality of the data, And if
Speaker 9: you look at a totality of the data, it really
Speaker 9: is a mixed picture.
Speaker 1: Right.
Speaker 9: GDP and jobs look okay, and some of the other
Speaker 9: data that I spoke about, some of the survey based
Speaker 9: measures and the move and the unemployment rate look more recessionary.
Speaker 9: And so this is why business cycles come to an end.
Speaker 9: When you're at an inflection point, it looks a little
Speaker 9: bit messy. It's not totally clear cut. So if policymakers
Speaker 9: are waiting for a completely obvious recession to slap them
Speaker 9: upside the head.
Speaker 8: Then they're going to be way behind the curve.
Speaker 2: Mike, you had a couple of triades. One was long
Speaker 2: duration inequities, it was focused on defensives. We've had a
Speaker 2: big reset in markets since since that call.
Speaker 7: Where are you now on where we should be in markets?
Speaker 9: Yeah, I think probably investors should still stick with the
Speaker 9: defensive categories for now. We've been an advocate of the
Speaker 9: utility sector since last fall. You know, really got smashed
Speaker 9: hard last year with long term interest rates rising so violently,
Speaker 9: up to five percent on the ten year, and so
Speaker 9: a substantial chunk of that has been reversed. I think
Speaker 9: we're going to have to be a little bit more
Speaker 9: patient for some of the cyclicals, even small caps. You know,
Speaker 9: the valuations have come way down relative to the overall
Speaker 9: s and P five hundred, So I do think there
Speaker 9: are some increasingly attractive areas here that are cyclical, but
Speaker 9: the business cycle matters a lot, and so you don't
Speaker 9: want to be too early there. Typically those areas are
Speaker 9: bottoming out as you move into like the middle part
Speaker 9: of a downturn. So I think for the cyclicals more patients.
Speaker 9: I would not be chasing large cap growth concerns here.
Speaker 9: The valuations going into this correction were super high. We've
Speaker 9: been using the phrase rarely seen and never sustained. So
Speaker 9: the forward pe on the infotech S and P five
Speaker 9: hundred infotech index was above thirty coming into this correction
Speaker 9: in mid July. That's even above where we were in
Speaker 9: late twenty one early twenty two before a big downdraft
Speaker 9: in the equity market led by infotech stocks. So my
Speaker 9: concern there is that the expectations are just way too high.
Speaker 9: I mean, overall earnings expectations growth for the S and
Speaker 9: P five hundred and now is thirteen percent over the
Speaker 9: next year. That looks totally out of kilter with all
Speaker 9: the other indicators that we look at, and certainly a
Speaker 9: slowing economy, if not recession. So you know, I think
Speaker 9: we're probably going to be in a bit of a
Speaker 9: volatility storm here for a while. So defensive categories I
Speaker 9: think makes sense to stick with for now.
Speaker 2: Mike great Co has quite to catch up, so we've
Speaker 2: got to talk long the next time. Michael Dado of
Speaker 2: rough M Camp, I want to send banks they not
Speaker 2: of stice. No, we are baby being Macro Associates making
Speaker 2: some headlines co writing a paper saying the Treasury is
Speaker 2: manipulating death issuance to boost the US economy. Treasury Secretary
Speaker 2: Jennet Yellen rejecting Repeating's arguments, saying it quote suggest a
Speaker 2: strategy that is intended to ease financial conditions, and I
Speaker 2: can assure you one hundred percent that there is no
Speaker 2: such strategy. Nor how jo just now for more, nor
Speaker 2: how wonderful to hear from you, sir. Let's just take
Speaker 2: it from the start, from the top. For the people
Speaker 2: that missed that and haven't read that paper the U
Speaker 2: co author and put out in the last couple of
Speaker 2: weeks activist Treasury issuance, just take the opportunity to explain
Speaker 2: to our audience what you're talking about.
Speaker 10: Well. Treasury usually instead management as what they call regular
Speaker 10: and predictable issurance, they say how many short term bills
Speaker 10: as opposed to coupon clipping bonds they are going to issue.
Speaker 10: In the past, the rule has been that not more
Speaker 10: than fifteen to twenty percent of the stock of that
Speaker 10: should be bills that are short term less with being
Speaker 10: medied in the long term. But since last year, the
Speaker 10: issues of short term bills has been something like the
Speaker 10: margin the flow of it something like sixty to seventy
Speaker 10: percent of the issues. So they have an issue much
Speaker 10: less of the long term bonds and more of the
Speaker 10: shorterm bonds. That like a backdoor version of quantity basing.
Speaker 10: Because it reduces the supply of long term bonds, it
Speaker 10: boosts the price and reduces the long term interest rates
Speaker 10: on ten year treasuries. We estimate that the amount of
Speaker 10: it has been such that is equivalent to a reduction
Speaker 10: of twenty five business points in ten year treasuries four
Speaker 10: one hundred business points reduction of the Fed funds rate
Speaker 10: by the Fed. So the Fed is trying to tighten
Speaker 10: financial condition to slow down the column inflation, to achieve
Speaker 10: a soft landing, while Treasure has been trying to ease
Speaker 10: financial conditions by trying to boost the economy.
Speaker 8: So that's what's been happening.
Speaker 2: No, rather say suggestion in the pace. So this is
Speaker 2: a deliberate political project. What gives you, what tells you
Speaker 2: that that's ultimately what they've been doing, and something of
Speaker 2: course that they deny.
Speaker 10: Well, first of all, they do admit that what they're
Speaker 10: doing as an impact on financial condition. They cannot deny that,
Speaker 10: But then the question is about the motivation. Now, Treasury
Speaker 10: traditional issues more of the shortened bills when there is
Speaker 10: a recession, a financial crisis, a liquidity shock, an episode
Speaker 10: like COVID, or other types of turmoil like a severe recession.
Speaker 10: That's normal and that happens. But believe in a time
Speaker 10: in which there is no financial crisis, growth is about potential.
Speaker 10: Inflation is still above target, and financial conditions are normal,
Speaker 10: and until recently effectively acid prices like the stock market
Speaker 10: where at all time high. So the question is why
Speaker 10: they're doing it at this time. And my explanation was
Speaker 10: the last summer when ten year Treasury went to five
Speaker 10: percent because suddenly the bond vigilantes globally woke up and
Speaker 10: realize that our deaths are large and associate enable. Treasury
Speaker 10: got nervous about it, and they decided to effectively afford
Speaker 10: a backdoor que by buying more of the bills and
Speaker 10: issue more of the bills and less of the long
Speaker 10: term months. And that is financial conditioned quite significantly.
Speaker 1: Now.
Speaker 6: The Treasury official that oversees debt issuance, Joshua Frost, had
Speaker 6: this to say. He said, the autumn slow down, added
Speaker 6: issuance of ten, twenty and thirty year securities amounted to
Speaker 6: roughly a one percent change. So how is that basically
Speaker 6: the Treasury knowingly trying to what it feels like, manipulate
Speaker 6: the markets or make financial conditions easier if it's only
Speaker 6: a one percent change.
Speaker 10: Well, what has happened is that the range of the
Speaker 10: stock of term bills was between fifteen and twenty. Right
Speaker 10: now it's significant above twenty. And the flow in the
Speaker 10: last few months has been something like sixty to seventy
Speaker 10: percent of the new issues being bills. And on top
Speaker 10: of it, now the Treasure is started even for our
Speaker 10: guidance fed style. They've been saying for the next few quarters,
Speaker 10: you can expect the disions of TA bills are going
Speaker 10: to be significant like in the last few months or quarters.
Speaker 10: That's a signal that this policy has gone in a
Speaker 10: very different direction from regular and predictable, very different from
Speaker 10: the norms that they choose themselves about fifteen to twenty percent,
Speaker 10: and it's continued to go in the same direction.
Speaker 4: Well, no real the way that it's the same of norms.
Speaker 4: And you kind of hinted at this that at every
Speaker 4: turning point. This is what the Treasury does, and not
Speaker 4: that it's a crisis. But the contention is that interest
Speaker 4: rates are coming down. That's why they issue more at
Speaker 4: a turning point because essentially interest rates come down. You
Speaker 4: don't want to lock in long term debt when it's
Speaker 4: going to come down later. So, putting politics aside, if
Speaker 4: you thought interest rates were coming down, isn't this the
Speaker 4: right policy?
Speaker 10: Well, first of all, the treasure is never trading rates,
Speaker 10: that's not their jobs. Secondly, the year curve until recently
Speaker 10: was significantly inverted. So by issuing bills that are boring
Speaker 10: at much more expensive rates than you would otherwise, the
Speaker 10: subject to refinancing risk and rollover risks. And we're seeing
Speaker 10: that there is episodes of market turmoil and we know
Speaker 10: that body years and not going to go back to
Speaker 10: zero one percent. There are fundamental reasons higher inflation, lower savings,
Speaker 10: more capects why they equalibrium long term real and nominal
Speaker 10: rate for long term treasury is probably closer to five percent,
Speaker 10: if not higher. So the right thing to do will
Speaker 10: be that to issue long term debt rather than border
Speaker 10: get much higher shorter debts. I don't believe right now
Speaker 10: there is an episode of risk of is going to
Speaker 10: be probably temporary years are slightly lower. But if you're
Speaker 10: looking at the midium term, given what's going to happen
Speaker 10: to the deficit. If Trump is elected, is going to
Speaker 10: have tariffs weekend, the dollar is going to have permanent
Speaker 10: tax cuts are not funded. All these things imply higher nominal.
Speaker 8: And long term interest rates.
Speaker 10: So this policy doesn't make sense. And fraserle is not
Speaker 10: supposed to trade rates. They're not speculators.
Speaker 2: Ultimately, we're exploring two things here. One is consequences outcomes.
Speaker 2: The other is motivation. It's much much difficult, much much
Speaker 2: more difficult to decipher motivation. Let's talk about outcomes. Give
Speaker 2: the economic dator of the last week or so, no reale.
Speaker 2: Is there any evidence this.
Speaker 7: Is working.
Speaker 1: Well?
Speaker 10: What's happening in the last year the week is that
Speaker 10: markets are getting nervous about a recession. But I would
Speaker 10: say the stock market is predicted ten out of the
Speaker 10: last three recessions. Same thing with the bond market and
Speaker 10: the inmerted year curve. And the markets have been mistaken
Speaker 10: even about the Fed. You know, at the beginning of
Speaker 10: the year they expected six rate cards or the Fed
Speaker 10: said three then when the FED went to one, the
Speaker 10: expected three. Now they expect that the Fed is going
Speaker 10: to do four of them twenty five business points. So
Speaker 10: the markets are often wrong about what's going on with
Speaker 10: the economy and what the FED is going to be doing.
Speaker 10: There is some significant, i'd say, evidence of some slow
Speaker 10: down of the economy, but I don't think the data
Speaker 10: suggests that we're going to have a hard landing anytime soon.
Speaker 10: If anything, Actually there's some elements of strength.
Speaker 2: In the economy, elements of strength from Nuria Rabinis. So
Speaker 2: that tees up quite an obvious question. Let's talk about
Speaker 2: the market. You think it's a time perhaps where the
Speaker 2: economy is stronger than people think, which might come as
Speaker 2: surprise the people watching this program, given how BEARISHEF once
Speaker 2: become over the last few days. I think we all
Speaker 2: noticed now last week an application for a new ETF.
Speaker 2: You're one of the three portfolio managers listed on the
Speaker 2: Atlas America fund. Noel, with everything you've said in mind,
Speaker 2: what is going to go into that fund? What are
Speaker 2: you offering that perhaps we're missing.
Speaker 10: Well, first of all, we're trying to hedge against scale
Speaker 10: risk like inflation. The basement of your currency, digitalization, global
Speaker 10: climate change, pandemic protection is the globalization, cyber warfare, social bility, instability,
Speaker 10: and so on and so on. When those risks occur
Speaker 10: like the recurrent the recent past, your stackflacury shock, inflation
Speaker 10: is higher, growth is lower, and the traditional defensive act
Speaker 10: it is long duration treasury. That's terrible. Look what happened
Speaker 10: in twenty two when treasure did worse than SMP. Look
Speaker 10: what happened last summer. We need one to five percent
Speaker 10: and treasure loss ten percent. So if inflation was even
Speaker 10: only five percent, bondies will be something like seven over
Speaker 10: the medium term. Today they're less than four, So we'd
Speaker 10: have another forty percent loss on what is supposed to
Speaker 10: be the defensive aset That is twenty three dollon dollars
Speaker 10: outstanding of long term treasury. So you need something that
Speaker 10: does well in bad times and also helps you to
Speaker 10: rebuild America. We need to have climate resistant real estate,
Speaker 10: new communities, infrastructure, food security, reshot, green metals and rare
Speaker 10: earths and so on. So what's going on in this
Speaker 10: new fund is several things that are hedging you against
Speaker 10: those risks. First of all, climate resistant riks. We have
Speaker 10: looked at all the reach so we see which one
Speaker 10: are in the parts of North America will be less
Speaker 10: subject to climate change. Secondly, is itf allow you to
Speaker 10: invest into fifteen percent of we liquid assets new communities?
Speaker 10: Even Trump is talking about creating ten new freedom cities.
Speaker 10: Brighten and Harris want to invest into new infrastructure. We
Speaker 10: want to have food security, we want to reshore critical
Speaker 10: things we need. Gold is the youf to edge against social, political,
Speaker 10: geopolitical and financial risk. And if inflation's got to be higher,
Speaker 10: you want to stay away from long term treasure into
Speaker 10: stuff that's going to be having higher yield without having
Speaker 10: a price effect, short term treasure and tips. So they
Speaker 10: dynamically optimize combination of all these assets. They provide you
Speaker 10: a new, much more resilient, defensive asset and one that
Speaker 10: invest actually in rebuilding America at the time when we
Speaker 10: need to do so.
Speaker 7: That's the pitch. Fascinating stuff. Noria.
Speaker 2: When you're back in New York, which I think is
Speaker 2: next month, we're going to sit down and have a
Speaker 2: longer conversation about this. Appreciate your time this morning. There
Speaker 2: of Rabbeini Macro Associates lots of work through there beneficials
Speaker 2: refusing to overreact to last week's payrolls data, former New
Speaker 2: York Fed President Bill Dudley suggesting that patience might be misplaced.
Speaker 2: Right in this the FEDS wild ride has only just begun.
Speaker 2: A deteriorating labor market tends to be self reinforcing. The
Speaker 2: longer the FED weights, the greater for potential for damage.
Speaker 2: An immediate rate cut is in order, but that's very unlikely.
Speaker 2: Prepare for more volatility in stock and bond markets. Bill
Speaker 2: joined us. Now for more, Bill, Let's start the labor market.
Speaker 2: Then we can get to the Fed lack of response
Speaker 2: to it. What suggests to you that this is self reinforcing?
Speaker 2: This is the beginning of something much worse.
Speaker 5: Well, a couple of things. Number one, we've seen rise
Speaker 5: in unemployment claims. We've seen a drop in the higher's rate.
Speaker 5: We've seen a drop in the quits rate. It looks
Speaker 5: to me like the labor market is cooling off quite significantly.
Speaker 8: We've also triggered a so called samrle.
Speaker 5: Where if the unemployer rate rises by more than a
Speaker 5: half a percent ver a twelve month period.
Speaker 8: Every time that's happened, we've ended up in recession.
Speaker 5: So there's a lot of risk out there to the
Speaker 5: downside in terms of the labor market. On the other
Speaker 5: side of the mandate, the inflation news has been very,
Speaker 5: very good recently. So it seems to me that the
Speaker 5: FED needs to hold both sides of the mandate with
Speaker 5: equal weight right now, and that implies that monetary policy
Speaker 5: should be neutral, not restrictive. And we're a long way
Speaker 5: from neutral. I mean, people don't know exactly what a
Speaker 5: neutral monetary policy is precisely, but nobody thinks that five
Speaker 5: and a quarter of five and a half percent FEDI
Speaker 5: ful fund trate's consistent with neutral. Probably somewhere in the
Speaker 5: three to four percent range is where the Fed should be.
Speaker 11: Bill, You've had an enormous influence on how people are
Speaker 11: thinking on Wall Street about what's ahead. So I want
Speaker 11: to ask you, if you think an immediate weight cut
Speaker 11: is not on the table, that they won't move into meeting,
Speaker 11: what would you recommend they should do in the next
Speaker 11: few weeks.
Speaker 5: I think what they should do is change the messaging
Speaker 5: a little bit and make it very clear that they're
Speaker 5: now focused more on the liver side of the mandate.
Speaker 5: Get the market tuned to the notion that if we
Speaker 5: get weak data over the next six weeks, that fifty
Speaker 5: basis points is highly likely. At the September meeting, you
Speaker 5: can put fifty basis points firmly on the table if
Speaker 5: the data kept flow continue in the same direction.
Speaker 11: And do you think that'd be willing to do that.
Speaker 11: This has been a very backward looking FED and now
Speaker 11: they need to regain control of the narrative. Do you
Speaker 11: think that that by itself at Jackson Hole, for example,
Speaker 11: would be enough to regain control of the narrative?
Speaker 5: Well help a lot, because if the Fed, if people
Speaker 5: feel that the Fed's got it, financial conditions will become
Speaker 5: more accounted, stock market recover and he'll provide support. You know,
Speaker 5: the problem here is when the labor market starts to deteriorate,
Speaker 5: confidence starts to decline. We saw that over the last
Speaker 5: couple of days, you know, the big change in market sentiment.
Speaker 5: And when market sentiment deterirates, that can be self reinforcing.
Speaker 5: People start to pull back on hiring, people pulled back
Speaker 5: on spending. Next thing, you know, the unemployer rate hasn't
Speaker 5: gone up a half a percent has gone up a
Speaker 5: full percentage point or two percentage You're in recession. Now,
Speaker 5: the good news here is that, you know, if we
Speaker 5: have economic weakness, the FED has.
Speaker 8: Plenty of firepower.
Speaker 5: They have there a long way from zero percent short
Speaker 5: term rates, so that fifth can respond.
Speaker 8: Pretty aggressively if needed.
Speaker 5: And I think you know, my view is that the
Speaker 5: risk that they're going to need to respond aggressively has
Speaker 5: increased significantly in recent weeks.
Speaker 4: Well, I just want to put a fine point on that,
Speaker 4: because you did write about two weeks ago before the
Speaker 4: FED decision, before we got the jobs data, that not
Speaker 4: going in July would increase the risk of recession, and.
Speaker 7: All of that happened.
Speaker 4: So just how acute is the risk at this moment?
Speaker 5: Well, I think that what's happened is there's quite a
Speaker 5: bit of stress in a couple areas of the economy.
Speaker 5: Number one, low income households are really feeling it, both
Speaker 5: because they they're tapped out the savings that was generated
Speaker 5: by the fiscal transfers during the pandemic. And two, they're
Speaker 5: the ones who pay the higher short term interest rates
Speaker 5: in terms of credit card debt.
Speaker 8: And not a loan debt.
Speaker 5: And number two, we're seeing softness in the housing sector,
Speaker 5: especially in multi family construction. So you're seeing areas of
Speaker 5: weakness that are leading to softer labor market. And that's
Speaker 5: a softer labor market, though is the key thing. If
Speaker 5: it frightens consumers, then you have weakness and consumption and
Speaker 5: the thing becomes self reinforcing.
Speaker 4: I think the confusing thing for a lot of people
Speaker 4: bill is for every week point, there seems to be
Speaker 4: a strong point for every issue. At Airbnb, there is
Speaker 4: a disney that can raise prices. There is an uber
Speaker 4: that people are willing to buy. How do you distinguish
Speaker 4: between a lower end consumer that's dropping off a cliff
Speaker 4: and one that has just gotten more picky with where
Speaker 4: it spends its money.
Speaker 5: Well, it is difficult to sort out. And high income
Speaker 5: consumers are doing pretty well. I mean, they've locked in
Speaker 5: low mortgage rates. They have been the beneficiaries of a
Speaker 5: very strong stock market. Even after the recent decline in
Speaker 5: the stock market's still up quite over ten percent this year.
Speaker 5: So the high end consumer is feeling pretty good about things,
Speaker 5: but the low end is not. The other thing, of course,
Speaker 5: is also what's happening on the investment side. The Biden
Speaker 5: administration had a number of initiatives that boosted investment, spending, infrastructure,
Speaker 5: chipsacked climate and the question is what's the impetus from
Speaker 5: investment from those programs.
Speaker 8: Has that peaked or not?
Speaker 5: And if that has peaked, that's another source of potential
Speaker 5: restraint in coming months.
Speaker 2: Bill, It's great to catch up with you, sir as.
Speaker 2: Always appreciate the comments. This morning, Bill, don't be there,
Speaker 2: the former New York Fed President. This is the Bloomberg
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