WEBVTT - Surveillance: Apple's Disappointing Q2 With Munster 0:00:09.880 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jay Ley. 0:00:13.960 --> 0:00:17.560 We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.480 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:27.159 Bloomberg dot Com, and of course on the Bloomberg. He 0:00:27.240 --> 0:00:30.360 knows it well Gene Munster for years at Piper Jeffrey 0:00:30.400 --> 0:00:33.680 Jean Munster Munster with Loop Ventures. Now on where we 0:00:33.760 --> 0:00:36.640 are in technology, Jane, I know John's got a lot 0:00:36.680 --> 0:00:39.680 of questions on philosophy. Let me ask you a cash question. 0:00:40.159 --> 0:00:44.600 They raised the dividend six of Apple. They've retired percent 0:00:44.680 --> 0:00:48.800 of the stock in about five years. What's the January 0:00:48.840 --> 0:00:52.640 first cash return to Apple to shareholders? Can I say 0:00:52.680 --> 0:00:57.639 it's as high as seven percent? Yeah, it's that's exactly 0:00:57.680 --> 0:01:00.280 the right number if you look at the dividend plus 0:01:00.280 --> 0:01:04.240 the buy back. Uh. That's the numerical piece. There's also 0:01:04.520 --> 0:01:07.600 the message behind that fifty billion dollar increase, something that 0:01:07.640 --> 0:01:11.640 I did not anticipate unpressed these times, and I think 0:01:12.080 --> 0:01:16.000 it is probably elementary to connect the dots that that 0:01:16.160 --> 0:01:20.039 is a sign that they believe that despite largely being 0:01:20.280 --> 0:01:23.920 a throwaway year for Apple and most companies, I think 0:01:23.959 --> 0:01:27.080 that it will. The company feels confident about the cash 0:01:27.120 --> 0:01:32.160 flow to continue to support this massive growth opportunity long term. Yeah, 0:01:32.200 --> 0:01:34.920 disappointment this morning and overnight Gene that we didn't get 0:01:34.920 --> 0:01:36.759 a forecast. But from what I hear from you, you're 0:01:36.760 --> 0:01:39.399 saying that is the guidance, that is the forecast. It's 0:01:39.440 --> 0:01:42.640 the increase in the buyback, right. That's well said, John, 0:01:42.640 --> 0:01:46.080 They uh that that is what investors should undoubtedly take 0:01:46.120 --> 0:01:50.240 away from this too. And another piece around the forecasting 0:01:50.440 --> 0:01:53.880 is that the product line is intact. These are product companies. 0:01:54.200 --> 0:01:57.520 I mean every company Facebook as a product company, Google Awful. 0:01:57.920 --> 0:02:00.800 It's a little bit more clear just because they have 0:02:00.840 --> 0:02:04.880 physical products. But ultimately is keeping that product woradmap on 0:02:04.960 --> 0:02:07.480 track is critical. And what if I would kind of 0:02:07.520 --> 0:02:09.880 take a step back and look at this quarter and 0:02:09.919 --> 0:02:12.960 the contours of the quarter. I think that the messages 0:02:13.120 --> 0:02:17.400 that yes, it's difficult, uh, that they will be impacted, 0:02:17.480 --> 0:02:21.080 but ultimately they're making the right decisions to be leaders 0:02:21.120 --> 0:02:23.400 and to benefit. So what if you're gonna put all 0:02:23.480 --> 0:02:25.959 this into the math, the business is probably gonna be 0:02:25.960 --> 0:02:28.040 down five or ten percent in the June quarter. But 0:02:28.320 --> 0:02:30.920 fast forwarding to next year, it will probably be up 0:02:30.960 --> 0:02:34.320 fifteen percent, So I think we're gonna see some kind 0:02:34.360 --> 0:02:36.640 of a return to growth off of easy comps, but 0:02:36.720 --> 0:02:39.720 the return of growth nonetheless next year. Yeah. It's kind 0:02:39.720 --> 0:02:41.920 of amazing that this is the kitchen sink year for 0:02:43.160 --> 0:02:45.120 when you think about what some of these companies are 0:02:45.120 --> 0:02:47.280 throwing in and yet Apples still manage to eat out 0:02:47.280 --> 0:02:50.760 a profit and increased dividends UH and share buybacks. I'm 0:02:50.760 --> 0:02:54.519 wondering if in some ways we're seeing actually a strengthening 0:02:54.560 --> 0:02:56.519 of the core businesses of some of the big tech 0:02:56.600 --> 0:02:59.240 companies with the idea of diversification. We're seeing that with 0:02:59.280 --> 0:03:02.480 Apple with an increasing sales away from their iPhone UH 0:03:02.600 --> 0:03:05.880 product and towards services, which they've been pushing. And we've 0:03:05.919 --> 0:03:09.120 seen this certainly with Facebook and some of the other things. 0:03:09.160 --> 0:03:11.440 I mean, are you seeing this pretty much across the board, 0:03:11.520 --> 0:03:15.360 diversification and a greater resilience of big tech despite what 0:03:15.400 --> 0:03:18.360 the share price is saying. Well, I think yes, to 0:03:18.360 --> 0:03:20.520 look at it like spaying on a case by case basis, 0:03:20.600 --> 0:03:24.360 But in the case of Google and Facebook, is less 0:03:24.360 --> 0:03:27.919 deplification more about their core advertising businesses. Not a lot 0:03:28.040 --> 0:03:31.440 has changed there in the case of Apple. You're exactly right. 0:03:31.440 --> 0:03:33.399 I mean, you've had the services scheme for a long time, 0:03:33.480 --> 0:03:36.640 wearables out of nowhere, AirPods and did an impact. They 0:03:36.640 --> 0:03:39.920 don't break out the wearable segment, but based on commons 0:03:39.920 --> 0:03:42.800 that they periodically make, weaken back into what that growth is. 0:03:42.880 --> 0:03:46.120 And so in the March quarter was up two percent 0:03:46.200 --> 0:03:48.680 year of a year. That compares up forty four and 0:03:49.440 --> 0:03:52.040 in the two previous quarters. So it did decelerate and 0:03:52.080 --> 0:03:55.120 they expected to decelerate again, but that does not change 0:03:55.160 --> 0:03:58.600 the message. You're absolutely right, is that in Apple's case, Uh, 0:03:58.640 --> 0:04:01.680 this is still a large part of their business, desire 0:04:01.720 --> 0:04:04.640 phone half of the business, but ultimately this is going 0:04:04.720 --> 0:04:07.360 to be much more than an iPhone story longer term, 0:04:07.560 --> 0:04:10.960 all those wearables, and uh, they did give a teaser 0:04:11.000 --> 0:04:15.440 if you're curious about some future features within Apple Watch 0:04:15.560 --> 0:04:18.520 that should continue to boast a wearable segment. Just got 0:04:18.520 --> 0:04:20.320 a headline crossing a bloom bag. It comes from an 0:04:20.320 --> 0:04:23.680 oil company, Xon posting its first quarterly loss in at 0:04:23.760 --> 0:04:26.640 least thirty two years. And of course the big oil 0:04:26.680 --> 0:04:29.240 companies have got to cut back on capex. So let's 0:04:29.240 --> 0:04:32.719 move to Amazon. Amazon has this amazing luxury of acting 0:04:33.040 --> 0:04:36.800 canta cyclically, just flicking the spend switch all over again. 0:04:37.360 --> 0:04:39.440 And when Jeff Bezol says, you may want to take 0:04:39.440 --> 0:04:42.120 a seat, which seat the un gene you in the 0:04:42.160 --> 0:04:44.040 back seat or the front seat, Because if I'm a 0:04:44.080 --> 0:04:47.039 shareholder right now, I'm just surprised how disappointed some people 0:04:47.080 --> 0:04:50.400 are that here's a man leading the company, willing to 0:04:50.480 --> 0:04:52.680 invest in his company the time like this, so it's 0:04:52.680 --> 0:04:57.000 in a better position in years to come. I think 0:04:57.000 --> 0:05:00.159 the investors are are largely on board with everything that 0:05:00.400 --> 0:05:03.480 he's doing. The stock has moved fire since uh you 0:05:03.520 --> 0:05:05.680 know the peaks in the market, so it's near all 0:05:05.680 --> 0:05:07.880 the time. Has obviously down today, but I think that 0:05:07.920 --> 0:05:10.520 the big messages investors are largely supportive of that. I 0:05:10.520 --> 0:05:14.080 want to put quickly into context the amount of spending 0:05:14.080 --> 0:05:16.000 that he's talking about to sit down to four billion, 0:05:16.040 --> 0:05:18.520 what does that mean relative to their past? In the 0:05:18.560 --> 0:05:21.799 September quarter last year, they talked about a nine million 0:05:21.800 --> 0:05:24.279 dollar step up over the next or in that quarter 0:05:24.360 --> 0:05:27.440 the September nineteen quarter n hundred million for same day 0:05:27.800 --> 0:05:31.200 delivering a WS investment. So we're talking about essentially a 0:05:31.320 --> 0:05:34.240 four x acceleration off of one already high numbers. So 0:05:34.279 --> 0:05:37.880 this is some pretty steep um spending that they're going 0:05:37.880 --> 0:05:40.720 through the right thing. Longer term, Amazon is going to 0:05:40.800 --> 0:05:45.560 become foundational to the US in terms of infrastructure, delivery, commerce, 0:05:45.600 --> 0:05:48.400 all that. But I think when as an investor, one 0:05:48.480 --> 0:05:51.599 question front seat, back seat is what do you what 0:05:51.640 --> 0:05:55.120 do you pay for this ultimately? And I think that uh, 0:05:55.160 --> 0:05:57.080 you know, they generated two and a half billion dollars 0:05:57.080 --> 0:06:00.839 in gap men income, Apple generated eleven point two billion, 0:06:00.920 --> 0:06:02.600 and they both had the same one point to chilling 0:06:02.640 --> 0:06:04.920 dollar market caps. I think there is a question about 0:06:05.000 --> 0:06:07.719 valuation that has to be answered, Well, is that going 0:06:07.760 --> 0:06:11.120 to come to the cloud and seventy of business or 0:06:11.160 --> 0:06:13.839 whatever it is or Gene does it just come through 0:06:13.920 --> 0:06:17.520 this continued capture retail. I should point out folks that 0:06:17.680 --> 0:06:21.920 his Amazon was dazzling all, including John Farrell with their 0:06:21.960 --> 0:06:27.159 public performance. Jake Crew, j C. Penny, Macy's are on oxygen. 0:06:27.800 --> 0:06:30.680 I mean, Gene, do they have more room to take 0:06:30.760 --> 0:06:32.520 retail or is this all going to be done with 0:06:32.560 --> 0:06:38.000 the cloud? Uh? Probably more room in retail. Cloud is 0:06:38.120 --> 0:06:41.000 more competitive and not growing as fast relative to the 0:06:41.000 --> 0:06:44.279 other cloud competitors. In aws still a big business, the 0:06:44.360 --> 0:06:46.719 largest one out there. But let's just take the retail 0:06:46.760 --> 0:06:50.240 piece alone. Is that it seems obvious that e commerce 0:06:50.279 --> 0:06:54.160 has done well, but it's still relatively small college what 0:06:54.279 --> 0:06:57.679 people spend in the US, and so the offline piece, 0:06:57.720 --> 0:07:00.880 what they can do there about transferring, deliver, remaking some 0:07:00.960 --> 0:07:03.840 of the frictionalists, bringing more that online is still an 0:07:03.880 --> 0:07:08.039 incredible opportunity. The biggest opportunity for the company Gene. This 0:07:08.080 --> 0:07:10.080 has been too short. Let's do it again. Jane Munster 0:07:10.160 --> 0:07:14.240 Luke ventures with this on technology. Where we are We 0:07:14.280 --> 0:07:17.160 love folks, great conversations with the like of Mr Munster. 0:07:18.480 --> 0:07:21.400 John's introduction there Mohammed and I think it really points 0:07:21.440 --> 0:07:25.000 to the president and his trip to Arizona manufacturer here 0:07:25.040 --> 0:07:28.360 for I believe may fifth to honeywell, real simple, does 0:07:28.440 --> 0:07:32.160 he have forward momentum away from the eight zip codes 0:07:32.280 --> 0:07:36.000 covering him in the East Coast media? That's a really 0:07:36.040 --> 0:07:38.200 that's I think that's the sort of a million dollar 0:07:38.360 --> 0:07:41.120 question him and his team are trying to figure out. 0:07:41.160 --> 0:07:44.600 I'm really happy you started out with the presidential approval number. Overall, 0:07:44.840 --> 0:07:49.560 it's John's idea, not mine. Yeah, so it's but what's 0:07:49.640 --> 0:07:52.800 interesting is that when we asked sort of March to 0:07:52.920 --> 0:07:56.600 April UM, how people are doing in terms of these 0:07:56.680 --> 0:08:00.720 key actors in the crisis. The President and Congress actually 0:08:00.720 --> 0:08:04.160 lost the most support. So in March he had six 0:08:04.640 --> 0:08:07.560 approval on how he was handling the crisis. In April 0:08:07.560 --> 0:08:10.600 he had fifty UM. Congress went from fifty nine to 0:08:11.840 --> 0:08:15.640 So I wouldn't rely too much into the take up 0:08:15.680 --> 0:08:18.800 to forty nine. It's obviously an ongoing sort of saga. 0:08:18.840 --> 0:08:24.120 What's really interesting is that, unlike most periods in presidential 0:08:24.160 --> 0:08:27.840 approval eras UM, there's a lot happening right now. I mean, 0:08:27.840 --> 0:08:29.760 there are a few times when the President of the 0:08:29.880 --> 0:08:33.440 United States is directly addressing the nation on a daily basis. 0:08:33.920 --> 0:08:36.040 We've pulled on whether or not people are tuning in 0:08:36.120 --> 0:08:41.559 to the press conferences to get information UM, and a 0:08:41.559 --> 0:08:43.760 minority of Americans are doing that. As you can imagine, 0:08:43.760 --> 0:08:47.480 Republicans are tuning in more than Democrats. But on the whole, 0:08:47.520 --> 0:08:50.160 I think it's still really early to sort of make 0:08:50.200 --> 0:08:54.360 too much of any movement there. The other really key 0:08:54.440 --> 0:08:58.160 factors are UM as, you know, the economy, and I 0:08:58.200 --> 0:09:01.440 think whoever is going to come out sort of on 0:09:01.559 --> 0:09:04.559 top in terms of figuring out how to get America 0:09:04.600 --> 0:09:08.560 out of this situation. Um. Instinctively, for the politicians, right 0:09:08.679 --> 0:09:11.240 is going to get a reward, and that's I think 0:09:11.240 --> 0:09:14.840 what everybody's grasping towards. Interestingly, though, when you ask Americans 0:09:14.880 --> 0:09:17.360 about how to get out of this economic goal, their 0:09:17.400 --> 0:09:21.280 trust is in local actors. Um. So Americans when you 0:09:21.320 --> 0:09:24.760 ask them, for example, UM, who do you have confidence 0:09:24.880 --> 0:09:28.120 in in terms of getting things back to normal with 0:09:28.200 --> 0:09:31.800 the economy? The governor in your state at per cent 0:09:32.000 --> 0:09:34.959 getting a great deal or fair amount of conference. And 0:09:35.000 --> 0:09:37.440 that's the highest that goes down after that to Jerome 0:09:37.480 --> 0:09:41.920 Powell to eight percent, Steve Venusiante, President Trump forty seven, 0:09:42.440 --> 0:09:45.520 the Republican leaders forty seven, and then the Democratic leaders 0:09:45.559 --> 0:09:49.400 in Congress forty six. So Democratic Republican. Um, that's not 0:09:49.440 --> 0:09:52.800 where America is really looking to solve this problem. But 0:09:52.880 --> 0:09:55.200 that's exactly where I wanted to go, this idea of 0:09:55.400 --> 0:09:59.000 what Americans are looking for to direct whether they like 0:09:59.120 --> 0:10:02.880 someone and they're not. In terms of President Trump's approval rating, 0:10:03.320 --> 0:10:06.400 what are the main issues that week to week seemed 0:10:06.440 --> 0:10:09.760 to sway the population the most? Is it the consumer 0:10:09.840 --> 0:10:13.439 comfort which seems to be deteriorating deteriorating rapidly? Is it 0:10:13.559 --> 0:10:17.240 the expectation about personal financial situation? What are the main 0:10:17.280 --> 0:10:21.480 issues here? The major issue is the economy. I mean, 0:10:21.520 --> 0:10:24.760 we've been asking Americans two questions and creating something called 0:10:24.760 --> 0:10:27.439 the Economic Concepts Index since the ninth and it basically 0:10:27.480 --> 0:10:30.920 asked how economic conditions are for you today and your 0:10:30.960 --> 0:10:34.400 perception of the future. UM. This month we had a 0:10:34.480 --> 0:10:37.200 fifty four point drop in that index that sort of 0:10:37.600 --> 0:10:39.679 levels at zero, goes up to plus a hundred and 0:10:39.800 --> 0:10:43.560 negative hundred UM. It was the largest one month change 0:10:43.600 --> 0:10:48.920 in our tracking since UM that fifty four point dropped 0:10:49.160 --> 0:10:53.200 among Republicans, it was actually seventy two point dropped UM. 0:10:53.320 --> 0:10:55.600 So that's a very kind of when you talk about 0:10:55.640 --> 0:10:59.560 the partisanship thing, Americans tend to assess how the economy 0:10:59.640 --> 0:11:02.520 is doing based on whether they like basically the leadership 0:11:02.520 --> 0:11:05.120 in the White House lately. But what we know for 0:11:05.280 --> 0:11:08.400 much longer that's really a phenomenon sort of the post 0:11:08.400 --> 0:11:11.760 Obama Trump era, but we know for a longer period 0:11:11.800 --> 0:11:13.880 of time is the economy is always the number one 0:11:13.920 --> 0:11:16.640 thing when you ask Americans, what are the economics? What 0:11:16.679 --> 0:11:18.680 are the policy issues that are going to drive your boat? 0:11:18.760 --> 0:11:22.920 That in healthcare. UM. So the economic issues are going 0:11:23.000 --> 0:11:26.320 to be really really key more than ever, I think 0:11:26.679 --> 0:11:29.920 to this election. The other pieces getting this getting back 0:11:29.960 --> 0:11:34.160 to normal. Um. And we've been asking Americans whether there 0:11:34.240 --> 0:11:36.760 if there were no restrictions currently sort of would you 0:11:36.800 --> 0:11:38.360 just get up and go back to doing what you 0:11:38.360 --> 0:11:42.160 were doing At this point, Only of Americans say that 0:11:42.240 --> 0:11:46.520 they would sort of resume normal activities right now. Uh say, 0:11:46.520 --> 0:11:50.079 after there are new cases in your state, declined significantly. 0:11:50.360 --> 0:11:53.400 Another third day after there are no new cases, about 0:11:53.440 --> 0:11:55.640 twelve fe cent say that they're gonna wait until a 0:11:55.720 --> 0:11:59.320 vaccine is developed. We do see a partisans split on 0:11:59.400 --> 0:12:01.920 those issues. So, for example, compared to that sort of 0:12:03.440 --> 0:12:07.000 for the national average, percent of Republicans say that they 0:12:07.120 --> 0:12:10.920 sort of get back to normal right away. UM. But 0:12:11.040 --> 0:12:13.200 it's interesting that it's you know, it's been an increased 0:12:13.280 --> 0:12:15.959 nineteen point increase in a month for Republicans, but it's 0:12:15.960 --> 0:12:20.360 still only forty so UM. As Americans now have a 0:12:20.400 --> 0:12:23.240 more optimistic view. I mean, they're still very concerned about 0:12:23.280 --> 0:12:25.120 the crisis, but when you ask about is it getting 0:12:25.160 --> 0:12:27.760 better or worse, we see more Americans now saying things 0:12:27.760 --> 0:12:31.920 are improving. UM. And the rollout, you know, sort of 0:12:31.920 --> 0:12:35.080 plays out in some of these local areas. Uh. I 0:12:35.120 --> 0:12:38.319 think it's going to determine how the policy explains to 0:12:38.400 --> 0:12:41.520 the economical I'm great to catch op with this morning. 0:12:41.520 --> 0:12:45.760 We appreciate its. Let's do a brief here, folks on 0:12:45.800 --> 0:12:48.079 this May day, of course, a big deal in China. 0:12:48.160 --> 0:12:52.760 Henrietta tres joints her FATA partners on Washington policy. Henrietta, 0:12:52.840 --> 0:12:54.960 this is John and Lisa about out front of me 0:12:55.040 --> 0:12:59.160 on this. But but Henrietta, this is really really caught 0:12:59.280 --> 0:13:02.520 up quickly. Let me look back, as John did yesterday 0:13:02.520 --> 0:13:05.960 on Twitter, asking if Phase one is dead? Is a 0:13:06.000 --> 0:13:09.160 whole tariff dance of the last two years? Is that 0:13:09.280 --> 0:13:13.920 like done? You know? That's that's maybe one way to 0:13:13.960 --> 0:13:17.040 put it. I think we're actually ramping into a different 0:13:17.120 --> 0:13:18.680 kind of a gear that I find a lot of 0:13:18.720 --> 0:13:20.800 similarities to the trade war that we've had to the 0:13:20.880 --> 0:13:25.360 last two years. Um So the tariff specific conversation. I 0:13:25.400 --> 0:13:28.720 don't expect, especially during a recession or even a depression, 0:13:28.720 --> 0:13:31.120 that we're going to escalate tariffs from here right now. 0:13:31.360 --> 0:13:33.439 But they're certainly not going to come off, and they're 0:13:33.760 --> 0:13:36.959 acting on and exploring a whole host of other ideas 0:13:37.000 --> 0:13:41.280 from export control restrictions, which they meaningfully expanded on Monday, 0:13:41.400 --> 0:13:45.080 from the b I S two proposals to fully decouple, 0:13:45.440 --> 0:13:48.440 whether it's on the pharmaceutical side or broader health care side, 0:13:48.480 --> 0:13:51.000 that is the next phase. So it's not tariff specific, 0:13:51.200 --> 0:13:54.880 but it is absolutely um a redo of the trade 0:13:54.880 --> 0:13:57.160 war and just a different arena. Well, hen RT's on 0:13:57.200 --> 0:14:00.520 this topic of decoupling, what is the that you think 0:14:00.520 --> 0:14:02.400 we should pay a lot of attention to? Obviously send 0:14:02.440 --> 0:14:05.319 it to Rubiot has been pushing the financial aspect of 0:14:05.400 --> 0:14:08.679 decoupling over the last couple of years. Should we focus there? 0:14:08.760 --> 0:14:11.840 Is it elsewhere? Where are you laser focused? Well? I 0:14:11.840 --> 0:14:14.080 think decoupling is something that we need to watch from 0:14:14.080 --> 0:14:16.560 a number of different fronts. So first start off with 0:14:16.600 --> 0:14:18.920 the sectors that you think are going to have national 0:14:18.960 --> 0:14:22.280 security implications, because that's well they'll start. So that's on 0:14:22.320 --> 0:14:24.920 the pharmaceutical side. That's on chemicals you know they make 0:14:25.320 --> 0:14:29.120 uh not, we we use Americans use generic drugs which 0:14:29.160 --> 0:14:32.120 come from generic products that are produced in China from 0:14:32.160 --> 0:14:35.360 their chemical plants, and they produce nine of the world's supply. 0:14:35.760 --> 0:14:38.800 So it's a whole range of components that they need. 0:14:38.840 --> 0:14:41.720 But then when you think about decoupling UM, you have 0:14:41.760 --> 0:14:44.000 to remember that if you're the FDA, or you're a 0:14:44.000 --> 0:14:49.560 company that's creating ipprofen or a knockoff generic product, you 0:14:49.840 --> 0:14:53.160 need approval from the FDA, which takes anywhere from three 0:14:53.160 --> 0:14:55.880 to seven years just to form a new plant. So 0:14:56.000 --> 0:14:59.000 you can't just make a new plant in Ohio. You've 0:14:59.000 --> 0:15:02.480 got to uh sort of repeat or have a have 0:15:02.520 --> 0:15:05.400 another one UM somewhere else that you start to slowly 0:15:05.440 --> 0:15:07.720 get ramped up to speed so that three years from 0:15:07.720 --> 0:15:09.840 now you can eventually begin coupled. But it takes a 0:15:09.880 --> 0:15:11.840 long time. But I would imagine they start in the 0:15:11.880 --> 0:15:15.400 pharmasector or chemicals, uh, and the healthcare space with ppe 0:15:15.560 --> 0:15:18.400 and masks and all that as well. Henrietta, I remember 0:15:18.440 --> 0:15:21.360 back when we were dealing with the trade wars in 0:15:21.400 --> 0:15:24.880 their first iteration in this cycle, a lot of companies 0:15:24.920 --> 0:15:27.000 were pushing back and saying, this isn't good for our 0:15:27.040 --> 0:15:30.240 business and we want to do business with China and 0:15:30.280 --> 0:15:32.640 we depend on these supply chains that are complicated to 0:15:32.600 --> 0:15:35.400 have been built up over time. Is there a different 0:15:35.680 --> 0:15:39.680 tone now from Corporate America saying we need to domesticate 0:15:39.760 --> 0:15:43.200 our supply chains. We need to couple for our business, 0:15:43.520 --> 0:15:47.800 not just a political reason. I think the business reasons 0:15:47.800 --> 0:15:50.960 are being driven by the political I still, you know, 0:15:51.040 --> 0:15:53.640 despite the last three years of what we've had under 0:15:53.640 --> 0:15:58.280 President Trump and a sort of cry for nationalism and protectionalism, 0:15:58.320 --> 0:16:00.520 a lot of business owners in most them is still 0:16:00.520 --> 0:16:02.360 saying that free trade is actually the best way for 0:16:02.400 --> 0:16:05.040 you diversify in the event of a pandemic like this 0:16:05.280 --> 0:16:07.920 or in the event of the need for global growth 0:16:08.000 --> 0:16:11.120 later on. If you have global trade, you use your 0:16:11.160 --> 0:16:13.840 trade and your productivity as efficiently as possible. That's a 0:16:13.880 --> 0:16:17.040 pretty standard economic model, and I think most businesses still 0:16:17.040 --> 0:16:19.640 have used that. What they're layering on top now is 0:16:19.680 --> 0:16:23.720 political risk, and that sometimes is superseding the economic arguments. 0:16:24.000 --> 0:16:26.040 And so they're saying, all right, well, you know, if 0:16:26.040 --> 0:16:27.960 we can't go to China because we don't know what's 0:16:27.960 --> 0:16:30.760 going to go on with tariff or even more insidiously, 0:16:30.800 --> 0:16:33.800 these export control restrictions, you have to get your financing 0:16:33.800 --> 0:16:36.120 outside of China, you need to get your staff outside 0:16:36.120 --> 0:16:39.440 of China um and you need to probably produce outside 0:16:39.440 --> 0:16:40.840 of China. So a lot of folks who looking to 0:16:40.920 --> 0:16:45.160 Mexico um as a natural backstop for another another's country, 0:16:45.200 --> 0:16:47.240 that might be a better opportunity for them. So I 0:16:47.240 --> 0:16:51.240 think they're still free market, still free trade, but have 0:16:51.440 --> 0:16:53.880 to layer on a political calculus as a result of 0:16:53.880 --> 0:16:57.400 both President Trump's policies but also now coronavirus, which is 0:16:57.400 --> 0:17:00.800 going to be a bipartisan opposition situation. That's it, isn't it. 0:17:00.880 --> 0:17:03.840 That's the political story, and that's the story. Free trade 0:17:03.840 --> 0:17:07.480 doesn't win the November election, does it. Nope? And sure doesn't. 0:17:08.320 --> 0:17:09.639 And that's going to be the problem here on now. 0:17:09.720 --> 0:17:11.320 So let's talk about the other side of the aisle. 0:17:11.440 --> 0:17:14.119 What's Vice President, former Vice President Joe Biden's position on 0:17:14.119 --> 0:17:16.720 all of this. Yeah, that's a great question. I actually 0:17:16.720 --> 0:17:19.320 think there's a possibility that Biden could be even worse, 0:17:19.400 --> 0:17:21.960 and that's because what we've seen under Trump is a 0:17:22.119 --> 0:17:25.160 very US exclusive approach. He's actually said to the EU 0:17:25.240 --> 0:17:27.760 and Japan and other nations, you know, get in line, 0:17:27.800 --> 0:17:29.479 We're going to get our deal with China. You can 0:17:29.520 --> 0:17:32.600 get your own. Um. What President Biden would say is, 0:17:32.800 --> 0:17:34.919 all right, these tariffs are all on three hundred and 0:17:34.920 --> 0:17:36.880 sixty billion dollars worth of stuff. I like, what you've 0:17:36.880 --> 0:17:39.320 done here. Now let's think about how we can get 0:17:39.359 --> 0:17:42.040 more out of China from the environmental front, from a 0:17:42.160 --> 0:17:44.640 human rights front, from an economic front. And he says, 0:17:44.720 --> 0:17:48.359 let's let's let's use the global rules based world order 0:17:48.480 --> 0:17:51.760 and try to prop up the w t O UM, 0:17:51.960 --> 0:17:54.520 get the EU in Japan to join forces with US, 0:17:54.520 --> 0:17:57.720 and we all target China together, and that way China 0:17:57.800 --> 0:18:00.359 can't just stop purchasing our pork and bring the United 0:18:00.400 --> 0:18:03.520 States farming community to its knees. We can combine forces 0:18:03.520 --> 0:18:05.919 with the EU, with Canada, with Japan and other nations 0:18:05.960 --> 0:18:08.879 with w t O bolster that and then really extract 0:18:08.920 --> 0:18:11.960 concessions from China, get them to become a developed nation, 0:18:12.600 --> 0:18:16.520 get them to more fully participate, be more transparent, and 0:18:16.560 --> 0:18:20.040 actually exact extract change. So I think Biden is actually 0:18:20.080 --> 0:18:23.040 a worse situation for China than just President Trump, who 0:18:23.160 --> 0:18:26.400 they sort of know was playbooks already and night upon. 0:18:27.880 --> 0:18:32.399 Michael Gapen is hugely qualified at Barclay's our chief US economists, 0:18:32.440 --> 0:18:37.560 but was serious international experience as well. Michael thrilled you 0:18:37.680 --> 0:18:39.760 with us. I want to get right to wages because 0:18:39.760 --> 0:18:42.359 I know that's what all of our listeners are worried 0:18:42.359 --> 0:18:47.520 about what will be the wage dynamic forward given claims 0:18:47.680 --> 0:18:53.000 and given that job's report we see in exactly seven days, Well, 0:18:53.040 --> 0:18:55.800 I think it's going to be a very thoughtful labor 0:18:55.800 --> 0:18:58.720 marketers Jonathan was just alluding to. And we we have 0:18:58.760 --> 0:19:01.840 the unemployment rate probably going to rise to the eighteen 0:19:01.920 --> 0:19:05.159 nineteen percent range in April, and it will be elevated 0:19:05.200 --> 0:19:08.000 we think for several years. We might get a lot 0:19:08.040 --> 0:19:10.760 of re employment over the next day, several months, and 0:19:10.840 --> 0:19:13.119 several quarters, but we think that there will be a 0:19:13.200 --> 0:19:16.480 tail to this in terms of of a high unemployment 0:19:16.520 --> 0:19:19.240 rate and thought to labor market conditions for some time. 0:19:19.520 --> 0:19:23.119 And I think what's been interested what we're watching. Um 0:19:23.160 --> 0:19:24.919 if you if you look back to the O eight, 0:19:24.960 --> 0:19:28.080 o nine experience and even previous recessions, there's been a 0:19:28.119 --> 0:19:30.760 lot of nominal wage rigidity in the US. As you know, 0:19:30.880 --> 0:19:34.000 that's been one of the reasons we think cor insulation 0:19:34.200 --> 0:19:37.040 was so stable even though we had wide swings in 0:19:37.040 --> 0:19:40.720 the macro economy. Firms historically have been reluctant to give 0:19:40.800 --> 0:19:44.160 wage cuts. We're seeing a lot of reports and reading 0:19:44.200 --> 0:19:47.280 a lot of news stories where that's not the case 0:19:47.400 --> 0:19:51.080 this time. So in lieu of even more layoffs. We 0:19:51.200 --> 0:19:54.760 may actually be getting wage cuts in the near term 0:19:54.880 --> 0:19:57.520 that could persist for some time. Now, those could be 0:19:57.560 --> 0:20:00.320 taken back, but it might take some time for that. 0:20:00.359 --> 0:20:02.560 So I think I think we have a two uh, 0:20:02.840 --> 0:20:06.760 potentially a two prong problem here where we have a 0:20:06.800 --> 0:20:08.840 lot of slack in the labor market, and at least 0:20:08.880 --> 0:20:11.800 in the near term, to preserve some employment, some actual 0:20:11.840 --> 0:20:15.760 wage cuts that may persist for several quarters through the 0:20:15.760 --> 0:20:18.480 rest of the year. That's what we're worried about. And Michael, 0:20:18.520 --> 0:20:20.719 we have seen that from a number of companies just 0:20:20.760 --> 0:20:23.520 saying we're going to cut salaries across the board by 0:20:23.560 --> 0:20:26.800 a certain proportion in order to remain solvent through this period. 0:20:27.040 --> 0:20:28.639 In a recent story in the New York Times, you 0:20:28.680 --> 0:20:30.879 were quoted saying that you expect the unemployment rate to 0:20:30.960 --> 0:20:35.080 hit nineteen and a half percent in April. Also, you said, 0:20:35.119 --> 0:20:38.280 given the trillion spent, we would have hoped that federal 0:20:38.320 --> 0:20:41.920 efforts would have been more effective at stebbing job losses. 0:20:42.040 --> 0:20:44.440 Given the fact that we have seen the surge in 0:20:44.560 --> 0:20:48.200 jobless rates, what does that tell you about the efforts? 0:20:48.200 --> 0:20:50.600 Can you just sort of extrapolate forward in terms of 0:20:50.600 --> 0:20:54.640 what that means. Yeah, I think that the risk here 0:20:55.040 --> 0:20:57.600 is that you know, any time you get laid off, 0:20:57.640 --> 0:20:59.840 even though you think it's for a short period of time, 0:21:00.040 --> 0:21:02.040 your employer says, look that we're going to do this 0:21:02.119 --> 0:21:05.800 now the expectations we can hire you back. You risk 0:21:06.000 --> 0:21:09.639 detachment from the labor force, You risk a longer spell 0:21:09.680 --> 0:21:14.240 of unemployment, You risk a deterioration uh in in skills, 0:21:14.560 --> 0:21:17.320 and obviously the longer you're unemployed, the harder it is 0:21:17.359 --> 0:21:20.399 to to get back uh and And so we we 0:21:20.480 --> 0:21:24.119 think what you're you're you're ultimately risking slower potential growth 0:21:24.160 --> 0:21:27.680 and higher unemployment and flack or for a period of time. 0:21:28.080 --> 0:21:31.520 Connectivity to the labor market is is hugely important. We 0:21:31.680 --> 0:21:34.200 know that. And the way that we've done this here 0:21:34.200 --> 0:21:37.320 in the US is different than than is being done 0:21:37.320 --> 0:21:41.600