Speaker 1: This is Bloomberg Business Wait inside from the reporters and
Speaker 1: editors who bring you America's most trusted business magazine, plus
Speaker 1: global business, finance and tech news. The Bloomberg Business Week
Speaker 1: Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
Speaker 2: Here to ask my brother the worst thing that's happened
Speaker 2: to him over the last year. He would, no doubt say,
Speaker 2: the trouble that I'm logging into Matt.
Speaker 3: Matt, if you're listening.
Speaker 2: Logging into the family Netflix account.
Speaker 3: What do you mean? Denny's mentioned it's up about seventeen
Speaker 3: percent this year. It's pretty much staying just off its
Speaker 3: highs of the day. The high was up eighteen percent,
Speaker 3: so it's holding out of the games. Despite the FED
Speaker 3: talk the focus on rates. Netflix now up almost thirty
Speaker 3: seven percent year to date.
Speaker 2: Wow, so this after the company said it's raising prices
Speaker 2: for some customers here in the US, the UK, France.
Speaker 2: It's posted its best quarter for subscriber growth in years.
Speaker 2: It's a sign that management's confidence in the future, even
Speaker 2: as rival streaming services lose money. Speaking of rivals, Yeah, Meanwhile,
Speaker 2: profit at Walt Disney's Sports TV networks fell twenty percent
Speaker 2: through the first nine months of fiscal twenty twenty three,
Speaker 2: as the company provided the first peak at that business
Speaker 2: on a standalone basis. We got with us a great
Speaker 2: voice on all things media and streaming. Keita Rogna gothen
Speaker 2: Tech in, a media analyst a Bloomberg Intelligence. She joins
Speaker 2: us on Zoom from BI headquarters in Princeton. Gita, I
Speaker 2: want to get to Disney in a few minutes. First,
Speaker 2: let's just start with Netflix. Wow, a great quarter from
Speaker 2: the company. It turns out that cracking down on password
Speaker 2: sharing actually does lead to people who signing up for Netflix.
Speaker 4: Yeah, it absolutely does. And this, you know, it just
Speaker 4: tells us about the power of the platform, right Tim,
Speaker 4: because Netflix, I think today is really more like a
Speaker 4: utility almost, and so people really do want to have
Speaker 4: this service. It's a must have when it comes to
Speaker 4: streaming content. And that's kind of reinforced by the fact that,
Speaker 4: you know, you just look at their subscriber gains in
Speaker 4: in the third quarter. And what's even more surprising is
Speaker 4: the guidance that they gave for the fourth quarter. Apart
Speaker 4: from the fact that they do expect the subscriber momentum
Speaker 4: to kind of continue into twenty twenty four, So they
Speaker 4: do recognize the power of the platform, and I think
Speaker 4: the real guts move was the fact that they really
Speaker 4: announced that those price changes, right, so they know that
Speaker 4: they have a lot of pricing power. They know that
Speaker 4: people really love their content and are going to sign
Speaker 4: up no matter what.
Speaker 3: In terms of where they announce those price increases is
Speaker 3: that where they're growing the most.
Speaker 4: That's where there are Pooh is the highest, so their
Speaker 4: average revenue per user number is the highest, So those
Speaker 4: are the markets that contribute the most in terms of revenue.
Speaker 4: So yes, they wanted to make sure that they're able
Speaker 4: to kind of offer a nice variety of different price points.
Speaker 4: But they also know that, you know, taking up the
Speaker 4: premium price, so they increase the premium price plan by
Speaker 4: about fifteen percent in the US, or instead of costing
Speaker 4: twenty dollars now it will cost about twenty three dollars,
Speaker 4: so kind of really forcing you to pay up, but
Speaker 4: again offering enough flexibility because they left the ad based
Speaker 4: plan at that low price point of seven dollars. So
Speaker 4: what they're effectively trying to do is push more and
Speaker 4: more people to take advertising. Because though they mentioned that
Speaker 4: advertising is kind of building it is gaining traction, they
Speaker 4: still do need a critical mass of subscribers on that
Speaker 4: ad based plan to really attract the big, big AD
Speaker 4: dollars and build up a huge business.
Speaker 3: One thing I want to ask, do you feel like,
Speaker 3: following this report, Kita, that it's Netflix when it comes
Speaker 3: to streaming and everybody else like Netflix just seems to
Speaker 3: have figured it out, especially when you look at their
Speaker 3: you know, free cash.
Speaker 4: Flow, they certainly have figured it out. I mean, you know,
Speaker 4: one year ago we were in the midst of this
Speaker 4: great Netflix correction and we were all scratching our heads about,
Speaker 4: you know, what is the endgame for streaming, And they've
Speaker 4: kind of really definitely cracked the code when it comes
Speaker 4: to building subscriber scale, when it comes to profitability, because
Speaker 4: you just look at some of the profit metrics that
Speaker 4: they threw out there. You know, there was a little
Speaker 4: bit of concern Carol about their margin trajectory, but they
Speaker 4: kind of put that to rest because they said that
Speaker 4: you know, they will get to two to three percent
Speaker 4: increase in twenty twenty four, so about twenty three percent
Speaker 4: operating margins. And I think the real positive commentary was
Speaker 4: they said there's really no ceiling here, so you know,
Speaker 4: they know that they have a lot of operating leverage
Speaker 4: in the model. And it's been a complete shift in
Speaker 4: the tone in the sentiment from last year and definitely
Speaker 4: from last quarter. There's a lot more confidence in the story.
Speaker 4: I think it's emerging as a real clean story now
Speaker 4: and a lot of levers that they have to pull
Speaker 4: going out into the next few quarters.
Speaker 2: I got to push back on Carol's comment about year
Speaker 2: to date a little bit. Carol, forgive me, Netflix might
Speaker 2: be doing very well year to date, but if we
Speaker 2: take a look at what it's done over the last
Speaker 2: few years, we are still down geta more than forty
Speaker 2: percent from those all time highs that were reached a
Speaker 2: while back in November of twenty twenty one. Where is
Speaker 2: Netflix right now after that terrible few months that it's
Speaker 2: stuff for a couple of years ago.
Speaker 4: Yes, I think you know, that was obviously the perfect storm,
Speaker 4: and I think in our minds we had kind of
Speaker 4: always thought of the total addressable market for Netflix as
Speaker 4: kind of being this one billion dollar, sorry, one billion
Speaker 4: user market. Of course, when they kind of hit the
Speaker 4: wall and they started even losing subscribers, there was this
Speaker 4: def definitely, this reset a recalibration of kind of assessing
Speaker 4: the whole streaming space, and now I think we've kind
Speaker 4: of finally come to the conclusion that it's probably closer
Speaker 4: to about five hundred million. That's kind of what Netflix
Speaker 4: keeps saying over and over again. They're at that halfway point.
Speaker 4: So you know, out of that five hundred million market,
Speaker 4: they're already at two to fifty million. Question is are
Speaker 4: they going to be able to get to the next
Speaker 4: two fifty million. I think so, I mean maybe not,
Speaker 4: you know, total penetration, but I think they'll get to
Speaker 4: almost sixty seventy percent there at almost sixty seventy percent
Speaker 4: here in the US, so there's no reason they should
Speaker 4: be able to get to that in other developed markets
Speaker 4: as well and kind of really build that base in developing,
Speaker 4: you know, emerging and developing markets.
Speaker 3: You know, I was thinking about the conversation at screen
Speaker 3: time with Ted Sarandos that Lucashaw had, and I do
Speaker 3: feel like this is a company, you know, geta that
Speaker 3: does figure out how to pivot. If you think about
Speaker 3: the origins of this company, right, like, it's just pretty amazing.
Speaker 4: Absolutely. I mean, you know, they introduced DVD. They knew
Speaker 4: when to get into streaming, they knew when to make
Speaker 4: that pivot from licensed programming to original programming, and they
Speaker 4: knew also when to make the pivot just from English
Speaker 4: originals to you know, originals and all kinds of local languages.
Speaker 4: And that's actually performing really really well for them. So
Speaker 4: they've kind of they've they've really known how to kind
Speaker 4: of adapt and kind of be the leader.
Speaker 2: Gita. I mentioned Disney because we got we got to
Speaker 2: talk a little bit about the peak that we got
Speaker 2: at Disney's Sports TV network profit. It fell twenty percent
Speaker 2: through the first nine months of fiscal twenty twenty three.
Speaker 2: You wrote that the results could help Disney attract outside investors,
Speaker 2: and you also said the business could be worth as
Speaker 2: much as twenty two billion dollars based on those newly
Speaker 2: released figures. Give us your interpretation of what we saw
Speaker 2: released in that filing yesterday.
Speaker 4: Yeah, so those are a little bit of both good
Speaker 4: and bad news, I would say, Tim. So, the good
Speaker 4: news is that the top line is relatively stable, so
Speaker 4: they do generate a pretty hefty sixteen billion dollars per year,
Speaker 4: both from affiliate fees as well as advertising. This is
Speaker 4: just the ESPN division, both domestic and international TV channels,
Speaker 4: as well as their ESPN Plus streaming unit, which is
Speaker 4: pretty good and you know the fact that it has
Speaker 4: been pretty stable, hasn't really moved around too much. That's
Speaker 4: good news. The bad news is their margins are fairly low.
Speaker 4: So we're talking about mid teens operating margins. And the
Speaker 4: reason why this is pretty low and I say it's
Speaker 4: low because you look at a cable network, and average
Speaker 4: cable network the typical margins are around thirty to thirty
Speaker 4: five percent. So this is a little bit of a
Speaker 4: different animal because you know, you have sports rights fees,
Speaker 4: and sports rights fees are not only huge, they also
Speaker 4: keep increasing pretty rapidly year after year, and so that's
Speaker 4: one thing that kind of ESPN has to grapple with
Speaker 4: that reality. So margins are pretty low. EBIT or EBITDA
Speaker 4: is in decline, so they do have to do something,
Speaker 4: they have to do it fast. You know, obviously this
Speaker 4: is a very very valuable asset. Everybody knows that they
Speaker 4: have tremendous reach, they have tremendous brand name, so I
Speaker 4: think you know they're they're of course looking for a
Speaker 4: distribution partner I think that's kind of why they want
Speaker 4: to provide this transparency in terms of, you know, their financials.
Speaker 4: So we'll have to see how it plays out.
Speaker 3: So geta distribution partner or do they just want an
Speaker 3: outright sale of it or do they want to still
Speaker 3: kind of have some control or connection with it and
Speaker 3: just kint about thirty seconds.
Speaker 4: Yeah, I think they still definitely want to retain the asset.
Speaker 4: I mean, this is this is a huge asset for them,
Speaker 4: you know, so I think they definitely want to have
Speaker 4: some kind of control, but they also need a distribution partner.
Speaker 4: So they've been looking at different you know, players, whether
Speaker 4: it's a Horizon, whether it's an Apple. So we'll have
Speaker 4: to see how that kind of plays out.
Speaker 3: All right, So appreciate it. You are our hidden gem.
Speaker 3: Guita Ranganathan. She's technology media analyst at Bloomberg Intelligence, joining
Speaker 3: us from BI headquarters in Princeton, New Jersey. But man,
Speaker 3: I love talking on media with her. She's just so
Speaker 3: on it and just knows it all.
Speaker 2: It's pretty amazing to see Netflix up seventeen percent today, Carol.
Speaker 3: Yeah, in a day where we have seen certainly the
Speaker 3: equity side of things whipsod in the markets. And Netflix
Speaker 3: is pretty much held on too. And this is when
Speaker 3: you you know, will have strategists or folks and say,
Speaker 3: you know, you get a look company by company in
Speaker 3: this market place.
Speaker 2: Sure to the day of the Nasdack's down nine tens one percent.
Speaker 1: If you're listening to the Bloomberg Business Week podcast, catch
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Speaker 3: Want to talk, certainly, that's having an impact in the market.
Speaker 3: Tesla shares there about one point seven percent of the
Speaker 3: S and P five hundred, nearly three percent of the
Speaker 3: Nasdaq one hundred, and they are definitely under pressure today.
Speaker 2: Yeah, down ten point three percent as we speak this
Speaker 2: after third quarter results fall below concessus analyst that's Smiths
Speaker 2: across the board. Carrol, we're talking profit, we're talking sales,
Speaker 2: We're talking margins Eland Musk calls to struck a cautious
Speaker 2: tone on the call yesterday.
Speaker 3: You have seen pretty bummed out right. He dialed back
Speaker 3: expectations for Tesla as years of rapid expansion collide with
Speaker 3: rising interest rates in a more host conscious consume our interest.
Speaker 3: Everybody was consumed with how many times he said interest.
Speaker 3: Dana Hall is senior technology reporter for Bloomberg News. She's
Speaker 3: back with us on the phone in San Francisco. Danna,
Speaker 3: thanks for being with us. Gosh, it feels like it
Speaker 3: was a pretty He was really pretty bummed out here
Speaker 3: following this release. But let's go give us first of
Speaker 3: all the highlights the low lights and then talk to
Speaker 3: us about his tone on the call.
Speaker 5: Yeah, so it was I mean, so we sort of
Speaker 5: knew that it was going to be a bad quarter
Speaker 5: because Tesla missed their delivery targets in terms of how
Speaker 5: many cars they delivered to customers in three Q, so
Speaker 5: we knew it was going to be deb bad. But
Speaker 5: even then, they like missed on EPs, they missed on margins.
Speaker 5: And then what was funny was that it was like
Speaker 5: this weird thing so that it was a bad quarter,
Speaker 5: but they announced that they were going to hand over
Speaker 5: the first cyber truck on November thirtieth. So initially after
Speaker 5: the release hit, the stock was actually positive. When we
Speaker 5: were like, okay, everyone must be excited about the cyber truck.
Speaker 5: Then the call begins and Elon was like the most dour,
Speaker 5: down beaten, down trodden CEO like I've heard in a while,
Speaker 5: and like he has different moods, right, Like usually he's
Speaker 5: very ebulate. This is like dower Elon. I mean he
Speaker 5: said things like I'm scarred by two thousand and nine
Speaker 5: when General Motors and Chrysler wet bankrupt. That has seared
Speaker 5: into my mind with a branding iron. Then he talked
Speaker 5: about the challenges of the cyber truck and he said,
Speaker 5: we dug our own graves with the cyber truck. Nobody
Speaker 5: in general digs their own grave better than themselves. And
Speaker 5: then he spent a lot of time just talking about
Speaker 5: interest rates and how we have to make our cars
Speaker 5: more affordable and that when interest rates are high, that
Speaker 5: just raises the price of the car for the average consumer. So,
Speaker 5: I mean, he's complained about interest rates for quite a while,
Speaker 5: but he was just like he just sounds deflated, and
Speaker 5: it really brings into question whether Tesla's going to hit
Speaker 5: their target for the year if more price cuts are
Speaker 5: to come, you know. So it's just it was it
Speaker 5: was wild and like you're seeing the stock is down
Speaker 5: ten percent today. That's a big move for Tuessla.
Speaker 3: Does it need a warm puppy or new plan.
Speaker 5: I think that, like we were talking, I was talking
Speaker 5: about this earlier today with some colleagues, you know. I
Speaker 5: think the one thing that people forget is that the
Speaker 5: era of free money is over and Tesla's growth story
Speaker 5: was really fueled by these rock bottom interest rates that
Speaker 5: lasted for like over a decade. And this is the
Speaker 5: first time that Tesla has really been in a high
Speaker 5: interest rate environment. And the automotive industry is very cyclical.
Speaker 5: People are very price conference when you have mortgage debt,
Speaker 5: when you have credit card debt, when like the cost
Speaker 5: of food is through the roof, when like your your
Speaker 5: personal paycheck is you know, not going as far as
Speaker 5: it used to. Like a car is a really big
Speaker 5: purchase for people, and if you can't afford that monthly payment,
Speaker 5: you're going to wait. And and unfortunately, like Musk has
Speaker 5: kind of trained us all to know that, like he
Speaker 5: will continue to cut races. So I think a lot
Speaker 5: of customers are sitting on the sidelines wondering if he's
Speaker 5: going to cut prices yet again. So there's just a
Speaker 5: in in, you know, So he's going a little bit
Speaker 5: of a pickle. I think that you're going to see
Speaker 5: a lot of analysts change their price targets. You're going
Speaker 5: to see a lot of forecasts for twenty twenty four
Speaker 5: come down. And then we also, okay, so now last point.
Speaker 5: So they're going to hand over the cyber truck on
Speaker 5: November thirtieth, we still don't know how much it's gonna cost,
Speaker 5: Like they still have not given any specs, so that's
Speaker 5: like a big missing number.
Speaker 2: Did this make you feel Dana like it was twenty
Speaker 2: eighteen for Tesla all over again? When you know, describing
Speaker 2: production Hell sleeping on the floor of the factory? Is it?
Speaker 2: Is it that Elon Musk?
Speaker 5: It's a little bit. It's like we're in interest rate.
Speaker 5: I guess we're in interest rate Hell. And yeah, I
Speaker 5: mean I think anytime a company brings forth a new
Speaker 5: vehicle program, there it's tricky. It was just interesting because
Speaker 5: he did kind of allude to the fact that like
Speaker 5: getting the cyber truck out in high volume is going
Speaker 5: to be is going to be hard, and like, you know,
Speaker 5: you would think that Tesla would have learned these lessons
Speaker 5: over time, but yeah, this is like a whole new
Speaker 5: vehicle he said, He's like, oh, the cyber truck has
Speaker 5: a lot of bells and whistles, and it's like, well, geez,
Speaker 5: like do they need all the bells and whistles? Like
Speaker 5: what I would love to know, Like what exactly is
Speaker 5: so hard about this truck? Like he kept saying on
Speaker 5: the call Us last night that they dug their own
Speaker 5: grave with it, but like why.
Speaker 2: Kevin Tynan on our Area yesterday Dana made the point
Speaker 2: that it's it's you know, every other card that they've
Speaker 2: built has sort of been based on the same what's
Speaker 2: the It's not the same is it the same chassis,
Speaker 2: it's the same platform as how he described it, And
Speaker 2: this is like so risky starting something completely from scratch,
Speaker 2: building it out of what is it? Stainless steel? I
Speaker 2: mean stainless steeliaah yah, it's a big risk for the company.
Speaker 5: I did see one, so like they do exist, Like
Speaker 5: I actually saw one, like driving in my Oakland neighborhood
Speaker 5: while I was like walking to Trader Joe's and it
Speaker 5: went by, like you're.
Speaker 2: Being followed by Tesla Janna.
Speaker 5: I couldn't get a close look, but I was like, oh,
Speaker 5: there's a cyber truck. Look at that and so like
Speaker 5: they do exist, but yeah, like it is risky, and
Speaker 5: I think a lot of the things that Tesla has done,
Speaker 5: like they announced this new plant in Mexico, and he
Speaker 5: also kind of slow walks the plant like they're they're gonna,
Speaker 5: I mean, they're still gonna do it, but they're not
Speaker 5: gonna they might not like construct it as fast as
Speaker 5: the originally planned.
Speaker 6: Like they just you know, they're.
Speaker 5: Just he's he's worried, like he's you know, to his credit,
Speaker 5: he's like the longest serving automotive CEO right now. Right
Speaker 5: he has been the CEO of Tesla since two thousand
Speaker 5: and eight, so he has been through these economic cycles
Speaker 5: and I think he's pretty astute to them. I Mean,
Speaker 5: he was also warning like commercial real estate is gonna
Speaker 5: you know, there's more shoes to drop with commercial real estate,
Speaker 5: and he was talking about credit like he's he he
Speaker 5: was like it was interesting to hear him kind of
Speaker 5: expound on economics. But like the yeah, the more he talks,
Speaker 5: the more the stock tanks. And then you're really seeing
Speaker 5: that sell off today.
Speaker 3: As someone who covers this company and the twists and
Speaker 3: turns of all things that are Tesla and Elon Musk.
Speaker 3: I do wonder he's gone through different periods. Is this
Speaker 3: just another different period or something different? You think in
Speaker 3: the life cycle of this company.
Speaker 5: It's a little bit different in that, you know, he
Speaker 5: has not had to manage a kind of high interest
Speaker 5: rate environment for quite as long as they are managing
Speaker 5: in that. Now, consumers do have other options when it
Speaker 5: comes to evs. I mean, for a long time, we
Speaker 5: kept hearing that the competition is coming. You know, the
Speaker 5: competition is not that robust. I mean, the competitors are
Speaker 5: still selling in pretty small volumes, but there are choices.
Speaker 5: And then, frankly, I think the big elephant in the
Speaker 5: room is that Elon Musk bought Twitter. That is an
Speaker 5: albatross around him. Eat, He's got this huge debt payment
Speaker 5: and his buying of Twitter and his sort of public
Speaker 5: persona as this media mogul has turned off some of
Speaker 5: his most like loyal consumers. Like, we live in a
Speaker 5: polarized country and people like used to think that Elon
Speaker 5: was like this like clean tech democrat, and now they
Speaker 5: think that he's this like right wing guy. And you know,
Speaker 5: I have no hard data on how that yeah, digging
Speaker 5: into demand, but like, yeah, but there are definitely people
Speaker 5: that are like for political reasons. I'm never going to
Speaker 5: buy a car from this guy because I hate what
Speaker 5: he's on Twitter.
Speaker 3: He's you know, he's controversial. You either like him or
Speaker 3: you don't.
Speaker 2: Should have known what that's you know that that would spread.
Speaker 2: He should have known.
Speaker 3: Dnah Hall, so appreciate it, Senior technology reporter for Bloomberg News.
Speaker 3: You know his slump elon his fortune also slump.
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Speaker 3: I wonder if could play Abba in the halls of
Speaker 3: the Federal Reserve. What do you think?
Speaker 2: Good choice? Paul Brannan for this.
Speaker 3: Song money, Money, Hey, what's the most important price in
Speaker 3: the global economy?
Speaker 1: Well?
Speaker 3: Is it the price of a barrel of crud? A microchip,
Speaker 3: or maybe a big mass?
Speaker 2: I think a big mac?
Speaker 1: Am?
Speaker 2: I right, is a big mac? Is it a big mac?
Speaker 3: I don't know? No, Considering that song.
Speaker 2: I think more important than the price of any of
Speaker 2: those things, Carol, is actually the price of money. For
Speaker 2: more than three decades, it was falling in now it's
Speaker 2: going up. Just look at what the tenure Treasury you'll
Speaker 2: did today came within a Harris breadth of five percent
Speaker 2: at the highest in two thousand and seven. That has
Speaker 2: pulled up the cost of mortgages, corporate loans and more.
Speaker 3: Yeah, it's a different cost of money, that's for sure.
Speaker 3: And so we get into this because he writes about
Speaker 3: this Tom Orlick and Company in the new issue of
Speaker 3: Bloomberg BusinessWeek, which is on newsstands already online at Bloomberg
Speaker 3: dot com, Slash BusinessWeek, and of course on the Bloomberg terminal. Tom,
Speaker 3: by the way, joining us on the phone from Washington, DC.
Speaker 3: He is chief economist for Bloomberg Economics. So good to
Speaker 3: have you here, Tom. The price of money is going up.
Speaker 3: It does feel like a very very different paradigm. Let's
Speaker 3: go back for the last ten years or so, money
Speaker 3: didn't cost us anything, did it, or it felt like
Speaker 3: it didn't.
Speaker 6: It's really interesting, Carol, And we just heard all the
Speaker 6: news from Powell's speech and his conversation with Bloomberg, Dave Western,
Speaker 6: and of course day to day it's the Federal Reserve
Speaker 6: who are calling the shots on the interest rate and
Speaker 6: driving government bond yields. But there's also something more fundamental
Speaker 6: going on. The price of money, like the price of
Speaker 6: the semiconductor, like the price for big mac, is set
Speaker 6: by the balance of supply and demand, supply of saving
Speaker 6: and demand for investment. And for much of the last
Speaker 6: thirty years, a huge driver of global interest rates and
Speaker 6: interest rates in the US has been that the supply
Speaker 6: of saving has been going up, baby boomers putting away
Speaker 6: money for retirement, China saving money and investing it in
Speaker 6: US treasuries, and investment has not been that strong, and
Speaker 6: that's one of the reasons you've had this long term
Speaker 6: down trend in interest rates. So what we do in
Speaker 6: this piece today running in Business Week, is we take
Speaker 6: a look at those drivers. And what we find is,
Speaker 6: you know what, that trend, which has been dragging interest
Speaker 6: rates down for the last three decades, seems to have
Speaker 6: come to an end. We're already seeing that with the
Speaker 6: ten year yield now pushing close to five percent. And
Speaker 6: the case we make is that the drivers of higher
Speaker 6: borrowing costs. The drivers of a higher price of money,
Speaker 6: they're actually going to stay in place in the years,
Speaker 6: even in the decades ahead.
Speaker 2: Okay, So take us through what some of those drivers are, Tom.
Speaker 6: So, if we think about what's been dragging interest rates
Speaker 6: down over the last few decades, Well, the supply of
Speaker 6: saving was going up. You had the Baby Boom generation
Speaker 6: putting away money for retirement. You had China saving money
Speaker 6: and pumping it into US treasury. And because growth in
Speaker 6: the economy was trending down, well, the incentive to invest
Speaker 6: wasn't really so strong. So he had more saving, more
Speaker 6: supply of money, less investment demand, and the net impact
Speaker 6: was to drag interest rates down.
Speaker 3: Okay, And so obviously a different environment. And you know,
Speaker 3: talk to us then about why, you know, because I
Speaker 3: think about J. Powell today and I feel like fed speakers,
Speaker 3: you know, constantly remind us higher for longer. What is
Speaker 3: the changing dynamics paradigm that really speaks to a very
Speaker 3: different interest rate environment and cost of money going forward?
Speaker 3: And is it, tom Moore, normal where we're going right?
Speaker 3: We consistently, I feel like, talk about remind everybody when
Speaker 3: money costs nothing. That was the unusual part but helped
Speaker 3: me out and make some clarity about whether or not
Speaker 3: that's the case, and are we just getting back more
Speaker 3: to normal.
Speaker 6: So short term, Carol, it's all eyes on the FED,
Speaker 6: all eyes on whether there's another rate hike or not.
Speaker 6: But at a more fundamental level, there's also some structural
Speaker 6: forces which are going to be keeping interest rates high
Speaker 6: in the long term. Think about the wide wide deficit
Speaker 6: in the US government finances, all of that government borrowing.
Speaker 6: Think about how China has stopped pumping money into US treasury.
Speaker 6: Think about how the Baby Boom generation of now retired
Speaker 6: they've stopped saving, their spending down their savings. Think about
Speaker 6: climate change and the thirty trillion dollars which our colleagues
Speaker 6: at Bloomberg any app say is going to be required
Speaker 6: to get to the net zero transition. If you put
Speaker 6: all of those things together, you've got a picture of
Speaker 6: saving coming down, investment coming up. And if we think
Speaker 6: of it further out, if we think beyond Powell and
Speaker 6: the next bed move, it's those forces which we think
Speaker 6: are going to be keeping interest rates high into the
Speaker 6: medium term.
Speaker 3: All right, So I'm going to tell you I consider
Speaker 3: Tim and I fairly smart.
Speaker 2: Fairly sometimes, but we've been talking about your own stuff.
Speaker 3: We've been talking about your story a lot, and like
Speaker 3: trying to understand this concept of Okay, savings down, investment up.
Speaker 3: That means money costs more. Can you just just.
Speaker 2: I know you've talked to us like we're I don't
Speaker 2: want to say, five thirteen years old.
Speaker 6: So think about it like this, if you the interest
Speaker 6: rate is a reflection of the supply and the demand
Speaker 6: for money. Now, the Fed can manipulate that in the
Speaker 6: short term by setting the federal funds rate at a
Speaker 6: certain level through quantitative easing, but there's also all of
Speaker 6: these huge macro forces which are determined how much people
Speaker 6: save and how much people and businesses invest. Right, think
Speaker 6: about demographics. If the population is young, they're going to
Speaker 6: be saving for retirement. If you've got an older population,
Speaker 6: well they've already retired. They're not saving anymore. They're spending
Speaker 6: down their savings. Think about the business sector. If the
Speaker 6: economy's humming, they're going to think investment means more profits.
Speaker 6: I'm going to invest more for tomorrow. If the economy
Speaker 6: is sluggish, well the incentive to invest isn't there. So
Speaker 6: what we try and wrap our heads around in this
Speaker 6: Business Week piece, and it I mean, it's certainly not
Speaker 6: beyond the great minds of Caroll and Tim, but it
Speaker 6: is conceptually a bit tricky structural forces. What are those
Speaker 6: big structural forces driving saving, driving investment? And when we
Speaker 6: pull those numbers together, what we see is this big
Speaker 6: transition from a world of a lot of saving and
Speaker 6: not much investment, the world which was dragging interest rates
Speaker 6: down over the last thirty years, to a world in
Speaker 6: the future where there's less saving, more investment, and interest
Speaker 6: rates go up. And all that means for equities, for
Speaker 6: real estate, and of course the big one for the
Speaker 6: cost of servicing the US government debt.
Speaker 3: Tom, I wonder, as you guys do this and write
Speaker 3: it out in this story that's in BusinessWeek, but could
Speaker 3: something change that? And I think about all those years
Speaker 3: that Greenspan talked about how productive we were, and could
Speaker 3: a higher level of productivity, could higher growth rates kind
Speaker 3: of change your thinking about this?
Speaker 6: And there's a lot of uncertainties here, Carol, So I mean,
Speaker 6: let's just talk about a couple of them. Let's talk
Speaker 6: about the productivity question which you raise. So if we
Speaker 6: go into a world where AI is driving huge gains
Speaker 6: in productivity and huge growth in the econom me well,
Speaker 6: if growth is booming, people are going to want to
Speaker 6: invest to get a piece of the profits from that growth.
Speaker 6: That's going to push investment higher. That would be something
Speaker 6: which pushed interest rates higher. Think about the climate change
Speaker 6: piece of it. Our colleagues at Bloomberg Nies say thirty
Speaker 6: trillion dollars required to get to net zero on carbon emissions.
Speaker 6: Is the world going to deliver that thirty trillion in
Speaker 6: investment or are we going to keep kicking that can
Speaker 6: down the road. So there's a lot of big questions
Speaker 6: about how the future is going to shape out. But
Speaker 6: when we think about the base case for demographics, for productivity,
Speaker 6: for the response to climate change, where the place we
Speaker 6: come out is that the period of falling interest rates
Speaker 6: is over and really, no matter what how and the
Speaker 6: team do at the next meeting, in the meeting after that,
Speaker 6: we're moving into a world of higher interest rates in
Speaker 6: the years ahead.
Speaker 3: So I'm going to go back to history and I've
Speaker 3: worked with colleagues who talked about paying mortgage rates of fifteen, sixteen,
Speaker 3: seventeen percent. Is this more logical though? The environment and
Speaker 3: just feels uncomfortable because we all got really comfy, you know,
Speaker 3: where money was essentially free.
Speaker 6: It felt like, yeah, I mean, it's not better or worse, right,
Speaker 6: it just changes the pattern of winners and losers in
Speaker 6: the economy.
Speaker 1: Right.
Speaker 6: Let's say that you are someone who owns a house
Speaker 6: and owns stocks, and you're painting on the value of
Speaker 6: your house and the value of your equities as something
Speaker 6: which is going to reduce your income in retirement. Well,
Speaker 6: if we're moving into a high interest rate world, what
Speaker 6: that means is actually the pressure on real estate prices,
Speaker 6: the pressure on stock prices is going to be to
Speaker 6: come down. And so perhaps people who've been counting on
Speaker 6: that for a one k equity market investments and those
Speaker 6: steadily gaining in value to finance their retirement, well, perhaps
Speaker 6: that's not going to be there the way that they
Speaker 6: thought it was.
Speaker 2: But stock still moved higher in high interest rates and
Speaker 2: grate environments. Historically, maybe we didn't see what they did,
Speaker 2: and you know the S and P five hundred did
Speaker 2: over the last ten years. But I do think Tom,
Speaker 2: you know this is not We're not in uncharted territory here, right.
Speaker 6: So we are not moving into a world where interest
Speaker 6: rates are going to be higher than they've ever been before.
Speaker 6: We're moving into a world where the trajectory of interest
Speaker 6: rates is going from falling to rising. And interest rates, well,
Speaker 6: interest rates your kind of your opportunity cost of investing
Speaker 6: in equity. They your opportunity cost of investing in real estate.
Speaker 6: So interst rates go higher, Well, the opportunity cost of
Speaker 6: putting your money in equities putting your money in real
Speaker 6: estate goes up. And what that means is, on balance,
Speaker 6: you'd expect more downward pressure on those asset prices.
Speaker 3: Well, I think about this whole idea of like when
Speaker 3: the tide goes out, right, you do wonder the longer
Speaker 3: this sticks around, whether it's real estate, whether it's corporate ZOM,
Speaker 3: you know, companies that just shouldn't exist. It was interesting
Speaker 3: to hear Elon Musk on the call talks so much
Speaker 3: about interest rates, and you know, we cut up with
Speaker 3: our reporter down a hall and just this whole concept
Speaker 3: of you know, Tesla's been a company that has benefited
Speaker 3: in this low rate environment. Like it's a different environment.
Speaker 3: Whether you're a leader of a company, whether you're investor,
Speaker 3: you're going to look at things right, bottom line Tom differently,
Speaker 3: and you're going to have to reassess valuations and so on.
Speaker 6: So I think that's completely right, Carol. I mean, in
Speaker 6: a world where money is free, you can build castles
Speaker 6: in the air, right. You can have a dream that
Speaker 6: you're going to build an electric vehicle which isn't going
Speaker 6: to make profits for ten years time or twenty years time,
Speaker 6: and in twenty years time it's going to deliver a
Speaker 6: huge profit. And you can find out and that project
Speaker 6: because money is free, right, And in a world where
Speaker 6: money is expensive, that becomes harder. So perhaps some of
Speaker 6: those kind of Silicon Valley projects become harder to deliver.
Speaker 6: On the other side of it, well, in a world
Speaker 6: where money is free, bitcoin looks like a really good idea,
Speaker 6: Crypto looks like a really good idea, right, and you
Speaker 6: have kind of speculative frenzies.
Speaker 1: Right.
Speaker 6: In a world where money is expensive, well, maybe people
Speaker 6: think a bit harder before piling into these bubbles, and
Speaker 6: maybe you have financial markets which are a bit less
Speaker 6: bubble prone.
Speaker 3: Six percent not unrealistic. Thirty seconds left, Tom on that tenure.
Speaker 6: So it's one of the things that we consider, Carol.
Speaker 6: So let's think about a world where US deficits remain wide,
Speaker 6: the government's still borrowing. Let's think about a world where
Speaker 6: we get serious about climate change and invest the money
Speaker 6: we need to get to net zero emission. That's where
Speaker 6: you can start seeing that six percent ten year treasury
Speaker 6: yield in our model.
Speaker 3: Well and to day where we listened so closely to
Speaker 3: FED Chair J. Powell. I mean, this just kind of
Speaker 3: fits into this dynamic higher for longer. We certainly got
Speaker 3: that message, and this story plays so much into that. Tom.
Speaker 3: Thank you so much, Really appreciate it. Tom more like
Speaker 3: as chief economist at Bloomberg Economics. This story in the
Speaker 3: current new issue of Bloomberg BusinessWeek on newstand newsstands now,
Speaker 3: on the Bloomberg terminal, and online at Bloomberg dot com
Speaker 3: slash BusinessWeek. You ready for high rates.
Speaker 2: It doesn't matter if I'm ready or not. They're here.
Speaker 3: They're here, We're all going to live in it. It
Speaker 3: feels that way. This is Bloomberg.
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