Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Farroll and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best an economics, geopolitics, finance and investment.
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Speaker 1: with twenty two V Research. Twenty two V Research is
Speaker 1: Michael Herson, head of their China research. This morning, Michael,
Speaker 1: were you surprised by the NBC report of a discussion
Speaker 1: between the two world leaders over the future of Taiwan.
Speaker 2: No, not particularly surprised. It was consistent with what I
Speaker 2: heard from the meeting. I obviously wasn't there, so I
Speaker 2: can't speak to the details, but I think the notion
Speaker 2: that she didn Ping is determined to pursue reunification with
Speaker 2: Taiwan is not new. I think in some ways it
Speaker 2: was equally as interesting that he told US officials, according
Speaker 2: to this report, that there is no set timeline for
Speaker 2: China to do so, and I think that is consistent
Speaker 2: with the view that while this is a really important issue.
Speaker 2: Beijing continues to exercise what you could call strategic patients
Speaker 2: on this issue, and that's important because if that changes,
Speaker 2: it does I think, you know, increase the near term
Speaker 2: risks around Taiwan. For now, I think those near term
Speaker 2: risks are manageable.
Speaker 3: There is this question around whether China is going to
Speaker 3: take an opportunity at a time where the US is
Speaker 3: involved in a two front proxy war with both Russia
Speaker 3: and Iran, to try to engage in this more aggressively
Speaker 3: since it's already difficult for the US to commit exactly
Speaker 3: how much they're going to weigh on these other conflicts.
Speaker 2: I don't think we should dismiss those kinds of concerns.
Speaker 2: I mean, we need to be realistic about, you know,
Speaker 2: not mirror imaging in terms of how China thinks that
Speaker 2: they're going to think about this the same way that
Speaker 2: we do. At the same time, I think we need
Speaker 2: to keep in mind there's a fundamental calculus that work
Speaker 2: for Beijing, which is right now, it would be extremely risky,
Speaker 2: even with the US tied down, so to speak, with
Speaker 2: other conflicts, to pursue reunification through military means. And I
Speaker 2: don't think that the urgency is there for China. I
Speaker 2: think Beijing continues to feel that time is on their
Speaker 2: side now that timeline is not infinite, as according to
Speaker 2: the report she Dian paying stress to President Biden. But
Speaker 2: I think the notion that Beijing would take this kind
Speaker 2: of gamble in the near term seems to me probably
Speaker 2: not worth it from the standpoint of China's leadership.
Speaker 3: What is the motivation to try to take Taiwan at
Speaker 3: a time where there are some real clouds over the
Speaker 3: economic outlook for China, where they're trying to woo back
Speaker 3: US and other international businesses, and where Xijinping is dealing
Speaker 3: with a host of issues around the housing market that
Speaker 3: are also challenging.
Speaker 2: I think that's exactly right. I think if they made
Speaker 2: this kind of move now, it would basically be trading
Speaker 2: off all of Sheet and Pang's broader ambitions for China
Speaker 2: in terms of economic development and its place in global leadership.
Speaker 2: So I don't think that the calculus is worth it
Speaker 2: for Beijing. I think the risk is that this could
Speaker 2: change over time. Beijing could decide that it's less risky
Speaker 2: and we're urgent for them as time goes on. But
Speaker 2: I don't think that that calculus is going to shift
Speaker 2: such as to arguing for in our conflict over Taiwan
Speaker 2: anytime to it. We should add, though, we have a
Speaker 2: very important election coming up in Taiwan January thirteenth, the
Speaker 2: presidential election, which is going to have an important bearing
Speaker 2: on these issues.
Speaker 1: This is right where I wanted to go, michae Elson.
Speaker 1: One final question. We've got to march on here with
Speaker 1: our day and thank you so much for joining, but
Speaker 1: abruptly here our stereotype is the KMT in the Pan
Speaker 1: Blue coalition they lost in twenty sixteen. The domestic politics
Speaker 1: of Taiwan, are they uniformly for America and four independencers?
Speaker 1: There are a nuance there that Beijing can play off of.
Speaker 2: There's a nuance. I do think fundamentally voters in Taiwan
Speaker 2: want to maintain the status quo, and the difference between
Speaker 2: the two camps really is what is the best way
Speaker 2: to maintain that status quo? Keeping China aut in arm's
Speaker 2: length or engaging with China in a more close, you know,
Speaker 2: political economic relationship.
Speaker 1: A terrific brief Michael Hurston, thank you so much, sirill
Speaker 1: that you could join.
Speaker 4: Us, super excited that Francis Donald's with us in the
Speaker 4: studio Global Chief Economist, strategist a manual Life morte Francis,
Speaker 4: good morning. You've taken all that beautiful fed speak of
Speaker 4: the last week, any Cleara.
Speaker 5: I think it's all semantics. We are in a global
Speaker 5: easing cycle. They can tell us they're not talking about it,
Speaker 5: but then we're talking about how they're not talking about it.
Speaker 5: Emerging markets are cutting. Every single day I get a
Speaker 5: new emerging market that's cutting. They led the cycle on
Speaker 5: the way up in rates, they are leading on the
Speaker 5: way down. Every morning I wake up to inflation prints
Speaker 5: that are surprising to the downside. Macro is most valuable
Speaker 5: at inflection points. The toothpaste is out of the tube.
Speaker 5: We have already effectively eased. We will see it very
Speaker 5: soon in some areas, like housing that has very strong reactivity.
Speaker 5: It doesn't change that. I still technically have two quarters
Speaker 5: of negative GDP in my forecast, so that's technically a recession.
Speaker 5: But if we do get this earlier easing via financial markets,
Speaker 5: it will help us come out faster, and it will
Speaker 5: reduce the odds of financial accidents, which has been a
Speaker 5: concern for some economists on the show with.
Speaker 1: Apple with thirty times forward earnings, right, excuse me on
Speaker 1: present earnings thirty two times pe multiple. They need to
Speaker 1: make earnings, they need to make revenues, which means they
Speaker 1: need to live within decent nominal GDP. Are we going
Speaker 1: to see enough on nominal GDP to keep the earnings
Speaker 1: in revenue boat going?
Speaker 5: I don't know where it's going to come from. Tom.
Speaker 5: It's not coming from CAP which is declining sharply. There's
Speaker 5: not a lot of fiscal room. We talk about the
Speaker 5: soft lining hard landing. That's only a US conversation because
Speaker 5: anywhere else I go in the world, we're not discussing
Speaker 5: soft landing or hardlining because we're already in hard landing.
Speaker 5: Germany is most probably in a recession. A whole range
Speaker 5: of dms are already in recession. Asia is slowing very prominently,
Speaker 5: so we don't have the global impulse that comes through,
Speaker 5: and the consumer is declining and slow. We don't need
Speaker 5: the consumer to be in a recession for the US
Speaker 5: economy to be in a recession. So two things can
Speaker 5: be true at the same time. We can be celebrating
Speaker 5: the pivot party, which we are, and recognize that it's
Speaker 5: not going to be a straight line up for equities
Speaker 5: and a straight line down for bonds. In fact, I
Speaker 5: my ask of you actually at this table is every
Speaker 5: time you have a guest, come on, ask them what
Speaker 5: their investment horizon is, because your investment horizon for the
Speaker 5: next three months is very different than your nine month
Speaker 5: to twelvemonth horizon, and you have to be able to
Speaker 5: reconcile the two when they are different perspectives, and in
Speaker 5: this environment they are different perspective.
Speaker 4: We already know it's happ and yes that I extrap
Speaker 4: light that out five minutes and say if it changes,
Speaker 4: isn't that it brama the last two months?
Speaker 3: I mean, this is a reason why people are saying
Speaker 3: we're bullish. There might be some volatility, but by it
Speaker 3: and so at what point is this just basically being
Speaker 3: bullish into next year and trying to have a unique
Speaker 3: take on it. Here's my question to you, is there
Speaker 3: a risk of us not getting a landing if you
Speaker 3: have a longer term horizon, does it have to include
Speaker 3: a greater risk of reinflation?
Speaker 5: You know, if you have a five to tenure horizon,
Speaker 5: which a lot of sticky institutional money does. They are
Speaker 5: not asking me, do you have a recession call? They
Speaker 5: want to know what the five to ten year inflation
Speaker 5: outlook is. They want to know where interest rates are
Speaker 5: going to be. They want to know our central Bank's
Speaker 5: going to be changing inflation targets because if so, then
Speaker 5: our relationship between inflation and interest rate changes, and that
Speaker 5: changes our long term asset allocation models. So no, there
Speaker 5: are certain investors who do not care about recession risk
Speaker 5: for twenty twenty four, and that's important. They are asking larger,
Speaker 5: more important questions about the framework within our front with
Speaker 5: which our financial markets change. And that's why I think
Speaker 5: the Powell pivot is so critical and interesting to this
Speaker 5: large sticky money because it basically said this concept of
Speaker 5: you know what, we need two percent inflation in order
Speaker 5: to cut We need to see the evidence. We're focused
Speaker 5: on services, ex rents, all of this discussion around financial conditions.
Speaker 5: Now I've heard you over the past few days question
Speaker 5: what was it that led to the pivot? That question,
Speaker 5: to me is far more important than how many rate
Speaker 5: cuts do we have next year? Or is it one
Speaker 5: quarter or two quarters of negative GDPs?
Speaker 4: So let's go to the labor market and talk about
Speaker 4: some of the forces underpinning maybe this pivot. There's a
Speaker 4: belief on the street from a lot of people, I think,
Speaker 4: led by Neil data earlier on this year, that this
Speaker 4: labor market is no longer a reason to be hawkish.
Speaker 4: What America has benefited from is this supply side led
Speaker 4: rebalancing in the labor market, increased participation. Do you see
Speaker 4: reason to believe that continues into next year? Is that
Speaker 4: something we're taking for granted.
Speaker 5: Yeah, any sort of leading indicator you have of the
Speaker 5: job market right now is going to tell you that
Speaker 5: things are deteriorating and going in the wrong direction. Now,
Speaker 5: markets are second rerivative creatures. They're going to care more
Speaker 5: about the rise and the unemployment rate than how far
Speaker 5: it necessarily goes up until a breaking point. So the
Speaker 5: unemployment rate is going to rise. It takes two years
Speaker 5: for the first FED rate hike to impact the labor market.
Speaker 5: That's q one. The mistaken calling for that to happen
Speaker 5: last year was thinking that that lag would be shorter
Speaker 5: because the Fed moved faster. But until we get through
Speaker 5: the next three to six months, we won't be able
Speaker 5: to say that the relationship between rates and the labor
Speaker 5: market is truly broken because we haven't even passed the
Speaker 5: first starting post of when that's going to impact things.
Speaker 5: So I can't throw out the argument that the labor
Speaker 5: market interest rate conversation is totally different than it has
Speaker 5: been in the past because we're not even there yet.
Speaker 1: So what do you watch to see if wage disinflation begins?
Speaker 5: Well, real time data. Probably we need surveys, We need
Speaker 5: to be keeping a close eye on that, But maybe
Speaker 5: tom we also need to be asking how much is
Speaker 5: it going to matter to the inflation story. We went
Speaker 5: from nine percent down to three per and change on
Speaker 5: inflation largely off of the disinflation from supply chain dynamics.
Speaker 5: Are we allowed to say that that was transitory?
Speaker 6: Yet?
Speaker 5: Like, is my head going to be on a stick
Speaker 5: for that?
Speaker 4: Would you like to I'll just floated.
Speaker 5: I'm going to throw up the balloon and see what
Speaker 5: kind of push back again on Twitter. The next phase
Speaker 5: is when you say, you know, the next phase of
Speaker 5: disinflation is what they call the painful part, not because
Speaker 5: it's hard to go from three percent to two percent,
Speaker 5: but because consumers and wages carry the brunt of that.
Speaker 5: So we would posit that the disinflation we've seen so far,
Speaker 5: we don't get to actually say thank you Fed for that.
Speaker 5: It's the next part that comes. And so what I
Speaker 5: want to know is this wage inflation story, how critical
Speaker 5: is it to actually the inflation that we're monitoring? And
Speaker 5: what inflation does the FED need to see. Is it
Speaker 5: just a headline number or core number around two or
Speaker 5: does it matter where it's coming from, because my sense
Speaker 5: is we got told a lot in the past year.
Speaker 5: It mattered where it was coming from. I think it
Speaker 5: just matters that we're closer to Targe.
Speaker 4: I'm so pleased that you brought some of these issues
Speaker 4: up because think it's so important. Lisa, just how much
Speaker 4: of the disinflation that we've seen so far is actually
Speaker 4: off the back of the feder reserve tightening in the
Speaker 4: last eighteen months. Speak to people like Francis, the answer
Speaker 4: is not much of it.
Speaker 3: When you talk to a lot of economists, they've been
Speaker 3: using the tea word all along. They just are being
Speaker 3: a little bit louder about it and basically saying maybe
Speaker 3: the FED was right and it was transitory, and that's
Speaker 3: the reason why the Fed's getting nervous, because if the
Speaker 3: Fed's actual raid hike start to kick in, then it
Speaker 3: starts to become something else in a downward cycle. That said,
Speaker 3: the jury is still out and services sector inflation is
Speaker 3: still going up. So this is a huge question mark.
Speaker 4: Not too much.
Speaker 3: We still have supply tain.
Speaker 4: Issues recycling the tea words shameless, just shameless. Yeah, are
Speaker 4: you talking to me, Francis Donald head on a state Francis,
Speaker 4: thank you. You one of the best to appreciate it.
Speaker 1: The inflation adjusted yield, which is what I look at
Speaker 1: and our next guest looks at, is one point six
Speaker 1: nine percent. It was a two and there was sweat
Speaker 1: on effect hired a two point two zero or even
Speaker 1: unimaginately high. In this melt up, the inflation adjusted yield,
Speaker 1: one measurement of our good feeling, has really come down.
Speaker 1: Jim Caron is expert at the CIO of Portfolio Solutions
Speaker 1: Group at Morgan Stanley. You take the Christmas field, Jim,
Speaker 1: you talk about naughty or nice in the real yield.
Speaker 1: What is a level of the real yield that keeps
Speaker 1: asset inflation going?
Speaker 7: So I think where the Fed wants to go with this,
Speaker 7: because what really matters is what they think. And I'm
Speaker 7: gonna talk about the policy the real policy yield. So
Speaker 7: this is a nominal FED funds rate minus inflation. I
Speaker 7: think that number is around one and a half percent,
Speaker 7: so it's lower than what it is today. So if
Speaker 7: we look at nominal If we look at nominal FED
Speaker 7: funds today at five and a half percent, and let's
Speaker 7: say US inflation is at three, that means real policy
Speaker 7: rates are at two and a half percent, which means
Speaker 7: that the Fed could cut one hundred basis points just
Speaker 7: to get to their neutral level.
Speaker 8: So I know we've been talking.
Speaker 7: I've listened on the show that yes, there's like six
Speaker 7: rate cuts priced in, but remember one hundred basis points
Speaker 7: of those rate cuts is really just getting to neutral, right,
Speaker 7: and they don't start really easing until they start doing
Speaker 7: more than one hundred.
Speaker 1: I did some fancy math, Jim, in honor of your
Speaker 1: attending today, on the standard deviation move of the Bloomberg
Speaker 1: Financial Conditions Index. We've gone from a commodative and this
Speaker 1: is not Stan Fisher one oh one, it's Tom Keene
Speaker 1: one on one. We're grossly accommodative. Well, how does it fed?
Speaker 1: Their degrees of freedom just seem to have shrunk because
Speaker 1: of the market statement on accommodation.
Speaker 7: Right, So when we look at financial conditions, this is
Speaker 7: really a way for the FED to gauge how their
Speaker 7: monetary policy is impacting the broader markets, and there should
Speaker 7: be some feedback mechanism from markets to what their policy
Speaker 7: is actually saying. So the way that I think about
Speaker 7: this is that if the market's are rallying, that's okay
Speaker 7: with the FED. The FED doesn't have to push back
Speaker 7: on a rally because they don't like a rally.
Speaker 8: That's not their job.
Speaker 7: Effectively, what they're saying is can we get this rally
Speaker 7: and can inflation also stay low? And if the answer
Speaker 7: is yes to both, then they don't care. If the
Speaker 7: market continues the rally, they don't feel so they have
Speaker 7: to push back on that. And right now, the look
Speaker 7: through to inflation going forward. As you mentioned in the UK,
Speaker 7: we had a downside surprise in inflation. Inflation is coming
Speaker 7: down in the US. As long as it does, then
Speaker 7: the FED is okay with higher equity prices, tighter credit spreads,
Speaker 7: and even easier financial conditions, as long as we don't
Speaker 7: get inflation starting to move higher.
Speaker 3: Which is let's park that for a second. This idea
Speaker 3: that disinflation goldilocks this idea of the FED just simply
Speaker 3: cutting rate surgically in order to keep in tandem with
Speaker 3: where inflation is going and go to actually the fundamental
Speaker 3: and earnings. And I wonder how much that is the
Speaker 3: real risk that people are not talking about right now,
Speaker 3: Given the fact that FedEx disappointed shares lower by some
Speaker 3: twelve percent in early and pre market trading, general mills
Speaker 3: retracting some of their full year forecast, downgrading it in
Speaker 3: response to lower sales, those shares falling even after an
Speaker 3: underwhel underwhelming performance, is this the theme of January that
Speaker 3: people are missing.
Speaker 7: So that's a really good question, Lisa, because effectively we
Speaker 7: have to we have to think about the look through
Speaker 7: to this if the unemployment rate starts to rise, because
Speaker 7: that's what we're talking about when we're talking about earnings
Speaker 7: and missing earnings and things like this. What we're really saying,
Speaker 7: what an economist is really saying, is at what point
Speaker 7: do these companies start laying workers off and at what
Speaker 7: point does that boost the unemployment rate. So what we're
Speaker 7: seeing at this point, at least the last data point
Speaker 7: in the unemployment rate, the unemployment rate has come down
Speaker 7: the labor market still remains relatively tight, and it's relatively strong.
Speaker 7: Yes it's softening, Yes we are seeing signs of softening,
Speaker 7: but we're not seeing signs of a collapse. So ultimately,
Speaker 7: some of these things are going to be somewhat cyclical.
Speaker 7: Some companies are going to post worse earning, some companies
Speaker 7: is going to post better earnings. But if we look
Speaker 7: at the broad market, the story for December is actually
Speaker 7: not that these supercharged seven stocks are doing really well
Speaker 7: in tech. The story for December is that the market's
Speaker 7: actually broadening out, is that the other sectors, the other
Speaker 7: four hundred and ninety three stocks out of the S
Speaker 7: and P five hundred excluding those seven, are actually participating
Speaker 7: in the upside. So yes, it's not going to be
Speaker 7: a straight line. It's going to be volatile. But the
Speaker 7: point here is that missing earnings is one thing, and
Speaker 7: that could be cyclical, and I get that sector by sector,
Speaker 7: But as long as it doesn't affect hiring and wages
Speaker 7: and things like that to the degree that it creates
Speaker 7: a deeper downturn and loss of consumption, then that's just markets.
Speaker 8: Markets.
Speaker 3: It sounds like you're pretty bullish, are you just telling
Speaker 3: clients to go all in that basically their biggest risk
Speaker 3: is missing out in the upside next year.
Speaker 8: No, I'm not saying that.
Speaker 7: Actually, you know, one of the things that we you know,
Speaker 7: we've been bullish, we've been positive, we've been overweight inequities
Speaker 7: all year, and right now, towards the end of this year,
Speaker 7: we're starting to think about reducing that and moving towards neutral.
Speaker 7: We haven't done it yet, but that's but that's probably
Speaker 7: our next step. And why that is is because everything
Speaker 7: that we thought about in late October November is actually
Speaker 7: already come through by the end of the year. So
Speaker 7: we've got this like fifteen percent rally across the board inequities.
Speaker 7: We've got credit spreads a lot tighter, bond yels ten
Speaker 7: year yeelds are below four percent. I mean, my gosh,
Speaker 7: my year end forecast with a ten yure note not
Speaker 7: that I make a forecast, but it.
Speaker 8: Was around four percent and we're already We're already there.
Speaker 7: So I think a lot of that good news has
Speaker 7: been pulled forward, so we need another catalyst to get higher,
Speaker 7: and I'm I'd rather go to neutral, and I think
Speaker 7: neutral is the new defensive. So we can be tactical
Speaker 7: of the new year ahead because there will be dislocations.
Speaker 1: Jim mccarr, that's a question for those trying to recover
Speaker 1: from the bond tobaccle use negative ten degrees at Boden.
Speaker 1: You were studying physics, you go, oh, kel Tech, that
Speaker 1: may be warm, so you go out to kel Tech
Speaker 1: to get some decent weather and aeronautical engineering. Okay, great,
Speaker 1: are these gl glide pass of stability and do they
Speaker 1: indicate the dividend growth is a proxy for yield forward?
Speaker 1: That back and forth between your world of bonds inequities
Speaker 1: is a yield alternative? Can that be possible?
Speaker 7: So I think it can be possible. I don't see
Speaker 7: it as highly probable. And the thing that I'm concerned
Speaker 7: about the most is that I do think that twenty
Speaker 7: twenty four will be a very rocky year. So I
Speaker 7: know we're talking about these glidepaths and soft landings. We
Speaker 7: may ultimately get a mild slow down or a mild recession,
Speaker 7: which would be characterized as a soft landing. But I
Speaker 7: I think it's a really dangerous landing at this point,
Speaker 7: and it's one of the reasons why I think that
Speaker 7: we need to engage in more of.
Speaker 8: A balanced portfolio approach.
Speaker 7: So have some fixing income, have some equity, have some growth,
Speaker 7: have some value, and just real quick.
Speaker 3: Jare before we run out of time, what do you
Speaker 3: mean by dangerous landing?
Speaker 7: So I think there's more geopolitical tensions and more geopolitical
Speaker 7: risks that are out there to start this year.
Speaker 8: Than last year.
Speaker 7: We have obviously, you know, China, Taiwan, we have Taiwan elections,
Speaker 7: we have a US presidential election. I think that's going
Speaker 7: to create a lot of volatility, and I think the
Speaker 7: markets are and don't forget, we have the twenty twenty
Speaker 7: five you know, the Trump tax cuts come come due
Speaker 7: in twenty twenty five. At some point in twenty twenty four,
Speaker 7: we're going to start to price the outcome of that
Speaker 7: in and that can swing the markets from an earning
Speaker 7: perspective quite a bit and from a multiple perspective. So
Speaker 7: I think let's just enjoy this calumn right now, because
Speaker 7: I think it's going to get a lot rockier and
Speaker 7: a lot less, a lot more uncertain into the future.
Speaker 1: Jim Karen, thank you. With Morgan Stanley there on your
Speaker 1: total return and ability to clip a coupon.
Speaker 4: With a growing iPhone business into next year on the
Speaker 4: heels of what we view as a new tech bullmarket beginning,
Speaker 4: Apple is poised to have a strong year ahead.
Speaker 1: Teak interesting and of course he's been all over the media,
Speaker 1: but also he's been right right right, As I mentioned,
Speaker 1: Neil duddis maybe my economist of the year on the
Speaker 1: cell side, get into magnificent seven, right, nobody's been as
Speaker 1: visible and articulate as mister ives he holds court at Wedbush.
Speaker 1: I want to go to the morning's valuation where you
Speaker 1: give me a half assed sum of the parts. You've
Speaker 1: got the service sector at the one point five trillion
Speaker 1: of four trillion, which is two hundred and fifty seven
Speaker 1: dollars per share. What's the total some of the parts?
Speaker 1: Is it above two fifty seven twelve months out?
Speaker 6: Yeah, it's closer to three hundred some of the party.
Speaker 1: I just can't go to five trillion because you don't
Speaker 1: want to, you know, be inflammatory.
Speaker 6: Well, the big thing is really the services is going
Speaker 6: to be the key over the next year. The rerating
Speaker 6: that we're going to see an Apple, I think numbers
Speaker 6: moving higher is gonna be services driven. I think that's
Speaker 6: where the one point five to one point six trillion
Speaker 6: comes in. But I do think what's starting to happen now,
Speaker 6: you know, despite what John in terms of like some
Speaker 6: of the China issues, you're now seeing unit growth come up.
Speaker 6: ASP's going up to me right now in Cooper Tino,
Speaker 6: they're popping the champagne, getting ready for a phenomenal year ahead.
Speaker 1: Buried in the CFA is a is a Barbelle, and
Speaker 1: one is are you running is a revenue growth story?
Speaker 1: Or are you running as a profit making story? To me,
Speaker 1: Apple is almost out of Graham, Dot and Coddle. They're
Speaker 1: running this thing for.
Speaker 6: Profit right, and that's how. That's how cook is what
Speaker 6: jobs did, It's how they've done it. But I think
Speaker 6: the difference to your point, it's the monization. The install
Speaker 6: bas is on parallel two billion iOS devices.
Speaker 1: So now if them are in my house, continue exactly.
Speaker 6: And look and you're one of the cross selling opportunity
Speaker 6: for Cooking.
Speaker 9: And the thing is is that now what's starting to
Speaker 9: happen is that if you look at the services piece
Speaker 9: and you look at the penetration, the average Apple customer
Speaker 9: is still twenty to twenty five percent penetrate from a
Speaker 9: services perspective.
Speaker 6: That's going to continue to up. And then I believe
Speaker 6: the big thing here is the AI app store that
Speaker 6: I think they introduced over the next year. That's going
Speaker 6: to be the new shiny object.
Speaker 4: Okay, before we get to the new shiny object, let's
Speaker 4: talk about the old shiny object, the iPhone. If I
Speaker 4: told you where revenue was and where it would be
Speaker 4: at the start of the year for the end of
Speaker 4: the year, would you have said the stock was up
Speaker 4: fifty two percent year today?
Speaker 8: Yeah?
Speaker 6: So okay, So what I'd say is that part has
Speaker 6: definitely been an upside surprise in terms of where the
Speaker 6: stock I think the difference it really rests on the
Speaker 6: services business and what I believe is the margin story.
Speaker 6: So even though from a unit perspective there have been
Speaker 6: some choppiness over the last quarter or two, if you
Speaker 6: look at the margins, I mean, so they've been able
Speaker 6: to expand grew as margins in this environment, which I
Speaker 6: know we've talked about a lot of this on the show,
Speaker 6: but that just shows that they have control over their ecosystem.
Speaker 6: From a chip perspective, that's been a key.
Speaker 4: To the bull You think they can go ex growth
Speaker 4: but still Retina growth multiple.
Speaker 6: I think they this past year they were able to
Speaker 6: go ex growth and get the growth multiple. This next year,
Speaker 6: the renaissance of growth happens in Cooper Tino on services
Speaker 6: back double digits unit from an iPhone unit perspective continues
Speaker 6: to i'll say single digits. And the China story, despite
Speaker 6: all the worries, despite many yelling fire in a crowded theater,
Speaker 6: We're going to see China growth.
Speaker 3: So exactly, fire and a crowded theater. Whatever keeps piling in.
Speaker 3: But I am wondering if you see growth coming mostly
Speaker 3: from the United States, or if that's international growth, where
Speaker 3: does it come from in a pretty competitive landscape.
Speaker 6: I think seventy percent of its US and Europe thirty
Speaker 6: percent of the growth. The incremental growth is in China
Speaker 6: because at least if you look at it today, one
Speaker 6: hundred million iPhones in China have not been upgraded three years.
Speaker 6: So even with Huawei and what even in Huawei and
Speaker 6: what we're seeing the actual penetration the upgrade opportunity, I'll
Speaker 6: call it essentially a mini supercycle that's playing out. Look
Speaker 6: as of twenty four hours ago, are Asia checks showing
Speaker 6: no cuts and I think that's very important.
Speaker 4: Because you said exactly the same thing twelve months ago
Speaker 4: and it didn't happen. Where is this upgrade supercycle?
Speaker 6: Okay, so now to that point, the upgrade cycle has
Speaker 6: under the radar been happening.
Speaker 4: But at some point that you sit there and say
Speaker 4: that these phones haven't been upgraded for a reason, and
Speaker 4: then maybe they're not going to be upgraded.
Speaker 6: But the look, and I know it's a great point
Speaker 6: that you've brought up from an upgrade cycle. I think
Speaker 6: the difference is is that the last eighteen months, maybe
Speaker 6: the upgrades have been in a slower piece, but they've
Speaker 6: gained one hundred million new iPhones in the last eighteen months,
Speaker 6: So I think if maybe we've been right for the
Speaker 6: wrong reasons wherever you want to call it, is like
Speaker 6: the upgrade opportunity, we admit has definitely been a little
Speaker 6: more subdued this year than we would have expected. But
Speaker 6: on the upside, what we didn't expect is that the
Speaker 6: Android market share games they've gotten have been a fox
Speaker 6: to muscles moment.
Speaker 4: There's no doubt you've been right. I just want to
Speaker 4: get into the reasoning. Suret it you know that, but
Speaker 4: you have been right. The stock is up fifty two
Speaker 4: percent year today. I can't argue with that. We talk
Speaker 4: about the watch just briefly, telling Father Christmas he can't
Speaker 4: deliver presence on December twenty sixth. It's not a big deal.
Speaker 4: I just wonder the gift from the regulator from your
Speaker 4: point of view, to turn around to Apple and say
Speaker 4: can't sell the eyewatch from December twenty fifth, I mean,
Speaker 4: what does that actually do?
Speaker 6: What does that achieve when the red phone rings and
Speaker 6: it's Cook and Cooper Tino.
Speaker 4: That's what you think that made a difference, The fact
Speaker 4: this was Apple. You think that's actually made a difference
Speaker 4: that it regulates.
Speaker 6: When I think Apple just brings the different prier and
Speaker 6: we see it in terms of big tech, and it's
Speaker 6: one where the even within Europe and when we see
Speaker 6: continue map Brussels and even in the US, there's a
Speaker 6: recognition where you don't want to poke the bear like
Speaker 6: in other words, like to actually do this in a
Speaker 6: holiday season, to go let's say December fifteenth would have
Speaker 6: been much more drastic than obviously going Christmas Eve. But
Speaker 6: this is Look, this is not ending. They're going to
Speaker 6: continue to have patent issues and battles on the healthcare's front.
Speaker 3: Are they really a proletariat issue though? When they're charging
Speaker 3: fourteen hundred dollars for an iPhone? I mean, is this
Speaker 3: is sort of going to become an issue if margins
Speaker 3: are too big and they do get the nods from
Speaker 3: the regulators at a time of souring economic backdrop, does
Speaker 3: that become a real pressure point of just how much
Speaker 3: those margins could keep expanding.
Speaker 6: Look, I think margins continue to expand because from a
Speaker 6: chip perspective, they own their own ecosystem, and that's really
Speaker 6: been the That's and Key's talk about. That's a huge
Speaker 6: part of the opportunity in terms of just gaining more
Speaker 6: and more margins. But from a regulator perspective, they're like, look,
Speaker 6: I'm more focused on the cappuccino this morning than regulators
Speaker 6: in Europe because that continues to just be noise, not real.
Speaker 4: You sound like a man who's got stocks up fifty
Speaker 4: this year.
Speaker 1: Yes, clearly for radio You're not getting the full joys
Speaker 1: this because Dan Eyes is dressed like a pinata this morning.
Speaker 1: You are the bear market pinata that's out there. They
Speaker 1: love going after you, and to me, the heart of
Speaker 1: the matter and I'm gonna go back to Graham, Dodd
Speaker 1: and Coddle. Ibada twenty nineteen, twenty nine percent margin, Ibata
Speaker 1: right now thirty three percent margin. Where's that ibadad margin?
Speaker 1: In four years?
Speaker 6: That's getting toward forty percent?
Speaker 1: And I think that you're gonna give me an Ebatha
Speaker 1: forty percent.
Speaker 6: I believe because as services becomes a bigger piece the
Speaker 6: margins on that's double the hardware business. So is they
Speaker 6: further out? If you're a bull right now, you're not
Speaker 6: looking next year, you look in next two to three years.
Speaker 6: It's a cash flow machine margin When you look toward
Speaker 6: twenty twenty five, twenty twenty six, this is one where
Speaker 6: it's gonna continue moving that direction.
Speaker 4: Okay, you've got thirty seconds. You're gonna tell me now,
Speaker 4: what on earth is an AI app store?
Speaker 8: What is that?
Speaker 6: There's gonna be a separate app store in Apple. That's
Speaker 6: gonna be health. It's gonna be health fitness. AI apps.
Speaker 6: Developers are gonna build that Apple will have it's gonna
Speaker 6: be an offshoot of the app store, an AI app store.
Speaker 6: And right now it's all about developers. That's the hearts
Speaker 6: and lungs of Cooper Tina, the.
Speaker 1: Hearts and lungs. Here's radio is not taking all this in.
Speaker 1: You got the day glot, pink sneakers, the lime green
Speaker 1: lime sorbete pants. You got the lavender thing going up top.
Speaker 1: He looks like a pigon shuit punch back.
Speaker 4: He was wearing leopard print dog mountains the other day.
Speaker 6: Well, that's but I respected Doc mart It's aggressive, but
Speaker 6: he could pull it off.
Speaker 4: It's aggressive, it's aggressives. Congratulations, Thanks, you were right to be, Thanks.
Speaker 7: Went Bush.
Speaker 1: One of the great doers in our international relations is
Speaker 1: Aaron David Miller's thesis was searched for security centering on
Speaker 1: Saudi Arabia's senior fellow at the Carnegian Endowment for International Peace. Aaron,
Speaker 1: you have written about the stretch of sea which to
Speaker 1: us is romantic, indeed biblical, the Red Sea. What is
Speaker 1: distinctive about the Red Sea and Yemen?
Speaker 8: It's turned into a choke point frankly, and you refer
Speaker 8: to the region's centrality in both the fifty six Wars
Speaker 8: sixty seven. You now have a situation in which an extremist,
Speaker 8: once ragtag militia driven by ideology, the huthis now run
Speaker 8: by one of the founder sons, up Del Malakuthi, has
Speaker 8: turned this organization into a significant threat proto state which
Speaker 8: controls one air capital in Sanna, who is now control
Speaker 8: a part of the country which contains Yemen, which contains
Speaker 8: a third of the population of the entire nation. And
Speaker 8: rather than being sort of wholly owned subsidiaries by Iran,
Speaker 8: they are willing participants, driven by theology common affinity. They're
Speaker 8: both twelve ver Shia, just like the Iranians, inspired by
Speaker 8: the Iranian Revolution. They now thanks to technology now drones
Speaker 8: are being manufactured by the Houthis. They now have presented
Speaker 8: themselves as an actor certainly now in the regional stage.
Speaker 8: And given Kirby's comment.
Speaker 1: The relation doctor Miller the relationship of Saudia Arabia with
Speaker 1: some form of recent peace agreement with the Hoosies, but
Speaker 1: I don't buy it for a minute. Triangulate our interests
Speaker 1: with these rebels, with Saudi Arabia and Riyod.
Speaker 8: Well, the Saudi's right now do not want an escalation,
Speaker 8: given the fact that Mohammed bin Selman's plans for twenty
Speaker 8: thirty have now been in some respect undermined by regional
Speaker 8: instability caused by the Israel Hamas war. Sadis are trying
Speaker 8: to find a way to extricate themselves from Yemen. They
Speaker 8: fought the Huthis unsuccessfully. They may actually energized a Huthi
Speaker 8: caused by any number of Arrant air strikes which killed
Speaker 8: the hundreds, if not thousands, of Yemeni's. So I think
Speaker 8: the Saudis don't want a US escalation with the Houthis
Speaker 8: either do the Omanis, who are serving as a sort
Speaker 8: of bridge. Look you look and see the maritime task
Speaker 8: force that Secretary Austin tried to assemble. You've got seven nations.
Speaker 8: The only regional nation that agreed to participate is Bahrain,
Speaker 8: and that's considered a sort of consolation prize given their
Speaker 8: relationship with Saudi Arabia. So the Arab States seemed very
Speaker 8: reluctant as long as the Israeli go as a war
Speaker 8: goes on to join in in an American effort to
Speaker 8: suppress a group that is actually even more than his
Speaker 8: volah launching an actual short range ballistic missile in Israel's direction.
Speaker 8: This is a This is going to be a huge
Speaker 8: problem because our options here are not great. We can
Speaker 8: go through them, if you want, But in terms of deterrence,
Speaker 8: we're already past that. But who the these don't seem
Speaker 8: to be able to be deterred right now.
Speaker 3: Ered what you just said there was fascinating that the
Speaker 3: Middle Eastern allies traditionally with the United States are not
Speaker 3: getting involved because of the war between Israel and Hamas.
Speaker 3: Is this sort of Aran taking this opportunity to direct
Speaker 3: the Huthis to do this to exploit the weakness, the
Speaker 3: lack of ties right now between Riad and Washington DC.
Speaker 8: I think that, yeah, I mean some of argued that
Speaker 8: the one of the key motivators of the Hamas Terra
Speaker 8: surge on October seven as a sort of pro Irani
Speaker 8: and pro Hamas effort to undermine a relationship Israel Saudi
Speaker 8: US that could have created a whole new security architecture
Speaker 8: in the region. I mean, we're prepared, apparently, and don't
Speaker 8: get me started on this to basically conclude a mutual
Speaker 8: defense pact with Saudi Arabia in an effort to facilitate
Speaker 8: this normalization process. We haven't done that since we amended
Speaker 8: the US Japan Security Treaty in nineteen sixty. So yeah,
Speaker 8: this was I think a part of Iran's calculation to
Speaker 8: chill that relationship that was emerging and ultimately undermine it.
Speaker 8: And who these have the same motivation.
Speaker 3: Which to me really raises this question, Okay, how much
Speaker 3: does this add to the urgency of getting some resolution
Speaker 3: to the war between Israel and Hamas that seems to
Speaker 3: maybe be entering a new phase but doesn't seem close
Speaker 3: to a resolution.
Speaker 8: It's important point. You know, it's now global trade, it's
Speaker 8: now supply chain, it's now Christmas. I mean ten to
Speaker 8: fifteen percent of global trade through the Red Sea in
Speaker 8: Suice Canal three week delay and BP has already pulled
Speaker 8: their red sea operational trade from that region. You have
Speaker 8: to go around the Cape of Good Hope. That adds
Speaker 8: another three weeks to a month. I mean, this could
Speaker 8: if it truly began to cause other private companies basically
Speaker 8: to pull out of the red sea trade, have a
Speaker 8: big impact. I just don't think it's going to affect
Speaker 8: either Israel's or Hamas's calculator. That's being driven by a
Speaker 8: whole new, whole different set of dynamics.
Speaker 1: And David Miller. If we decide to become more offensive
Speaker 1: against these whatever they are, terroristies, who's these whatever you
Speaker 1: want to call them. Is that a decision of defense?
Speaker 1: Is that a decision of state and defense? State? Is
Speaker 1: it decided at sixteen under Pennsylvania? How do we change
Speaker 1: us thrust politically in Washington.
Speaker 8: Sixteen hundred Pennsylvania? I mean the options I'm totally already
Speaker 8: on the table. You could have armed escorts, but we
Speaker 8: don't have enough warships. You could create a corridor with
Speaker 8: a sort of a anti drone anti missile bubble above them.
Speaker 8: But remember every time the Huthis launch a two thousand
Speaker 8: dollars drone, we respond with interceptors that cost two million dollars.
Speaker 8: And the Pentagon is already concerned about the expense of
Speaker 8: waging war. I think the only real deterrence would be
Speaker 8: strikes against hoothy assets in Yemen. Yeah, and quite the
Speaker 8: fact that they've launched thirty eight drones and any number
Speaker 8: of missiles we've just intercepted. I don't think there's a
Speaker 8: real drive on the part of the administration to go there, although.
Speaker 1: You good to leave it there. Aaron David Miller, thank
Speaker 1: you so much for the briefing with the Carnigian DOMA
Speaker 1: can't say enough about his writings over the recess decades
Speaker 1: as well. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify,
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