Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene
Speaker 1: Jay Leye. We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg to
Speaker 1: the Treasury market. Then, what a start of the year.
Speaker 1: It's been the tenure starting the year around to forty,
Speaker 1: up thirty four basis points since then, and up another
Speaker 1: three or four basis points in today's session alone. Two
Speaker 1: point seven four pc is your yield on a US
Speaker 1: ten uere For year after year many strategists have called
Speaker 1: for three percent, and for year after year many of
Speaker 1: those strategists have been disappointed. When I can tell you
Speaker 1: this year we're a whole lot closer than we have
Speaker 1: been the quite a while. John gets not to discuss
Speaker 1: in New York City is a bond market legend in
Speaker 1: these pasts. His name is Gary Shilling, a Gary Shilling President.
Speaker 1: Gary always great to get your insight on what's happening.
Speaker 1: Can you tell me where we're out now at seventy
Speaker 1: four and what kind of world with pricing in Well,
Speaker 1: we're in a world where the Fed is obviously got
Speaker 1: the bit in their mouth to raise rates, and there
Speaker 1: is a spillover effect. I mean, if you look at
Speaker 1: the entire post work period and look at the average
Speaker 1: spill over. Now this is average, of course, but for
Speaker 1: every hundred basis point increase in the FED controlled FED
Speaker 1: funds rate, you get a forty four basis point increase
Speaker 1: in the ten year yield. And that's over about the
Speaker 1: next six months. Now when you get out to the
Speaker 1: thirty year yield, it's much less. It's thirty four basis
Speaker 1: points for every hundred basis point increase in FED funds
Speaker 1: Or isn't that's what you'd expect. The further further, what
Speaker 1: you get from where the Fed is the less the impact.
Speaker 1: And the third year has a lot of other forces
Speaker 1: acting on it, uh deflationary forces in my view, things
Speaker 1: like globalization, certainly very important, things like Amazon what they're
Speaker 1: doing to online sales, a lot of other forces affecting
Speaker 1: the longer run. So for anyone getting excited about the
Speaker 1: reflation theme finally taking hold of the treasury market, are
Speaker 1: you saying that to state, take a step back, garyon
Speaker 1: and look at the bigger pitch of world Watte. Hey, John,
Speaker 1: I I the yield on the thirty year bond was
Speaker 1: twelve point six and I said in writing, we're in.
Speaker 1: We're ending the bond rally of a lifetime now, all
Speaker 1: the way down in yields, all the way up in prices.
Speaker 1: The the consensus has been, oh, no, rais are going up,
Speaker 1: razor going up raisor going up, Raiser going up. I
Speaker 1: can't remember one time when there was any general agreement
Speaker 1: with this, with this position, and yeah, maybe it's right
Speaker 1: this time. But the point is that this is this
Speaker 1: has happened so many times in the past that I'm
Speaker 1: not persuaded because I look at I look at what
Speaker 1: I consider the fundamentals. Let's say, when you look at
Speaker 1: what's going on in terms of even in the service economy,
Speaker 1: and we're increasingly as incomes. As economies expand, service has
Speaker 1: become more important than goods. You can only put so
Speaker 1: many cars in your drive away, but you can spend
Speaker 1: infinite a louts of money on healthcare, recreation, travel and
Speaker 1: so on. And and even in the service inflation area, education,
Speaker 1: service costs are coming down. A lot of pressure. UH,
Speaker 1: students and their parents are saying, hey, this is too expensive.
Speaker 1: I'm going to go to apprenticeship program rather than for
Speaker 1: your college. Healthcare. A lot of pressure there. And you
Speaker 1: see this this recent decision by h Morgan Bank uh
Speaker 1: Um Amazon, and yeah, and you know that these things
Speaker 1: are really coming under control. So I think there's a
Speaker 1: there's just a lot of deflationary forces in the world,
Speaker 1: and I'm not sure the feed is properly recognize those.
Speaker 1: They will be they're beginning to. They've they've an effects
Speaker 1: said that the natural rate of interest, this sort of
Speaker 1: interest rate where we're in nirvana and everything is just
Speaker 1: copacetically right off into the into the horizon, into the sunset.
Speaker 1: You know, equilibrium never exists. It's just a it's just
Speaker 1: a momentary point you're passing through on the way to
Speaker 1: one extreme or the other. But even the FED, I think,
Speaker 1: is beginning to recognize that the world has changed. Do
Speaker 1: you think do you think that yields have to go down? Then?
Speaker 1: And I ask in this context that Feds raised rates
Speaker 1: five times and financial conditions are looser than ever, so
Speaker 1: you could argue that what they're doing isn't the problem
Speaker 1: and yields don't have to fall. Well, yeah, that's a
Speaker 1: good point. Mike, and I think the reality is that
Speaker 1: there is so much liquidity slashing around the world as
Speaker 1: a result of quantitative easing, the FED, the Bank of England,
Speaker 1: Bank of Canada, Bank of Japan, European Central Bank, uh,
Speaker 1: the the Swedish Rice Bank. You have all this liquidity
Speaker 1: slashing around the world, and it's gonna take a while
Speaker 1: to soak that up. In other words, and and so
Speaker 1: I think, you know, if the FED raisers raised three
Speaker 1: times this year, four times, I'm not sure that makes
Speaker 1: a lot of difference to the overall equidity now. Sooner
Speaker 1: or later, if the FED continues to do what they
Speaker 1: what they always do are almost always do, and that
Speaker 1: is get credit too tight and kill the economy, get
Speaker 1: a bear market in stocks, and and uh, by my account,
Speaker 1: in eleven or twelve times in the post World War
Speaker 1: two period when the FED started on a tightening binge,
Speaker 1: they ultimately did achieve that they only had one stoft
Speaker 1: landing in the mid nineties, But that could be years
Speaker 1: away because there's so much liquidity out there to be
Speaker 1: soaked up. Let me ask you this, Johnna, I've been
Speaker 1: insulting Gary all day by asking him questions about the
Speaker 1: olden days. Um, But because you've been doing this for
Speaker 1: so long, do we have better data now that would
Speaker 1: enable a central bank to get ahead of the idea
Speaker 1: that they could go too far? I mean we have
Speaker 1: all these, for example, financial condition indexes. I don't think so.
Speaker 1: The problem is there's really too much data and too
Speaker 1: little analysis. I mean you look for example, at at
Speaker 1: the data on consumer sentiment the Conference Board of the
Speaker 1: Michigan to leading surveys on this. The correlation between that
Speaker 1: and what consumers spend is lawful. As a matter of fact,
Speaker 1: the way it is that consumers spending leads confidence, it's
Speaker 1: it's quite the reverse of what you'd expect. It's not
Speaker 1: a leading it's a lagging indicator. And I just think
Speaker 1: that the that the idea of you can rely on data.
Speaker 1: I mean that this years ago, there was this belief
Speaker 1: that this belief that you could design these huge econometric
Speaker 1: models of the economy two and three D equation jobs.
Speaker 1: And I was trained as econometrician. Uh when I got
Speaker 1: my PhD of Sanford, and everybody thought these were going
Speaker 1: to solve the world. Well, the problem is that they didn't.
Speaker 1: And and there's so many nuances, there's so many unknowns.
Speaker 1: There's so many, so many things you have to put
Speaker 1: in to wreck the models from blowing up, from giving
Speaker 1: a nonsensical answers that by the time you get through
Speaker 1: your shower, Say, wait a minute, there's a lot of
Speaker 1: human nature in here that you never really can quite
Speaker 1: you can't quantify, at least not in today's world. Everybody
Speaker 1: hated economists after the Great Financial Crisis because nobody called
Speaker 1: the Great Financial Crisis. Now, wait a minute, except for
Speaker 1: a Gary Sully, it seems to be that I do
Speaker 1: love the way that history has kind of rewritten itself
Speaker 1: with the words nobody predicted this. Michael. I don't know
Speaker 1: where you were going with it. But Gary, does that
Speaker 1: frustrate you that somehow we sit and we sit here
Speaker 1: and say, nobody predicted this? People did? Yeah? Yeah, And
Speaker 1: of course there's there's always a question of the degree
Speaker 1: of prediction. I mean, it's a somebody who said, um,
Speaker 1: say five years I mean, we were on top of
Speaker 1: the of the housing bubble. The first time we started
Speaker 1: writing about this was in uh two thousand two, and
Speaker 1: we said, a bubbleist farming sooner or later. A crack
Speaker 1: Now it only crack. Actually February of of two thousand
Speaker 1: eight was probably the time that you could because that
Speaker 1: was on the A b X UH when the A
Speaker 1: b X trouble b UH minus index went off the cliff.
Speaker 1: But did anybody say February is a data ahead of time.
Speaker 1: We didn't, and I think we're as good as anybody.
Speaker 1: But it's always a degree. I mean, when you know,
Speaker 1: and hey, let's face it, the Tennessee is when you're
Speaker 1: right to go back and say, well, I told you so,
Speaker 1: and I refer to this, and of course, uh, there're
Speaker 1: guys like Michaelill remind you that there's sometimes you said
Speaker 1: things that didn't come up and come through and that's
Speaker 1: weekly valid. But you know, it is a degree. It
Speaker 1: is a degree of forecast. It's not a it's not
Speaker 1: a one off kind of you're either right or either wrong.
Speaker 1: Just to finish things up with you before we before
Speaker 1: we lose you. We've got one minute left. What do
Speaker 1: you think people are getting wrong? Now? Um? I think
Speaker 1: they're getting wrong. The conviction that this is going to
Speaker 1: continue forever. The complacency in markets is extreme. Now, that
Speaker 1: doesn't mean that they're gonna have a big come up
Speaker 1: and tomorrow or the next day. But I do think
Speaker 1: and and the latest example of this is bitcoin. When
Speaker 1: you see this, when people are just desperate for returns
Speaker 1: and they're going to speculative areas like this, it tells
Speaker 1: you that they really have that that the greed has
Speaker 1: overcome fear. Alright, Gary Shilling, Um, we will continue to
Speaker 1: hold your feet to the fire because that's what I do. Okay,
Speaker 1: love you the bees. Okay, the bees are okay. It's
Speaker 1: been produced. So I wish I checked him out a
Speaker 1: couple of weeks ago ahead and give him a food.
Speaker 1: It's called fonding his cake decoration for they can eat
Speaker 1: to get through the winter. I don't want him to starve.
Speaker 1: But uh, out of a hundred hives, and I only
Speaker 1: had about five of them that have died so far
Speaker 1: in the winter. And that's pretty good. That's pretty good.
Speaker 1: Gary Shilling, Hey, Gary Shilling Company and a beekeeper. We
Speaker 1: love them here on Bloomberg Surveillance. The story, though, for
Speaker 1: the equity market will be all about the tech earnings,
Speaker 1: and we have had a taster from Facebook. The story
Speaker 1: from Wall Street is that less time spent on Facebook
Speaker 1: is apparently no big deal. So let's have a big
Speaker 1: conversation about Facebook. Shall we with the man who quite
Speaker 1: literally wrote the book on Facebook. It's David Kirkpatrick, CEO
Speaker 1: of and founder of Teconomy Media, David Kirkpatrick joining us
Speaker 1: on the phone. David helped me out here. Less time
Speaker 1: spent on Facebook apparently no big deal? Is it a
Speaker 1: big deal? Um? I don't. I don't think it's yet
Speaker 1: a big deal, and thanks for having me. And I
Speaker 1: think that in the United States and North America is
Speaker 1: where we saw this trend just begin for the first
Speaker 1: time ever, that there was actually a net loss of
Speaker 1: uh daily active users. But on the global basis, which
Speaker 1: is really what the level of would Facebook operates and
Speaker 1: you have to think and where it's opportunity ultimately lies,
Speaker 1: that was not the trend. The monthly average users continued
Speaker 1: to go up globally, actually quite considerably. So I don't
Speaker 1: think yet you can say that the decline in North
Speaker 1: America in daily users is extremely serious and that company
Speaker 1: is saying, which I probably for now would accept, that
Speaker 1: this change is something you might expect given the level
Speaker 1: of penetration this company has in the North American population.
Speaker 1: That's something more like a fluctuation. You mean they couldn't
Speaker 1: go up forever in terms of getting you know, more
Speaker 1: than they can't get more than everybody to be on Facebook,
Speaker 1: and they've gotten perilously close to that. So that particular
Speaker 1: thing doesn't worry me yet it could if it continued
Speaker 1: to be a trend. Is it too early, David to
Speaker 1: say that in North America that we're seeing significant signs
Speaker 1: of saturation. Oh? No, I think we've seen saturation coming
Speaker 1: for some time, which isn't necessarily a problem if they
Speaker 1: can at least keep those people there and then begin
Speaker 1: to raise their AD rates over time, which they have
Speaker 1: been able to do in many I mean, AD rates
Speaker 1: are going up on Facebook, So that's their kind of
Speaker 1: lever they can play with regardless of what happens with users.
Speaker 1: But they have to of course retain the interest of
Speaker 1: their of their community. To use the word they love
Speaker 1: to use. To your point, ad rates are going up,
Speaker 1: and AD revenue growth still is pretty strong to me, David.
Speaker 1: So they've warned about engagement, and actually the warnings of
Speaker 1: engagement actually materialized, but the warnings around ad growth haven't
Speaker 1: really materialized at all. Is there any reason to believe
Speaker 1: Facebook when they tell us that this is going to
Speaker 1: slow sometime soon. Well, you know what what they've said
Speaker 1: especially is that add load, meaning the amount of ads
Speaker 1: that are given user sees when they go on Facebook,
Speaker 1: will go down, and that they'd actually like to see
Speaker 1: it go down a little bit. But because they seem
Speaker 1: to have so much leverage in pricing UH, that doesn't
Speaker 1: seem to affect their results. I mean, and I think
Speaker 1: it's worth pausing to notice the unbelievable impressiveness of the
Speaker 1: financials here. I mean, this is a company h which
Speaker 1: is growing its revenues considerably more than its costs, where
Speaker 1: you know, their profitability rates increased um and their profit
Speaker 1: growth was something like uh at a time when they're
Speaker 1: close to a fifty billion dollar company. I mean, this
Speaker 1: is this is something you haven't seen in companies like
Speaker 1: this before. Really, there hasn't been a company like this before.
Speaker 1: And the financials remained spectacular. So I think that's the
Speaker 1: reason why the stock, even though it dropped considerably in
Speaker 1: the few minutes after the earnings were released, once people
Speaker 1: had more time to digest what was really going on,
Speaker 1: they turned around and now the stock is up from
Speaker 1: where it was before the release. And of course it's
Speaker 1: worth a night in David that for all of these
Speaker 1: tech companies that report over the next twenty four hours,
Speaker 1: the comps for the whole of the next year are
Speaker 1: going to be really, really tough, because just last year
Speaker 1: was so so, so so good. I looked at some
Speaker 1: of the numbers in the quarterly earnings release yesterday after
Speaker 1: the close head count and costs arising materially now that
Speaker 1: may be outstripped by what they're doing with that revenue.
Speaker 1: And that's great, David, But on the costs and the
Speaker 1: head count, what's the story behind that? Well, I mean,
Speaker 1: I think they've said they were going to double the
Speaker 1: number of people who they devote to overseeing content to
Speaker 1: try to address some of these very serious criticisms they've
Speaker 1: received from received for their social role, that it was
Speaker 1: going to go from ten thousand to twenty thousand, and
Speaker 1: they have said that in October. So some of that
Speaker 1: increase is probably attributable to that. I think a lot
Speaker 1: of it is also attributable to just the scale of
Speaker 1: their global growth and the fact that they continue to
Speaker 1: become a more and more important platforms in literally something
Speaker 1: like a hundred and ninety countries, which means they have
Speaker 1: to have people on the ground in many of those places.
Speaker 1: Um so UM. I don't think the cost problem worries
Speaker 1: me that much. I mean, I'm just looking at the
Speaker 1: release right now advertising increased, costs increased. You know, as
Speaker 1: long as they could keep that kind of ratio, they
Speaker 1: don't have a problem with costs, even if they're adding
Speaker 1: more people and spending more money. They've also said they're
Speaker 1: going to spend a lot of money on infrastructure and
Speaker 1: server farms and cloud infrastructure and all the back end
Speaker 1: stuff that they have to spend on to keep this
Speaker 1: service operating. Uh, and they're very aggressive in that kind
Speaker 1: of spending. But so far there's no sign and that
Speaker 1: I can see that that's affecting their profitability. To me,
Speaker 1: the threat, such as it is, and it's something of
Speaker 1: a unique one, is a political, social, of socioeconomic threat
Speaker 1: and perceptual one. And if they if they cannot shift
Speaker 1: the narrative and begin to be seen as a positive
Speaker 1: contributor to society, I think that implies all kinds of peril,
Speaker 1: including eventually financial peril. Well, Scott Galloway of n y
Speaker 1: U has been quite vocal about this. I'm sure you know, David.
Speaker 1: He said that the company has been tone deaf to
Speaker 1: these kind of things, I think slipping. Um, Yes, I
Speaker 1: mean there's certainly they are tone deaf. I think their
Speaker 1: immaturity as a company is increasingly evident. Um. They are
Speaker 1: a young company, especially to now be fifty billion dollar
Speaker 1: company making this kind of profit, you know, run by
Speaker 1: a someone in his early thirties who has absolute power. Um.
Speaker 1: These are delicate and challenging realities. I mean, Galloway goes
Speaker 1: much further. He says Facebook should be broken up in
Speaker 1: no unequivocal terms. I heard him speak just last week
Speaker 1: in Munich. Um. The guy is rapidly critical of not
Speaker 1: just Facebook but all the Internet giants, but he singles
Speaker 1: them out especially for criticism. Believe Facebook should be broken up, David, No,
Speaker 1: I don't see how you could break it up. I
Speaker 1: think breakup is the wrong term. Um. But you know,
Speaker 1: here's what I do think. Um, Facebook operates on its
Speaker 1: own with no oversight in a hundred and nineties some
Speaker 1: countries h at a at a time when we know
Speaker 1: that it is having, alongside many many deeply beneficial effects,
Speaker 1: some extremely worrisome negative effects on both individuals and society.
Speaker 1: So we have issues of addiction, and also we have
Speaker 1: a lot of other things, including issues of political manipulation
Speaker 1: inside an ungoverned platform, which we saw very evident in
Speaker 1: the United States, and Americans ought to be clearied in
Speaker 1: realizing is a problem in every country. This is not
Speaker 1: It's not just the US election you know might have
Speaker 1: been uh manipulated, or the Russians might have attempted to
Speaker 1: manipulated inside Facebook. They and bad actors, including the governments
Speaker 1: themselves when they're not democratic, are attempting to manipulate public
Speaker 1: opinion inside Facebook in literally every country. So we need
Speaker 1: to find a way to somehow combat that. Facebook needs
Speaker 1: to find a way to combat that. But I don't
Speaker 1: see how that could ever be found by them alone.
Speaker 1: I think somehow a new form of compact needs to
Speaker 1: be arrived at between governments, the general's public business, and
Speaker 1: these platforms, particularly Facebook. Many of these same points hold
Speaker 1: true for Google and some of these other companies, I
Speaker 1: would say as well, but Facebook is the one where's
Speaker 1: most obvious. David Kirkpatrick, they see and founder of Teconomy Media,
Speaker 1: joining us on those facebooktarnings. Really appreciate your time, sir,
Speaker 1: Thank you very much from New York city you're listening
Speaker 1: to val Kate Warren is in just was tragic, said
Speaker 1: Edward Jones. We've ostensibly brought her in to talk about
Speaker 1: the FED and jobs and markets ahead, and I'm gonna
Speaker 1: start with the markets rather than the Fed, because when
Speaker 1: we started the show today, futures were up and it
Speaker 1: was like, all right, you know, forget that little sell
Speaker 1: off we had. And then we've started to get some
Speaker 1: bad earnings numbers today, and now we've got these Ford
Speaker 1: and Chrysler numbers which suggests January was not at all
Speaker 1: a good month for auto sales. Is there a crack
Speaker 1: of the armor? Is there something to start to be
Speaker 1: worried about here? Or is this just going to turn
Speaker 1: out to be one day story and into tonight, Apple
Speaker 1: or Faith, you know, or or Amazone's gonna come out
Speaker 1: and say, you know, earnings were great and everybody's buying
Speaker 1: again tomorrow. Well it's har to tell, because short term
Speaker 1: you never know exactly why where the markets are going
Speaker 1: to move. And I don't think there's really a crack
Speaker 1: in the armor. But I think investors have gotten a
Speaker 1: little ahead of themselves in terms of thinking that all
Speaker 1: the good news we're seeing from earnings earlier was going
Speaker 1: to translate into nothing but great earnings from everyone. So
Speaker 1: I wouldn't be too worried about this. I would certainly
Speaker 1: be using it as an opportunity to add investments to
Speaker 1: broaden the diversification in your portfolio. But I think it's
Speaker 1: a good reminder for investors also that if you have
Speaker 1: too much in stocks, now is the time to add bonds.
Speaker 1: Even though, of course the Feds on the way to
Speaker 1: raising interest buying bonds, they're going down in value. Yes, exactly,
Speaker 1: everything is going down. And that's a situation where you
Speaker 1: look at the markets and you say, how do you
Speaker 1: protect in a world where interest rates are rising and
Speaker 1: stocks maybe you know, poised for dropping, and we don't
Speaker 1: even have bitcoin anymore to invest it, so well, we'd
Speaker 1: stay away from bitcoin. So so don't take that as
Speaker 1: an investment careful they're so, what do you do? I
Speaker 1: think what you do is make sure you've got the
Speaker 1: right mix of stocks and bonds, and you prepare for
Speaker 1: that volatility by realizing that it's likely to be short
Speaker 1: term that stocks are going to bounce like we've seen
Speaker 1: the last couple of days sometimes, so you just you
Speaker 1: hold on for this that you said the right stocks
Speaker 1: or the right investments. What are the right investments? I
Speaker 1: think right now it's quality companies that can make their
Speaker 1: own luck in this environment. And that's part of why
Speaker 1: tech has done so well is they've been able to
Speaker 1: grow markets, they've been able to grow market share, and
Speaker 1: they've sort of powered through whether the economy was fast
Speaker 1: or slow. So I'm not too worried about the technology
Speaker 1: stocks right now. I'd certainly be adding that. But many
Speaker 1: people may be overweight. So what you're trying to do
Speaker 1: is be sure you're not taking too much risk in
Speaker 1: any specific place. And I think that's really the key,
Speaker 1: which is positioning your portfolio not based on what's just
Speaker 1: done great, but making sure that you're sort of looking
Speaker 1: more at over time, how are these companies going to
Speaker 1: do well? And do you have the right mix and
Speaker 1: stocks and bonds to stay invested in case stocks continue
Speaker 1: to go down? Do I wanna buy any gold or
Speaker 1: put any cash aside, or or even get into commodities
Speaker 1: or something something besides stocks and bonds, which is we're
Speaker 1: just saying we're both going down. I think that you
Speaker 1: don't want to buy gold in this environment unless you
Speaker 1: think that the price is going higher and certainly won't
Speaker 1: know the things we've seen disconnect is typically when the
Speaker 1: US dollar drops, gold goes up instead. It's been going
Speaker 1: down too, although it's somewhat higher, so I would say no,
Speaker 1: the commodities gold are not the place to be that
Speaker 1: it really is more traditional stocks and bonds, and that's
Speaker 1: sufficient to build a well diversified portfolio. Well, if if
Speaker 1: most of us know that this isn't gonna last forever,
Speaker 1: is it worth while setting aside some cash. Yes, I
Speaker 1: do think it's worthwhile setting aside some cash and buying
Speaker 1: when we see a bigger dip than we saw, or
Speaker 1: something will lasts a little longer than you know, a
Speaker 1: few hours. So I do think this is an environment
Speaker 1: where part of your fixed incomfortable. It should be a
Speaker 1: little heavier in cash and a little less in long
Speaker 1: term fixed income, especially since the longer term part of
Speaker 1: the interest rates haven't risen as much as I think
Speaker 1: they may as people worry more about inflation. You've also written,
Speaker 1: I believe that investors may feel worse because of these
Speaker 1: sudden moves lower or at least against their positions, because
Speaker 1: they have not had the experience of volatility at least
Speaker 1: for the last twelve months. Yes, actually for the last
Speaker 1: two years, because think about the fact that the last
Speaker 1: time we had a ten percent pullback in stocks was
Speaker 1: about two years ago. In last year, as we all know,
Speaker 1: the biggest drop in the SMP five hundred was less
Speaker 1: than three percent. So even the normal five percent moves
Speaker 1: up and down that we typically see in the stock
Speaker 1: market haven't been happening. I think we're headed back into
Speaker 1: that environment, partly because of less accommodation from monetary from
Speaker 1: central banks, the FED, but also the rest of the world,
Speaker 1: but also because inflation is beginning to pick up. And
Speaker 1: after this very strong run in the stock market and
Speaker 1: even the last few months, I think investors are beginning
Speaker 1: to say, all right, what happens next. We had the
Speaker 1: benefit of the tax cuts, we've had the benefit of
Speaker 1: stronger economic growth, of stronger earnings growth. What's going to
Speaker 1: propel stocks higher? And I think that's where you get
Speaker 1: more volatility. What is it? What are you going to
Speaker 1: watch for as a sign that this change is happening.
Speaker 1: Because we had the big sell offs earlier in the weekend,
Speaker 1: everybody said it's finally time for a correction, and then
Speaker 1: nothing happened. I would say you never know, because think
Speaker 1: about the fact that for the last couple of years,
Speaker 1: investors have really ignored money of the risks that we
Speaker 1: knew were out there, whether it's geopolitical risk or whether
Speaker 1: it's policy uncertainty. Investors continue to be positive even when
Speaker 1: some of the news wasn't so positive. And I think
Speaker 1: it's uh the problem in answering your question, Mike, as
Speaker 1: nobody knows when investors there's something going to switch and say, well,
Speaker 1: there's good news and there's bad news, and we're going
Speaker 1: to react negatively to the bad news as supposed to
Speaker 1: just ignoring it. And that's what you're really asking. When
Speaker 1: are people going to do that? The psychology of markets,
Speaker 1: I think is the thing that we never know, and
Speaker 1: that's why we want to be sure we're always looking
Speaker 1: at the fundamental They can make you crazy. Kate Warren
Speaker 1: of Edward Jones, We're going to continue the theme of
Speaker 1: talking about automobiles with Mike Jackson. He is the chief
Speaker 1: executive of Auto Nation that He began his career helping
Speaker 1: to be a technician at an automotive dealership in Cherry Hill,
Speaker 1: New Jersey. Following his graduation from St. Joseph's University. He
Speaker 1: joins us Now, Mike Jackson, thanks very much for being
Speaker 1: with us, my pleasure, good morning. I imagine you can't
Speaker 1: really fix any of the new cars now with all
Speaker 1: the technology that's in them, all that experience. It has
Speaker 1: to go somewhere else. Absolutely, But uh, we actually love
Speaker 1: the complexity and the benefit of the technology in the
Speaker 1: new cars because as they become ever more sophisticated and complicated,
Speaker 1: those who have the training, the tools, the equipment and
Speaker 1: the skill to repair them become fewer and fewer. And uh,
Speaker 1: that is our strength, and therefore we are very optimistic
Speaker 1: about growing our customer care business. We currently service over
Speaker 1: four million cars a year and we increase our customer
Speaker 1: care growth profit in the fourth quarter by a kind
Speaker 1: of oddball question here, but just flowing out of what
Speaker 1: you were saying there, there's a guy who knows what's
Speaker 1: under the hood. Uh, this whole NAFTA trade deal. One
Speaker 1: of the things that hinges on is automobiles. And the
Speaker 1: Canadians came up with this concept of if you want
Speaker 1: to increase the amount of North American produced stuff, count
Speaker 1: the software and technology that they put in cars today
Speaker 1: that they didn't before. Do you think that's a fair idea.
Speaker 1: I'm very concerned about the entire discussion around UH NAFTA.
Speaker 1: It's been in place for twenty five years, clearly needs
Speaker 1: to be modernized. But the idea of walking away from
Speaker 1: it would have a significant impact on the auto industry immediately,
Speaker 1: which has built this ballet of suppliers and assembly across
Speaker 1: the continent, with barts moving back and forth across borders
Speaker 1: UH several times a day in the in the millions,
Speaker 1: so it would really be massively disruptive. And I hope
Speaker 1: they find a solution now UH modernized, Yes, find a
Speaker 1: fair way to value where added value UH comes in, absolutely,
Speaker 1: and hopefully they find solutions. And I'm open to any
Speaker 1: suggestions including let's let's count how much software development is
Speaker 1: in these hicals today, which is, you know, a multiple
Speaker 1: of what the Space Shuttle used to be. Mike Jackson.
Speaker 1: As far as your dealership network goes, you've got what
Speaker 1: I think it's more than three hundred and seventy new
Speaker 1: vehicle franchises in fifteen states. You sell thirty five new brands,
Speaker 1: so you have a pretty good pulse on the market.
Speaker 1: What are you hearing from from the folks that are
Speaker 1: managing your individual dealerships. What are there is their general
Speaker 1: feeling right now? Well, first, we have our own performance,
Speaker 1: and we released our fourth quarter earnings today and on
Speaker 1: an operating basis, uh we're our strongest ever with revenue
Speaker 1: of five point seven billion, up four percent, but even
Speaker 1: more importantly, gross profits were up uh a seven percent
Speaker 1: on the same store sale basis, driven particularly by our
Speaker 1: performance in pre owned vehicles being up uh six So
Speaker 1: the overall environment is quite good when I look at
Speaker 1: the outlook for this year for new vehicle sales um
Speaker 1: even though the economy is going to be rather robust,
Speaker 1: and I'm a big supporter of finally achieving corporate tax
Speaker 1: reform and what that means for the US economy, US corporations,
Speaker 1: competitiveness around the world, what it means for the workers
Speaker 1: of America is all very positive. Paradoxically, I think new
Speaker 1: vehicle sales will go down somewhat from above seventeen million
Speaker 1: to just below seventeen million around six eight. That's mainly
Speaker 1: caused by this new category of vehicle we have due
Speaker 1: to all the vehicles put in leasing three to four
Speaker 1: years ago are coming back to market, and it's four
Speaker 1: million vehicles coming back this year at a price point
Speaker 1: of around thousand. So you have a new segment that's
Speaker 1: a compelling value offer for the American consumer. So there
Speaker 1: is a certain substitution or cannibalization away from the new
Speaker 1: vehicle market into the nearly new market. But the manufacturers
Speaker 1: will have a good year and we will have a
Speaker 1: good year. You wear another hat, and that as chairman
Speaker 1: of the board of the Atlanta Federal Reserve Bank, and
Speaker 1: I'm sure that Raphael Bostick has you in and asked
Speaker 1: you how things look in the economy, So let me
Speaker 1: ask you that how do things look in the economy.
Speaker 1: Everybody seems to be very, very confident that this is
Speaker 1: going to be a strong year. I think that is
Speaker 1: the sentiment that we're hearing from the grassroots level. And
Speaker 1: one of the things I admire about the Federal Reserve
Speaker 1: is not only do they have their phenomenal economist, uh,
Speaker 1: but they are very keen to get a grassroot sent
Speaker 1: of what's going on in reality through their twelve reserve banks.
Speaker 1: And I'm honored to serve as chairman. I think the
Speaker 1: debate is, can you have this new level of growth
Speaker 1: without inflation, and what does it mean for We're where
Speaker 1: are the workers going to come from? For this level
Speaker 1: of growth with an unemployment rate of four point one
Speaker 1: And when you get go down to the next level,
Speaker 1: you say, well, workforce participation has fallen in the US
Speaker 1: from the high sixties into the low sixties. And this
Speaker 1: is a structural issue that we have to address in
Speaker 1: America if you really want UH to sustain growth of
Speaker 1: three or or even something more. And the big issues
Speaker 1: there that have to be dealt with is you you
Speaker 1: had a robust safety net from the Great Crash that
Speaker 1: a significant percent of the population got comfortable with. You
Speaker 1: have a skills gap where we have technical jobs that
Speaker 1: pay very well, but an education system that's not UH
Speaker 1: not supplying them, and a society that doesn't put a
Speaker 1: big social value on those jobs. So where where these
Speaker 1: workers going to? I'm from And let's face an, immigration
Speaker 1: has always been a source of increase in the worker
Speaker 1: population in America and supportive growth and immigration is that
Speaker 1: we say, not exactly functioning smoothly today. So the debate
Speaker 1: centers around not so much will there be growth. I
Speaker 1: think there is a sense that growth will actually increase
Speaker 1: in maybe to three percent, But how do you manage
Speaker 1: the threats of inflation and longer term where the work
Speaker 1: is going to come from? What you are in what
Speaker 1: used to be called an interest rate sensitive industry back
Speaker 1: when we had interest rates, now that they're going up again,
Speaker 1: is there a level at which you think auto buying
Speaker 1: would suffer at when a level where people would say
Speaker 1: that makes my monthly payment too high? Well, you know. Uh, Fortunately,
Speaker 1: I've been in this business so long that I can
Speaker 1: remember interest rates and trying to do business with them. Uh.
Speaker 1: The key issues are availability and affordability of credit, both
Speaker 1: for corporations and for consumers. And I see no issues there.
Speaker 1: And the idea that we need crisis rates that were
Speaker 1: put in place during the Great Crash and the and
Speaker 1: the six seven, eight years that followed, Uh, we're not.
Speaker 1: This economy is not in a crisis. So a step
Speaker 1: towards normalization of rates is entirely appropriate. Uh, and entirely
Speaker 1: makes sense. And I think the new normal of where
Speaker 1: rates settled down is lower than what it was in
Speaker 1: the past, So I think it's all manageable. And until
Speaker 1: inflation aggressively rears its head, um, I think, uh, we're fine.
Speaker 1: On both the availability of credit and the pricing of credit.
Speaker 1: Mike Jackson, in ten seconds, can you tell us what
Speaker 1: the biggest mistake is that you find people make when
Speaker 1: to go into an automobile dealership to buy an automobile,
Speaker 1: or at least one ten seconds? Uh. First, the consumer
Speaker 1: prepares themselves like never before, uh, through digital and the internet.
Speaker 1: So the only mistake you can make is not to
Speaker 1: go online first. All right, do all of your homework.
Speaker 1: Well done, Thanks before you come in. Okay, thanks very much,
Speaker 1: Mica Jackson. He is the chief executive of Auto Nation.
Speaker 1: They are based in Fort Lauderdale, Florida. Thanks for listening
Speaker 1: to the Bloomberg Surveillance podcast. Subscribe and listen to interviews
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