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Speaker 3: with our Bloomberg Intelligence analysts. They cover two thousand companies
Speaker 3: and one hundred and thirty industries worldwide, and we're going
Speaker 3: to do that now with one of them in relation
Speaker 3: to Apple, So that stock is down to over one percent.
Speaker 3: It's a tough tape for sure. But the news overnight
Speaker 3: was that Apple has assembled about fourteen billion dollars worth
Speaker 3: of iPhones in India in the last fiscal year. So
Speaker 3: we want to get perspective with anurag Rana. He's Bloomberg
Speaker 3: Intelligence senior technology analyst. He's the guy we go to
Speaker 3: for all these kind of headlines on AOG. Always a pleasure.
Speaker 3: Fourteen billion dollars worth of phone sounds like a lot,
Speaker 3: is it.
Speaker 4: No, it's not a whole lot, but at the end
Speaker 4: of the day. You know, one of the things we
Speaker 4: have seen that over the last two and a half
Speaker 4: three years, Apple has been assembling its phone outside And
Speaker 4: you know, for us, the real reason for that is
Speaker 4: a couple of years ago there was a COVID big
Speaker 4: issue in China. It had an impact on some of
Speaker 4: the phones coming out, that had an impact on sales
Speaker 4: and so forth. Now having said that, that was one reason.
Speaker 4: Second Apple prior to the you know, you could say
Speaker 4: the COVID issue was completely dependent on China for all
Speaker 4: the assembly and their parts. Now what we are seeing
Speaker 4: is they are moving out of the assembly from China
Speaker 4: into other areas, mostly India. But one of the things
Speaker 4: I tell everybody at the same time, they still make
Speaker 4: most of the parts. So it's you know, if we
Speaker 4: ever get into a problem with China in terms of
Speaker 4: geopolitical issues, we still lean those parts to assemble the phone.
Speaker 4: It's not as if you know, those those parts are
Speaker 4: available all over the world.
Speaker 5: An I just wonder how you know investors in Apple
Speaker 5: view this China risk. Are they of the opinion I
Speaker 5: assume that if they own stock in the company there,
Speaker 5: they have some level of comfort with the China risk.
Speaker 6: Here.
Speaker 5: Did they just believe it's hey, you know, it's kind
Speaker 5: of a mutually beneficial relationship Apple and China that at
Speaker 5: the end of the day, that's what's going to keep
Speaker 5: everything moving.
Speaker 4: So well, I've seen two people, I mean two different buckets.
Speaker 4: One is, people are extremely concerned about the US China
Speaker 4: relationship in the long run. They obviously have you know,
Speaker 4: they don't want to deal with Apple or any other
Speaker 4: companies that you know, fall into that bucket. But the
Speaker 4: others said, listen, this is spart and parcel of the
Speaker 4: global world chain, supply chains, and most manufacturing companies are
Speaker 4: dependent on China. Like it or not. They seem to
Speaker 4: be okay with it, you know from our side, you know, yes, absolutely.
Speaker 4: The biggest risk that Apple faces from a stock point
Speaker 4: of view, from a revenue point of view, from a
Speaker 4: supply chain point view, is if something happens between the
Speaker 4: US and China, and we've talked about that quite a bit.
Speaker 4: But from a sales point of view, I think it
Speaker 4: is to me that's a bigger issue right now in
Speaker 4: the medium term, because China accounts for eighteen to twenty
Speaker 4: percent of total of Apples sale and frankly speaking, that
Speaker 4: is the big growth engine, and we have seen over
Speaker 4: the last twelve months of problems in that growth engine
Speaker 4: because of whahweh do we how.
Speaker 3: Much do they make these phones for in India versus China,
Speaker 3: versus other areas, and trying to get a sense of
Speaker 3: where they make, where the margins are, and what they
Speaker 3: look like.
Speaker 4: That's a very good question. And frankly speaking, we thought
Speaker 4: when they started making more phones in China or sorry
Speaker 4: in India, or we started seeing new phones coming out
Speaker 4: of that, that would have an impact on their gross margins.
Speaker 4: But they have managed it very well. And remember one
Speaker 4: of these things, it's the factories that they outsource their
Speaker 4: stuff to, and you know, it's kind of somebody else's headache.
Speaker 4: But in the end, you know, Apple will have to
Speaker 4: make some you could say concessions. But at the same time,
Speaker 4: so far we have not seen any impact on Apple's
Speaker 4: gross margins. I mean, surprisingly, we have seen them, you know,
Speaker 4: hold up very nicely over the last two years.
Speaker 5: Can you just kind of characterize the competitive landscape for
Speaker 5: Apple in China visa the Huawei and other phones here
Speaker 5: are they maintaining share, losing share, gaining share? How's Apple
Speaker 5: doing so?
Speaker 4: Apple has not done this you know, same number of
Speaker 4: sales as WAWE over the last twelve months. Now. There
Speaker 4: are two elements of it. One is the competitive landscape.
Speaker 4: People are choosing Chinese phone so over a foreign brand,
Speaker 4: So that's one aspect. The second aspect, which I'm hoping
Speaker 4: is probably you know correct in the long run for
Speaker 4: Apple's sake, is that Wawei didn't have a very you know,
Speaker 4: brand new phone for several years, and this is their
Speaker 4: first big new refresh, which is why people who have
Speaker 4: been using Quawei phones in the past are going out
Speaker 4: and refreshing their phone at a much faster clip. So
Speaker 4: that could be the second reason Apple is doesn't have
Speaker 4: that same you know, I would say, I mean, the
Speaker 4: cache is still there. But typically what I would do
Speaker 4: is if I have an Apple phone, you know, I'm
Speaker 4: doing everything on it, you know, chat and the pictures
Speaker 4: and every but in China, what happens is you do
Speaker 4: a whole lot of your transactions using the the you know,
Speaker 4: the the apps that you have or the super apps,
Speaker 4: and for that you can download those app in any ecosystem.
Speaker 4: So I would say, on a on a you know,
Speaker 4: competitive basis, you are less prone to be an Apple
Speaker 4: customer than you are in the Western world.
Speaker 3: Well that's interesting. So and then to that point is
Speaker 3: that what the regulation or the penalties in the EU
Speaker 3: in the US is going to force Apple to do
Speaker 3: an essence so it won't become that ecosystem in the
Speaker 3: same way.
Speaker 4: Well, there is no super app in the US that
Speaker 4: is very much like v chat. I mean you could
Speaker 4: you could say WhatsApp could be one of them. But
Speaker 4: frankly speaking, I mean Apple has done such a good
Speaker 4: job of uh you know, I would say, maintaining their
Speaker 4: customer base in the in the US and in Europe.
Speaker 4: That I mean, I don't I don't see that happening.
Speaker 4: That is certainly a new app comes in and people
Speaker 4: start using that over what's going on with Apple or
Speaker 4: the habits that they have right now?
Speaker 5: All right, Hona rock, I've got the iPhone eleven? Do
Speaker 5: I upgrade? Now? Do? I? Wait? What am I doing here?
Speaker 4: You should look at Wait till the September October, you
Speaker 4: know framework, Because one of the things is, as we
Speaker 4: talked about it last week, if in June they are
Speaker 4: able to go out and convince the world that they
Speaker 4: do have an AI play with new features coming in,
Speaker 4: then you would need a little bit more firepower in
Speaker 4: terms of the memory and the CPO that's going to
Speaker 4: which means the next phone will have a faster version
Speaker 4: of that. You know, I would wait for that because
Speaker 4: you know you will you will have both the both
Speaker 4: bigger memory as well as faster speeds.
Speaker 3: Interesting, see, that's what they get you right, Like, once
Speaker 3: you start, you can't leave that and closed ecosystem. It's
Speaker 3: definitely a thing. So what's the next catalyst now for Apple?
Speaker 3: What are you looking at? Well, any catalyst I guess
Speaker 3: would be.
Speaker 4: A big way. The June I mean that's it's Tune's
Speaker 4: Worldwide Developers conference where there are to talk about AI
Speaker 4: and what's a of Apple's AI strategy. That is the
Speaker 4: only thing that can actually put some fire in this
Speaker 4: particular you know, where is it down thirteen fourteen percent
Speaker 4: year a year todate Because other than that, I mean,
Speaker 4: we don't see China bouncing back this year, We don't
Speaker 4: see any major new product announcement, and obviously Apple Vision
Speaker 4: pro is not going to drive the overall growth rate
Speaker 4: of the company. So it's the iPhone and if there
Speaker 4: is anything that's out there that can force Paul to
Speaker 4: go out and buy a new phone. I think that's
Speaker 4: going to drive the next cycle.
Speaker 5: All right, Well, I'm heading down to Duke tomorrow Anarox,
Speaker 5: so there's a reasonable chance I might bump into Tim Cook.
Speaker 5: I'm going to make my dividend increase. Pitch. Yet again, he's.
Speaker 3: Gonna run away from you probably, Yeah? Is that had
Speaker 3: that conversation though, as you say, he's like, leave me alone.
Speaker 5: Paul I said, would a kill you to put a
Speaker 5: two and a half or three percent dividend yield on
Speaker 5: this thing? All right, Honorrock, thanks so much for joining
Speaker 5: us on rog ran a senior technology analyst Bloomberg Intelligence
Speaker 5: from the Technology Growth Boomtown of Chicago, Illinois. Go figure that?
Speaker 5: So AnyWho? So, yeah, we'll see the Apple. I think
Speaker 5: if you're a shareholder, you just you have to be just.
Speaker 5: I'll take the China risk, you know. I think the
Speaker 5: bigger risk isn't necessarily so supply chain, but at the
Speaker 5: competitive risk and the risks of my sales people, for
Speaker 5: whatever reason, are in the we're not really buying American
Speaker 5: stuff if we don't have to.
Speaker 3: Well yeah, and also it disrupts the thesis that like
Speaker 3: all of India is going to go buy an iPhone,
Speaker 3: which is like all of China's going to go buy
Speaker 3: an iPhone. Like, clearly we're seeing a difference in that
Speaker 3: thesis too. So such a good point. Not a supply
Speaker 3: chain issue with China, but just straight up demands.
Speaker 5: Yeah, I think that could be the bigger issue.
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Speaker 2: just Say Alexa playing Bloomberg eleven thirty.
Speaker 3: I'm interested to see we are breaching those technical levels
Speaker 3: for the markets, but then what winds up happening to
Speaker 3: buying the dip? Does that materialize or do we actually
Speaker 3: get a proper longer. Francis Donald is chief a global
Speaker 3: chief economist and strategist for Manual Life Investment Management, and
Speaker 3: she joins us. Now, great person to talk to on this.
Speaker 3: Do you think investors buy the dip on this?
Speaker 4: Oh?
Speaker 6: I'm not sure I'm there just yet, Alex. I mean,
Speaker 6: we've been living in soft landing euphoria where everything is perfect,
Speaker 6: growth is coming in just fine, but inflation is declining.
Speaker 6: And we've said you can't have your cake and eat
Speaker 6: it too Either growth will hold in too long, inflation
Speaker 6: will reaccelerate and you will lose your rate cuts, which
Speaker 6: is what's happening, or and I think this is the
Speaker 6: next phase of this, growth will deteriorate and you will
Speaker 6: no longer be in this soft landing narrative. So we
Speaker 6: still have concerns that even though inflation is coming in sticky,
Speaker 6: growth is going to decline in the second half of
Speaker 6: the year. So what worries me. What worries me is
Speaker 6: this word stagflationary is probably going to come back a
Speaker 6: lot more in our narrative in the next three to
Speaker 6: six months. That's a very difficult place for the Federal
Speaker 6: Reserve to be. They're going to have to pick their
Speaker 6: favorite child, Sophie's choice. Is it inflation or is it growth?
Speaker 6: And I think it's a really difficult environment for risk assets.
Speaker 6: They're going to have to deal with the worst of
Speaker 6: both worlds.
Speaker 5: No bueno. So how about the Federal Reserve bump? FED
Speaker 5: Chairman J Powell. In the back of my mind, do
Speaker 5: I have a scenario where I don't cut rates with
Speaker 5: all this year.
Speaker 6: Of course, that's always a scenario. I mean that team
Speaker 6: and I sat down this morning. Our base case has
Speaker 6: been the FED would go later but faster, but we'd
Speaker 6: penciled in June to the starting point, and so I said, team,
Speaker 6: you know, are we moving to September? And all of
Speaker 6: us agreed. We got to wait. In the next twenty
Speaker 6: four hours. There is so much FED speak coming forward,
Speaker 6: and I think you know as well as I do.
Speaker 6: It's not uncommon to see extra FED speak pop up
Speaker 6: when you have big moves of this magnitude. So what
Speaker 6: we want to know is not the data itself, but
Speaker 6: what is going to be the interpretation of the data.
Speaker 6: There were many categories in today's CPI that are not
Speaker 6: going to flow through as strong to PCEE. Does Chair
Speaker 6: Powell want to emphasize that? What about that wages are
Speaker 6: decelerating fairly rapidly, and all of our leading indicators of
Speaker 6: wages say, well, there's not going to be a wage
Speaker 6: price spiral. If the FED wants to cut in June,
Speaker 6: they have enough data to be able to say, hey,
Speaker 6: we're going to cut in June. If they like to
Speaker 6: take the opening the bond market gave them to go later,
Speaker 6: then you'll probably hear a lot less from them in
Speaker 6: the next twenty four hours. They'll try to stay mute.
Speaker 6: But this is this part in the cycle where macro
Speaker 6: forecasting and FED forecasting becomes a little less science and
Speaker 6: a little more art. It's a lot more subjective. I
Speaker 6: need to hear what Powell says, not just what the
Speaker 6: data looks like.
Speaker 3: And just talking about sort of market reaction. Euro dollars
Speaker 3: down as much as one percent. We're now at one
Speaker 3: spot oh seven, biggest drop since July. So we'll just
Speaker 3: watch out for more of those superlatives as we go.
Speaker 3: You mentioned the PCE CPI thing of a bob, and
Speaker 3: I say a thing a bob because like, not everything
Speaker 3: counts in the same way to get different baskets. But
Speaker 3: you had the firmerical motor vehicle insurance costs and medical
Speaker 3: care and both of those are what feeds into PCE differently,
Speaker 3: So why how what does the FED talk about with that?
Speaker 6: Whatever they want? And this is what's been really challenging
Speaker 6: for us is there are measures like six month annualized
Speaker 6: CPI X shelter. Heading into this was stub two percent.
Speaker 6: That was totally enough for the FED to be cutting
Speaker 6: or they can lean on the shelter side of the picture.
Speaker 6: So this is a really challenging environment where the FED
Speaker 6: can choose what numbers it wants to focus on. They
Speaker 6: can tailor which data they reference to what they think
Speaker 6: is the appropriate outcome. We're talking a lot about inflation here,
Speaker 6: but let's not forget the job side of the picture.
Speaker 6: The job side of the picture, when you look at
Speaker 6: the leading indicators, is weakening and there on end, they
Speaker 6: can say headline job growth is good, or they can
Speaker 6: say full time jobs have been deteriorating very sharply, and
Speaker 6: that suggests it's going to be labor market weakness. That's
Speaker 6: why listening to the FED is going to become paramount,
Speaker 6: and unfortunately, especially for those of us that are trying
Speaker 6: to actively trade, it a lot more volatility and rates
Speaker 6: in the next couple months.
Speaker 5: All right, Well, if the underlying jobs data maybe is
Speaker 5: not as strong as the headline data, and we have
Speaker 5: persistent inflame here, it's got to be tough on the
Speaker 5: consumer out there. How do you think about the US consumer?
Speaker 6: Depends which consumer you are, I know there's a lot
Speaker 6: of depends coming through here, and it's because we have
Speaker 6: so much diversification and desynchronization. This is a really big term.
Speaker 6: I mean, this week we had a horrible, horrible small
Speaker 6: business optimism number. It was more like small business deep
Speaker 6: pessimism number. That's very consistent with dark recessions. And yet
Speaker 6: CEO confidence is off the charts. Look at consumer confidence
Speaker 6: by income. High income consumers are feeling gosh, are good
Speaker 6: and low income consumers are struggling. They're out of excess saving,
Speaker 6: their credit cards are too expensive, they're going to linquid.
Speaker 6: If you're a high income consumer, you're a saver. You're
Speaker 6: benefiting from investment returns and house prices returns. You're a
Speaker 6: really good shape. Let's not forget those high income consumers,
Speaker 6: the top twenty percent. They spend thirty five percent of
Speaker 6: all expenditures. So if you're a consumer right now that
Speaker 6: is interest rate sensitive, you are feeling recessionary. If you
Speaker 6: are not interest rate sensitive, then things look really pretty
Speaker 6: for you. The key here is not to cherry pick
Speaker 6: which side of theirs you're going to look at. It
Speaker 6: is to understand from a policy perspective that the economic
Speaker 6: experience across income groups and regions in the US is
Speaker 6: very different and from an aggregate perspective to look top
Speaker 6: down and say, what does this look like in totality,
Speaker 6: not just looking at one side of the picture or
Speaker 6: the other.
Speaker 3: So and to that point, sort of just looking at
Speaker 3: the areas where we saw increases versus decreases. I found
Speaker 3: it was so interesting, not to like bore you guys,
Speaker 3: but things like car insurance and clothing and personal care
Speaker 3: and education and furniture that all went up, right, But
Speaker 3: what went down on are things like the price of
Speaker 3: butter for example, Grocery store foods went down, cereals and
Speaker 3: bakery products so like go make croissants, so like it's hard.
Speaker 3: So I wonder, are we in like a rolling inflation
Speaker 3: scenario where we kind of saw that last year and
Speaker 3: the year before when it comes to rolling recession in
Speaker 3: certain areas of the equity market and industries. Are we
Speaker 3: in that place right now?
Speaker 6: Possibly? I mean on the flip side, goods are actually
Speaker 6: in straight up deflation right now. So where we're seeing
Speaker 6: the inflationary pressure is on the services side. But we
Speaker 6: were a little bit worried today we're going through the number.
Speaker 6: We said, Look, apparel is starting to pick up there's
Speaker 6: enough categories that the momentum is moving in the wrong way,
Speaker 6: So that's proving a little bit of concern for us.
Speaker 6: One thing I can't help but think about is last year,
Speaker 6: my team and I were saying constantly, hey, when the
Speaker 6: Fed cuts rates, you won't be asking why. And yet
Speaker 6: in December when Chair Powell pivoted, I constantly was asking
Speaker 6: myself why what changed from October to December to really
Speaker 6: create this movement? It didn't seem like a good idea.
Speaker 6: And there's going to be criticism on Share Powell, I
Speaker 6: think today, especially that he pivoted too early, He eased
Speaker 6: indirectly and therefore inflated the economy a little bit too early.
Speaker 6: I think that's going to be some of the pressure
Speaker 6: he gets now. On the flip side, if they say, okay,
Speaker 6: you know what, We're going to push out rate cut
Speaker 6: expectations till later this year, you might see some of
Speaker 6: that inflation come back. Is a veritable rollercoaster for our clients.
Speaker 6: We tell them focus on the two year horizon. Two
Speaker 6: years from now, rates will be much lower than where
Speaker 6: they are now, whether they start in June, September or
Speaker 6: frankly twenty twenty five is less relevant for most investors
Speaker 6: than that two year cycle. So that's what we're advocating,
Speaker 6: focusing on not big bets right now, not super tactical
Speaker 6: bets right now, unless, of course you have.
Speaker 5: To I like that too. Your view makes sense to me.
Speaker 5: That being said, we do have the warp function on
Speaker 5: Bloomberg terminal where people are kind of racing it out
Speaker 5: month the month here. So are you guys in the
Speaker 5: camp that says, hey, this Fed doesn't have to rush,
Speaker 5: they can wait as long as they want.
Speaker 6: Well, we're ver embarrassed on the economy compared to consensus.
Speaker 6: We still have a recession in our forecast, and actually
Speaker 6: today's inflation print, which tells us the Fed is going
Speaker 6: to stay a little bit longer, amplifies our concerns about
Speaker 6: recession risk for later this year and into twenty twenty five.
Speaker 6: So we see twenty twenty five as being really underpriced
Speaker 6: when it comes to easing. But for the rest of
Speaker 6: this year, as I said, we're going to listen to
Speaker 6: the a little bit in the next twenty four hours.
Speaker 6: It's going to be June or September. Of course, we're
Speaker 6: going to have a lot of short term focus on that,
Speaker 6: but big market moves should really be driven off of
Speaker 6: are we heading into a recession? Is it a traditional
Speaker 6: easing cycle with hundreds of basis points of cuts? That's
Speaker 6: going to be far more important for acid allocation decisions
Speaker 6: or bonds and stocks than June or September.
Speaker 3: Francis Francis Donald, thanks a lot, Manulife Senior chief chief
Speaker 3: economist and strategist over there. Yeah, And that's so interesting too,
Speaker 3: because when you take a look at what the forecast is,
Speaker 3: does it matter why they cut, Like are they cutting
Speaker 3: because the economy stinks? Or are they cutting because they're normalizing?
Speaker 3: And if they're normalizing, that's not going to be like
Speaker 3: three hundred bases points of cuts unless the economy super tanks.
Speaker 3: So does that change how you allocate?
Speaker 5: Yeah? Exactly right. And I think if I think what
Speaker 5: a lot of folks took from today's data is in
Speaker 5: any scenario, you can make a stronger case today that
Speaker 5: they can wait a little bit.
Speaker 3: Yeah or no, why aren't we talking about hikes?
Speaker 5: Why aren't we talking Yeah? Right, yeah, that's no fun though.
Speaker 3: No one always no fun and we don't like doing it,
Speaker 3: But like, why aren't we actually like talking about it
Speaker 3: at that point.
Speaker 5: Yeah, exactly.
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Speaker 3: I should point out the SEP is off the lows
Speaker 3: of the session, just down eight tens of one percent.
Speaker 3: I feel like my buying the dip question isn't as
Speaker 3: crazy as maybe would have got two hours ago. So
Speaker 3: let's ask it now to Shanna Sizzle, president and CEO
Speaker 3: of better On Capital Management. She joints now on Zoom
Speaker 3: from Chicago, Illinois. Shanna, do you buy the dip?
Speaker 7: I always buy the dip?
Speaker 8: Okay, But I mean, the market goes up more than
Speaker 8: it goes down.
Speaker 7: Why wouldn't you buy the dip. It's not like the
Speaker 7: market's going to go permanently down.
Speaker 8: I'm a big fan of buying on weakness, and there's
Speaker 8: weakness today for good reason. Also, I feel the need
Speaker 8: to tell you I heard your earlier comments about Funco
Speaker 8: and I had to have my bubblehead in the shot
Speaker 8: for that reason.
Speaker 3: So is that a Funkco bubble head.
Speaker 8: It is it is is that your head had to
Speaker 8: do it.
Speaker 7: That is supposed to be my head.
Speaker 8: I don't know how accurate it looks, but that's supposed
Speaker 8: to be my head. But I digress. No, I'm a
Speaker 8: big fan of buying on weakness. We have strong economic growth.
Speaker 8: CPI coming in hotter than expected.
Speaker 7: Is an indication of that. We still have very strong demand.
Speaker 8: I think the markets week obviously on the fact that
Speaker 8: this makes a FED rate cut less likely. But I've
Speaker 8: been saying all along that I thought the sixth that
Speaker 8: was originally priced in earlier this year was a pipe
Speaker 8: dream that would be more like three. Now I'm actually
Speaker 8: going to go really far out on a limb here
Speaker 8: and say I don't think they're cutting this year.
Speaker 5: Torsten Slock over to Pollo Management agrees with you. He
Speaker 5: was at with a note this morning. We're affirming that
Speaker 5: call for him.
Speaker 7: Sean.
Speaker 5: So, when you think about your portfolio, think about the
Speaker 5: stocks that you like out there. How much do you
Speaker 5: worry about Federal Reserve policy, about the inst rate environment
Speaker 5: visa v the fundamentals of those companies.
Speaker 8: I think it affects some of the growthier names more
Speaker 8: than an effect say a name like Fang, which is
Speaker 8: on my list. That's an energy name. I think that's
Speaker 8: more a supplied demand situation. I think the demand for
Speaker 8: oil in particular isn't going anywhere anytime soon. But for
Speaker 8: the growthier names, FED policy can really impact, you know,
Speaker 8: the valuations and the potential upside because of just how
Speaker 8: time value of money works.
Speaker 7: Higher rates tend not to.
Speaker 8: Be helpful for growth names because you've got to have
Speaker 8: more growth and so you know, you can't get as
Speaker 8: much of a premium as when rates are really lower.
Speaker 7: But I don't worry about.
Speaker 8: It too much because I think the overall tailwinds are
Speaker 8: so compelling that even in a higher rate environment, higher
Speaker 8: rates mean the economy is doing well, which will mean
Speaker 8: that stock should do well.
Speaker 3: Fang is Diamondback Energy. Just to break that down, that
Speaker 3: stock trades about two hundred and five dollars and eighty
Speaker 3: five cents. So you mentioned that maybe the FED won't
Speaker 3: cut at all. Does that pair back the amount of
Speaker 3: cuts you expect overall in this cutting cycle, because that
Speaker 3: would also dictate kind of how the economy is doing.
Speaker 7: Yeah.
Speaker 8: So I think that the FED has a target interest rate,
Speaker 8: so I think they'll cut as much as they have
Speaker 8: to get to what that target is, I think it's
Speaker 8: probably somewhere between two to three and a half.
Speaker 7: It's not zero.
Speaker 8: I know we got used to zero, but it ain't zero,
Speaker 8: and so I think we'll get there. If they have
Speaker 8: to do it faster and there's less cuts, that means
Speaker 8: that we've had some sort of economic instability.
Speaker 7: That's how I look at it.
Speaker 8: If there's more cuts, that means that we've achieved the
Speaker 8: unicorn soft landing, which I'm still not convinced of, and
Speaker 8: so I don't have an opinion on that.
Speaker 7: I just think that.
Speaker 8: More cuts means smoother landing, right, that's stupid thing when
Speaker 8: you fly, you smooth landing.
Speaker 7: Air air Force pilot.
Speaker 8: Yeah, so we've achieved the smooth landing. The air Force
Speaker 8: is in control.
Speaker 3: Uh.
Speaker 8: And if they have to cut fast and they're bigger cuts,
Speaker 8: it's because there's some sort of economic stability and they
Speaker 8: have to hit the deck really hard.
Speaker 5: All right. So a name like in video, which is
Speaker 5: a name we've talked about with you before you've you've
Speaker 5: you guys own that. I can't think of an interest
Speaker 5: rate scenario that would get me off of that story
Speaker 5: because I mean, the fundamental drivers of AI. If you
Speaker 5: really believe the growth potential of AI, that has got
Speaker 5: to be a building block story in that. So how
Speaker 5: does it, you know, the movement in today's market kind
Speaker 5: of impact your thoughts about a big growth story like Nvidio.
Speaker 7: Well, you and me both. I don't think the it
Speaker 7: has any impact on Nvidia because of.
Speaker 8: The AI trend We're so early on there. It's training
Speaker 8: it like a twenty eight times forward earning multiple, which
Speaker 8: is insane to me. I still look at like just
Speaker 8: the sheer price of it over eight hundred and fifty
Speaker 8: dollars per share, and that's intimidating because my cost basis
Speaker 8: on it is two fifty. But not to brag or anything,
Speaker 8: I don't own that much, dude, I don't own that
Speaker 8: much and I haven't added to it. That just sounded
Speaker 8: really obnoxious. But yeah, so I'm not sure I'm necessarily
Speaker 8: a buyer, but I do find the twenty eight times
Speaker 8: forward earnings compelling. So maybe I jump in here, especially
Speaker 8: on weakness like today. If it got under say eight
Speaker 8: twenty five, I would be jumping in all day long.
Speaker 3: You also own Vertex Pharmaceuticals ticker VRT. X. It's a
Speaker 3: biotech company, tell us more so.
Speaker 8: That's a super volatile company. Biotech is not for the
Speaker 8: phantom heart. But I like some of these healthcare names
Speaker 8: right here, some of the more volatile ones actually, because
Speaker 8: drug development is always volatile. You you know, you might
Speaker 8: think you have something great and then you get to
Speaker 8: you know, the stage three trials, and all of a sudden,
Speaker 8: everything falls apart. Vertex has some great cystic fibrosis drugs.
Speaker 8: The stock has been super volatile, but volatile to the upside,
Speaker 8: so you get some really crazy movement in the stock,
Speaker 8: but the stock has positive returns. I think they have
Speaker 8: kind of a dominant position and system fibrosis, which is,
Speaker 8: you know, a major concerned that's a major disease that
Speaker 8: affects a lot of people, and those things are positive
Speaker 8: for the stock. They have some great R and D
Speaker 8: and those are the things that I think are the
Speaker 8: key drivers. It's good management, smart balance sheet, all the
Speaker 8: things you.
Speaker 7: Look for in a good stock. But it is biotech,
Speaker 7: so it.
Speaker 8: Is not for the faint of heart.
Speaker 5: Biotech not for the faint of heart. In Nvidia one
Speaker 5: gard you not for the faint of heart? How do
Speaker 5: you guys, screen for stock at your shop. I mean,
Speaker 5: do you tend to go for growth? How do you screen?
Speaker 6: So?
Speaker 8: Oddly enough, my entire background, in all the years have
Speaker 8: been in the business has been value. So I know
Speaker 8: that seems strange looking at like my recommendations here, But
Speaker 8: I don't screen the way that normal you would normally hear.
Speaker 8: I started my career in manager research, and so I
Speaker 8: used to meet with managers of funds, hedge funds, mutual funds,
Speaker 8: ETFs all the time, and they talk about their socks, right,
Speaker 8: So I got.
Speaker 7: A lot of my ideas from them.
Speaker 8: So I've met with thousands of managers at this point
Speaker 8: in my career, and there are like a handful that
Speaker 8: I think are amazing. And those handful are the ones
Speaker 8: that I will look at their portfolios. I'll look at
Speaker 8: their thirteen f's and and see what they own, maybe
Speaker 8: pick up the phone and ask them and and write
Speaker 8: out their reasoning, and then I'll do my own work
Speaker 8: on the stock. See does it make sense to me?
Speaker 8: Is this story something that I think is compelling? But
Speaker 8: that's how we get my ideas. I don't screen for
Speaker 8: stocks like most folks who sit there and pick you know,
Speaker 8: twenty thirty forty stocks because they have to manage a
Speaker 8: portfolio at any given time. I might be following ten
Speaker 8: names because that's not the core of our business, but
Speaker 8: that's kind of how I get my ideas.
Speaker 5: Got you all right, Shannon, thank you so much for
Speaker 5: joining us. Really appreciate that. Shanna Sissel, President and CEO
Speaker 5: of ban Rhenn Capital Management.
Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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Speaker 5: All right, let's check in with one of our favorite
Speaker 5: e congress. We'd like to talk about macro stuff Withjeffrey Cleveland.
Speaker 5: He's the chief economist at paid In and Regal. He's
Speaker 5: in that little hamlet out west called Los Angeles. Jeffrey,
Speaker 5: thanks so much for joining us here. Boy, the kind
Speaker 5: of a look at what's happened in the financial markets
Speaker 5: here today. I don't think they were discounting this kind
Speaker 5: of inflation print. What did you make about the CPI.
Speaker 1: Well, someone said uggs earlier, and I just I just thought, ugly,
Speaker 1: that's all I could think about. Yeah, I mean so
Speaker 1: I think, as I always say, context matters for markets,
Speaker 1: and the context going into this number was that January
Speaker 1: was a fluke and February was a bump in the
Speaker 1: road and things were going to settle down. And this,
Speaker 1: this morning's number for CPI in particular, at another point,
Speaker 1: for that tells me it's more than just a fluke.
Speaker 1: A colleague just texted me and said, what's the technical
Speaker 1: definition of a trend? And I said, you know, three months,
Speaker 1: three months is a trend. And so I think we
Speaker 1: have to have a trend here of stickier inflation, and
Speaker 1: that's what's playing out. And you could say, now the
Speaker 1: two year yield maybe is more fairly priced than it
Speaker 1: was certainly at the start of the year, but we
Speaker 1: still have a couple of rate cuts priced in, so
Speaker 1: there might be more room for repricing here. Still, even
Speaker 1: after today's number, do.
Speaker 3: You believe that there'll be two cuts or do you
Speaker 3: think we could be in a situation where we're talking
Speaker 3: hikes in the next couple of months, or are we
Speaker 3: talking about no cuts?
Speaker 1: Last week I said June was off the table, and
Speaker 1: I felt a little nervous about that until we saw
Speaker 1: this number. So I think June is off, and then
Speaker 1: I think you have to really wonder about July, and
Speaker 1: then September is tough for me. I'm not saying the
Speaker 1: FED is political. I'm just saying, do you really want
Speaker 1: to start a cutting or an easy or to even
Speaker 1: do just one right before an election? I think, you know,
Speaker 1: if the data justified it, maybe, but if there's any
Speaker 1: question mark, you wait.
Speaker 5: So I think that.
Speaker 1: Should really reduce the market should be reduce seeing the
Speaker 1: probability of that September cut as well, so everything I
Speaker 1: think is just going to get pushed out as possible.
Speaker 1: We only get one, and that would be contingent upon
Speaker 1: a second half that looks more like last year's second half,
Speaker 1: which could happen here. I don't want to get too
Speaker 1: caught up in the inflation many at the moment too
Speaker 1: emotional about it, but it's entirely possible that we could
Speaker 1: run the year without without.
Speaker 6: Getting the caught.
Speaker 1: At this point, I think that's a likely scenario that
Speaker 1: investors should consider.
Speaker 5: Jeffery, how about just kind of the economic call here,
Speaker 5: soft landing, no landing, how do you kind of think
Speaker 5: this see economies behaving right now?
Speaker 3: I heard hot landing, hot landing. Yeah, I don't really
Speaker 3: know what that is, but I heard about that today. Okay,
Speaker 3: so we've been sort of operating with the no landing.
Speaker 1: You know, it would be an acceleration in GDP and
Speaker 1: acceleration inflation, a new low in the unemployment rate. We're
Speaker 1: not quite in that scenario yet. Maybe that's more the
Speaker 1: hot the hot landing scenario. Then we said, okay, sticky,
Speaker 1: sticky inflation. That's where inflation on core CPI hangs out.
Speaker 1: I don't know three, you know, three eight to four percent,
Speaker 1: somewhere in that range on a year on year basis,
Speaker 1: good growth above trend growth, the unemployment rates stays low.
Speaker 1: So it feels like that's the scenario we're with. We're
Speaker 1: in the sticky inflation scenario. The soft landing is if
Speaker 1: you need to see a further moderation and inflation. So
Speaker 1: at present we're in we're not in the soft landing
Speaker 1: scenario in my view. Now the ones I would say,
Speaker 1: if people are getting too pessimistic about things, I mean,
Speaker 1: there's a worse scenario, which would be a stagflation type
Speaker 1: scenario where we do have this inflation that we're seeing,
Speaker 1: but growth is struggling, and that is not what we're
Speaker 1: seeing the jobs report on Friday. We're still seeing aggregate
Speaker 1: income growth six to seven percent, So we're seeing good
Speaker 1: income growth that is feeding into spending, that is keeping
Speaker 1: price pressures. It's not a terrible situation. Good growth, higher
Speaker 1: than expected inflation. So don't be too bearish about things
Speaker 1: out there. I'm looking for a bond firm here, but
Speaker 1: I feel like this is advice to the equity investors
Speaker 1: in some way.
Speaker 3: We get it. We get it. We were talking to
Speaker 3: a Francis Donald a Manu Life earlier in the last hour,
Speaker 3: and she basically, if I summarize that there is a
Speaker 3: narrative out there that this is Powell's fault that he
Speaker 3: called sort of the pivot in December two early and
Speaker 3: that actually reignited the economy, I'm really loose in financial conditions.
Speaker 3: Is is there truth to that?
Speaker 1: I don't think so, you know, I want to defend
Speaker 1: Chair Pally. I think he's done a great job. I'm
Speaker 1: not being paid for this defense. But look, he said, hey,
Speaker 1: we had great progress in the second half of last year.
Speaker 1: If that progress continues. There's a case that we don't
Speaker 1: need to be at five point thirty on the funds rate.
Speaker 5: We can reduce.
Speaker 1: We don't want to over type. That's what he said.
Speaker 1: And he also said, we need to see greater confidence.
Speaker 1: We want to see more data like we've seen in
Speaker 1: the second half of last year. Well, guess what, everyone,
Speaker 1: every investor can look at this. We have not seen
Speaker 1: more data like we saw in the second half of
Speaker 1: last year. It's come in hotter. So I think he
Speaker 1: set it up nicely. The problem is investors they hear
Speaker 1: what they want to hear. I do think a lot
Speaker 1: of mom investors. It's been a painful couple of years.
Speaker 3: I get it.
Speaker 1: They wanted they wanted rates to go lower, they wanted cotts,
Speaker 1: and so there was more hope than it was you know,
Speaker 1: actual reading of the economic data. In my view, so
Speaker 1: I don't blame the I don't blame the FED for this.
Speaker 1: Investors need to look in the mirror and not find
Speaker 1: some scapeboat out there and you know in foggy bottom
Speaker 1: and d C.
Speaker 5: All right, Jeffrey, thank you so much for joining U.
Speaker 5: Jeffrey Cleveland, chief economist at paid in and regal based
Speaker 5: in La joining us via zoom. In just moments, we're
Speaker 5: going to be going to former US Treasury Secretary Larry Summers.
Speaker 5: He'll be sitting down with Bloomberg's David Weston talk about
Speaker 5: the CPI print.
Speaker 4: YEP.
Speaker 3: There's some interesting tidbits though that you just want to
Speaker 3: dive into a little bit with the numbers. So apparently
Speaker 3: care of invalids and the elderly at home soared five
Speaker 3: point nine percent from February. Okay, how does the and
Speaker 3: that's just you. You would imagine that's going to get
Speaker 3: so much worse as the baby boomers age. It's gonna
Speaker 3: be pretty dicey.
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Speaker 3: So lots of drama unfolding after that hot CPI pause,
Speaker 3: I'm bringing it up the verb function WRP. That's where
Speaker 3: you go to see what everyone's sort of thinking about
Speaker 3: Wall Street and investors alike, about what the Fed's going
Speaker 3: to do, and it's currently pricing in about two cuts. Man,
Speaker 3: that is a very different kind of scenario than we
Speaker 3: saw just a few months ago. Well, let's break it down.
Speaker 3: Sally Bakewell is Bloomberg US Finance team leader and she
Speaker 3: joins us. Now, Sally, as we dig through here, how
Speaker 3: many reports are in your inbox about pushing a FED
Speaker 3: cut back from June two?
Speaker 9: Yes, approximately two thousand of the mire in my in box.
Speaker 9: And I think the sort of the level of uncertainty remains,
Speaker 9: but I guess they are. There is this sort of
Speaker 9: clear expectation of a path to cutting and around that.
Speaker 9: Wall Street banks which will start reporting on Friday, are
Speaker 9: probably going to have to be rethinking some of the
Speaker 9: guidance they've given on one of their key sources of revenue,
Speaker 9: which is.
Speaker 3: Net interest income.
Speaker 9: They had, you know, just a few months ago worn
Speaker 9: that they would probably have to probably see a slide
Speaker 9: in this metric. But it's looking like they'll be able
Speaker 9: to up some of the guidance on this now.
Speaker 5: Yeah, it's interesting. I'm looking at the reporters in this
Speaker 5: story on your team here put in some you know,
Speaker 5: showed some of the big banks for providing twenty twenty
Speaker 5: four guidance and pretty conservative looking, and I guess it
Speaker 5: reflected kind of what they were thinking at the time,
Speaker 5: which is the markets pricing and six rate cuts. We
Speaker 5: have to reflect that in our P and L. So
Speaker 5: do you think we'll see revised guidance here? Is that
Speaker 5: some of the issues?
Speaker 9: I mean, I think that's what analysts expect. I think
Speaker 9: investors are also optimistic of that. And the big question
Speaker 9: seems to be JP Morgan. It is being looked at
Speaker 9: as one that did have particularly conservative guidance at about
Speaker 9: ninety billion of net interest income for twenty twenty four,
Speaker 9: and it may have to up that based on the
Speaker 9: fact that you know that was they brought that out
Speaker 9: when you know they're expecting as many as six rate cuts,
Speaker 9: and now if they're only two, they'll they'll probably have
Speaker 9: to revise it. And Wells Fargo is another one being
Speaker 9: discussed in the same vein. But I think analysts is
Speaker 9: saying a lot of the big banks, which are sort
Speaker 9: of more asset sensitive than the regional lenders, could have
Speaker 9: to rethink their guidance.
Speaker 3: But that only holds in a good way if the
Speaker 3: loan demand is also good, right, I mean, that's the
Speaker 3: whole idea. Will loan demand be good?
Speaker 9: Well, I think for the as we see banks reporting
Speaker 9: earnings on Friday, we are expecting to see quite a
Speaker 9: subdued loan demand because the sort of lagging effect of
Speaker 9: higher rates is still ongoing. But yes, interest rates come down,
Speaker 9: that is in theory sort of big tail wind for
Speaker 9: lending because people start to borrow more. And I think
Speaker 9: it should in theory be a sort of positive thing.
Speaker 9: But there are there remain uncertainties here that might sort
Speaker 9: of cloud the kind of expectations that loan demand could
Speaker 9: come roaring back.
Speaker 5: Yeah, I mean just on Monday, just looking in this
Speaker 5: article here from Bloomberg. On Monday, JP Morgan chief executive
Speaker 5: Officer Jamie Diamond delivered a warning on the economy. So
Speaker 5: you know, he might say, there was CFO and investor
Speaker 5: relations person saying, well, wait wait wait, wait, wait wait wait,
Speaker 5: I don't think we need to be taking up our
Speaker 5: guidance here a little bit because he may have some
Speaker 5: underlying concerns about the economy exactly.
Speaker 9: And actually, you know people are saying that potentially JP
Speaker 9: Morgan anyway, waits till it's invested a if it wants
Speaker 9: to boost its guidance and does it then, and that's
Speaker 9: in late May, but definitely, I mean Jamie Diamond, he
Speaker 9: kind of gave his his couched assessment of the economy,
Speaker 9: which is that consumers remain healthy and they are spending,
Speaker 9: but there are all kinds of inflation repressures. There's this
Speaker 9: very difficult geopolitical backdrop the transition to sort of green,
Speaker 9: a greener economy, ongoing fiscal spending, all these inflationary pressures
Speaker 9: that actually are a big overhang to sort of, you know,
Speaker 9: a really robust economy continuing, and that could definitely end
Speaker 9: up dampening sort of the consumer's ability to borrow.
Speaker 5: And that investor day for JP Morgan is May twentieth.
Speaker 3: All right, marketing calendar. Maybe we should yeah, oh good,
Speaker 3: idea take radio down there. Okay, here's my pet, Peeve Marcus.
Speaker 3: So we are familiar with Marcus. Okay, it's Goldman Sachs's
Speaker 3: high yield savings account. Right. They lowered their rate ten
Speaker 3: basis points on what Friday. That's not okay. The Fed
Speaker 3: hasn't done anything. What's going on? And that's my personal
Speaker 3: way of talking about the deposit beta when it comes
Speaker 3: to these big banks. And then what the Fed's doing.
Speaker 9: Right, I mean I think that all they continue to
Speaker 9: be under pressure to stop customers going to other high
Speaker 9: yielding options, and I suspect that's you know what Marcus
Speaker 9: is doing.
Speaker 3: Oh they cut it. Oh, I say cut it ten
Speaker 3: basis points Okay, okay, to be fair, right, it's like
Speaker 3: four point six percent. They took it to four point
Speaker 3: five or something like that.
Speaker 5: Put it on an account of your size. That's real money.
Speaker 3: I mean, we're looking like billions at this point. But still,
Speaker 3: I mean, but the idea that they're already kind of
Speaker 3: front running cuts that may not happen or September.
Speaker 7: Wow, I mean that's fascinating.
Speaker 5: So what are the bank? Yeah? So what are the banks?
Speaker 5: I mean, as we were talking about before, one of
Speaker 5: the things is just simply are they making loans out there?
Speaker 5: Are they suffering charge offs? So what do we think
Speaker 5: that we're going to hear from the banks as relates
Speaker 5: to credit quality and charge offs of their loans? They
Speaker 5: think things like that because I know that's a big metric.
Speaker 9: Well, I think charge offs are expected to be pretty
Speaker 9: stable actually, and again I think that's another sort of
Speaker 9: signifier and indication of consumers being in relatively decent health,
Speaker 9: but of course they were reliant to a degree on
Speaker 9: a lot of the savings they are massed during the pandemic,
Speaker 9: and those of course have faded and will continue to fade.
Speaker 9: So again, the situation with charge offs seems pretty stable
Speaker 9: at the moment, but there are those headwinds. And I
Speaker 9: think also a lot of banks are expected to set
Speaker 9: aside more money in provisions this quarter than they have
Speaker 9: done in the previous quarter a year ago, which is
Speaker 9: another indication that they see sort of storm clouds on
Speaker 9: the horizon and that people will start to default on
Speaker 9: their loans, and loans will sell, and they all need
Speaker 9: to be able to cover the cost of those.
Speaker 3: We've seen M and A started to pick up, investment
Speaker 3: banking started to pick up. Is that going to be
Speaker 3: squashed a bit if we still have higher for longer?
Speaker 3: I think this.
Speaker 9: Is really interesting. It seems like a lot of the
Speaker 9: investment community and companies have gotten somewhat used to this,
Speaker 9: the current interest rates situation and the current uncertainty, which
Speaker 9: sounds a little bit paradoxical to say, and for that
Speaker 9: reason they have been more willing to do some deals.
Speaker 9: We've seen a pickup in deals. We've seen IPOs sort
Speaker 9: of start to slightly rebound, so I think higher for
Speaker 9: longer hasn't been a huge there's been a persistent deal
Speaker 9: slump for months and months and months. But investors have
Speaker 9: started to get used to to this sort of uncertain
Speaker 9: rate path, I think, and so they have been coming
Speaker 9: out of the woodwork a little bit interesting.
Speaker 3: Or could you see the certainty Well you're the former
Speaker 3: investor there coming in us in banker. Is it the
Speaker 3: rate or is it just a certainty or the trajectory?
Speaker 5: It's just the trajectory here. So I mean, I think,
Speaker 5: you know, we're I think the market's more normalised. We're
Speaker 5: seeing investment grade market be very robust because you know,
Speaker 5: they can get deals done and so they're going to
Speaker 5: get them done. Could they have gotten them done at
Speaker 5: a lower rate two years ago, Yeah, but that's that's
Speaker 5: two years ago. Here we are, I mean need to
Speaker 5: we need to fund growth. So again just a trajectory
Speaker 5: of where things are going. So anyway, Sally, thank you
Speaker 5: so much. We appreciate it. Sally bake Well, us finance
Speaker 5: team leader for Bloomberg News uh with the article out
Speaker 5: today from her team Wall Street banks may redo key
Speaker 5: profit guidance on fewer red cuts, i e. Take net
Speaker 5: interest income forecast a little bit higher.
Speaker 3: Yeah, that'd be really interesting to be and just that
Speaker 3: even if they don't do it for their earning season,
Speaker 3: like recalibrating it, just the commentary on the calls will
Speaker 3: be quite interesting and I'm sure that analysts will be
Speaker 3: all over them to add that question. So that'll be
Speaker 3: very interesting indeed. And also for the JP Morgan, the
Speaker 3: city in the Bank of America, the consumer part of
Speaker 3: it and how their charge offs are doing and what
Speaker 3: their read is on the consumer. As Frances Donald was
Speaker 3: talking about, just two totally different worlds, two totally different consumers.
Speaker 5: Yep. Absolutely, So we'll see JP Morgan reporting on Friday,
Speaker 5: so that'll be You're off though, I'm off you darnel right,
Speaker 5: I'm long.
Speaker 3: He's not going to care till Monday.
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