1 00:00:02,640 --> 00:00:05,320 Speaker 1: Welcome to the Bloomberg Penl podcast. I'm Paul Sweene. You, 2 00:00:05,360 --> 00:00:07,680 Speaker 1: along with my co host Lisa Brahma wits each day 3 00:00:07,720 --> 00:00:10,240 Speaker 1: we bring you the most noteworthy and useful interviews for 4 00:00:10,280 --> 00:00:12,520 Speaker 1: you and your money, whether at the grocery store or 5 00:00:12,560 --> 00:00:15,480 Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple 6 00:00:15,520 --> 00:00:17,959 Speaker 1: podcast or wherever you listen to podcasts, as well as 7 00:00:17,960 --> 00:00:23,320 Speaker 1: at Bloomberg dot com. Well, it certainly looks like the 8 00:00:23,360 --> 00:00:27,200 Speaker 1: media spotlight is back on the US regional bank business. Uh, 9 00:00:27,280 --> 00:00:29,960 Speaker 1: given today's big deal BB and T is merging with 10 00:00:30,000 --> 00:00:33,519 Speaker 1: SunTrust Banks in a twenty eight billion dollar deal, creating 11 00:00:33,560 --> 00:00:36,120 Speaker 1: the sixth largest bank in the US. To help us 12 00:00:36,120 --> 00:00:38,199 Speaker 1: break it this deal down and what it means for 13 00:00:38,240 --> 00:00:40,560 Speaker 1: the sector overall that, we have two interesting guests today 14 00:00:40,560 --> 00:00:42,360 Speaker 1: that will help us do that. First is Chris Whale 15 00:00:42,360 --> 00:00:45,280 Speaker 1: and chairman of Whale and Global Advisers. He's on the 16 00:00:45,280 --> 00:00:48,559 Speaker 1: phone in New York. And Arnold Cacuda. Arnold is a 17 00:00:48,640 --> 00:00:52,400 Speaker 1: senior credit analyst carving the global banking sector for Bloomberg Intelligence. 18 00:00:52,400 --> 00:00:54,640 Speaker 1: He joins us in our Bloomberg eleven three oh studios 19 00:00:54,680 --> 00:00:57,080 Speaker 1: here in New York. Gentlemen, thank you for joining US. 20 00:00:57,080 --> 00:01:00,280 Speaker 1: I'll start with you, Chris, what do you make of 21 00:01:00,400 --> 00:01:03,240 Speaker 1: this deal? Why did this deal happen? Why did it happen? Now? 22 00:01:04,360 --> 00:01:07,600 Speaker 1: I think mostly this is about cost savings. Uh. These 23 00:01:07,640 --> 00:01:12,160 Speaker 1: are two very consistent performers. They're big, um, they're probably 24 00:01:12,319 --> 00:01:14,640 Speaker 1: two of the largest banks. It would be allowed to 25 00:01:14,760 --> 00:01:18,080 Speaker 1: do a deal by regulators right now. U S Bank 26 00:01:18,120 --> 00:01:20,200 Speaker 1: could also do a deal if they chose to. But 27 00:01:20,280 --> 00:01:22,480 Speaker 1: they like the size they're at, which is roughly where 28 00:01:22,520 --> 00:01:24,560 Speaker 1: these two banks are going to be. And you look 29 00:01:24,600 --> 00:01:26,720 Speaker 1: at the asset and equity returns and like I say, 30 00:01:26,760 --> 00:01:29,640 Speaker 1: they're dead center of peer group one, which is all 31 00:01:29,640 --> 00:01:32,600 Speaker 1: the big banks and anything above ten billion in assets. 32 00:01:32,680 --> 00:01:35,280 Speaker 1: So you know to me, they're going to consolidate the 33 00:01:35,280 --> 00:01:37,640 Speaker 1: back end. They're going to keep doing what they're doing. 34 00:01:37,959 --> 00:01:41,960 Speaker 1: They have slightly lower funding costs and the big banks, 35 00:01:42,280 --> 00:01:46,360 Speaker 1: and they're good CNI lenders, kind of middle market lenders. 36 00:01:46,640 --> 00:01:49,000 Speaker 1: RESI is not a huge part of their book in 37 00:01:49,000 --> 00:01:51,440 Speaker 1: either case. Although sun Trusts used to be very big 38 00:01:51,760 --> 00:01:56,200 Speaker 1: in residential lending before the crisis. UM, But unlike a 39 00:01:56,280 --> 00:01:59,200 Speaker 1: US bank, they don't have that big trust business at 40 00:01:59,200 --> 00:02:02,560 Speaker 1: big off balance cheap component that would make them a 41 00:02:02,600 --> 00:02:05,640 Speaker 1: money center. So there's still a big, big regional bank. 42 00:02:05,680 --> 00:02:08,360 Speaker 1: Now if you look in the evaluations one point three 43 00:02:08,440 --> 00:02:12,200 Speaker 1: one point four Tom's book about the same. So Arnold, 44 00:02:12,240 --> 00:02:16,480 Speaker 1: come on in here, Arnold Cucuta of Bloomberg Intelligence. Is 45 00:02:16,520 --> 00:02:19,200 Speaker 1: there a risk that when banks start to get very 46 00:02:19,280 --> 00:02:22,679 Speaker 1: big through consolidation, that they start feeling compelled to take 47 00:02:22,720 --> 00:02:25,160 Speaker 1: on more risk and go global? Is that sort of 48 00:02:25,160 --> 00:02:27,800 Speaker 1: a concern from a credit perspective or is this wholly 49 00:02:27,880 --> 00:02:31,200 Speaker 1: a positive? Well, so far it looks like, um, you know, 50 00:02:31,240 --> 00:02:34,480 Speaker 1: the combined entities, Uh, they're they're asset quality, credit quality 51 00:02:34,600 --> 00:02:36,840 Speaker 1: is going to be you know towards the better end appears, 52 00:02:36,840 --> 00:02:38,840 Speaker 1: and you know they're not talking about you know, taking 53 00:02:38,840 --> 00:02:40,960 Speaker 1: on more risk if anything. You know, they have a 54 00:02:41,040 --> 00:02:43,920 Speaker 1: good um you know, synergies overlap in the mid Atlantic. 55 00:02:44,040 --> 00:02:46,079 Speaker 1: You got you got UM B, B and T more 56 00:02:46,120 --> 00:02:49,680 Speaker 1: mid Atlantic focus and then um UM sun Trust who 57 00:02:49,680 --> 00:02:51,920 Speaker 1: has more of a Southeast and mid Atlantic so you know, 58 00:02:51,960 --> 00:02:54,320 Speaker 1: taking out costs the first thing, and then that's going 59 00:02:54,360 --> 00:02:56,720 Speaker 1: to help their effigiency ratio, which is basically your costs 60 00:02:56,720 --> 00:02:58,400 Speaker 1: as a percentage of revenue, which is going to be 61 00:02:58,440 --> 00:03:01,640 Speaker 1: pure leading exceeding even lower than even US bank corps, 62 00:03:01,840 --> 00:03:05,000 Speaker 1: which should bring their returns their profitability to the highest 63 00:03:05,000 --> 00:03:07,120 Speaker 1: of the peer group. So you know that that's something 64 00:03:07,160 --> 00:03:09,400 Speaker 1: that you know, really that's what the equity trade on, 65 00:03:09,560 --> 00:03:11,760 Speaker 1: is profitability. And if that's going to take that higher 66 00:03:11,760 --> 00:03:13,600 Speaker 1: than US Bancorp, you know, there's a lot to like, 67 00:03:13,800 --> 00:03:16,200 Speaker 1: and I think you see it in the stock reaction today. 68 00:03:16,280 --> 00:03:19,760 Speaker 1: So Chris is interesting to note that. I'm sorry, Chris, No, 69 00:03:19,960 --> 00:03:22,280 Speaker 1: they are efficient. They're very good at what they do, 70 00:03:22,440 --> 00:03:25,680 Speaker 1: especially BB and T s I I described this as 71 00:03:25,720 --> 00:03:29,600 Speaker 1: an exemple are getting together with a very good UH bank. 72 00:03:30,040 --> 00:03:32,079 Speaker 1: You know, BB and T as far as lending and 73 00:03:32,160 --> 00:03:35,680 Speaker 1: overall operational efficiency is great. But what they don't have 74 00:03:35,880 --> 00:03:39,560 Speaker 1: is that huge funding advantage you know, forty plus basis 75 00:03:39,560 --> 00:03:43,000 Speaker 1: points the US Bank has because of their their float 76 00:03:43,480 --> 00:03:46,720 Speaker 1: from their custodial business and everything else They're They're funding 77 00:03:46,760 --> 00:03:49,720 Speaker 1: costs is half of the average for peer group one, 78 00:03:49,760 --> 00:03:52,880 Speaker 1: which is extraordinary, and that's because you have a lot 79 00:03:52,880 --> 00:03:55,320 Speaker 1: of employers and a lot of other customers who just 80 00:03:55,440 --> 00:03:59,720 Speaker 1: leave money on deposit with US Bank. Chris, I mean 81 00:04:00,400 --> 00:04:02,440 Speaker 1: both you as well as Arnold. Both of you are 82 00:04:02,680 --> 00:04:07,320 Speaker 1: talking very positively about this transaction. The stock but to 83 00:04:07,360 --> 00:04:09,880 Speaker 1: your question, Yes, the answer is yes, but we have 84 00:04:09,920 --> 00:04:13,720 Speaker 1: to chase bigger loans, yes, no question. In other words, 85 00:04:13,760 --> 00:04:16,880 Speaker 1: take more risk. Yeah, and they don't bank the way 86 00:04:16,880 --> 00:04:19,679 Speaker 1: a community bank banks. So bank at the community level 87 00:04:19,720 --> 00:04:23,599 Speaker 1: knows our customers. Once you see these large mergers, the 88 00:04:23,640 --> 00:04:27,800 Speaker 1: ability of the branch managers of those banks gets constrained 89 00:04:28,120 --> 00:04:30,400 Speaker 1: because the Fed starts to look at them like a 90 00:04:30,440 --> 00:04:33,880 Speaker 1: big bank. To your point, right, they end up in 91 00:04:33,920 --> 00:04:36,760 Speaker 1: a world where the law of large numbers governs their 92 00:04:36,839 --> 00:04:40,640 Speaker 1: production more than know your customer. And that's why the 93 00:04:40,720 --> 00:04:44,159 Speaker 1: small bank is much better at managing credit. So Arnold, 94 00:04:44,440 --> 00:04:46,520 Speaker 1: is that is that consistent with what you've seen in 95 00:04:46,640 --> 00:04:52,320 Speaker 1: terms of smaller banks taking on a bit uh perhaps risk, 96 00:04:52,600 --> 00:04:55,520 Speaker 1: but they actually know who they're dealing with, whereas at 97 00:04:55,520 --> 00:04:59,200 Speaker 1: big banks, customers become numbers and there can be more 98 00:04:59,320 --> 00:05:01,640 Speaker 1: sort of holess stick credit concerns. I mean, there is 99 00:05:01,640 --> 00:05:04,440 Speaker 1: a concern with that right where you know, they say 100 00:05:04,480 --> 00:05:08,159 Speaker 1: scale helps profitability, but then again, well, if you're having 101 00:05:08,240 --> 00:05:10,760 Speaker 1: a fewer eyeballs or technology to kind of look through 102 00:05:10,800 --> 00:05:15,400 Speaker 1: something while your revenues increasing, things can fall through the track. Cox. 103 00:05:15,440 --> 00:05:18,039 Speaker 1: But you know, then again it's uh, you get efficiencies 104 00:05:18,080 --> 00:05:20,440 Speaker 1: and technology, right, so you know, the more you can 105 00:05:20,440 --> 00:05:22,359 Speaker 1: invest there and then you have a bigger based to 106 00:05:22,680 --> 00:05:25,279 Speaker 1: kind of offset it over then then yes, definitely, I 107 00:05:25,279 --> 00:05:27,120 Speaker 1: think I think that helps too. But but more so 108 00:05:27,160 --> 00:05:30,600 Speaker 1: I think, um, you know, in terms of added oversight, um, 109 00:05:30,640 --> 00:05:33,400 Speaker 1: you know the two fifty billion there, they're both exceeding that, right, 110 00:05:33,440 --> 00:05:36,839 Speaker 1: Yet you're taking to two billion banks pretty much doubling 111 00:05:36,839 --> 00:05:39,080 Speaker 1: the size. You're gonna go over two hundred fifty billion. 112 00:05:39,120 --> 00:05:41,600 Speaker 1: But a key thing I think that is driving this 113 00:05:41,680 --> 00:05:44,880 Speaker 1: merger and that I think will drive even more regional 114 00:05:44,880 --> 00:05:48,520 Speaker 1: bank mergers is uh this October proposal by the FED 115 00:05:48,680 --> 00:05:52,800 Speaker 1: which really lowers regulation for the regional banks, and so 116 00:05:52,880 --> 00:05:55,040 Speaker 1: kind of the new threshold to look at I think 117 00:05:55,120 --> 00:05:58,160 Speaker 1: in terms of big regional banks is seven billion, right, 118 00:05:58,200 --> 00:06:01,320 Speaker 1: and so US bank Corps four than seventy billion, and 119 00:06:01,400 --> 00:06:02,960 Speaker 1: you still got a long way to go from that. 120 00:06:03,040 --> 00:06:05,400 Speaker 1: So I think as long as you stay under seven bill, 121 00:06:05,920 --> 00:06:08,520 Speaker 1: you're still going to get this you know, less regulation 122 00:06:08,960 --> 00:06:10,880 Speaker 1: that that that's going to come into sex right October. 123 00:06:11,480 --> 00:06:15,000 Speaker 1: It's size, but it's also the composition of the business. 124 00:06:15,160 --> 00:06:17,560 Speaker 1: If you have a lot of touch points with many 125 00:06:17,640 --> 00:06:21,360 Speaker 1: other financial institutions, then even somebody is boring his Bank 126 00:06:21,400 --> 00:06:24,000 Speaker 1: of New York. I love them, right, but they're custodian. 127 00:06:24,400 --> 00:06:27,320 Speaker 1: They are very significant in the grand scheme of things. 128 00:06:27,960 --> 00:06:31,120 Speaker 1: US Bank has much more street exposure. And then another 129 00:06:31,160 --> 00:06:33,120 Speaker 1: one that you know we could have talked about in 130 00:06:33,160 --> 00:06:35,560 Speaker 1: this group is P and C. P and C is 131 00:06:35,720 --> 00:06:38,600 Speaker 1: much more Wall Street exposure than a BBT or a 132 00:06:38,680 --> 00:06:42,520 Speaker 1: sun Trust. You know, these are two commercial lenders. They 133 00:06:42,560 --> 00:06:45,240 Speaker 1: come from the Southeast, which was a tough area. It 134 00:06:45,360 --> 00:06:48,480 Speaker 1: still is. The the off market areas still haven't come 135 00:06:48,520 --> 00:06:52,560 Speaker 1: back in the Southeast. So you know, it's an interesting merger. 136 00:06:52,600 --> 00:06:54,640 Speaker 1: But I agree with my colleague. I think could cost 137 00:06:54,800 --> 00:06:57,760 Speaker 1: savings is driving this um and there was nothing else 138 00:06:57,800 --> 00:06:59,920 Speaker 1: to do. They could buy a smaller bank, but it's 139 00:07:00,080 --> 00:07:03,200 Speaker 1: not going to move the needle um sold. The street 140 00:07:03,240 --> 00:07:05,880 Speaker 1: barely cares about this transaction. Let's be fair. We all 141 00:07:05,920 --> 00:07:09,680 Speaker 1: love banks, but you know it's not that big, right 142 00:07:09,720 --> 00:07:12,440 Speaker 1: so Arnold. So the obviously the equity markets like this deal. 143 00:07:12,480 --> 00:07:15,640 Speaker 1: Both SunTrust and BBT stocks are up. There's a credit 144 00:07:15,680 --> 00:07:19,240 Speaker 1: market support consolidation in the banking sector. Well, um, you know, 145 00:07:19,320 --> 00:07:21,240 Speaker 1: unlike M and A and other space where you know, 146 00:07:21,320 --> 00:07:24,800 Speaker 1: typically you'd see huge bond deals, sit to finances. This 147 00:07:24,920 --> 00:07:27,680 Speaker 1: is an all stock, um, you know merger, and then 148 00:07:27,720 --> 00:07:29,840 Speaker 1: you know you don't need that financing. And and the 149 00:07:29,840 --> 00:07:32,040 Speaker 1: thing with that is, you know, banks are highly regulated. 150 00:07:32,320 --> 00:07:34,760 Speaker 1: They need to keep their equity ratios you know where 151 00:07:34,800 --> 00:07:37,080 Speaker 1: they are or you know, at at high levels. And 152 00:07:37,080 --> 00:07:39,960 Speaker 1: and even post merger, you know, they they're still targeting 153 00:07:40,520 --> 00:07:42,840 Speaker 1: a ten percent common equity at one ratio, which is 154 00:07:42,880 --> 00:07:45,440 Speaker 1: you know, still pretty solid. So um and and and 155 00:07:45,480 --> 00:07:47,160 Speaker 1: the thing is, you know we talk about size. They're 156 00:07:47,160 --> 00:07:50,280 Speaker 1: increasing in size, but they're not going to become global 157 00:07:50,360 --> 00:07:53,960 Speaker 1: systemically important banks, right. Um. You know, you know, Chris 158 00:07:53,960 --> 00:07:57,679 Speaker 1: talked about kind of the state streets the US bank course, 159 00:07:57,720 --> 00:08:01,000 Speaker 1: but I'm sorry, I'm the being hy melon. But those guys, 160 00:08:01,040 --> 00:08:05,000 Speaker 1: even though asset wise they're not that big, they're huge 161 00:08:05,040 --> 00:08:09,720 Speaker 1: custol Global custolial presence makes them highly systemically important. Right, 162 00:08:09,720 --> 00:08:12,440 Speaker 1: So that's why they're they're considered gesip's higher equity and 163 00:08:12,520 --> 00:08:15,560 Speaker 1: debt requirements. So this is not the case for you know, 164 00:08:15,600 --> 00:08:17,320 Speaker 1: the merger that we see today. Well, I'm sure that 165 00:08:17,360 --> 00:08:19,520 Speaker 1: we will have you both back on when we announce er. 166 00:08:19,680 --> 00:08:22,960 Speaker 1: We discussed the next merger between a two regional banks 167 00:08:22,960 --> 00:08:25,960 Speaker 1: that will inevitably get to announced based on this backdrop. 168 00:08:26,040 --> 00:08:28,440 Speaker 1: That makes a lot of sense for them to do so. 169 00:08:28,520 --> 00:08:31,960 Speaker 1: Chris Whale and chairman of Whaling Global Advisors, and Arnold Cakuta, 170 00:08:32,080 --> 00:08:35,040 Speaker 1: senior credit analyst of focusing on the global banking sector 171 00:08:35,120 --> 00:08:37,760 Speaker 1: for Bloomberg Intelligence, joining us here in our Bloomberg Director 172 00:08:37,800 --> 00:08:40,000 Speaker 1: Broker Studios. Both of you, thank you so much for 173 00:08:40,040 --> 00:08:57,920 Speaker 1: being with us. So Earlier this week we were speaking 174 00:08:57,960 --> 00:09:00,040 Speaker 1: with the head of fixed income for JP Morgan's of 175 00:09:00,120 --> 00:09:02,560 Speaker 1: a Bank, Tom Kennedy, who said that when the FED 176 00:09:02,640 --> 00:09:05,840 Speaker 1: talks about being patient with raising rates, it means they're 177 00:09:05,840 --> 00:09:07,640 Speaker 1: not going to raise rates for the next three months, 178 00:09:07,679 --> 00:09:10,360 Speaker 1: but then they're gonna be data dependent again. Joining us 179 00:09:10,360 --> 00:09:12,559 Speaker 1: now to weigh in on that and all things fixed 180 00:09:12,559 --> 00:09:15,720 Speaker 1: income is Kevin get Us, Executive vice president and head 181 00:09:15,800 --> 00:09:18,559 Speaker 1: of fixed Income for Raymond James, joining us here in 182 00:09:18,600 --> 00:09:21,320 Speaker 1: our bloombergiddera active broker's studios. So, Kevin, what do you 183 00:09:21,360 --> 00:09:24,400 Speaker 1: make of that? Well, I would say that it actually 184 00:09:24,440 --> 00:09:28,520 Speaker 1: goes contrary to what Robert Kaplan said today about being patient. 185 00:09:28,600 --> 00:09:31,320 Speaker 1: I think patient uh to the FED is longer than 186 00:09:31,320 --> 00:09:33,880 Speaker 1: a three month period, So you know when we started 187 00:09:33,880 --> 00:09:37,800 Speaker 1: the year, UM, we thought that June could be the 188 00:09:37,840 --> 00:09:40,840 Speaker 1: next rate height and they would be on the sidelines 189 00:09:40,920 --> 00:09:44,160 Speaker 1: until then. It seems like that's now pushed to September 190 00:09:44,320 --> 00:09:46,840 Speaker 1: at a minimum, And some are saying, you know, and 191 00:09:46,880 --> 00:09:50,800 Speaker 1: if you look at FED funds probability index UM, the 192 00:09:50,840 --> 00:09:54,160 Speaker 1: next double digit chance of anything is the FED lowering 193 00:09:54,240 --> 00:09:57,600 Speaker 1: rates in January. So I actually think it means something 194 00:09:57,640 --> 00:09:59,719 Speaker 1: longer than three months, and I think the Fed will 195 00:09:59,800 --> 00:10:03,120 Speaker 1: kind I watched this market for the next uh probably 196 00:10:03,120 --> 00:10:06,079 Speaker 1: six to nine months. So alright, so the FED is 197 00:10:06,160 --> 00:10:08,839 Speaker 1: on the sidelines. What do you think gets them back 198 00:10:08,920 --> 00:10:11,080 Speaker 1: into the game, if you will, to re engage. What 199 00:10:11,120 --> 00:10:12,800 Speaker 1: do you think are the data points that they are 200 00:10:12,840 --> 00:10:16,360 Speaker 1: focusing on. It centers around inflation um, whether it's wage 201 00:10:16,440 --> 00:10:19,880 Speaker 1: or price. So as long as you know the latest 202 00:10:20,120 --> 00:10:23,240 Speaker 1: even the wage, our greatest hope for inflation came from wages, 203 00:10:23,360 --> 00:10:26,200 Speaker 1: right average early learning slowly ticked up during the course 204 00:10:26,200 --> 00:10:30,920 Speaker 1: of eighteen UM. Yet more recently it's appears to have 205 00:10:30,960 --> 00:10:34,040 Speaker 1: stopped um or you know, up one tenth or something 206 00:10:34,120 --> 00:10:37,120 Speaker 1: like that. So until we see really any wage inflation 207 00:10:37,720 --> 00:10:41,160 Speaker 1: UM price inflation will get numbers next week with further 208 00:10:41,200 --> 00:10:43,960 Speaker 1: definition it's just not there. The interesting thing is, and 209 00:10:44,000 --> 00:10:46,160 Speaker 1: somebody else has made this point, so I'm stealing it. 210 00:10:46,240 --> 00:10:49,480 Speaker 1: Just full disclosure. But last year the Federal Reserve hiked 211 00:10:49,800 --> 00:10:54,520 Speaker 1: numerous times, and the expected inflation over the next decade plummeted. 212 00:10:54,559 --> 00:10:56,960 Speaker 1: It fell off a cliff. There was no inflation pressures 213 00:10:57,040 --> 00:11:00,559 Speaker 1: last year, and yet the Feds still raised rates. So 214 00:11:00,840 --> 00:11:05,360 Speaker 1: what changed? What changed for the Fed? Yeah, they realized 215 00:11:05,360 --> 00:11:07,520 Speaker 1: they made a mistake by raising rates too many times. 216 00:11:07,559 --> 00:11:10,440 Speaker 1: And think that they realized they made a mistake. Yeah, 217 00:11:10,440 --> 00:11:12,360 Speaker 1: two out of the three mandates were met a long 218 00:11:12,400 --> 00:11:16,080 Speaker 1: time ago. The mandate of inflation has yet to be met. 219 00:11:16,120 --> 00:11:19,600 Speaker 1: And we touched two percent basically once for a short 220 00:11:19,640 --> 00:11:22,880 Speaker 1: period of time and then fell back slightly below it. 221 00:11:23,000 --> 00:11:25,160 Speaker 1: So you know, they got to their target. They said, okay, 222 00:11:25,160 --> 00:11:27,480 Speaker 1: here we go, this is the launch and and you 223 00:11:27,520 --> 00:11:30,600 Speaker 1: know around every corner is another brick wall for inflation. 224 00:11:30,720 --> 00:11:33,439 Speaker 1: So I think the world has just changed for us 225 00:11:33,480 --> 00:11:36,600 Speaker 1: to calculate inflation in the way that meets the FEDS 226 00:11:37,000 --> 00:11:39,160 Speaker 1: real mandate, and I think that they just missed it. 227 00:11:39,160 --> 00:11:41,320 Speaker 1: In fact, part of the global slowdown is because of that. 228 00:11:41,600 --> 00:11:43,320 Speaker 1: I want to push back a little bit because some 229 00:11:43,360 --> 00:11:45,480 Speaker 1: people could say you're like, all right, bring it, because 230 00:11:45,480 --> 00:11:47,880 Speaker 1: some people could say, all right, the inflation expectations were 231 00:11:47,880 --> 00:11:51,480 Speaker 1: falling last year, the Federal Reserve still raised rates, and 232 00:11:51,800 --> 00:11:55,680 Speaker 1: inflation has continued to accelerate, albeit not at the pace 233 00:11:55,760 --> 00:11:57,600 Speaker 1: that people would like to see. But wages are still 234 00:11:57,640 --> 00:11:59,719 Speaker 1: going up. Doesn't this say that they didn't make a 235 00:11:59,760 --> 00:12:01,800 Speaker 1: miss stake and that they were right to raise rates 236 00:12:01,800 --> 00:12:04,680 Speaker 1: to normalize? Yeah, I mean you can. You can certainly 237 00:12:04,720 --> 00:12:07,720 Speaker 1: make that argument. It's the problem is is you know 238 00:12:07,760 --> 00:12:10,920 Speaker 1: where are we now? UM? We're we've peeked and turned 239 00:12:10,920 --> 00:12:15,480 Speaker 1: back down UM or slight increases UM, it's not UM, 240 00:12:15,679 --> 00:12:18,199 Speaker 1: it's not hurting the job market, but it's not creating wealth. 241 00:12:18,200 --> 00:12:20,199 Speaker 1: It's going to help the economy. So you know, I 242 00:12:20,400 --> 00:12:22,840 Speaker 1: would say that um, the fet is going to do 243 00:12:22,920 --> 00:12:27,280 Speaker 1: more harm to the economy than meet the mandate of inflation. UM, 244 00:12:27,320 --> 00:12:31,040 Speaker 1: and I doubt will be at two percent all year long. So, Kevin, 245 00:12:31,040 --> 00:12:33,800 Speaker 1: as you're out and about talking to your clients, institutional 246 00:12:33,840 --> 00:12:37,320 Speaker 1: and retail clients, what are they doing? What do you sense? 247 00:12:37,320 --> 00:12:40,240 Speaker 1: It is the risk appetite. They really embraced this market 248 00:12:40,280 --> 00:12:42,760 Speaker 1: and are back in, you know, maybe allocating more of 249 00:12:42,800 --> 00:12:44,560 Speaker 1: an investment rate, the high yield and maybe going out 250 00:12:44,600 --> 00:12:46,600 Speaker 1: on the risk curve. What are you hearing from them? 251 00:12:46,640 --> 00:12:49,400 Speaker 1: You know, we've kind of UM, we've we've taken this 252 00:12:49,559 --> 00:12:55,240 Speaker 1: UM approach that UM, they needed a shortened duration last year, UM, 253 00:12:55,400 --> 00:12:59,080 Speaker 1: and UH still invest in quality and stay away from 254 00:12:59,160 --> 00:13:03,480 Speaker 1: some of the risk here aspects of the fixed income market. UM. 255 00:13:03,559 --> 00:13:05,960 Speaker 1: And that proved to be pretty true until the end 256 00:13:05,960 --> 00:13:08,040 Speaker 1: of the year. And then UM, you know, the Fed 257 00:13:08,080 --> 00:13:11,800 Speaker 1: put the brakes on the dollar UM. UH made some 258 00:13:11,800 --> 00:13:16,840 Speaker 1: some real fundamental changes, and UM it felt okay to 259 00:13:16,920 --> 00:13:19,839 Speaker 1: go back into risk. I think that what we're saying 260 00:13:19,840 --> 00:13:23,240 Speaker 1: this year is stay with quality UM. But you you 261 00:13:23,320 --> 00:13:26,160 Speaker 1: have the ability to go back out on the duration 262 00:13:26,200 --> 00:13:29,160 Speaker 1: curve UM with your investments without getting hurt. This is 263 00:13:29,160 --> 00:13:31,040 Speaker 1: so interesting to me because you're seeing this in et 264 00:13:31,160 --> 00:13:33,920 Speaker 1: F flows two and other people are doing this as well. UH. 265 00:13:34,040 --> 00:13:36,840 Speaker 1: Two funds that are actually they've seen the biggest withdrawals 266 00:13:36,880 --> 00:13:39,160 Speaker 1: year today in the fixed income space are too short 267 00:13:39,280 --> 00:13:41,600 Speaker 1: term US debt funds. In other words, it's a reversal 268 00:13:41,880 --> 00:13:44,720 Speaker 1: of the flight to cash last year, coming out of cash, 269 00:13:44,760 --> 00:13:47,600 Speaker 1: going into duration and going into risk. How long is 270 00:13:47,640 --> 00:13:50,240 Speaker 1: that gonna work? You know? It could work for a while. 271 00:13:50,280 --> 00:13:52,439 Speaker 1: I think, Look, the fundamental change of the bond market 272 00:13:52,480 --> 00:13:57,400 Speaker 1: actually actually occurred with the elections, which gave them the 273 00:13:57,440 --> 00:14:00,320 Speaker 1: Democrats back the house. So you know what what the 274 00:14:00,360 --> 00:14:03,520 Speaker 1: market was worried. If you remember, the MENI market was 275 00:14:03,679 --> 00:14:05,880 Speaker 1: um kind of on its heels for the first part 276 00:14:05,880 --> 00:14:09,000 Speaker 1: of the year because of the tax uh rebates and 277 00:14:09,240 --> 00:14:11,000 Speaker 1: things that they that were taking them away from what 278 00:14:11,120 --> 00:14:14,240 Speaker 1: was gonna fundamentally be able to finance in the state 279 00:14:14,240 --> 00:14:17,960 Speaker 1: county municipal market. That went away with the election, and 280 00:14:18,000 --> 00:14:20,680 Speaker 1: then so money started plunging back into the meuni market 281 00:14:20,800 --> 00:14:23,920 Speaker 1: is actually driven spreads tighter as well as some risk 282 00:14:24,000 --> 00:14:27,240 Speaker 1: and a lot of investment grade credits. So I think, um, 283 00:14:27,280 --> 00:14:29,920 Speaker 1: I think you have a real opportunity, um, and we're 284 00:14:29,920 --> 00:14:31,760 Speaker 1: not part of it. This is not a credit crisis 285 00:14:32,240 --> 00:14:33,920 Speaker 1: that we're in. It doesn't appear to be one in 286 00:14:33,960 --> 00:14:37,120 Speaker 1: the future. You don't have inflationary pressures that are gonna 287 00:14:37,400 --> 00:14:40,120 Speaker 1: gonna hurt the long in the market. You can swim 288 00:14:40,160 --> 00:14:42,040 Speaker 1: for a while out in the open water right now, 289 00:14:42,320 --> 00:14:45,600 Speaker 1: So just real quickly, any place you're telling your clients 290 00:14:45,640 --> 00:14:50,440 Speaker 1: to really just avoid. You know that this is a 291 00:14:50,520 --> 00:14:53,320 Speaker 1: we We've had about a five year stretch for yield 292 00:14:53,600 --> 00:14:55,880 Speaker 1: and UM. The offset to that is a down and 293 00:14:55,960 --> 00:15:00,120 Speaker 1: credit trade that UM still makes us nervous. UM. There's 294 00:14:59,920 --> 00:15:02,360 Speaker 1: a been a lot spoken about the legers woman market 295 00:15:02,400 --> 00:15:05,320 Speaker 1: that that index itself dropped pretty hard, then it came 296 00:15:05,360 --> 00:15:08,320 Speaker 1: back up UM. But we're still We're still a quality 297 00:15:08,480 --> 00:15:11,080 Speaker 1: UM quality buyer right now. So if you're going, if 298 00:15:11,080 --> 00:15:15,800 Speaker 1: you want to go along end, avoid triple C. Yeah. 299 00:15:15,840 --> 00:15:17,800 Speaker 1: So so long if you want to reach duration, you 300 00:15:17,840 --> 00:15:19,440 Speaker 1: reach it in your knees. If you want to reach 301 00:15:19,880 --> 00:15:22,560 Speaker 1: for yield, reach it inside of five years in corporates, 302 00:15:22,720 --> 00:15:26,640 Speaker 1: got it? Kevin? Kevin Gettish, thanks so much. Kevin's executive 303 00:15:26,680 --> 00:15:29,120 Speaker 1: vice president, head of fixed income from Raymond James based 304 00:15:29,120 --> 00:15:31,720 Speaker 1: in Memphis, Tennessee. But he joins us in our eleven 305 00:15:31,760 --> 00:15:52,400 Speaker 1: three oh studio today. Facebook's advertising model it's coming to 306 00:15:52,400 --> 00:15:55,360 Speaker 1: our attack, you know. Yet again it's particularly in Europe. 307 00:15:55,400 --> 00:15:58,360 Speaker 1: So what we've had just recently in Europe is German 308 00:15:58,440 --> 00:16:01,280 Speaker 1: antitrust regulators have ordered the social network to overall how 309 00:16:01,360 --> 00:16:05,520 Speaker 1: attracts its users internet browsing smartphone apps. This is once again, 310 00:16:05,560 --> 00:16:07,360 Speaker 1: I think if you think about Facebook and they're advertising 311 00:16:07,440 --> 00:16:09,880 Speaker 1: model and social media in general list. They're really kind 312 00:16:09,880 --> 00:16:13,760 Speaker 1: of coming under some increased regulatory oversight that investors, I 313 00:16:13,760 --> 00:16:15,720 Speaker 1: think in the back of the mind really have as 314 00:16:15,720 --> 00:16:20,200 Speaker 1: a risk factor here, they do accept shares are not 315 00:16:20,440 --> 00:16:22,680 Speaker 1: down that much, which is really the question I want 316 00:16:22,720 --> 00:16:25,560 Speaker 1: to ask Alex web about his European technology columnists with 317 00:16:25,640 --> 00:16:29,520 Speaker 1: Bloomberg Opinion joining us from London. Alex, why do shareholders 318 00:16:29,520 --> 00:16:32,120 Speaker 1: not care more about the fact that Germany is taking 319 00:16:32,120 --> 00:16:35,280 Speaker 1: a much harder stance with them. I think there's probably 320 00:16:35,280 --> 00:16:37,880 Speaker 1: two things that play here. On the one hand, it 321 00:16:37,960 --> 00:16:39,640 Speaker 1: might be prized into the share as already. You know, 322 00:16:39,680 --> 00:16:43,920 Speaker 1: we've seen this Facebook stock take a huge pummeling since 323 00:16:43,920 --> 00:16:46,960 Speaker 1: the middle of last year when it first said that 324 00:16:47,000 --> 00:16:49,000 Speaker 1: it was going to have to that its margins were 325 00:16:49,000 --> 00:16:51,960 Speaker 1: going to be impacted by some of the measures they're 326 00:16:51,960 --> 00:16:54,440 Speaker 1: putting in place to reduce the amount of dangerous content. 327 00:16:55,040 --> 00:17:02,080 Speaker 1: But equally, the this German UH decision probably will take 328 00:17:02,080 --> 00:17:03,480 Speaker 1: a while to play out. You know, there's going to 329 00:17:03,520 --> 00:17:06,720 Speaker 1: be an appeal process. It could then you know, ultimately 330 00:17:06,800 --> 00:17:10,960 Speaker 1: be overturned and and for now it's only in Germany. 331 00:17:10,960 --> 00:17:14,000 Speaker 1: What really becomes significant though, and this is the issue 332 00:17:14,040 --> 00:17:16,320 Speaker 1: with the German decision, is that Germany is seen as 333 00:17:16,320 --> 00:17:18,359 Speaker 1: the model for the rest of Europe. Germany was almost 334 00:17:18,359 --> 00:17:21,359 Speaker 1: given this as a test case by European authorities to 335 00:17:21,520 --> 00:17:24,040 Speaker 1: do the legwork and see what needed to be done, 336 00:17:24,320 --> 00:17:27,439 Speaker 1: and other European nations might start following suit. So, Alex, 337 00:17:27,440 --> 00:17:29,679 Speaker 1: what do you think is the risk that again, this 338 00:17:29,720 --> 00:17:32,480 Speaker 1: will be more of a European wide issue. We've seen 339 00:17:32,520 --> 00:17:36,320 Speaker 1: again just coming from the EU regulations against the facebooks 340 00:17:36,320 --> 00:17:37,800 Speaker 1: of the world's and the Googles of the world, and 341 00:17:37,880 --> 00:17:40,920 Speaker 1: just US technology companies in general taking a much harder 342 00:17:40,920 --> 00:17:43,560 Speaker 1: review of US tech. What is the risk or the 343 00:17:43,600 --> 00:17:47,399 Speaker 1: concern at this point that some of these issues may 344 00:17:47,400 --> 00:17:50,880 Speaker 1: become more European wide. What the problem that Facebook has 345 00:17:50,880 --> 00:17:53,560 Speaker 1: in Europe right now is that user engagement is declining. 346 00:17:53,600 --> 00:17:56,520 Speaker 1: There's been a huge amount of antipathy towards its platforms, 347 00:17:56,600 --> 00:18:00,919 Speaker 1: not just Facebook itself, but Instagram and WhatsApp. That means 348 00:18:00,920 --> 00:18:03,879 Speaker 1: that it's under more pressure therefore to increase its average 349 00:18:03,880 --> 00:18:07,280 Speaker 1: revenue per user. That means that um even if the 350 00:18:07,320 --> 00:18:09,399 Speaker 1: number of people who are using the website declines, it 351 00:18:09,400 --> 00:18:13,280 Speaker 1: can still grow revenue because it's getting more AD dollars 352 00:18:13,320 --> 00:18:15,520 Speaker 1: for each user. Now in order to deliver that. They've 353 00:18:15,520 --> 00:18:18,199 Speaker 1: got to have more compelling, more granular data on the 354 00:18:18,280 --> 00:18:21,560 Speaker 1: users they have and being able to tie together what'sapp, 355 00:18:21,600 --> 00:18:24,399 Speaker 1: Instagram and Facebook, which is what this ruling is all about. 356 00:18:24,520 --> 00:18:27,080 Speaker 1: That people have to consciously opt into that rather than 357 00:18:27,440 --> 00:18:30,480 Speaker 1: finding a way to opt out. UM that damages their 358 00:18:30,480 --> 00:18:34,120 Speaker 1: ability to find that granular data and therefore expand their 359 00:18:34,240 --> 00:18:37,000 Speaker 1: their average revenue per user to set off the declining 360 00:18:37,160 --> 00:18:39,960 Speaker 1: user growth. So, Alex, we should really go over what 361 00:18:40,160 --> 00:18:44,720 Speaker 1: exactly this German ruling said. Basically, it was it's an 362 00:18:44,760 --> 00:18:48,840 Speaker 1: overhaul or it's forcing Facebook to overall how it tracks 363 00:18:48,840 --> 00:18:53,560 Speaker 1: its users internet browsing and smartphone apps. So in plain English, 364 00:18:53,720 --> 00:18:56,760 Speaker 1: why does this matter? What happens right now is if 365 00:18:56,760 --> 00:18:59,280 Speaker 1: you visit a website and anywhere on and you are 366 00:18:59,320 --> 00:19:01,199 Speaker 1: a Facebook US sir and frankly even if you're not 367 00:19:01,240 --> 00:19:04,480 Speaker 1: a Facebook user, but there if on that website there's 368 00:19:04,800 --> 00:19:08,800 Speaker 1: a button which says like this page or share this page. 369 00:19:09,160 --> 00:19:11,840 Speaker 1: Irrespective of whether you click that button or not, that 370 00:19:11,960 --> 00:19:15,680 Speaker 1: website will send a cookie to Facebook servers indicating that 371 00:19:16,160 --> 00:19:20,080 Speaker 1: either you the user or be this particular computer UM 372 00:19:20,320 --> 00:19:22,720 Speaker 1: has visited this website. And that's the way of tracking 373 00:19:23,080 --> 00:19:25,199 Speaker 1: you know how people navigate the internet, possibly what the 374 00:19:25,240 --> 00:19:27,960 Speaker 1: interests are, and building up you know, these very complex 375 00:19:28,000 --> 00:19:31,800 Speaker 1: models of what people's interests are. This stops their ability 376 00:19:31,800 --> 00:19:34,520 Speaker 1: to do that, to do that without people opting actively 377 00:19:34,560 --> 00:19:37,480 Speaker 1: opting into it, and therefore, you know, poses a huge 378 00:19:37,560 --> 00:19:40,760 Speaker 1: risk to Facebook's advertising model. So, Alex, is there a 379 00:19:40,960 --> 00:19:44,800 Speaker 1: what is your sense of regulatory oversight? It seems to 380 00:19:44,800 --> 00:19:48,399 Speaker 1: be obviously focused on Facebook, But how about Snap, Twitter, Google? 381 00:19:48,480 --> 00:19:51,480 Speaker 1: Are you hearing that there is a growing sense that 382 00:19:51,520 --> 00:19:54,840 Speaker 1: maybe these companies as well need to be monitored? Frank 383 00:19:54,960 --> 00:19:58,560 Speaker 1: frankly Snap on Twitter, No, these are small companies. You know, 384 00:19:58,800 --> 00:20:02,080 Speaker 1: Snap has about hundred and eighty million active users. Twitter, 385 00:20:02,119 --> 00:20:04,879 Speaker 1: as we learned today has about a hundred hundred twenty million. 386 00:20:05,080 --> 00:20:07,560 Speaker 1: That's global daily active uses. Now Facebook has one point 387 00:20:07,600 --> 00:20:11,399 Speaker 1: six billion daily active users. It's a whole different realm 388 00:20:11,400 --> 00:20:14,399 Speaker 1: they're operating in. Nonetheless, it is a threat for Google. 389 00:20:14,440 --> 00:20:18,119 Speaker 1: Google has a similar thing. They also find you can 390 00:20:18,160 --> 00:20:20,760 Speaker 1: get cookie sent to them from every website that people visit, 391 00:20:21,359 --> 00:20:23,840 Speaker 1: uh and therefore build up these profiles and what your 392 00:20:23,880 --> 00:20:26,199 Speaker 1: interests are. That then feeds into the ads that you 393 00:20:26,240 --> 00:20:29,760 Speaker 1: get served on YouTube and Google Search, and so they 394 00:20:29,840 --> 00:20:33,320 Speaker 1: are highly vulnerable to being the next company that comes 395 00:20:33,320 --> 00:20:36,360 Speaker 1: into the firing line on this privacy front. I want 396 00:20:36,359 --> 00:20:38,320 Speaker 1: to go back to where we started and just to 397 00:20:38,359 --> 00:20:41,119 Speaker 1: wrap up the conversation with this idea of you know, 398 00:20:41,200 --> 00:20:44,760 Speaker 1: how much of a financial risk is this to Facebook, 399 00:20:44,920 --> 00:20:47,840 Speaker 1: to the behemoths that capture the great majority of the 400 00:20:47,880 --> 00:20:51,120 Speaker 1: advertising dollars and the eyeballs. And I'm just wondering, because 401 00:20:51,240 --> 00:20:54,200 Speaker 1: right now you said perhaps it's priced into the shares 402 00:20:54,680 --> 00:20:58,000 Speaker 1: that there will be more regulatory oversight. How does one 403 00:20:58,040 --> 00:20:59,760 Speaker 1: put a price on this? How do you know what 404 00:20:59,840 --> 00:21:03,919 Speaker 1: it actually is priced in? It's very very difficult to pass. 405 00:21:04,040 --> 00:21:09,040 Speaker 1: You know. Ultimately, this is a multi stage process and 406 00:21:09,119 --> 00:21:12,600 Speaker 1: we're still very early in that process. Um that means 407 00:21:12,640 --> 00:21:15,200 Speaker 1: that people, you know, even with some of the difficulties 408 00:21:15,200 --> 00:21:18,200 Speaker 1: Facebook's had over the past year, revenue has continued to grow, 409 00:21:18,680 --> 00:21:20,920 Speaker 1: and I think there might be a sense that Facebook 410 00:21:21,080 --> 00:21:25,400 Speaker 1: somehow finds a way now it's it's when the inflection 411 00:21:25,400 --> 00:21:27,600 Speaker 1: point is It's very very hard to tell, you know, 412 00:21:27,680 --> 00:21:30,359 Speaker 1: if if those fines start getting imposed and we actually 413 00:21:30,440 --> 00:21:33,720 Speaker 1: start seeing Facebook implement these measures across you know, huge 414 00:21:33,760 --> 00:21:37,879 Speaker 1: markets like Europe where it's three million people something like that, 415 00:21:37,480 --> 00:21:41,560 Speaker 1: that that is a huge threat to Facebook's growth opportunity. Now, 416 00:21:41,760 --> 00:21:44,520 Speaker 1: it's whether in the growth economies like Asia and Sub 417 00:21:44,560 --> 00:21:48,040 Speaker 1: Saharan Africa, if their regulators are as tough and often 418 00:21:48,080 --> 00:21:50,480 Speaker 1: they do follow suit for what happens in Europe, that 419 00:21:50,480 --> 00:21:53,320 Speaker 1: that's that that would be the bigger concern for Facebook's 420 00:21:53,320 --> 00:21:55,639 Speaker 1: next leg of growth. Alex web thank you so much 421 00:21:55,680 --> 00:21:58,639 Speaker 1: for being with us. Alex Webb, European technology columnist for 422 00:21:58,680 --> 00:22:14,440 Speaker 1: Bloomberg Opinion, joining us from London. Lisa, you and I've 423 00:22:14,440 --> 00:22:16,840 Speaker 1: been talking about just just today on the strength of 424 00:22:16,880 --> 00:22:19,560 Speaker 1: the consumer and how strong I mean, we just had 425 00:22:19,560 --> 00:22:22,720 Speaker 1: the guest on talking about retail sales forecast growth of 426 00:22:23,320 --> 00:22:26,680 Speaker 1: five percent in nineteen. So we're right in the midst 427 00:22:26,720 --> 00:22:29,720 Speaker 1: of a bunch of consumer companies reporting earnings over the 428 00:22:29,800 --> 00:22:31,560 Speaker 1: last couple of days. And help us kind of break 429 00:22:31,800 --> 00:22:35,119 Speaker 1: that down and what those results mean about the consumer. 430 00:22:35,440 --> 00:22:37,080 Speaker 1: We want to bring in. Ken Shay Ken is a 431 00:22:37,119 --> 00:22:40,840 Speaker 1: senior analyst covering the global food, beverage, and tobacco industry 432 00:22:40,840 --> 00:22:44,439 Speaker 1: for Bloomberg Intelligence. He calls in from Bloomberg's headquarters in Princeton, 433 00:22:44,440 --> 00:22:48,639 Speaker 1: New Jersey. Ken, thanks so much for joining us again. 434 00:22:48,720 --> 00:22:52,720 Speaker 1: Tyson reporting today Kellogg's reporting today. What are some of 435 00:22:52,760 --> 00:22:57,480 Speaker 1: your takeaways, uh from some of these big consumer products companies. Yeah, Hi, Paul, 436 00:22:58,000 --> 00:23:01,120 Speaker 1: Uh Yeah, today Kellogg Insison report, you know, to Bellweather 437 00:23:01,359 --> 00:23:04,080 Speaker 1: companies within the package food industry here in the US. 438 00:23:04,119 --> 00:23:08,040 Speaker 1: I think the broad takeaway to investors is that top 439 00:23:08,119 --> 00:23:11,840 Speaker 1: line sales growth remains elusive for these big companies. You know, 440 00:23:11,840 --> 00:23:14,399 Speaker 1: a lot of it is secular in nature. That is, 441 00:23:14,720 --> 00:23:17,800 Speaker 1: there's just not many more new mouths the feet of 442 00:23:17,800 --> 00:23:22,120 Speaker 1: the US. You know, population is pretty steady. Arguably, these 443 00:23:22,119 --> 00:23:25,520 Speaker 1: companies have not innovated to a degree that's exciting people 444 00:23:25,640 --> 00:23:29,960 Speaker 1: to go to their products, um, and it's really suffering 445 00:23:30,280 --> 00:23:32,959 Speaker 1: the bottom line as well. You know, it's hard to 446 00:23:33,000 --> 00:23:35,600 Speaker 1: grow when the top line is not growing. And that's 447 00:23:35,680 --> 00:23:38,520 Speaker 1: kind of the broad takeaway for both Tyson and Kellogg 448 00:23:38,560 --> 00:23:41,280 Speaker 1: this round. All right, So let's start with Kellogg, which 449 00:23:41,359 --> 00:23:43,440 Speaker 1: is near and dear to my heart because I've struggled 450 00:23:43,440 --> 00:23:45,359 Speaker 1: through breakfast with two kids, getting them at the door 451 00:23:45,400 --> 00:23:47,560 Speaker 1: in the morning, and that seems to be the demographic 452 00:23:47,560 --> 00:23:50,400 Speaker 1: that Kellogg tries to cater to. Kellogg shares now down 453 00:23:50,440 --> 00:23:55,040 Speaker 1: five point four percent after disappointing earnings earnings result and 454 00:23:55,080 --> 00:23:58,080 Speaker 1: you have to wonder talking about breakfast, how much are 455 00:23:58,119 --> 00:24:02,040 Speaker 1: they shifting gears away from sugar heavy, carb heavy types 456 00:24:02,080 --> 00:24:05,320 Speaker 1: of stuff. Is that really part of the issue in 457 00:24:05,440 --> 00:24:09,879 Speaker 1: sort of reshaping the view on healthy food. Yes, highly so, 458 00:24:10,000 --> 00:24:12,800 Speaker 1: that's exactly you know. Kellogg Is, to its credit, has 459 00:24:12,880 --> 00:24:16,359 Speaker 1: been really cutting costs dramatically over the last few years. 460 00:24:16,640 --> 00:24:18,119 Speaker 1: One of the leaders I would i would say was 461 00:24:18,160 --> 00:24:21,680 Speaker 1: in the packaged food space. However, you can't really cut 462 00:24:21,720 --> 00:24:25,719 Speaker 1: yourself the prosperity. The new CEO, Steve Callahan knows that 463 00:24:25,800 --> 00:24:27,480 Speaker 1: he's come aboard and say, you know, we're gonna pivot 464 00:24:27,560 --> 00:24:30,240 Speaker 1: now to grow our top line and we're going to 465 00:24:30,320 --> 00:24:34,359 Speaker 1: get there by investing a new product innovation. We're going 466 00:24:34,400 --> 00:24:37,760 Speaker 1: to make some selective acquisitions. Uh. Those are the two 467 00:24:37,840 --> 00:24:41,239 Speaker 1: key ways anyway. Um, but the challenge it has is 468 00:24:41,280 --> 00:24:45,040 Speaker 1: it's just over indexed the heavy carb products. I mean, 469 00:24:45,080 --> 00:24:48,480 Speaker 1: if you think about breakfast cereals and pop tarts and 470 00:24:48,640 --> 00:24:53,000 Speaker 1: pring goals and Jesus these are all some are growing 471 00:24:53,040 --> 00:24:55,040 Speaker 1: better than others. But at this end of the day, 472 00:24:55,040 --> 00:24:57,760 Speaker 1: you know, that's not really in sync where many consumers 473 00:24:57,760 --> 00:25:01,960 Speaker 1: are going today. They're pursuing mes like protein u natural 474 00:25:02,200 --> 00:25:07,720 Speaker 1: products with no artificial ingredients contemporary new brands, and that 475 00:25:07,840 --> 00:25:10,640 Speaker 1: doesn't really fit well to where Kellogg is right now. 476 00:25:11,280 --> 00:25:14,480 Speaker 1: So what is the strategy. There's the strategy to diversify 477 00:25:14,520 --> 00:25:18,280 Speaker 1: and try to chase the organic, healthy moving consumers. Maybe 478 00:25:18,320 --> 00:25:20,159 Speaker 1: you know, go go buy some of these startups. Or 479 00:25:20,240 --> 00:25:23,359 Speaker 1: is it to try to introduce new products or maybe 480 00:25:23,400 --> 00:25:26,840 Speaker 1: even be more aggressive on promotion. Well, they have done 481 00:25:26,840 --> 00:25:29,040 Speaker 1: a little bit of that call they recently to their credit, 482 00:25:29,119 --> 00:25:33,280 Speaker 1: but um Our x bar it's one of the UH 483 00:25:33,359 --> 00:25:35,160 Speaker 1: products that is doing really well in the space if 484 00:25:35,320 --> 00:25:40,200 Speaker 1: it's a convenient, health oriented or natural snack bar that 485 00:25:40,560 --> 00:25:42,520 Speaker 1: caters to a lot of the themes that I mentioned. 486 00:25:43,400 --> 00:25:47,879 Speaker 1: They're also chasing international growth. UM. They've bought a just 487 00:25:47,920 --> 00:25:50,480 Speaker 1: Food distributor in Africa and Nigeria is doing very well 488 00:25:50,680 --> 00:25:52,600 Speaker 1: and they're going to try to capitalize that and grow 489 00:25:52,640 --> 00:25:56,560 Speaker 1: their international exposure UM. And that's great and it's really 490 00:25:56,600 --> 00:25:58,639 Speaker 1: they deserve credit for doing that. The challenge they have 491 00:25:58,720 --> 00:26:01,879 Speaker 1: though is really twofold and doing that, and that is 492 00:26:02,200 --> 00:26:04,560 Speaker 1: first of all, they're not the only big packaged food 493 00:26:04,600 --> 00:26:08,479 Speaker 1: company trying to you know, expand to growthier markets outside 494 00:26:08,520 --> 00:26:10,640 Speaker 1: of the US. So it comes at a healthy price 495 00:26:10,680 --> 00:26:13,960 Speaker 1: tag to do that. And second, when they buy these 496 00:26:14,000 --> 00:26:16,920 Speaker 1: new assets, it requires a lot of management time and investment, 497 00:26:16,960 --> 00:26:19,199 Speaker 1: so they don't really carry the weight in margin in 498 00:26:19,240 --> 00:26:22,400 Speaker 1: the near term. So you know, we we we haven't 499 00:26:22,400 --> 00:26:26,960 Speaker 1: touched on Tyson yet, which is the chicken manufacturer distributor. UH, 500 00:26:27,000 --> 00:26:30,119 Speaker 1: and we talked about them earlier about possibly buying a 501 00:26:30,440 --> 00:26:35,960 Speaker 1: sort of organic, locally sourced California Northwestern Chicken company. And 502 00:26:36,080 --> 00:26:39,960 Speaker 1: right now it shares down nearly three after showing that 503 00:26:40,000 --> 00:26:44,159 Speaker 1: they are disappointing on their earnings and on their expansion, 504 00:26:44,200 --> 00:26:46,680 Speaker 1: and they are also looking for, to use your word, 505 00:26:46,720 --> 00:26:50,520 Speaker 1: can growthier pastures. But I have to wonder, if you 506 00:26:50,600 --> 00:26:54,840 Speaker 1: take a step back, how much Kellogg's and also Tyson 507 00:26:54,920 --> 00:26:59,280 Speaker 1: are both symptomatic of a larger protest and shift away 508 00:26:59,320 --> 00:27:03,040 Speaker 1: from big food that is more processed. Well, I think 509 00:27:03,080 --> 00:27:06,119 Speaker 1: that's part of it. It's hard to quantify that, but clearly, UM, 510 00:27:06,280 --> 00:27:09,160 Speaker 1: we know that millennials today in particular are not brand 511 00:27:09,160 --> 00:27:12,639 Speaker 1: conscious as as many of their parents were. We know 512 00:27:12,800 --> 00:27:15,919 Speaker 1: that they like to eat healthier. Um, they have more 513 00:27:15,960 --> 00:27:19,399 Speaker 1: information on their fingertips than with their cell phone or 514 00:27:19,480 --> 00:27:23,080 Speaker 1: their smartphone, I should say, uh. In terms of ingredients 515 00:27:23,080 --> 00:27:26,720 Speaker 1: that are in these products, so they are a less 516 00:27:26,920 --> 00:27:29,600 Speaker 1: or should say, a more pickle less brand loyal crowd. 517 00:27:30,000 --> 00:27:33,720 Speaker 1: Then many of these legacy package food companies are accustomed with. 518 00:27:34,280 --> 00:27:38,400 Speaker 1: Given that that's the case, who's benefiting well? I would 519 00:27:38,440 --> 00:27:42,440 Speaker 1: say some of the companies that are carring to niches 520 00:27:42,920 --> 00:27:48,800 Speaker 1: um uh comes to mind. Mandolie for instance. Although Sweet 521 00:27:48,800 --> 00:27:52,000 Speaker 1: Snacks doesn't seem a cater to this, um, they are 522 00:27:52,040 --> 00:27:56,080 Speaker 1: doing a good job in a brand innovation. Just to 523 00:27:56,119 --> 00:28:00,040 Speaker 1: take a look at their OREO reinvention and explain and 524 00:28:00,119 --> 00:28:02,320 Speaker 1: you know, the different flavors. That's actually catching on with 525 00:28:02,359 --> 00:28:06,040 Speaker 1: a lot of consumers. Although it sounds counterintuitive a sweet 526 00:28:06,080 --> 00:28:09,280 Speaker 1: snack like that, it's actually doing pretty well. Um. Pet 527 00:28:09,280 --> 00:28:12,960 Speaker 1: food companies are doing well. That's tapping into the increasing 528 00:28:13,040 --> 00:28:15,600 Speaker 1: trend of consumers that treat their pets like children and 529 00:28:15,600 --> 00:28:19,400 Speaker 1: there will just spoil them with high end premium products. 530 00:28:19,520 --> 00:28:23,080 Speaker 1: And that was behind General mills purchase of Blue Buffalo 531 00:28:23,520 --> 00:28:26,880 Speaker 1: last year. So that that that's a growth business that's 532 00:28:26,920 --> 00:28:29,000 Speaker 1: doing pretty well. They paid up for it, but nevertheless 533 00:28:29,040 --> 00:28:31,639 Speaker 1: the business is doing well. Yeah, Ken Shay, thank you 534 00:28:31,680 --> 00:28:33,760 Speaker 1: so much for being with us. Ken Say senior analysts 535 00:28:33,760 --> 00:28:38,080 Speaker 1: focused on the global food, beverages, and tobacco industries for 536 00:28:38,200 --> 00:28:42,160 Speaker 1: Bloomberg Intelligence. Thanks for listening to the Bloomberg PL podcast. 537 00:28:42,320 --> 00:28:44,960 Speaker 1: You can subscribe and listen to interviews at Apple Podcasts 538 00:28:45,000 --> 00:28:48,000 Speaker 1: or whatever podcast platform you prefer. I'm Paul Sweeney. I'm 539 00:28:48,000 --> 00:28:50,719 Speaker 1: on Twitter at pt Sweeney and Lisa bram Woyds I'm 540 00:28:50,720 --> 00:28:53,680 Speaker 1: on Twitter at Lisa bramwoits one. Before the podcast, you 541 00:28:53,720 --> 00:28:56,240 Speaker 1: can always catch us worldwide on Bloomberg Radio