WEBVTT - Investors Fail To Ask Apple Most Fundamental Question 0:00:02.640 --> 0:00:05.320 Welcome to the Bloomberg Penel Podcast. I'm Paul swing you. 0:00:05.360 --> 0:00:07.680 Along with my co host Lisa Brahma Waits. Each day 0:00:07.720 --> 0:00:10.240 we bring you the most noteworthy and useful interviews for 0:00:10.280 --> 0:00:12.520 you and your money. Whether at the grocery store or 0:00:12.560 --> 0:00:15.480 the trading floor. Find a Bloomberg Penl podcast on Apple 0:00:15.520 --> 0:00:17.960 podcast or wherever you listen to podcasts, as well as 0:00:17.960 --> 0:00:22.520 at Bloomberg dot com. Apple shares surging today up about 0:00:22.680 --> 0:00:26.279 seven percent, the biggest game at one point since April 0:00:26.320 --> 0:00:28.920 two tho fourteen. The shares now currently at the highest 0:00:28.960 --> 0:00:32.440 levels since November. The question is, did they deliver something 0:00:32.479 --> 0:00:36.279 so fabulous yesterday after the bell that this is a 0:00:36.320 --> 0:00:40.920 worthwhile rally? And here too, uh, perhaps cast little skepticism 0:00:41.000 --> 0:00:44.640 in sua ovida Bloomberg opinion columnists nobody covering all things 0:00:44.640 --> 0:00:47.320 tech and perhaps deservedly, let's hear what's going on here? 0:00:47.560 --> 0:00:50.680 So what's your take on this rally? Why our investors 0:00:50.680 --> 0:00:55.680 so excited? Well, the short explanation is the Apple's results 0:00:55.720 --> 0:01:00.640 are less bad than people and maybe Apple it's thought 0:01:00.720 --> 0:01:05.319 a few months ago. So that's good news. Um, but look, 0:01:05.400 --> 0:01:10.000 it's still not great conditions for Apple. So look iPhone 0:01:10.040 --> 0:01:13.119 sales declined. I think it was seven revenue from iPhones 0:01:13.200 --> 0:01:20.440 decline in the March quarter. The company forecast implies that 0:01:20.920 --> 0:01:24.120 revenue growth might be more or less flat from a 0:01:24.200 --> 0:01:28.120 year ago, so not great. And you've seen from what 0:01:28.160 --> 0:01:31.120 the company has done that it's doing things like discounting 0:01:31.120 --> 0:01:35.280 iPhones in China, offering aggressive prices on trade ins of 0:01:35.319 --> 0:01:39.440 older phones throughout many of their markets, so you know, 0:01:39.480 --> 0:01:44.160 there are effectively subsidizing UM iPhones to compensate for what 0:01:44.319 --> 0:01:48.720 has been declining unit sales of those devices. So I 0:01:48.720 --> 0:01:51.400 guess the question one of the questions I heard from investors, 0:01:51.520 --> 0:01:53.280 you know, kind of on the call last night, was 0:01:53.280 --> 0:01:56.160 trying to get a sense of this iPhone business. How 0:01:56.240 --> 0:02:00.200 much of it is a temporary weakness and I phone 0:02:00.240 --> 0:02:02.920 sales or is this just a fundamental change in their 0:02:02.960 --> 0:02:05.240 phone business? You know, I actually think this is a 0:02:05.280 --> 0:02:11.440 significant failure of Wall Street two force Apple to answer 0:02:11.880 --> 0:02:14.360 the to me what to me is the most fundamental 0:02:14.480 --> 0:02:20.080 question about Apple's business. Smartphone sales globally are declining, and 0:02:20.120 --> 0:02:23.320 they have been declining for eighteen months to two years, 0:02:23.320 --> 0:02:25.840 depending on or maybe longer, depending on whose numbers you 0:02:25.840 --> 0:02:28.120 look at. And if your Apple and you make the 0:02:28.120 --> 0:02:32.000 majority of your revenue from selling iPhones. That change in 0:02:32.040 --> 0:02:37.040 the market is an existential problem, and the company has 0:02:37.040 --> 0:02:40.480 never really had to address that question. Look, the market 0:02:40.600 --> 0:02:44.560 is declining. The market for your most important product is declining. 0:02:45.040 --> 0:02:48.120 Do you think it's temporary? If not, what are you 0:02:48.200 --> 0:02:52.000 doing about it? And the company really hasn't tackled that 0:02:52.120 --> 0:02:53.920 question head on, And again I think that's a failure 0:02:53.919 --> 0:02:57.560 by investors. Although you could say, in fairness, Apple has 0:02:57.560 --> 0:03:01.160 been emphasizing their services and Internet products side of the business, 0:03:01.440 --> 0:03:04.480 and that was one of the actual positives and surprisingly 0:03:04.560 --> 0:03:07.959 positive aspects of their earnings report was that they showed 0:03:08.040 --> 0:03:11.120 bigger than expected gains in those areas, So uh to 0:03:11.240 --> 0:03:13.360 some degree, couldn't you say that that's what they're trying 0:03:13.360 --> 0:03:15.680 to do, is to offset some of the concerns about 0:03:15.720 --> 0:03:20.440 the slowing smartphone UH cycle by emphasizing these other areas. Yeah, 0:03:20.480 --> 0:03:22.720 and I think that's a fair point that and that's 0:03:22.720 --> 0:03:25.360 certainly what Apple bowls have been focused on, is this 0:03:25.400 --> 0:03:29.520 growing pile of revenue and high profit revenue generally from 0:03:29.639 --> 0:03:33.160 things like you know, um Apple's commission on App Store 0:03:33.160 --> 0:03:37.080 downloads or Apple Music subscriptions or they're coming Apple Television 0:03:37.120 --> 0:03:40.960 Service or Apple Care warranties. So that is good news, 0:03:41.000 --> 0:03:45.960 but look, that cannot fully fill the whole left by 0:03:45.960 --> 0:03:48.240 declining iPhone sales. So once that I had in my 0:03:48.320 --> 0:03:51.320 column was in the first half of Apple's fiscal year, 0:03:51.680 --> 0:03:55.160 iPhone revenue declined by sixteen billion dollars, and the gains 0:03:55.200 --> 0:03:58.480 of everything else, every other business at Apple was eight 0:03:58.520 --> 0:04:01.080 and a half billion dollars, right, so you can see 0:04:01.120 --> 0:04:04.000 that there is still a mismatch between the declining main 0:04:04.080 --> 0:04:07.000 business and the growth of their other businesses. And look, 0:04:07.040 --> 0:04:09.840 I also feel like eventually you sort of run out. 0:04:10.360 --> 0:04:13.800 You know, it's like the coyote that I'm sorry, the yeah, 0:04:14.400 --> 0:04:19.440 that you're running out over the canyon and eventually kind 0:04:19.440 --> 0:04:22.000 of lost track of my cartoon metaphor. But anyway, you know, 0:04:22.040 --> 0:04:24.520 you're you're you're running, your legs are running, and eventually 0:04:24.560 --> 0:04:26.839 you run out over the canyon and you fall. That 0:04:27.480 --> 0:04:31.039 at some point, if Apple doesn't grow the number of 0:04:31.080 --> 0:04:35.440 new iPhone users, it is losing opportunities to sell you know, 0:04:35.560 --> 0:04:39.520 apps and Apple Music subscriptions and Apple TV subscriptions to 0:04:39.720 --> 0:04:43.760 that pool of people who own Apple devices, and so 0:04:43.800 --> 0:04:46.400 far to their credit, They've managed to keep growing that 0:04:46.520 --> 0:04:50.520 revenue even as the pool of new iPhone buyers levels off. 0:04:50.760 --> 0:04:53.880 But I can't imagine that last forever, particularly if Apple 0:04:53.960 --> 0:04:56.880 doesn't make a more concerted effort to sell those services 0:04:56.920 --> 0:04:59.640 to people who don't own their devices. It's billions of 0:04:59.640 --> 0:05:03.240 people at Apple's ignoring. So is there what do you 0:05:03.279 --> 0:05:06.800 think they need to do to maybe recharge the growth 0:05:06.839 --> 0:05:09.880 of this company? Is is it something as big and 0:05:09.920 --> 0:05:13.560 existential and changing as a big acquisition, or is this 0:05:13.640 --> 0:05:16.480 just trying to build up their services business. I don't know, 0:05:16.560 --> 0:05:18.479 and I think part of it is what kind of 0:05:18.520 --> 0:05:20.960 company does Apple want to be in the future. If 0:05:21.000 --> 0:05:24.600 it wants to be, let's say, a load a load 0:05:24.640 --> 0:05:30.040 of no growth company that generates revenue growth from squeezing 0:05:30.040 --> 0:05:34.080 its existing customers for more money. And my colleague Sarah 0:05:34.080 --> 0:05:37.560 Hallzac and I compared this basically to like Starbucks and McDonald's. Right, 0:05:37.640 --> 0:05:41.920 that restaurant traffic has been declining, but restaurants like McDonald's 0:05:41.920 --> 0:05:44.120 has been making up for it by price increases. So 0:05:44.160 --> 0:05:45.800 if Apple wants to do that, if this is an 0:05:45.920 --> 0:05:48.799 r poo play, you generate more revenue from a stagnant 0:05:48.839 --> 0:05:51.240 base of users. Fine, but that's not the apple that 0:05:51.279 --> 0:05:53.680 people have come to expect, and that's not the That's 0:05:53.720 --> 0:05:55.760 exactly right. They've been to such a great growth story 0:05:55.760 --> 0:05:58.239 and new product after new product, and you know where's 0:05:58.279 --> 0:06:00.400 the next new product? Sure of a day. Thank you 0:06:00.440 --> 0:06:03.159 so much for joining us. Shares of Technology, Calumness for 0:06:03.279 --> 0:06:22.200 Bloomberg Opinion. You can attach to any number of superlatives 0:06:22.240 --> 0:06:26.680 to Shopify, the Canadian e commerce retailer. If you take 0:06:26.720 --> 0:06:28.919 a look at its shares, they have more than doubled 0:06:28.920 --> 0:06:32.760 since Christmas Eve. They're the best performance performing shares on 0:06:33.080 --> 0:06:36.400 the S and P TSX Composite Index after a pot stock. 0:06:37.000 --> 0:06:40.520 Joining us here to talk about the company is Harley Finkelstein, 0:06:40.600 --> 0:06:43.440 chief operating officer of Shopify, Joining us here in our 0:06:43.440 --> 0:06:46.159 Bloomberger Active Brokers Studios and Harley. Before we get into 0:06:46.200 --> 0:06:48.400 all the superlatives, can you just give us a sense 0:06:48.440 --> 0:06:51.240 of what Shopify exactly is. Yeah, it's a great question. 0:06:51.360 --> 0:06:53.200 I think what we're best known for is is helping 0:06:53.279 --> 0:06:55.919 small businesses build beautiful online stores. We've been doing that 0:06:55.960 --> 0:06:58.400 now for over fifteen years, and people know us best 0:06:58.440 --> 0:07:00.560 for that. But I think actually today which shop play 0:07:00.800 --> 0:07:03.080 is truly as we are a retail operating system. And 0:07:03.080 --> 0:07:04.320 what I mean by that is you can come to 0:07:04.360 --> 0:07:06.400 Shopify because you want to build a great online store, 0:07:06.600 --> 0:07:08.120 or maybe you want to sell offline in a brick 0:07:08.160 --> 0:07:09.800 and mortar store and use our point of sell product, 0:07:10.000 --> 0:07:11.960 or maybe you want to cross sell on Amazon or 0:07:12.000 --> 0:07:14.680 eBay or something like Instagram or Facebook. But the idea 0:07:14.720 --> 0:07:17.360 is that it all feeds back into one centralized back office, 0:07:17.480 --> 0:07:19.560 and that Shopify. It's the first thing you open in 0:07:19.600 --> 0:07:22.320 the morning, lasting you close. That's where you have your inventory, 0:07:22.560 --> 0:07:25.440 your customer information, your marketing data, that where you process 0:07:25.440 --> 0:07:28.800 shipping and payments, and that really is is your business um. 0:07:28.800 --> 0:07:30.560 And so we're doing that now for about eight twenty 0:07:30.600 --> 0:07:33.040 thousand merchants who have sold more than a hundred billion 0:07:33.080 --> 0:07:35.760 dollars on Shopify. UM. But I would say retail operating 0:07:35.800 --> 0:07:38.440 system is probably a better, uh definition of what we 0:07:38.480 --> 0:07:42.080 are today. So obviously you're benefiting from this tremendous secular 0:07:42.160 --> 0:07:44.760 move from bricks and mortars to e commerce, and people 0:07:44.760 --> 0:07:47.360 think of that and they think of Amazon obviously. So 0:07:47.480 --> 0:07:50.640 aside from that great secular wind, that's that's at the 0:07:50.640 --> 0:07:53.600 back of your sales, What really are the growth drivers 0:07:53.640 --> 0:07:55.440 for your company. Here a couple of things. First of all, 0:07:55.520 --> 0:07:57.360 we make it really really easy to start a brand 0:07:57.360 --> 0:07:59.520 new business. So most of the most of the merchants 0:07:59.560 --> 0:08:01.600 that are on shop if these are first time entrepreneurs 0:08:01.600 --> 0:08:03.840 that are just getting started. In fact, every minute or 0:08:03.920 --> 0:08:06.360 so a new business gets their first sale on Shopify, 0:08:06.440 --> 0:08:08.200 which is really exciting. Remember the first time that I 0:08:08.200 --> 0:08:10.360 had my first sale, I was an early Shopify merchant 0:08:10.360 --> 0:08:12.920 before I joined the company about it was called Smoother. 0:08:13.040 --> 0:08:15.160 It was a T shirt company. I had to support 0:08:15.200 --> 0:08:17.160 myself in law school and didn't have any money. My 0:08:17.160 --> 0:08:20.120 parents couldn't pay for school, so I built a Shopify 0:08:20.200 --> 0:08:22.480 store back in two thousand six, ended up selling T 0:08:22.560 --> 0:08:24.960 shirts and paying my law school tuition. Um. And getting 0:08:24.960 --> 0:08:26.880 that first sale was it changed everything. It meant that 0:08:26.880 --> 0:08:28.440 I had freedom and I had autonomy and all of 0:08:28.480 --> 0:08:31.280 a sudden, now I can pursue my life's work and 0:08:31.280 --> 0:08:34.240 that happens now almost every minute on Shopify. UM. So 0:08:34.280 --> 0:08:36.080 I would say that making it really easy for people 0:08:36.080 --> 0:08:37.440 to start me and so not only we're growing our 0:08:37.440 --> 0:08:39.400 piece of the pie, but we're going the pie itself 0:08:39.559 --> 0:08:42.280 from a total usable market perspective, and the ones that 0:08:42.320 --> 0:08:44.800 are successful on Shopify stay with us for a very 0:08:44.800 --> 0:08:47.080 long time, and in that journey we try to find 0:08:47.080 --> 0:08:48.600 them all the things they need to run their business. 0:08:48.720 --> 0:08:51.240 So we created Shopify Payments to give them economies a 0:08:51.280 --> 0:08:53.720 scale on payment rates. We gave them shop by shipping rates, 0:08:53.720 --> 0:08:55.760 meaning they can get better rates to give you bigger companies. 0:08:55.960 --> 0:08:57.880 We now give capital. We've given out about over five 0:08:58.240 --> 0:09:00.960 million dollars of capital to these small businesses. So the 0:09:01.000 --> 0:09:02.680 idea is to find all the pain points that an 0:09:02.800 --> 0:09:06.040 entrepreneur may have and make it easier for them. And actually, 0:09:06.120 --> 0:09:08.320 if you aggregate all of our stores all in one, 0:09:08.400 --> 0:09:10.280 pretend that we are a retailer, we would be the 0:09:10.360 --> 0:09:13.600 third largest US eclom retailer. So we are able now 0:09:13.640 --> 0:09:15.520 to go to the shipping companies and the payment companies 0:09:15.640 --> 0:09:18.120 and negotiate rates as if we were the third largest 0:09:18.400 --> 0:09:21.200 of US online retailer. But then give all these economies 0:09:21.200 --> 0:09:23.520 a scale to someone just starting at their mom's kitchen table. 0:09:23.840 --> 0:09:26.440 Really interesting And just to sort of give some more context, 0:09:26.480 --> 0:09:29.720 after your ported earnings yesterday, uh, your second quarter revenue 0:09:29.720 --> 0:09:34.360 forecast did beat estimate, so that was one five above estimates, 0:09:34.360 --> 0:09:38.160 So it seems like things are going well. One question 0:09:38.160 --> 0:09:40.720 that I have though, is we talk about Amazon and 0:09:40.760 --> 0:09:43.360 its dominance and its effort to create its own products. 0:09:43.440 --> 0:09:45.679 We talk about Walmart, We talk about, you know, sort 0:09:45.679 --> 0:09:48.000 of how the big behemoths are getting bigger. How do 0:09:48.160 --> 0:09:51.280 small businesses compete with those? How do people find these 0:09:51.320 --> 0:09:56.240 sites given how much big, big, big store competition there is. Yeah, 0:09:56.320 --> 0:09:57.600 and it's a great question. So one of the things 0:09:57.640 --> 0:09:59.600 we also have as part of our retail operating system 0:09:59.679 --> 0:10:02.520 is a marketing UH marketing section, a place where a 0:10:02.520 --> 0:10:04.920 small business can go and easily able to buy ads 0:10:04.920 --> 0:10:07.000 and things like Google or Facebook. And on Monday we 0:10:07.000 --> 0:10:09.480 announce a partnership with Snapchat, so now they can easily 0:10:09.480 --> 0:10:12.400 buy ads directly on Snapchat to Traditionally, if a small 0:10:12.400 --> 0:10:14.120 business want to go ahead and buy ads on Facebook 0:10:14.160 --> 0:10:15.640 or Google or Snapchet, they would have to go to 0:10:15.679 --> 0:10:18.800 three different sites navigate the complexities of those ad platforms. 0:10:18.880 --> 0:10:20.560 And now we simplify it for them and we can 0:10:20.559 --> 0:10:22.400 go to those companies to ensure they're getting the best 0:10:22.480 --> 0:10:25.800 rates possible. I think most people assume that, um So, 0:10:26.040 --> 0:10:28.199 right now e commerce globally is about one point nine 0:10:28.200 --> 0:10:30.600 trillion dollars. That's gonna go to about four trillion dollars 0:10:30.679 --> 0:10:32.200 in the next few years. I think a lot of 0:10:32.200 --> 0:10:35.160 people automatically jump to Amazon, owning a majority of that. 0:10:35.520 --> 0:10:37.480 I think Amazon ultimately will be the place where you go. 0:10:37.559 --> 0:10:38.960 You go to buy the stuff that you need as 0:10:39.000 --> 0:10:42.400 a consumer, your toilet paper, your shampoo, your your paper towel. 0:10:42.679 --> 0:10:45.120 But I think for most consumers today, they actually like 0:10:45.200 --> 0:10:47.439 buying stuff from the people that make it. So you 0:10:47.480 --> 0:10:49.960 look at some of our favorite stores like Bombas Socks 0:10:50.040 --> 0:10:52.760 or Tommy john Underwear, or All Birds Shoes, or Kylie 0:10:52.760 --> 0:10:55.439 Cosmetics or Fashion Nova. These are all small businesses that 0:10:55.480 --> 0:10:58.040 are really large on Shopify, and they're able to sell 0:10:58.120 --> 0:10:59.480 direct to the end consumer in a way that they 0:10:59.480 --> 0:11:01.599 haven't been able to do before. I see on my 0:11:01.840 --> 0:11:04.680 handy Bloomber terminal here that Shopify gets about seventy percent 0:11:05.000 --> 0:11:07.360 revenue in the US. So talk to us about kind 0:11:07.360 --> 0:11:09.559 of how you view some of the opportunities outside of 0:11:09.600 --> 0:11:12.120 the US and maybe North America broadly. Yeah, So it's 0:11:12.200 --> 0:11:14.719 it's a great point you make. Um So, traditionally we've 0:11:14.760 --> 0:11:18.800 really focused on North America, Australia, New Zealand, and the UK. 0:11:19.440 --> 0:11:21.760 About a year ago, almost to the day, we decided 0:11:21.760 --> 0:11:23.080 that it was time for us to expand to an 0:11:23.120 --> 0:11:26.320 international market. We knew we had merchants elsewhere that wanted 0:11:26.320 --> 0:11:28.400 to use our products, but we didn't feel we had 0:11:28.440 --> 0:11:30.559 the right product fit yet, and so we began the 0:11:30.679 --> 0:11:33.320 journey to find product market fit internationally. And so we've 0:11:33.360 --> 0:11:37.079 now translated the Shopify dashboard into more than seven languages. 0:11:37.280 --> 0:11:39.480 We now have partners on the ground and in most 0:11:39.520 --> 0:11:41.920 of those countries as priority countries that can help you 0:11:41.920 --> 0:11:43.920 build an online store. And also we have the right 0:11:43.920 --> 0:11:46.240 payment gateways. So for example, in a place like Germany, 0:11:46.440 --> 0:11:48.920 credit card penetration is not as used as like debit 0:11:48.920 --> 0:11:51.480 cards are. So we had to begin the journey to 0:11:51.520 --> 0:11:54.000 find product market fit internationally. But I would say that, 0:11:54.120 --> 0:11:55.800 um the future, in the future, international will be a 0:11:55.880 --> 0:11:57.960 huge part of our story. We're just getting started with 0:11:57.960 --> 0:12:00.719 that right now. Do you still sell T shirts? Uh, 0:12:00.880 --> 0:12:03.000 you can go to my T shirt shop. It's uh, 0:12:03.080 --> 0:12:06.240 it's smoofered out my shopify dot com. It's still up there, 0:12:06.559 --> 0:12:08.520 but but unfortunately I've disabled to check it because I 0:12:08.520 --> 0:12:10.360 don't have time to shift the products out anymore myself. 0:12:10.920 --> 0:12:13.960 But um, but actually it's it's it's really great. In fact, 0:12:13.960 --> 0:12:16.480 Toby or our CEO and founder. He started Shopify because 0:12:16.520 --> 0:12:18.600 he wants sell snowboards on the internet in two thousand 0:12:18.640 --> 0:12:20.840 four and didn't like the software that was available throughout 0:12:20.840 --> 0:12:22.880 his own piece of software, and that software to sell 0:12:22.880 --> 0:12:27.440 those snowboards has become Shopify. That's a great story. That 0:12:27.559 --> 0:12:30.320 is a great story. Harley Finalstein, thank you so much 0:12:30.360 --> 0:12:33.000 for joining us. Harley as the chief operating officer of Shopify. 0:12:33.040 --> 0:12:35.640 There based in Ottawa, Ontario, kind of, but he joins 0:12:35.679 --> 0:12:57.000 us here in our Bloomberg Interactor Brokers studio. President Trump 0:12:57.040 --> 0:12:59.880 and a group of leading Democrats announced a promise of 0:13:00.120 --> 0:13:03.320 two trillion dollar infrastructure plan. To get a sense of 0:13:03.360 --> 0:13:06.520 what this means, we welcome Michael Jay's. Michael is the 0:13:06.640 --> 0:13:10.840 chief US Public Policy AMANUS WILL strategist at Morgan Stanley. Michael, 0:13:10.840 --> 0:13:13.400 thanks so much for joining us. So what is your 0:13:13.480 --> 0:13:16.600 take on this plan that was announced after the Democrats 0:13:16.640 --> 0:13:20.040 met with President Trump? Yeah, and thanks for having me 0:13:20.080 --> 0:13:23.480 on UM. I would say that until someone can identify 0:13:23.600 --> 0:13:26.040 what two trillion dollar tax i can fund this, that 0:13:26.080 --> 0:13:29.079 you should be deeply skeptical that something like this can happen. 0:13:29.200 --> 0:13:30.520 And in our view, we don't think you're going to 0:13:30.559 --> 0:13:35.160 see an infrastructure package before one because of it. I mean, 0:13:35.200 --> 0:13:37.680 there's just a couple of numbers to put it in perspective, 0:13:37.960 --> 0:13:39.679 because there's a lot of different taxes that have been 0:13:39.720 --> 0:13:42.240 floated out there is potentially pay for us. Right, So 0:13:42.679 --> 0:13:45.760 if you increase the gas tax, that would get you 0:13:45.800 --> 0:13:48.800 about four hundred billion dollars. If you're rolled back the 0:13:48.960 --> 0:13:51.640 corporate tax rate by five points, that gets you about 0:13:51.640 --> 0:13:53.800 five hundred billion dollars. If you took the two top 0:13:53.840 --> 0:13:56.200 two tax brackets up by a percentage each that gets 0:13:56.200 --> 0:13:58.520 you a d and twenty billion. Those are all extremely 0:13:58.600 --> 0:14:00.640 politically sensitive, and if you at all of them, you'd 0:14:00.679 --> 0:14:03.679 still have a trillion dollars left to go. So I 0:14:03.720 --> 0:14:05.959 think fair to say, can color us pretty skeptical about 0:14:05.960 --> 0:14:08.960 this going forward? So, Michael, there is a question though, 0:14:09.040 --> 0:14:12.840 of the private intervention here, the private involvement in some 0:14:12.880 --> 0:14:16.319 sort of infrastructure plan. To Lane show, the Transportation Secretary 0:14:16.400 --> 0:14:20.120 saying telling Bloomberg Television at the Melican Institute Global Conference 0:14:20.120 --> 0:14:22.040 in Los Angeles that there are private pension funds as 0:14:22.040 --> 0:14:24.000 well as damnment funds that would love to play to 0:14:24.320 --> 0:14:27.240 the opportunity to invest in public infrastructure. Do you see 0:14:27.320 --> 0:14:31.160 that materializing something on that front. Yeah. Yeah, it's a 0:14:31.200 --> 0:14:35.200 really interesting idea. And obviously we we've dealt with this 0:14:35.320 --> 0:14:38.640 for uh ten twenty years now, the sort of the 0:14:38.920 --> 0:14:41.920 talk of their being a tremendous amount of interest from 0:14:42.000 --> 0:14:46.680 private capital and investing and owning and operating public infrastructure assets. 0:14:46.720 --> 0:14:49.000 But uh, you know, from my perspective, as I mean 0:14:49.040 --> 0:14:51.640 it's poll analysts, I can tell you that I don't 0:14:51.800 --> 0:14:54.880 feel confident that the supply of those assets is there. 0:14:55.040 --> 0:14:56.960 And what I mean by that is that you know, 0:14:56.960 --> 0:14:59.440 state local government's own about eighty eight percent of all 0:14:59.480 --> 0:15:03.680 infrastructure assets in the US, but they're sort of highly 0:15:03.720 --> 0:15:08.800 incentivized to keep them right, so it's a revenue producing asset. Generally, 0:15:08.840 --> 0:15:11.760 state lowe garments don't give them up unless they are 0:15:11.840 --> 0:15:18.120 somewhat desperate for money. And uh, the cost of financing, uh, 0:15:18.160 --> 0:15:20.640 the construction of new assets is frankly just a lot 0:15:20.720 --> 0:15:24.000 cheaper through the tax exem bond market than giving up 0:15:24.160 --> 0:15:26.560 the cost of capital seven to eight percent returns for 0:15:26.640 --> 0:15:30.400 the private sector. So um, while you know P three's 0:15:30.440 --> 0:15:34.320 are generally the rule rather than the exception in other countries, 0:15:34.840 --> 0:15:37.360 largely because of the federalist system, we've set up here 0:15:37.360 --> 0:15:40.320 in the availability of tax exam financing. They're more the 0:15:40.320 --> 0:15:43.359 exceptions in the rule, and I would expect that to continue. 0:15:43.440 --> 0:15:45.920 So I think it's a bad idea to do what 0:15:46.000 --> 0:15:48.680 you can to incentivize private capital come in, but I 0:15:48.680 --> 0:15:52.000 wouldn't expect that to be the thing that catalyzes the 0:15:52.040 --> 0:15:55.320 major infrastructure investment that the US needs to get back 0:15:55.360 --> 0:15:59.080 up to speed. So, Michael, if there's two trillion dollar 0:15:59.400 --> 0:16:01.920 number that was thrown out by the Democrats and President 0:16:01.960 --> 0:16:05.320 Trump is not, you know, necessarily that realistic, what do 0:16:05.360 --> 0:16:11.280 you think can actually get done from the federal level. Yeah, Well, unfortunately, 0:16:11.360 --> 0:16:13.760 think on this issue where grid locked until the next 0:16:13.760 --> 0:16:19.080 election because um, frankly, what you need is one party 0:16:19.240 --> 0:16:21.640 in control of both the White House and Congress and 0:16:21.920 --> 0:16:24.640 for them to make this their top priority. And it's 0:16:24.640 --> 0:16:27.040 probably because if you if you know, you go through 0:16:27.080 --> 0:16:30.160 the list of tax revenues that we just talked about, 0:16:30.200 --> 0:16:34.520 there's probably not a politically friendly way to completely fund this, 0:16:34.840 --> 0:16:37.400 and so you need one party or the other to 0:16:37.440 --> 0:16:42.840 kind of frame this as um a deficit financed investment, UM, 0:16:43.000 --> 0:16:45.960 but in sort of politically friendly terms, right, as an 0:16:45.960 --> 0:16:49.320 economic investment or or something some other way that's consistent 0:16:49.360 --> 0:16:52.760 with their ideology. Uh So in the meantime between now 0:16:52.800 --> 0:16:56.840 and then, UM, I think unfortunately you're gridlocked. And even 0:16:56.920 --> 0:16:59.080 if you do the exercise of thinking about, well, what 0:16:59.240 --> 0:17:01.240 if we're wrong again, what if they actually could do 0:17:01.280 --> 0:17:03.760 a funded infrastructure plan, maybe slim it down to a 0:17:03.800 --> 0:17:07.359 trillion dollars over ten years. Um. You know, for investors, 0:17:07.359 --> 0:17:10.720 I don't know that that necessarily sends clear signals on 0:17:10.840 --> 0:17:13.119 what to do. Right. If it's funded, it's not a 0:17:13.240 --> 0:17:15.760 technically a fiscal stimulus, so over the next six to 0:17:15.840 --> 0:17:20.480 twelve months, it doesn't necessarily translate into a GDP boost. Uh. 0:17:20.520 --> 0:17:22.639 You know, there are companies that should benefit from this, 0:17:22.720 --> 0:17:24.560 but if you're rolling back the corporate tax rate, that 0:17:24.600 --> 0:17:27.480 cuts against them, right, or if you're increasing the gas 0:17:27.480 --> 0:17:31.000 tax that hurts autos and freight transportation. So just a 0:17:31.040 --> 0:17:33.280 lot of mixed signals on what investors can take away 0:17:33.320 --> 0:17:35.960 from this. I'm curious from your perspective, what's the most 0:17:35.960 --> 0:17:39.879 pressing infrastructure project that the federal government uh could finance 0:17:40.040 --> 0:17:45.040 or push along that that localities cannot. Well, you know, 0:17:45.080 --> 0:17:47.800 I don't know that there's one project in particular. I mean, 0:17:47.840 --> 0:17:51.600 they're Obviously there are several critical infrastructure projects UH in 0:17:51.680 --> 0:17:54.520 major urban hubs around the country. I think this is 0:17:54.520 --> 0:17:56.960 a situation where there just needs to be more federal 0:17:57.040 --> 0:18:00.320 money brought to bear in the aggregate and that sort 0:18:00.320 --> 0:18:04.840 of priority number one as opposed to being specific and surgical. 0:18:05.600 --> 0:18:07.199 But the reason why I ask is because we've been 0:18:07.240 --> 0:18:09.879 talking about the record volume of cash flooded into the 0:18:09.920 --> 0:18:13.040 municipal bond market, and we've talked about how, yes, these 0:18:13.040 --> 0:18:15.960 are slow moving freight trains when you talk about local governments, 0:18:16.480 --> 0:18:19.320 But why couldn't they take that private money and pump 0:18:19.359 --> 0:18:23.359 it into projects that they need. Well, they can, but 0:18:23.359 --> 0:18:26.879 I think the question of whether or not municipalities are 0:18:26.920 --> 0:18:31.960 willing to access the taxics a market to undertake new 0:18:32.000 --> 0:18:34.680 money financing. Right, So it's not that the money isn't there, 0:18:34.880 --> 0:18:37.680 it's a question of whether or not the willingness is there. 0:18:38.160 --> 0:18:41.320 And the constraint that state and local governments faces kind 0:18:41.359 --> 0:18:44.159 of a It's a combined political and fiscal constraint. And 0:18:44.200 --> 0:18:46.800 what I mean by that is that there's generally reticence 0:18:46.920 --> 0:18:51.159 to um increased taxes to help finance borrowing UM and 0:18:51.200 --> 0:18:55.600 budgets are already constrained from a combination of factors high 0:18:55.680 --> 0:18:59.240 operating leverage for one UM as well as pension overhanging 0:18:59.280 --> 0:19:01.480 a lot of different areas. So you have a system 0:19:01.480 --> 0:19:04.879 where state and local governments spend about the money on 0:19:04.920 --> 0:19:08.080 infrastructure in this country, UM, but for a combination of 0:19:08.119 --> 0:19:11.400 political and fiscal reasons, are constrained. So they have been increasing, 0:19:11.640 --> 0:19:13.560 in particular over the last two years, they have been 0:19:13.600 --> 0:19:17.960 increasing their infrastructure spend, but just not to the degree 0:19:18.320 --> 0:19:20.760 that gets you the sort of catch up the potential 0:19:20.800 --> 0:19:22.640 that we need to to be at. And that's where 0:19:22.640 --> 0:19:26.320 the the federal government's role, UM hypothetically then should be 0:19:26.400 --> 0:19:31.200 to really come in induce that entire process with more money. So, Michael, 0:19:31.480 --> 0:19:33.560 I'm a resident of New Jersey. I take the train 0:19:33.720 --> 0:19:36.640 every day back and forth under the Hudson River tunnels, 0:19:36.680 --> 0:19:38.439 and I fully expect them to cave in on me 0:19:38.680 --> 0:19:42.359 one day. Let's talk about the Gateway project. What is 0:19:42.400 --> 0:19:44.359 the status of that? Because that is going to be 0:19:44.480 --> 0:19:48.000 a state and federal partnership to get that done. What's 0:19:48.000 --> 0:19:52.480 the status of that? Yeah, also a resident of New Jersey. Uh, So, 0:19:52.600 --> 0:19:56.480 I understand where you're coming from. UM. I think this 0:19:56.560 --> 0:20:01.280 is a situation where the need for that projects largely 0:20:01.320 --> 0:20:06.560 already been improved. Um, it's been somewhat delayed over the 0:20:06.640 --> 0:20:09.760 last couple of budget rounds uh and what appears to 0:20:09.800 --> 0:20:13.439 be sort of a personal disagreement between the President and 0:20:13.560 --> 0:20:17.399 Chuck Schumer. Uh. So, I think there's a situation where 0:20:18.080 --> 0:20:20.640 the money, because it's already been approved, will eventually make 0:20:20.680 --> 0:20:25.959 it to its target, but it's being delayed for largely 0:20:26.000 --> 0:20:31.960 reasons of politics, which is not particularly comforting understand. But um, 0:20:32.119 --> 0:20:33.760 this appears to be a situation where the money has 0:20:33.760 --> 0:20:37.240 already approved for it. Yeah. Um, we're speaking with Michael 0:20:37.320 --> 0:20:40.520 Z's chief US public policy I mean strategist at Morgan Stanley. 0:20:40.520 --> 0:20:42.920 I want to just let you know that William Barr, 0:20:42.920 --> 0:20:46.439 Attorney General, is currently giving his opening statement in front 0:20:46.480 --> 0:20:51.080 of the Senate, discussing, of course, the Robert Mueller report 0:20:51.320 --> 0:20:55.440 that he did release UH with with redactions and did summarize. 0:20:55.480 --> 0:20:59.440 There is obviously a concern on the part of Robert Muller, 0:20:59.520 --> 0:21:01.600