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The Return of T+1 Stock Trading, Pricing Offshore Wind · Bloomberg Intelligence

0:02
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Speaker 3: All right, top of the top.
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Speaker 4: Go.
0:25
Speaker 1: Kind of thing today is Wall Street returns to a
0:27
Speaker 1: T plus one stock trading after a century Only in Bloomberg.
0:31
Speaker 1: When people read that kind of story, and maybe I'll
0:34
Speaker 1: find one other person that cares about this, Larry Tapp,
0:37
Speaker 1: He's head of market Structure a Bloomberg Intelligence. Larry, can
0:40
Speaker 1: you explain to us what is going on here? To
0:43
Speaker 1: explain it? Like I'm five years old, because when I
0:45
Speaker 1: started the business, I think it was T plus seven.
0:47
Speaker 1: That was a gentlemanly timeframe. Now it's T plus one.
0:49
Speaker 1: What's going on?
0:51
Speaker 5: Not a problem, Paul? Yeah, you know, starting today, securities
0:56
Speaker 5: traded today will actually settle tomorrow instead of on on Thursday.
1:01
Speaker 5: So what that means is that we buy I buy
1:05
Speaker 5: Apple today, and on tomorrow tomorrow, I get the shares
1:10
Speaker 5: in my account and my broker takes the payment out
1:14
Speaker 5: of my out of my account. Now for most retail
1:17
Speaker 5: it's not going to be that big an issue. It's
1:19
Speaker 5: much more of an institutional issue where the securities in
1:23
Speaker 5: cash don't reside at the broker, where they reside at
1:26
Speaker 5: a third party custodian, and that becomes a little more complicated.
1:30
Speaker 6: So how does it become complicated? Like it seems like
1:33
Speaker 6: a pretty straightforward thing, right, So where do the problems lie?
1:37
Speaker 5: Well, there are there are problems will lie in four
1:41
Speaker 5: or five different areas. The biggest problem is with foreign exchange.
1:48
Speaker 5: So let's just say I am Aberdeen and I'm located
1:52
Speaker 5: in Scotland or wherever, or in London. If they buy Apple,
2:00
Speaker 5: they're going to have to actually send over currency pounds
2:06
Speaker 5: and convert that to dollars and pay for that. The
2:09
Speaker 5: problem is that currency takes two days to settle in
2:12
Speaker 5: standard currency settlement, whereas the securities will settle in one day.
2:17
Speaker 5: So if they buy Apple today, will have to pay
2:19
Speaker 5: for the securities tomorrow. But if they send over pounds
2:22
Speaker 5: to pay for that to cover that, the pounds won't
2:24
Speaker 5: actually get converted to dollars till Thursday, which means they
2:29
Speaker 5: won't have the cash there on time, which means they
2:32
Speaker 5: either have to finance that purchase, or they have to
2:35
Speaker 5: move the cash earlier, or they have to instead of
2:40
Speaker 5: using Swift or CLS, which is the currency settlement system,
2:45
Speaker 5: they actually have to call somebody and say, hey, let's
2:47
Speaker 5: do this on an emergency basis and get this taken
2:51
Speaker 5: care of. And so that's an issue. The second it
2:55
Speaker 5: has to do with securities lending. So if my security
2:59
Speaker 5: is of my apples out on loan, they have to
3:02
Speaker 5: get that back so that I can actually make sure
3:05
Speaker 5: that can get delivered. Now, Apple's probably not a big
3:08
Speaker 5: issue there, but if it's hard to borrow security, it
3:11
Speaker 5: might be much more difficult to find the securities, you know,
3:14
Speaker 5: if I've lent them out to try to collect a feed,
3:17
Speaker 5: getting them back maybe a little bit more problematic. Other
3:21
Speaker 5: issues which impact actually everybody in the US is the
3:25
Speaker 5: allocation confirmation process. So if I'm FIDELI or if I'm
3:29
Speaker 5: a big asset manager, I'm not buying one hundred or
3:31
Speaker 5: two hundred shares of Apple. I'm probably buying one hundred
3:34
Speaker 5: thousand or a million shares of Apple. Trays these days
3:38
Speaker 5: don't necessarily occur in these big blocks like they used to.
3:43
Speaker 5: They get broken up into algos and they get executed
3:45
Speaker 5: in hundred share increments. That said, the und share increments
3:50
Speaker 5: don't settle immediately. They have to be badged up. We
3:53
Speaker 5: have to create an average price. There's a lot of
3:56
Speaker 5: manual or at least what used to be manual effort
3:59
Speaker 5: involved in managing that, and the process just needs to
4:03
Speaker 5: be sped up. And the close out time is generally
4:08
Speaker 5: nine nine PM for that, and so they have between
4:12
Speaker 5: you know, four and nine to get all that operational
4:15
Speaker 5: stuff done and that just takes, you know, takes time
4:18
Speaker 5: sometimes when when it you know, becomes harder to add
4:22
Speaker 5: all this stuff up and average price it out and
4:24
Speaker 5: break them up into the transactions. Because it's probably not
4:28
Speaker 5: a million shares of Apple for one fidelity account. It
4:31
Speaker 5: could be you know, ten different portfolios that are buying
4:35
Speaker 5: Apple and it has to be broken up into you know,
4:37
Speaker 5: ten little clumps. And there are a couple of other issues,
4:41
Speaker 5: but those are the big ones.
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Speaker 1: So given all that, why is a SEC doing this
4:47
Speaker 1: is simply because from a technological perspective, they can, well.
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Speaker 5: The SEC can do a lot of things, but increasingly
4:57
Speaker 5: people are suing the SEC, so there they can't do
5:00
Speaker 5: anything they want. I think the issue here revolves around
5:04
Speaker 5: the Robinhood issue back in January of twenty twenty one,
5:08
Speaker 5: where they got a margin call to come up with
5:10
Speaker 5: three billion dollars to cover all the memestock buying. And
5:14
Speaker 5: so there's an old saying in the back office that
5:17
Speaker 5: nothing good ever happens between trading and settlement date. So
5:21
Speaker 5: the challenge there is that if for whatever reason, XYZ
5:26
Speaker 5: broker goes bankrupt, you know, you know on one day,
5:33
Speaker 5: the shorter the settlement period is, the more likely that
5:37
Speaker 5: those transactions get paid for and they don't have to
5:41
Speaker 5: be funded by you know, the industry, because right now
5:44
Speaker 5: what happens is all these transactions washed through the DTCC.
5:48
Speaker 5: The DTCC, the depository trust guarantees settlements. So if God forbid,
5:54
Speaker 5: a broker goes down, you know, the other side of
5:59
Speaker 5: the isn't broken. But to do that they have to
6:03
Speaker 5: take margin from virtually the whole industry. And so if
6:07
Speaker 5: you shorten the settlement cycle, the risk of failure goes down,
6:11
Speaker 5: and so the amount of margin that you have to
6:13
Speaker 5: put up to guarantee those trades goes down, and so
6:19
Speaker 5: it just takes less risk, It takes risk out of
6:23
Speaker 5: the settlement system.
6:25
Speaker 6: So Larry, with that in mind, how long are we
6:27
Speaker 6: going to know? At what point when we know if
6:30
Speaker 6: T plus one is working or the difficulties are cropping up,
6:35
Speaker 6: when are we going to know that?
6:37
Speaker 5: Well, it depends on who we is, the brokers and
6:41
Speaker 5: the custodians and the folks involved that the transactions will
6:45
Speaker 5: know pretty quickly, you know. The problem is that data
6:51
Speaker 5: to the rest of the public probably won't be known
6:55
Speaker 5: for a while. And where we expect to see problems
6:58
Speaker 5: occur would be in the fail numbers. So if if, if,
7:02
Speaker 5: if I have to, if I'm a European, if I
7:04
Speaker 5: go back up, I'm Aberdeen, and I have to pay
7:06
Speaker 5: for Apple and the US and my payment doesn't come
7:09
Speaker 5: in two things Leiter happen. One is that I'll have
7:13
Speaker 5: to borrow cash from my bank, in which case we
7:18
Speaker 5: may never know about it because it's it'll just be
7:20
Speaker 5: wind up being a loan from X y Z bank
7:24
Speaker 5: to Aberdeen. Or two, the securities will fail and then
7:30
Speaker 5: the fail numbers come out on a delayed basis, so
7:33
Speaker 5: we won't know what the fails wind up going up
7:35
Speaker 5: for a couple of weeks. And so that's where and
7:39
Speaker 5: so and the third issue is that if all hell
7:41
Speaker 5: breaks loose and we have a real problem, that'll be
7:46
Speaker 5: known in the back offices before anything. And the question is,
7:50
Speaker 5: you know what kind of transparency will we get out
7:52
Speaker 5: of it. Maybe we'll know some stuff from the Federal
7:55
Speaker 5: Reserve if things go drastically awry, or the d DCC,
8:00
Speaker 5: your CEFMA. But they're going to have to They're gonna
8:03
Speaker 5: have to publish that information. It's not like something that
8:05
Speaker 5: we could see on a screen on the Bloomberg screen, right,
8:09
Speaker 5: A lot of that stuff is fairly private data.
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Speaker 1: All right, Larry, We're gonna to leave it there. Great stuff.
8:14
Speaker 1: Larry tab head of market Structure Bloomberg Intelligence. He is
8:18
Speaker 1: on top of He is the leading voice in the
8:20
Speaker 1: marketplace a back all these markets actually work. This is Bloomberg.
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8:43
Speaker 2: Just say Alexa, play Bloomberg eleven thirty Alex.
8:47
Speaker 1: This is how it was described to buy. Our next
8:50
Speaker 1: guest to me the first time I met him. The
8:51
Speaker 1: biggest company you never heard of?
8:53
Speaker 4: For me?
8:54
Speaker 1: Love that My man was I this is a fifty
8:56
Speaker 1: billion this is Arthur J. Gallagher and Company. It's an
8:59
Speaker 1: insurance company. I don't anything about insurance, and maybe that
9:01
Speaker 1: has some something to do with it. But it's fifty
9:03
Speaker 1: four billion dollars in market cap. I mean, it's up
9:05
Speaker 1: ten percent this year of the stock, up twenty three
9:07
Speaker 1: percent over the trailing twelve months. It just up into
9:10
Speaker 1: the right every year. Why haven't I paid it more
9:13
Speaker 1: attention to this one? But thank you.
9:14
Speaker 6: It's like a family business.
9:15
Speaker 4: I know.
9:15
Speaker 1: Great grandfather Pac Allagher joins this year, great grandson of
9:18
Speaker 1: the founder. He's the chief executive officer of Gallagher Insurance.
9:22
Speaker 1: Pat talk to us about your company. You're based on Chicago.
9:25
Speaker 1: Talk to us about a typical customer of yours and
9:28
Speaker 1: a typical piece of business you do for your customers.
9:30
Speaker 1: What are you guys really focusing on these days?
9:32
Speaker 4: Well, first of all, pall we're not an insurance company,
9:34
Speaker 4: so we don't take risks. We're insurance programs.
9:37
Speaker 1: So much rights.
9:39
Speaker 4: And it was my grandfather start of the company, not
9:41
Speaker 4: my great grandfather. But anyway, every single day we get
9:44
Speaker 4: up and we talk to customers about what the things
9:46
Speaker 4: are that they are facing them that could cause real
9:50
Speaker 4: disaster in their business. So this can be a business
9:52
Speaker 4: as large as any of the largest companies in America
9:55
Speaker 4: with professional risk management staff, all the way down to
9:58
Speaker 4: the smallest of companies that you know in neighborhood, and
10:01
Speaker 4: each of these businesses faces all kinds of complex risk
10:04
Speaker 4: that's becoming more complex as we sit here. We never
10:07
Speaker 4: ever thought of cyber ten years ago. Cyber is a
10:10
Speaker 4: huge risk. Everybody's concerned about it. I tell our production
10:14
Speaker 4: for us, if you're talking to the largest company in America,
10:17
Speaker 4: or you're talking to someone who owns nothing more than
10:19
Speaker 4: a sundry shop, they've got to be concerned about this.
10:22
Speaker 4: And now you add AI to that, and so you
10:24
Speaker 4: see the world everywhere. On top of that, of course,
10:28
Speaker 4: you've got climate change and weather related issues that are
10:30
Speaker 4: happening across the world, which is one of the reasons
10:33
Speaker 4: why you see such a difficult time, for instance, getting
10:36
Speaker 4: homeowners insurance in places like southern southern Florida. The point
10:40
Speaker 4: is that every single company, every single organization out there,
10:44
Speaker 4: faces these risks. What do they do with them. Insurance
10:48
Speaker 4: plays one role. The other part of a broker's role
10:50
Speaker 4: is to say, there's some things that aren't ensurable, Now,
10:53
Speaker 4: how do we deal with that? What are the things
10:54
Speaker 4: we do to help you control that. So we look
10:56
Speaker 4: at a full spectrum of risk for a client and say,
10:59
Speaker 4: these are the things that we can do to help
11:01
Speaker 4: you deal with that as you go forward, and that
11:04
Speaker 4: is incredibly valuable. We have a survey that we're just
11:08
Speaker 4: finalizing the details on now. We talked to about one
11:11
Speaker 4: thousand business owners across America and it's interesting to me
11:15
Speaker 4: because it really is a finger on the pulse. They're
11:19
Speaker 4: very concerned about weather related issues. Oh yeah, weather has
11:22
Speaker 4: all of a sudden gone from something that's important on
11:24
Speaker 4: the coasts to something that's important everywhere. I mean, I
11:27
Speaker 4: grew up in the Midwest. We never had tornadoes in
11:30
Speaker 4: the fall. Now that's normal. So just unfortunately a week
11:34
Speaker 4: ago in Iowa there was a terrible school So people
11:36
Speaker 4: are worried about that. They're worried about tech.
11:39
Speaker 6: So how many how many? So what kind of customers
11:42
Speaker 6: come to you and you say and they're like I
11:45
Speaker 6: can't get coverage on this, or like I need coverage
11:47
Speaker 6: on this, but I can't get it, or how has
11:50
Speaker 6: that conversation evolved just in the last five years.
11:53
Speaker 4: Oh, it's huge, So let's let's first of all, a
11:56
Speaker 4: big part of what we do is help people take
11:58
Speaker 4: their own risk. So that can take the form of
12:00
Speaker 4: a large client creating a self insured platform where we
12:03
Speaker 4: ensure excess of large deductibles. It can also go on
12:07
Speaker 4: all the way to the middle market where groups band
12:09
Speaker 4: together to form captive insurance companies. So the first the
12:13
Speaker 4: first line of defense, of course, is to look at
12:15
Speaker 4: all this and say what's insurable. Okay, you've got plants
12:18
Speaker 4: in Iowa, You've got plants in Naples, Florida. How's that
12:22
Speaker 4: going to shake out? What's that going to look like. Secondly,
12:24
Speaker 4: you've got workers. You have to ensure the worker's compensation.
12:28
Speaker 4: Those types of things you check off the list first.
12:30
Speaker 4: Then you come back and say, these things either shouldn't
12:33
Speaker 4: be or can't be insured. And there, Alexis really is
12:37
Speaker 4: really the point of differentiation, because that's where we bring
12:40
Speaker 4: an expert in to your point. If you ask anybody
12:43
Speaker 4: out in the marketplace, not everything's insurable. Who's going to
12:47
Speaker 4: help me? If you happen to be a builder. That's
12:50
Speaker 4: a different answer than if you happen to be a school,
12:52
Speaker 4: school district or university. So you have to have people
12:55
Speaker 4: that talk that language, and that is really what differentiates us.
12:59
Speaker 4: It's not just about quoting insurance.
13:01
Speaker 1: And you're a global business. Talk to us about the
13:05
Speaker 1: business here in the US versus maybe some of the
13:07
Speaker 1: other bigger markets outside the US.
13:10
Speaker 4: So we are global business. We like to say that
13:12
Speaker 4: any account of any size, located anywhere in the world,
13:15
Speaker 4: we can do and we can be helpful too. If
13:17
Speaker 4: you look at the United States, though, we have a
13:19
Speaker 4: very interesting business here in that it's incredibly fragmented right now.
13:24
Speaker 4: We have thirty thousand competitors. Those aren't people, those are firms.
13:29
Speaker 4: So in your local community, you know, you drive by
13:31
Speaker 4: main Street and you'll see Jones Insurance that's a competitor
13:35
Speaker 4: of ours. So it goes from those thirty thousand in
13:39
Speaker 4: business insurance, the top one hundred went all the way
13:41
Speaker 4: down to thirty five million, thirty six million in revenue.
13:44
Speaker 4: We did about ten billion last year and the other
13:47
Speaker 4: twenty nine nine hundred are smaller than that. So it's
13:50
Speaker 4: just incredibly fragmented business with professionals of all sizes and
13:54
Speaker 4: sorts around the country. That we have a very strong
13:57
Speaker 4: platform of acquisitions and we bring those people in, we
14:00
Speaker 4: don't want them to leave us. We feel that one
14:03
Speaker 4: plus one can equal five. Paul, you're in your community,
14:08
Speaker 4: you know your people. You're very good at insurance. But
14:11
Speaker 4: when we bring our capabilities in, when we bring our
14:14
Speaker 4: data and analytics. Now that big account in town, that
14:17
Speaker 4: large contractor the large university that you knew you had
14:20
Speaker 4: to stay away from, let's go get it together. And
14:23
Speaker 4: if that energizes you, you'll be a great fit for
14:25
Speaker 4: our acquisition team.
14:27
Speaker 1: You're going to sell insurance, No, but it's people I
14:30
Speaker 1: know that so insurance do fair very well. And you
14:32
Speaker 1: spend a lot of time on the golf course too,
14:33
Speaker 1: which I don't figure out that business.
14:35
Speaker 4: Oh ok, yeah, we are recruiting Paul.
14:39
Speaker 1: By the way, I think exactly what is a typical
14:43
Speaker 1: acquisition for you guys. Is there a typical size you
14:45
Speaker 1: like or is there a typical revenue.
14:46
Speaker 4: Number you like? Well, we're not afraid to do large deals,
14:49
Speaker 4: and in the last ten years we've done a number
14:51
Speaker 4: that have reached that billion mark and we're very proud
14:53
Speaker 4: of that. But really if you go back to my
14:55
Speaker 4: comment about size of the availability in the United States,
14:59
Speaker 4: and this is mirrored globally. Most of the people who
15:03
Speaker 4: are out there that are private are smaller. And by
15:06
Speaker 4: that I mean our average acquisition size is probably somewhere
15:09
Speaker 4: around ten million in revenue. Okay, it's probably owned by
15:11
Speaker 4: two or three entrepreneurs, may have started at their dining
15:14
Speaker 4: room table, or their parents may have started it. They've
15:17
Speaker 4: grown the business to a great size for them in
15:20
Speaker 4: their local community. To your point, Paul, they make a
15:22
Speaker 4: very good living, and yet at the same time, if
15:26
Speaker 4: they want to stay in touch with what's happening in
15:29
Speaker 4: the future, AI, cyber data analytics, et cetera, they need
15:33
Speaker 4: a partner. And that's what we bring. And again back
15:36
Speaker 4: to the point that we don't synergize out costs and
15:39
Speaker 4: say come in here, get rid of everybody. We just
15:41
Speaker 4: want your book of business. We want to take that
15:44
Speaker 4: platform and really expand it.
15:46
Speaker 1: That thirty seconds left, Pat, just how's your year been
15:48
Speaker 1: so far?
15:49
Speaker 2: Years?
15:49
Speaker 4: Looking great? Thank you very much. The last five years
15:52
Speaker 4: have been terrific, and we look at the future and
15:54
Speaker 4: we're just getting started.
15:55
Speaker 1: All right, sounds good to me. The insurance business is
15:57
Speaker 1: a good business. They all tell me that, but I
15:58
Speaker 1: just don't understand it.
16:00
Speaker 3: To be honest, I buy a lot of it. Yeah,
16:01
Speaker 3: I was gonna say, we buy a lot of it.
16:03
Speaker 3: This is very true.
16:04
Speaker 1: Yeah, I thought a lot of Pat Gallagher. He's the
16:06
Speaker 1: chief executive officer of Gallagher Insurance. Joining Slive here on
16:10
Speaker 1: a Bloomberg Interactive Brokers studio. Again, this is a large
16:14
Speaker 1: insurance brokerage firm, so I have to make sure I
16:17
Speaker 1: get that correct. Matt Palosol always on top of me
16:19
Speaker 1: about that. But I'm just looking at the revenue. Ten
16:21
Speaker 1: billion dollars of revenue, so it's just really extraordinary.
16:25
Speaker 2: You're listening to the Bloomberg Intelligence podcast. Catch us live
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Speaker 2: weekdays at ten am Eastern on fo card playing Android
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Speaker 2: outo with the Bloomberg Business app. Listen on demand wherever
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Speaker 2: you get your podcasts, or watch us live on YouTube.
16:40
Speaker 1: All right, let's check in with guy. He's pretty good
16:43
Speaker 1: on tech Space, He's okay, he's not bad. On Rock
16:46
Speaker 1: run our senior technology anelsts for Bloomberg Intelligence. On Rock,
16:49
Speaker 1: I was kind of paraphrasing what I think you're gonna
16:51
Speaker 1: say about this report that you know their iPhone shipments
16:55
Speaker 1: are up at gajillion percent here in the latest period.
16:58
Speaker 1: But talk to us about this data coming out of China.
17:00
Speaker 1: How reliable is it and how predictive is it? And
17:05
Speaker 1: if it's up fifty percent in the latest period, why
17:07
Speaker 1: isn't Apple stock up a lot more today?
17:10
Speaker 3: Yes, that's a very good question, Paul, And again I
17:12
Speaker 3: have nothing against the people who collect this data and
17:15
Speaker 3: figure it out, but this is the way I looked
17:17
Speaker 3: at it. In jan and Feb this data was down
17:20
Speaker 3: I think minus thirty five minus forty percent or so,
17:24
Speaker 3: and then when Apple reported their quarter, they said, you
17:26
Speaker 3: know what, mainland China, our iPhone revenue grew. So there
17:30
Speaker 3: is not that direct correlation between the two numbers. And
17:34
Speaker 3: it could be because there are times when Apple you know,
17:37
Speaker 3: sells phone, but it's stuck in the inventory channel in between.
17:41
Speaker 3: Then they put out a sale and then gets cleared up.
17:44
Speaker 3: So it's a question of timing not so much. But
17:46
Speaker 3: the big thing for us is that there is there
17:49
Speaker 3: was a downdraft of negative news coming out of China.
17:52
Speaker 3: It's turned positive two months in a row, so that's
17:55
Speaker 3: a good news. Seems more like a cyclical issue to me.
17:58
Speaker 3: Than a structural problem people giving away Apple phones not
18:02
Speaker 3: buying it, So that's not the case. So that's a
18:03
Speaker 3: good news. So I think, you know, from an overall
18:06
Speaker 3: point of sentiment point of view, I think this is
18:08
Speaker 3: good news for Apple that China, which in our view
18:11
Speaker 3: is the most important market for them over the next
18:14
Speaker 3: three to five years, and we are not going to
18:16
Speaker 3: see you know, let's say eurobar declining share. I think
18:20
Speaker 3: it's it's going to be okay over the next few years,
18:23
Speaker 3: even if it goes ups and down. So that's really
18:25
Speaker 3: the big takeaway for us. DAR.
18:27
Speaker 6: So can I call this a nothing burger? No, that's
18:31
Speaker 6: not true because I say that because you didn't hear it.
18:34
Speaker 6: But Paul was guessing you would call this data a
18:37
Speaker 6: nothing burger. But you're being too polite about it.
18:39
Speaker 3: I think done a wrong So sentiment vice think about it.
18:42
Speaker 3: The only thing that we've been hearing for almost a
18:44
Speaker 3: year now that people don't want to buy iPhones in China,
18:47
Speaker 3: it's because of the government and nationalism and so many
18:50
Speaker 3: all things. And I think this one tells us that's
18:52
Speaker 3: not the case. People are strapped for cash and if
18:56
Speaker 3: they get a good deal on a phone, they'll buy it.
18:58
Speaker 3: So what do I expect. I expect Apple to go
19:00
Speaker 3: out and do more promotional activities over the next few
19:03
Speaker 3: months to try and sell more products into the market. Now,
19:07
Speaker 3: not every market is different. Apple's not known to give
19:10
Speaker 3: a lot of discounts globally, but if that's what they
19:13
Speaker 3: have to do in China, that's what.
19:14
Speaker 5: They have to do, all right, fair enough.
19:16
Speaker 6: But let's go to the discounts though for a second.
19:18
Speaker 6: So even if we don't say, take this data as gold,
19:21
Speaker 6: but just directionally, Apple and discounts tend not to go together,
19:25
Speaker 6: at least in my mind. What do you make of that?
19:28
Speaker 3: Yeah, I think this is a new thing for Apple,
19:30
Speaker 3: and again they're probably grinding their teeth and not liking it.
19:33
Speaker 3: But you know what, they have the rest of the
19:35
Speaker 3: world to make up for it. In the US, for example,
19:37
Speaker 3: people are liking to buy the higher end model, the
19:40
Speaker 3: pro model. That helps margins, that helps the adage selling price.
19:44
Speaker 3: So if they have to give a little bit up
19:45
Speaker 3: to gain market share in China, I think they should
19:48
Speaker 3: do it because you don't want to be branded as
19:50
Speaker 3: somebody a second player in China out there, which is
19:54
Speaker 3: you know, in our view, the most important market for
19:56
Speaker 3: growth for Apple. Otherwise what's going to happen is you're
19:59
Speaker 3: not going to see any growth in China. For that matter,
20:02
Speaker 3: their top line growth is not going to grow, and
20:04
Speaker 3: that's not good for the stock. Also, and ra' talk to.
20:07
Speaker 1: Us about India. What is it as a percentage of
20:10
Speaker 1: Apple's business today and what do you think it can
20:12
Speaker 1: be five, six, seven years from now.
20:15
Speaker 3: Yeah, so in our view, apples very small, less than
20:17
Speaker 3: five percent. In fact, when you we have done a
20:20
Speaker 3: lot of work on the number of shipments in India,
20:24
Speaker 3: Apple's market share is you know, less than five percent.
20:27
Speaker 3: But here's the kicker. Ninety five percent of the phones
20:30
Speaker 3: don't even qualify for to be in the Apples you
20:34
Speaker 3: could say ecosystem, which means they're under three hundred dollars.
20:38
Speaker 3: As the Indian economy grows, as the middle class becomes
20:41
Speaker 3: more affluent, I think Apple's going to be a winner
20:44
Speaker 3: over here. But think about it this way. When we
20:46
Speaker 3: look at the US with per capita income of let's
20:48
Speaker 3: say sixty five seventy thousand dollars, somewhere in that realm,
20:51
Speaker 3: China is around twelve and a half thousand dollars. India
20:54
Speaker 3: is about two thousand, twenty five hundred dollars. So when
20:56
Speaker 3: you look at these three ecosystems, I think I think
21:00
Speaker 3: when we look at that growth driver from five years onwards,
21:04
Speaker 3: that's where you know, India comes in and there's a
21:06
Speaker 3: massive market there for Apple. But that's not going to
21:08
Speaker 3: happen next year or the.
21:09
Speaker 6: Year after, right, that's sort of a structural change, et
21:12
Speaker 6: cetera in the market. I don't round what else are
21:15
Speaker 6: you working on right now?
21:17
Speaker 3: I think the biggest thing right now is what happens
21:19
Speaker 3: at WWDC and whether that's going to be enough to
21:21
Speaker 3: sustain this. You know, I would say optimism that we
21:25
Speaker 3: have seen in Apple for the first time, I would
21:27
Speaker 3: say in the last eighteen months, because we all knew
21:30
Speaker 3: China was a problem. We saw that in the numbers,
21:33
Speaker 3: sales numbers and not very strong. But AI has that
21:37
Speaker 3: outside potential to go out and spur the next sale
21:40
Speaker 3: off phones. Why because there is a massive amount over
21:44
Speaker 3: forty three percent of the phones our iPhone twelve and below,
21:47
Speaker 3: which is old phones with lower you know, you could
21:50
Speaker 3: say RAM, memory and other things. Now for if they
21:53
Speaker 3: go out and say I have really cool features coming
21:56
Speaker 3: into the phone, you got to go find a way
21:58
Speaker 3: to upgrade it. Now, if some he has a fourteen
22:00
Speaker 3: or a fifteen, they're most likely not going to upgrade it.
22:03
Speaker 3: But if you have something and I can iPhone ten,
22:05
Speaker 3: iPhone eleven, there may be a reason enough for you
22:07
Speaker 3: to upgrade it. So that really brings a new fresh
22:12
Speaker 3: you could say life and Apple, and that's really important.
22:15
Speaker 3: On June tenth, when they get this developer conference.
22:18
Speaker 1: All right, I'm sitting on an Apple iPhone eleven. When
22:23
Speaker 1: do I upgrade?
22:24
Speaker 3: You should update it in the winter when the sixteen
22:27
Speaker 3: comes out or whatever the name they give that phone,
22:30
Speaker 3: because it should have a faster processor, it should have
22:33
Speaker 3: a lot more memory. They'll just make things easier for you.
22:35
Speaker 3: You can watch your golf shows in a little bit
22:37
Speaker 3: easier way.
22:38
Speaker 2: Very good.
22:39
Speaker 1: Now, Tim Cook's sixty three, I'm gonna s whitch gears
22:41
Speaker 1: on you? Is there any push for this guy to
22:44
Speaker 1: put out a succession plan of note or things just
22:48
Speaker 1: going so well at Apple that nobody's pushing for that.
22:51
Speaker 3: See, Tim's done well. The Apple's done very well under Tim.
22:56
Speaker 3: I have no way of predicting what he's going to leave,
22:58
Speaker 3: but I really I mean, in my view, if you
23:01
Speaker 3: were to somehow ring fence the China business. Apple alone
23:06
Speaker 3: is a company that I think, you know, can do
23:09
Speaker 3: can do good by itself. It doesn't really need a
23:12
Speaker 3: massive charismatic leader in order to you know, come up
23:15
Speaker 3: with that. This is a company with a global brand,
23:18
Speaker 3: the products people love, people trust the products, and the
23:21
Speaker 3: install base is very loyal. I mean, we think somewhere
23:24
Speaker 3: in the mid nineties people can keep the phones. They
23:27
Speaker 3: don't go out and change into a new ecosystem. I
23:30
Speaker 3: think this is a phenomenal business. But you know, you
23:34
Speaker 3: do need certain innovation, but not to the level you
23:37
Speaker 3: need in other technology companies now.
23:39
Speaker 6: But I wonder if you just need a really good
23:40
Speaker 6: China ambassador within that company.
23:44
Speaker 3: Yeah, I mean Tim's has been. Tim has been an
23:46
Speaker 3: amazing China ambassador. If you go back, even the days
23:49
Speaker 3: when we had China Tarraff wars, Apple really you know,
23:52
Speaker 3: skated unhurt from there. Now. The only issue we have
23:55
Speaker 3: been having in the last two three years is supply
23:57
Speaker 3: chain problems in China because of COVID. Then after that
24:00
Speaker 3: the consumers slow down and then a little bit negative
24:03
Speaker 3: you know, you could say fights between the US and
24:05
Speaker 3: China and that has had an impact on Apple. But
24:09
Speaker 3: you know, in our view, if there is there is
24:10
Speaker 3: the way to ring fact that I would say risk.
24:14
Speaker 3: You know, Apple, Apple is a good company to look.
24:16
Speaker 1: At all right, Honro, thanks so much for joining us
24:18
Speaker 1: on a rock run a senior technology anaels Bloomberg Intelligence.
24:22
Speaker 1: Just looking at the FA function for Apple revenue, the
24:27
Speaker 1: forecast for their September twenty fourth or fiscal twenty four
24:31
Speaker 1: year three hundred and eighty seven billion dollars of revenue,
24:35
Speaker 1: net income, one hundred and one billion dollars in free
24:38
Speaker 1: cash flow of one hundred and four billion dollars.
24:41
Speaker 3: Look a lot of money.
24:42
Speaker 6: That's like they make a lot of money.
24:50
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25:01
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25:08
Speaker 6: We also take a view of Bloomberg ne EF. It's
25:10
Speaker 6: Bloomberg New Energy Finance. They're a research center within Bloomberg
25:15
Speaker 6: that covers commodities, power, transport, industry, buildings, AG sectors, technology,
25:20
Speaker 6: sustainable issues, all to help businesses and companies kind of
25:23
Speaker 6: learn how they can transition as we move to net
25:26
Speaker 6: zero at some point. And today we're going to take
25:28
Speaker 6: a look at offshore wind here in the US. It's
25:31
Speaker 6: been a real nightmare, particularly here on the East Coast.
25:34
Speaker 6: In some ways it makes sense, big ocean, lots of wind.
25:37
Speaker 6: Stick a turbine in there, boom you have renewable power.
25:40
Speaker 6: The issue, though, is many of the issue has been
25:42
Speaker 6: in pricing. The contracts that were signed didn't account for
25:45
Speaker 6: the massive amount of inflation that we've seen in the
25:47
Speaker 6: last couple of years, and a lot of projects have
25:49
Speaker 6: then been canceled. So the question really is what happens now,
25:52
Speaker 6: particularly as inflation comes down. Oliver metcalf is head of
25:56
Speaker 6: Wind research at BNF and he joins US now in
25:59
Speaker 6: the Interactive Brokers studio. Ali, thanks for joining me, appreciate
26:02
Speaker 6: thanks for having me on. So I just sort of
26:04
Speaker 6: set up with the problem was where are we now
26:08
Speaker 6: with that?
26:10
Speaker 7: Well, it's been a difficult last twelve months for the
26:12
Speaker 7: US off your wind industry. We saw around nine gigawatts
26:15
Speaker 7: of off take contracts, so contracts for the generation of
26:18
Speaker 7: these projects get canceled. That's around a third of the
26:21
Speaker 7: contracts that were signed in total for the US off
26:24
Speaker 7: your Wind pipeline. You mentioned there it was because the
26:26
Speaker 7: high inflation, high interest rates have really hit the technology
26:30
Speaker 7: as well. So it's a really capitally intensive technology and
26:34
Speaker 7: so a higher cost of financing hits off your Wind
26:37
Speaker 7: especially hard compared with other technologies. We're beginning to see
26:41
Speaker 7: a bit of a turning of the fortunes. So we're
26:43
Speaker 7: seeing the first couple of commercial scale off your wind
26:47
Speaker 7: projects start to come online in the US. One has
26:49
Speaker 7: already come online off the coast of New York, and
26:52
Speaker 7: one that will feed Parento Massachusetts is under construction at
26:55
Speaker 7: the moment. So some good stories beginning. And we're also
26:58
Speaker 7: seeing states willing to adjust this obvioslete mechanisms to account
27:01
Speaker 7: for some of the pain that projects have been feeling recently.
27:04
Speaker 7: So offer developers more protection in the contracts they off take,
27:08
Speaker 7: contracts they're offering, and just simply higher prices that these
27:11
Speaker 7: these developers need to make their return.
27:14
Speaker 1: So talk to us about just wind research. How is
27:16
Speaker 1: wind I'm sorry, wind power? How is that from an
27:21
Speaker 1: efficiency perspective versus solar and versus other stuff that's out there.
27:25
Speaker 1: How competitors is wind.
27:28
Speaker 7: So you get kind of higher productivity from a wind
27:30
Speaker 7: turbine compared with a solar panel and that and that's
27:35
Speaker 7: even more productive offshore, and so offshore wind you have
27:38
Speaker 7: more consistent, more consistent wind speeds, stronger winds as well.
27:42
Speaker 7: So that means kind of if you imagine a wind
27:44
Speaker 7: turbine operating one hundred percent of the time, that's kind
27:47
Speaker 7: of the theoretical maximum. You can get between forty to
27:50
Speaker 7: sixty percent of that generation typically on a wind project.
27:55
Speaker 7: Now that sixty percent isn't too far off the kind
27:58
Speaker 7: of percentage we could see from a kind of conventional generator,
28:02
Speaker 7: a gas or a cold plant.
28:03
Speaker 6: Oh really, what about like nuclear? It's a nuclear a
28:06
Speaker 6: lot better than that.
28:07
Speaker 7: Nuclear is much harder to ramp up and down, and
28:09
Speaker 7: so they tend to operate completely as base loads. So
28:12
Speaker 7: you get really high what we call capacity factors for nuclear.
28:15
Speaker 7: So it's operating almost all the time if it's if
28:17
Speaker 7: it's part of the mix.
28:18
Speaker 6: So you mentioned so part of the issue is the
28:21
Speaker 6: off take contract. So basically, if I'm a developer, you know,
28:24
Speaker 6: Paul goes and says, okay, I'm gonna buy this win
28:26
Speaker 6: from you for this amount of time. He's going to
28:28
Speaker 6: pay me this, which gives me clarity on the how
28:30
Speaker 6: I can go and invest that money. But my costs
28:32
Speaker 6: go up and I'm kind of left naked at that point.
28:35
Speaker 6: How is that being resolved? You mentioned subsidies, but like
28:39
Speaker 6: what else? Because that gap is very unpredictable. And I
28:42
Speaker 6: remember talking to Siemens North America ahead about that and
28:45
Speaker 6: they're like, we took on all the commodity risk and
28:48
Speaker 6: they're trying to change that now because they're not commodity traders.
28:51
Speaker 3: But like, how do you do that?
28:52
Speaker 4: Well?
28:52
Speaker 7: Yeah, that is that unpredictability that hit developers especially hard.
28:56
Speaker 7: So in the previous contracts, there's ones I was talking
28:59
Speaker 7: about the got canceled. There was very little adjustment in
29:02
Speaker 7: the contract price to account for moving commodity prices to
29:05
Speaker 7: account for inflation. So that's the kind of thing that
29:08
Speaker 7: states are building into these contracts now to kind of
29:11
Speaker 7: better share the risk between a state which is buying
29:14
Speaker 7: the power and the developer that's building the project. So
29:18
Speaker 7: we're seeing kind of these prices getting index to CPI
29:22
Speaker 7: for example, to certain kind of producer price indexes and
29:26
Speaker 7: to certain commodity prices to make sometimes a one time
29:29
Speaker 7: adjustment from when you agree to that price to when
29:31
Speaker 7: you're actually securing finance, and sometimes you see that adjustments
29:36
Speaker 7: accounting for inflation right throughout the life.
29:38
Speaker 3: Of the project. That's interesting.
29:40
Speaker 7: That's the kind of structure we see in lots of
29:41
Speaker 7: other countries that have managed to build large scale off
29:44
Speaker 7: your wind projects globally, and so yeah, from the off
29:48
Speaker 7: your wind industry's perspective, it's good to see that happening
29:51
Speaker 7: in the US as well.
29:52
Speaker 1: Talk to us about you mentioned the project off the
29:54
Speaker 1: coast of New York. Talk to us about the economics.
29:57
Speaker 1: How much does it cost to build that thing? Hoop
30:00
Speaker 1: hate for it, and just the economics.
30:03
Speaker 7: So that is a project called South Fork. It was
30:07
Speaker 7: the kind of the first commercial scale offshore wind project
30:11
Speaker 7: in the US that was significantly more expensive than a
30:14
Speaker 7: project we expect to see getting installed today. That's partly
30:19
Speaker 7: because it was it was almost like a proof of concept.
30:21
Speaker 7: So up until then, there are only seven operational offshore
30:24
Speaker 7: wind turbines off the coast of the US so far.
30:27
Speaker 7: So this is the first kind of larger scale project
30:30
Speaker 7: for one of the newer projects you're probably looking between
30:34
Speaker 7: two point eight to three billion dollars for a one
30:37
Speaker 7: gigawap project, which is a really big off your wind firm,
30:40
Speaker 7: almost ten times the size of that early kind of
30:42
Speaker 7: commercial scale project that just came off the coast of
30:45
Speaker 7: New York. So these are a really sizeable infrastructure investments.
30:49
Speaker 6: Yeah, what part is the hardest? Because it seems to
30:54
Speaker 6: me that you know, moving the energy from offshore to
30:58
Speaker 6: the grid on land, like you kind of like build
31:01
Speaker 6: a transmission line for that, Like that seems really hard
31:03
Speaker 6: and dangerous. And then I also hear of the transmission
31:07
Speaker 6: plug shortages, so basically the thing you need to actually
31:10
Speaker 6: plug that wind into the grid, there's a shortage of that,
31:14
Speaker 6: and then you've got to build it. And there's all
31:15
Speaker 6: the raw material costs that come at actually building the turbine.
31:18
Speaker 6: Where's the biggest price increases?
31:21
Speaker 7: Well, I mean we saw a lot of price increases
31:24
Speaker 7: across the board over the last couple of years. Actually,
31:27
Speaker 7: when you look at a lot of commodity prices that
31:29
Speaker 7: are important for manufacturing of wind turbines, cables, that kind
31:33
Speaker 7: of thing, a lot of those raw material costs have
31:35
Speaker 7: come down. What we've seen is turbine prices have remained
31:38
Speaker 7: stubbornly high. Wind turbine makers were hit just as hard
31:42
Speaker 7: by rising costs, rising inflation, and many of them were
31:45
Speaker 7: having to deliver on contracts said signed at cheaper rates
31:49
Speaker 7: in this higher priced environment. So that means many of
31:52
Speaker 7: the kind of major wind turbine makers have suffered a
31:54
Speaker 7: lot over the last couple of years, and so they're
31:57
Speaker 7: maintaining higher prices to kind of have a bit of
32:00
Speaker 7: a buffer on their margin, trying to regain kind of
32:04
Speaker 7: stronger margins. But that means that developers are left paying
32:07
Speaker 7: higher prices for the turbines despite the fact that some
32:09
Speaker 7: of these input costs have started coming down.
32:12
Speaker 1: Who makes these big tribune things in the ocean, So.
32:15
Speaker 7: That's companies like Vestas Seamen's Energy. Ge is a big
32:21
Speaker 7: US player and so those I recently spun out. I
32:28
Speaker 7: mean so also it is one of the one of
32:31
Speaker 7: the companies that builds builds the project, so one of
32:33
Speaker 7: the biggest project developers globally. But there'll be the guys
32:36
Speaker 7: putting in the orders with your likes of Vestas Gemen.
32:40
Speaker 1: I mean, how do you build these things? I mean,
32:43
Speaker 1: how do you install them?
32:45
Speaker 3: Difficulty difficult. It's tough.
32:47
Speaker 1: Build them on land, ship them out there, then just
32:50
Speaker 1: plug them in the sand. I mean, how does this work?
32:52
Speaker 7: So most of what's getting built at the moment is
32:55
Speaker 7: bottom fixed off your wind. So you go out there,
32:57
Speaker 7: you build a foundation that's fixed to the seabed, and
33:00
Speaker 7: then you come out and you build the turbine on
33:01
Speaker 7: top of that. So you build up the tower and
33:03
Speaker 7: then component by component kind of build the big fan.
33:06
Speaker 3: You can see at the top, I know.
33:09
Speaker 6: And then also how do you then that question is
33:11
Speaker 6: like if something happens and it gets broken, like how
33:14
Speaker 6: do you fix it? Like what's it like when you
33:16
Speaker 6: go off shore? I mean, what happens when one of
33:18
Speaker 6: these things dies? Just like what's the shelf life of
33:21
Speaker 6: a turbine? And how do you recycle it?
33:23
Speaker 5: I don't, we haven't.
33:24
Speaker 3: We don't know that yet.
33:25
Speaker 7: Yeah, well, well going to your question on what happens
33:28
Speaker 7: when it goes wrong or how you construct it. You
33:30
Speaker 7: need really specialized vessels to build these things. So they
33:33
Speaker 7: call them jack up vessels. So their vessels that kind
33:35
Speaker 7: of have legs that they they extend down into the seabed.
33:40
Speaker 7: Jacks up the vessels, So it's sitting kind of above
33:42
Speaker 7: the water, so you've got a solid platform by which
33:45
Speaker 7: to install the components, or if something goes wrong, to
33:47
Speaker 7: send it out there, take off one of the components
33:49
Speaker 7: and replace it with a fixed one. But these are
33:53
Speaker 7: really specialized vessels. They cost a lot of money to build.
33:55
Speaker 7: Our estimates around three hundred to five hundred million dollars,
33:59
Speaker 7: and there's a shortage of these things globally at the
34:01
Speaker 7: moment to kind of specialized vessels to install the foundations
34:05
Speaker 7: and then and then the turbines. So if you're a developer,
34:07
Speaker 7: you're struggling to find those slots where you can secure vessels.
34:11
Speaker 7: And if something goes wrong on a recently installed project
34:13
Speaker 7: with one of these big, big new turbines, then you
34:16
Speaker 7: might struggle to get a vessel to come in and
34:19
Speaker 7: do that, do that replacement work.
34:20
Speaker 1: Oh cool, Yeah, I mean those engineer people, I don't
34:23
Speaker 1: understand them. They're different.
34:24
Speaker 6: I mean, it's amazing. Yeah, that's amazing, and we think
34:26
Speaker 6: it's all such an easy fix and it's most definitely not. Ali.
34:29
Speaker 6: Thanks a lot, Ali, Markalf he's joining us head of
34:31
Speaker 6: win research over at you know those super interesting Thank
34:35
Speaker 6: you so much.
34:36
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