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Investors Fail To Ask Apple Most Fundamental Question · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg Penel Podcast. I'm Paul swing you.
• 0:05
  Speaker 1: Along with my co host Lisa Brahma Waits. Each day
• 0:07
  Speaker 1: we bring you the most noteworthy and useful interviews for
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  Speaker 1: you and your money. Whether at the grocery store or
• 0:12
  Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
• 0:15
  Speaker 1: podcast or wherever you listen to podcasts, as well as
• 0:17
  Speaker 1: at Bloomberg dot com. Apple shares surging today up about
• 0:22
  Speaker 1: seven percent, the biggest game at one point since April
• 0:26
  Speaker 1: two tho fourteen. The shares now currently at the highest
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  Speaker 1: levels since November. The question is, did they deliver something
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  Speaker 1: so fabulous yesterday after the bell that this is a
• 0:36
  Speaker 1: worthwhile rally? And here too, uh, perhaps cast little skepticism
• 0:41
  Speaker 1: in sua ovida Bloomberg opinion columnists nobody covering all things
• 0:44
  Speaker 1: tech and perhaps deservedly, let's hear what's going on here?
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  Speaker 1: So what's your take on this rally? Why our investors
• 0:50
  Speaker 1: so excited? Well, the short explanation is the Apple's results
• 0:55
  Speaker 1: are less bad than people and maybe Apple it's thought
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  Speaker 1: a few months ago. So that's good news. Um, but look,
• 1:05
  Speaker 1: it's still not great conditions for Apple. So look iPhone
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  Speaker 1: sales declined. I think it was seven revenue from iPhones
• 1:13
  Speaker 1: decline in the March quarter. The company forecast implies that
• 1:20
  Speaker 1: revenue growth might be more or less flat from a
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  Speaker 1: year ago, so not great. And you've seen from what
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  Speaker 1: the company has done that it's doing things like discounting
• 1:31
  Speaker 1: iPhones in China, offering aggressive prices on trade ins of
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  Speaker 1: older phones throughout many of their markets, so you know,
• 1:39
  Speaker 1: there are effectively subsidizing UM iPhones to compensate for what
• 1:44
  Speaker 1: has been declining unit sales of those devices. So I
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  Speaker 1: guess the question one of the questions I heard from investors,
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  Speaker 1: you know, kind of on the call last night, was
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  Speaker 1: trying to get a sense of this iPhone business. How
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  Speaker 1: much of it is a temporary weakness and I phone
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  Speaker 1: sales or is this just a fundamental change in their
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  Speaker 1: phone business? You know, I actually think this is a
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  Speaker 1: significant failure of Wall Street two force Apple to answer
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  Speaker 1: the to me what to me is the most fundamental
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  Speaker 1: question about Apple's business. Smartphone sales globally are declining, and
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  Speaker 1: they have been declining for eighteen months to two years,
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  Speaker 1: depending on or maybe longer, depending on whose numbers you
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  Speaker 1: look at. And if your Apple and you make the
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  Speaker 1: majority of your revenue from selling iPhones. That change in
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  Speaker 1: the market is an existential problem, and the company has
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  Speaker 1: never really had to address that question. Look, the market
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  Speaker 1: is declining. The market for your most important product is declining.
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  Speaker 1: Do you think it's temporary? If not, what are you
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  Speaker 1: doing about it? And the company really hasn't tackled that
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  Speaker 1: question head on, And again I think that's a failure
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  Speaker 1: by investors. Although you could say, in fairness, Apple has
• 2:57
  Speaker 1: been emphasizing their services and Internet products side of the business,
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  Speaker 1: and that was one of the actual positives and surprisingly
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  Speaker 1: positive aspects of their earnings report was that they showed
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  Speaker 1: bigger than expected gains in those areas, So uh to
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  Speaker 1: some degree, couldn't you say that that's what they're trying
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  Speaker 1: to do, is to offset some of the concerns about
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  Speaker 1: the slowing smartphone UH cycle by emphasizing these other areas. Yeah,
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  Speaker 1: and I think that's a fair point that and that's
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  Speaker 1: certainly what Apple bowls have been focused on, is this
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  Speaker 1: growing pile of revenue and high profit revenue generally from
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  Speaker 1: things like you know, um Apple's commission on App Store
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  Speaker 1: downloads or Apple Music subscriptions or they're coming Apple Television
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  Speaker 1: Service or Apple Care warranties. So that is good news,
• 3:41
  Speaker 1: but look, that cannot fully fill the whole left by
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  Speaker 1: declining iPhone sales. So once that I had in my
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  Speaker 1: column was in the first half of Apple's fiscal year,
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  Speaker 1: iPhone revenue declined by sixteen billion dollars, and the gains
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  Speaker 1: of everything else, every other business at Apple was eight
• 3:58
  Speaker 1: and a half billion dollars, right, so you can see
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  Speaker 1: that there is still a mismatch between the declining main
• 4:04
  Speaker 1: business and the growth of their other businesses. And look,
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  Speaker 1: I also feel like eventually you sort of run out.
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  Speaker 1: You know, it's like the coyote that I'm sorry, the yeah,
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  Speaker 1: that you're running out over the canyon and eventually kind
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  Speaker 1: of lost track of my cartoon metaphor. But anyway, you know,
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  Speaker 1: you're you're you're running, your legs are running, and eventually
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  Speaker 1: you run out over the canyon and you fall. That
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  Speaker 1: at some point, if Apple doesn't grow the number of
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  Speaker 1: new iPhone users, it is losing opportunities to sell you know,
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  Speaker 1: apps and Apple Music subscriptions and Apple TV subscriptions to
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  Speaker 1: that pool of people who own Apple devices, and so
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  Speaker 1: far to their credit, They've managed to keep growing that
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  Speaker 1: revenue even as the pool of new iPhone buyers levels off.
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  Speaker 1: But I can't imagine that last forever, particularly if Apple
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  Speaker 1: doesn't make a more concerted effort to sell those services
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  Speaker 1: to people who don't own their devices. It's billions of
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  Speaker 1: people at Apple's ignoring. So is there what do you
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  Speaker 1: think they need to do to maybe recharge the growth
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  Speaker 1: of this company? Is is it something as big and
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  Speaker 1: existential and changing as a big acquisition, or is this
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  Speaker 1: just trying to build up their services business. I don't know,
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  Speaker 1: and I think part of it is what kind of
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  Speaker 1: company does Apple want to be in the future. If
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  Speaker 1: it wants to be, let's say, a load a load
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  Speaker 1: of no growth company that generates revenue growth from squeezing
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  Speaker 1: its existing customers for more money. And my colleague Sarah
• 5:34
  Speaker 1: Hallzac and I compared this basically to like Starbucks and McDonald's. Right,
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  Speaker 1: that restaurant traffic has been declining, but restaurants like McDonald's
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  Speaker 1: has been making up for it by price increases. So
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  Speaker 1: if Apple wants to do that, if this is an
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  Speaker 1: r poo play, you generate more revenue from a stagnant
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  Speaker 1: base of users. Fine, but that's not the apple that
• 5:51
  Speaker 1: people have come to expect, and that's not the That's
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  Speaker 1: exactly right. They've been to such a great growth story
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  Speaker 1: and new product after new product, and you know where's
• 5:58
  Speaker 1: the next new product? Sure of a day. Thank you
• 6:00
  Speaker 1: so much for joining us. Shares of Technology, Calumness for
• 6:03
  Speaker 1: Bloomberg Opinion. You can attach to any number of superlatives
• 6:22
  Speaker 1: to Shopify, the Canadian e commerce retailer. If you take
• 6:26
  Speaker 1: a look at its shares, they have more than doubled
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  Speaker 1: since Christmas Eve. They're the best performance performing shares on
• 6:33
  Speaker 1: the S and P TSX Composite Index after a pot stock.
• 6:37
  Speaker 1: Joining us here to talk about the company is Harley Finkelstein,
• 6:40
  Speaker 1: chief operating officer of Shopify, Joining us here in our
• 6:43
  Speaker 1: Bloomberger Active Brokers Studios and Harley. Before we get into
• 6:46
  Speaker 1: all the superlatives, can you just give us a sense
• 6:48
  Speaker 1: of what Shopify exactly is. Yeah, it's a great question.
• 6:51
  Speaker 1: I think what we're best known for is is helping
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  Speaker 1: small businesses build beautiful online stores. We've been doing that
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  Speaker 1: now for over fifteen years, and people know us best
• 6:58
  Speaker 1: for that. But I think actually today which shop play
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  Speaker 1: is truly as we are a retail operating system. And
• 7:03
  Speaker 1: what I mean by that is you can come to
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  Speaker 1: Shopify because you want to build a great online store,
• 7:06
  Speaker 1: or maybe you want to sell offline in a brick
• 7:08
  Speaker 1: and mortar store and use our point of sell product,
• 7:10
  Speaker 1: or maybe you want to cross sell on Amazon or
• 7:12
  Speaker 1: eBay or something like Instagram or Facebook. But the idea
• 7:14
  Speaker 1: is that it all feeds back into one centralized back office,
• 7:17
  Speaker 1: and that Shopify. It's the first thing you open in
• 7:19
  Speaker 1: the morning, lasting you close. That's where you have your inventory,
• 7:22
  Speaker 1: your customer information, your marketing data, that where you process
• 7:25
  Speaker 1: shipping and payments, and that really is is your business um.
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  Speaker 1: And so we're doing that now for about eight twenty
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  Speaker 1: thousand merchants who have sold more than a hundred billion
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  Speaker 1: dollars on Shopify. UM. But I would say retail operating
• 7:35
  Speaker 1: system is probably a better, uh definition of what we
• 7:38
  Speaker 1: are today. So obviously you're benefiting from this tremendous secular
• 7:42
  Speaker 1: move from bricks and mortars to e commerce, and people
• 7:44
  Speaker 1: think of that and they think of Amazon obviously. So
• 7:47
  Speaker 1: aside from that great secular wind, that's that's at the
• 7:50
  Speaker 1: back of your sales, What really are the growth drivers
• 7:53
  Speaker 1: for your company. Here a couple of things. First of all,
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  Speaker 1: we make it really really easy to start a brand
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  Speaker 1: new business. So most of the most of the merchants
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  Speaker 1: that are on shop if these are first time entrepreneurs
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  Speaker 1: that are just getting started. In fact, every minute or
• 8:03
  Speaker 1: so a new business gets their first sale on Shopify,
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  Speaker 1: which is really exciting. Remember the first time that I
• 8:08
  Speaker 1: had my first sale, I was an early Shopify merchant
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  Speaker 1: before I joined the company about it was called Smoother.
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  Speaker 1: It was a T shirt company. I had to support
• 8:15
  Speaker 1: myself in law school and didn't have any money. My
• 8:17
  Speaker 1: parents couldn't pay for school, so I built a Shopify
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  Speaker 1: store back in two thousand six, ended up selling T
• 8:22
  Speaker 1: shirts and paying my law school tuition. Um. And getting
• 8:24
  Speaker 1: that first sale was it changed everything. It meant that
• 8:26
  Speaker 1: I had freedom and I had autonomy and all of
• 8:28
  Speaker 1: a sudden, now I can pursue my life's work and
• 8:31
  Speaker 1: that happens now almost every minute on Shopify. UM. So
• 8:34
  Speaker 1: I would say that making it really easy for people
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  Speaker 1: to start me and so not only we're growing our
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  Speaker 1: piece of the pie, but we're going the pie itself
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  Speaker 1: from a total usable market perspective, and the ones that
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  Speaker 1: are successful on Shopify stay with us for a very
• 8:44
  Speaker 1: long time, and in that journey we try to find
• 8:47
  Speaker 1: them all the things they need to run their business.
• 8:48
  Speaker 1: So we created Shopify Payments to give them economies a
• 8:51
  Speaker 1: scale on payment rates. We gave them shop by shipping rates,
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  Speaker 1: meaning they can get better rates to give you bigger companies.
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  Speaker 1: We now give capital. We've given out about over five
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  Speaker 1: million dollars of capital to these small businesses. So the
• 9:01
  Speaker 1: idea is to find all the pain points that an
• 9:02
  Speaker 1: entrepreneur may have and make it easier for them. And actually,
• 9:06
  Speaker 1: if you aggregate all of our stores all in one,
• 9:08
  Speaker 1: pretend that we are a retailer, we would be the
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  Speaker 1: third largest US eclom retailer. So we are able now
• 9:13
  Speaker 1: to go to the shipping companies and the payment companies
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  Speaker 1: and negotiate rates as if we were the third largest
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  Speaker 1: of US online retailer. But then give all these economies
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  Speaker 1: a scale to someone just starting at their mom's kitchen table.
• 9:23
  Speaker 1: Really interesting And just to sort of give some more context,
• 9:26
  Speaker 1: after your ported earnings yesterday, uh, your second quarter revenue
• 9:29
  Speaker 1: forecast did beat estimate, so that was one five above estimates,
• 9:34
  Speaker 1: So it seems like things are going well. One question
• 9:38
  Speaker 1: that I have though, is we talk about Amazon and
• 9:40
  Speaker 1: its dominance and its effort to create its own products.
• 9:43
  Speaker 1: We talk about Walmart, We talk about, you know, sort
• 9:45
  Speaker 1: of how the big behemoths are getting bigger. How do
• 9:48
  Speaker 1: small businesses compete with those? How do people find these
• 9:51
  Speaker 1: sites given how much big, big, big store competition there is. Yeah,
• 9:56
  Speaker 1: and it's a great question. So one of the things
• 9:57
  Speaker 1: we also have as part of our retail operating system
• 9:59
  Speaker 1: is a marketing UH marketing section, a place where a
• 10:02
  Speaker 1: small business can go and easily able to buy ads
• 10:04
  Speaker 1: and things like Google or Facebook. And on Monday we
• 10:07
  Speaker 1: announce a partnership with Snapchat, so now they can easily
• 10:09
  Speaker 1: buy ads directly on Snapchat to Traditionally, if a small
• 10:12
  Speaker 1: business want to go ahead and buy ads on Facebook
• 10:14
  Speaker 1: or Google or Snapchet, they would have to go to
• 10:15
  Speaker 1: three different sites navigate the complexities of those ad platforms.
• 10:18
  Speaker 1: And now we simplify it for them and we can
• 10:20
  Speaker 1: go to those companies to ensure they're getting the best
• 10:22
  Speaker 1: rates possible. I think most people assume that, um So,
• 10:26
  Speaker 1: right now e commerce globally is about one point nine
• 10:28
  Speaker 1: trillion dollars. That's gonna go to about four trillion dollars
• 10:30
  Speaker 1: in the next few years. I think a lot of
• 10:32
  Speaker 1: people automatically jump to Amazon, owning a majority of that.
• 10:35
  Speaker 1: I think Amazon ultimately will be the place where you go.
• 10:37
  Speaker 1: You go to buy the stuff that you need as
• 10:39
  Speaker 1: a consumer, your toilet paper, your shampoo, your your paper towel.
• 10:42
  Speaker 1: But I think for most consumers today, they actually like
• 10:45
  Speaker 1: buying stuff from the people that make it. So you
• 10:47
  Speaker 1: look at some of our favorite stores like Bombas Socks
• 10:50
  Speaker 1: or Tommy john Underwear, or All Birds Shoes, or Kylie
• 10:52
  Speaker 1: Cosmetics or Fashion Nova. These are all small businesses that
• 10:55
  Speaker 1: are really large on Shopify, and they're able to sell
• 10:58
  Speaker 1: direct to the end consumer in a way that they
• 10:59
  Speaker 1: haven't been able to do before. I see on my
• 11:01
  Speaker 1: handy Bloomber terminal here that Shopify gets about seventy percent
• 11:05
  Speaker 1: revenue in the US. So talk to us about kind
• 11:07
  Speaker 1: of how you view some of the opportunities outside of
• 11:09
  Speaker 1: the US and maybe North America broadly. Yeah, So it's
• 11:12
  Speaker 1: it's a great point you make. Um So, traditionally we've
• 11:14
  Speaker 1: really focused on North America, Australia, New Zealand, and the UK.
• 11:19
  Speaker 1: About a year ago, almost to the day, we decided
• 11:21
  Speaker 1: that it was time for us to expand to an
• 11:23
  Speaker 1: international market. We knew we had merchants elsewhere that wanted
• 11:26
  Speaker 1: to use our products, but we didn't feel we had
• 11:28
  Speaker 1: the right product fit yet, and so we began the
• 11:30
  Speaker 1: journey to find product market fit internationally. And so we've
• 11:33
  Speaker 1: now translated the Shopify dashboard into more than seven languages.
• 11:37
  Speaker 1: We now have partners on the ground and in most
• 11:39
  Speaker 1: of those countries as priority countries that can help you
• 11:41
  Speaker 1: build an online store. And also we have the right
• 11:43
  Speaker 1: payment gateways. So for example, in a place like Germany,
• 11:46
  Speaker 1: credit card penetration is not as used as like debit
• 11:48
  Speaker 1: cards are. So we had to begin the journey to
• 11:51
  Speaker 1: find product market fit internationally. But I would say that,
• 11:54
  Speaker 1: um the future, in the future, international will be a
• 11:55
  Speaker 1: huge part of our story. We're just getting started with
• 11:57
  Speaker 1: that right now. Do you still sell T shirts? Uh,
• 12:00
  Speaker 1: you can go to my T shirt shop. It's uh,
• 12:03
  Speaker 1: it's smoofered out my shopify dot com. It's still up there,
• 12:06
  Speaker 1: but but unfortunately I've disabled to check it because I
• 12:08
  Speaker 1: don't have time to shift the products out anymore myself.
• 12:10
  Speaker 1: But um, but actually it's it's it's really great. In fact,
• 12:13
  Speaker 1: Toby or our CEO and founder. He started Shopify because
• 12:16
  Speaker 1: he wants sell snowboards on the internet in two thousand
• 12:18
  Speaker 1: four and didn't like the software that was available throughout
• 12:20
  Speaker 1: his own piece of software, and that software to sell
• 12:22
  Speaker 1: those snowboards has become Shopify. That's a great story. That
• 12:27
  Speaker 1: is a great story. Harley Finalstein, thank you so much
• 12:30
  Speaker 1: for joining us. Harley as the chief operating officer of Shopify.
• 12:33
  Speaker 1: There based in Ottawa, Ontario, kind of, but he joins
• 12:35
  Speaker 1: us here in our Bloomberg Interactor Brokers studio. President Trump
• 12:57
  Speaker 1: and a group of leading Democrats announced a promise of
• 13:00
  Speaker 1: two trillion dollar infrastructure plan. To get a sense of
• 13:03
  Speaker 1: what this means, we welcome Michael Jay's. Michael is the
• 13:06
  Speaker 1: chief US Public Policy AMANUS WILL strategist at Morgan Stanley. Michael,
• 13:10
  Speaker 1: thanks so much for joining us. So what is your
• 13:13
  Speaker 1: take on this plan that was announced after the Democrats
• 13:16
  Speaker 1: met with President Trump? Yeah, and thanks for having me
• 13:20
  Speaker 1: on UM. I would say that until someone can identify
• 13:23
  Speaker 1: what two trillion dollar tax i can fund this, that
• 13:26
  Speaker 1: you should be deeply skeptical that something like this can happen.
• 13:29
  Speaker 1: And in our view, we don't think you're going to
• 13:30
  Speaker 1: see an infrastructure package before one because of it. I mean,
• 13:35
  Speaker 1: there's just a couple of numbers to put it in perspective,
• 13:37
  Speaker 1: because there's a lot of different taxes that have been
• 13:39
  Speaker 1: floated out there is potentially pay for us. Right, So
• 13:42
  Speaker 1: if you increase the gas tax, that would get you
• 13:45
  Speaker 1: about four hundred billion dollars. If you're rolled back the
• 13:48
  Speaker 1: corporate tax rate by five points, that gets you about
• 13:51
  Speaker 1: five hundred billion dollars. If you took the two top
• 13:53
  Speaker 1: two tax brackets up by a percentage each that gets
• 13:56
  Speaker 1: you a d and twenty billion. Those are all extremely
• 13:58
  Speaker 1: politically sensitive, and if you at all of them, you'd
• 14:00
  Speaker 1: still have a trillion dollars left to go. So I
• 14:03
  Speaker 1: think fair to say, can color us pretty skeptical about
• 14:05
  Speaker 1: this going forward? So, Michael, there is a question though,
• 14:09
  Speaker 1: of the private intervention here, the private involvement in some
• 14:12
  Speaker 1: sort of infrastructure plan. To Lane show, the Transportation Secretary
• 14:16
  Speaker 1: saying telling Bloomberg Television at the Melican Institute Global Conference
• 14:20
  Speaker 1: in Los Angeles that there are private pension funds as
• 14:22
  Speaker 1: well as damnment funds that would love to play to
• 14:24
  Speaker 1: the opportunity to invest in public infrastructure. Do you see
• 14:27
  Speaker 1: that materializing something on that front. Yeah. Yeah, it's a
• 14:31
  Speaker 1: really interesting idea. And obviously we we've dealt with this
• 14:35
  Speaker 1: for uh ten twenty years now, the sort of the
• 14:38
  Speaker 1: talk of their being a tremendous amount of interest from
• 14:42
  Speaker 1: private capital and investing and owning and operating public infrastructure assets.
• 14:46
  Speaker 1: But uh, you know, from my perspective, as I mean
• 14:49
  Speaker 1: it's poll analysts, I can tell you that I don't
• 14:51
  Speaker 1: feel confident that the supply of those assets is there.
• 14:55
  Speaker 1: And what I mean by that is that you know,
• 14:56
  Speaker 1: state local government's own about eighty eight percent of all
• 14:59
  Speaker 1: infrastructure assets in the US, but they're sort of highly
• 15:03
  Speaker 1: incentivized to keep them right, so it's a revenue producing asset. Generally,
• 15:08
  Speaker 1: state lowe garments don't give them up unless they are
• 15:11
  Speaker 1: somewhat desperate for money. And uh, the cost of financing, uh,
• 15:18
  Speaker 1: the construction of new assets is frankly just a lot
• 15:20
  Speaker 1: cheaper through the tax exem bond market than giving up
• 15:24
  Speaker 1: the cost of capital seven to eight percent returns for
• 15:26
  Speaker 1: the private sector. So um, while you know P three's
• 15:30
  Speaker 1: are generally the rule rather than the exception in other countries,
• 15:34
  Speaker 1: largely because of the federalist system, we've set up here
• 15:37
  Speaker 1: in the availability of tax exam financing. They're more the
• 15:40
  Speaker 1: exceptions in the rule, and I would expect that to continue.
• 15:43
  Speaker 1: So I think it's a bad idea to do what
• 15:46
  Speaker 1: you can to incentivize private capital come in, but I
• 15:48
  Speaker 1: wouldn't expect that to be the thing that catalyzes the
• 15:52
  Speaker 1: major infrastructure investment that the US needs to get back
• 15:55
  Speaker 1: up to speed. So, Michael, if there's two trillion dollar
• 15:59
  Speaker 1: number that was thrown out by the Democrats and President
• 16:01
  Speaker 1: Trump is not, you know, necessarily that realistic, what do
• 16:05
  Speaker 1: you think can actually get done from the federal level. Yeah, Well, unfortunately,
• 16:11
  Speaker 1: think on this issue where grid locked until the next
• 16:13
  Speaker 1: election because um, frankly, what you need is one party
• 16:19
  Speaker 1: in control of both the White House and Congress and
• 16:21
  Speaker 1: for them to make this their top priority. And it's
• 16:24
  Speaker 1: probably because if you if you know, you go through
• 16:27
  Speaker 1: the list of tax revenues that we just talked about,
• 16:30
  Speaker 1: there's probably not a politically friendly way to completely fund this,
• 16:34
  Speaker 1: and so you need one party or the other to
• 16:37
  Speaker 1: kind of frame this as um a deficit financed investment, UM,
• 16:43
  Speaker 1: but in sort of politically friendly terms, right, as an
• 16:45
  Speaker 1: economic investment or or something some other way that's consistent
• 16:49
  Speaker 1: with their ideology. Uh So in the meantime between now
• 16:52
  Speaker 1: and then, UM, I think unfortunately you're gridlocked. And even
• 16:56
  Speaker 1: if you do the exercise of thinking about, well, what
• 16:59
  Speaker 1: if we're wrong again, what if they actually could do
• 17:01
  Speaker 1: a funded infrastructure plan, maybe slim it down to a
• 17:03
  Speaker 1: trillion dollars over ten years. Um. You know, for investors,
• 17:07
  Speaker 1: I don't know that that necessarily sends clear signals on
• 17:10
  Speaker 1: what to do. Right. If it's funded, it's not a
• 17:13
  Speaker 1: technically a fiscal stimulus, so over the next six to
• 17:15
  Speaker 1: twelve months, it doesn't necessarily translate into a GDP boost. Uh.
• 17:20
  Speaker 1: You know, there are companies that should benefit from this,
• 17:22
  Speaker 1: but if you're rolling back the corporate tax rate, that
• 17:24
  Speaker 1: cuts against them, right, or if you're increasing the gas
• 17:27
  Speaker 1: tax that hurts autos and freight transportation. So just a
• 17:31
  Speaker 1: lot of mixed signals on what investors can take away
• 17:33
  Speaker 1: from this. I'm curious from your perspective, what's the most
• 17:35
  Speaker 1: pressing infrastructure project that the federal government uh could finance
• 17:40
  Speaker 1: or push along that that localities cannot. Well, you know,
• 17:45
  Speaker 1: I don't know that there's one project in particular. I mean,
• 17:47
  Speaker 1: they're Obviously there are several critical infrastructure projects UH in
• 17:51
  Speaker 1: major urban hubs around the country. I think this is
• 17:54
  Speaker 1: a situation where there just needs to be more federal
• 17:57
  Speaker 1: money brought to bear in the aggregate and that sort
• 18:00
  Speaker 1: of priority number one as opposed to being specific and surgical.
• 18:05
  Speaker 1: But the reason why I ask is because we've been
• 18:07
  Speaker 1: talking about the record volume of cash flooded into the
• 18:09
  Speaker 1: municipal bond market, and we've talked about how, yes, these
• 18:13
  Speaker 1: are slow moving freight trains when you talk about local governments,
• 18:16
  Speaker 1: But why couldn't they take that private money and pump
• 18:19
  Speaker 1: it into projects that they need. Well, they can, but
• 18:23
  Speaker 1: I think the question of whether or not municipalities are
• 18:26
  Speaker 1: willing to access the taxics a market to undertake new
• 18:32
  Speaker 1: money financing. Right, So it's not that the money isn't there,
• 18:34
  Speaker 1: it's a question of whether or not the willingness is there.
• 18:38
  Speaker 1: And the constraint that state and local governments faces kind
• 18:41
  Speaker 1: of a It's a combined political and fiscal constraint. And
• 18:44
  Speaker 1: what I mean by that is that there's generally reticence
• 18:46
  Speaker 1: to um increased taxes to help finance borrowing UM and
• 18:51
  Speaker 1: budgets are already constrained from a combination of factors high
• 18:55
  Speaker 1: operating leverage for one UM as well as pension overhanging
• 18:59
  Speaker 1: a lot of different areas. So you have a system
• 19:01
  Speaker 1: where state and local governments spend about the money on
• 19:04
  Speaker 1: infrastructure in this country, UM, but for a combination of
• 19:08
  Speaker 1: political and fiscal reasons, are constrained. So they have been increasing,
• 19:11
  Speaker 1: in particular over the last two years, they have been
• 19:13
  Speaker 1: increasing their infrastructure spend, but just not to the degree
• 19:18
  Speaker 1: that gets you the sort of catch up the potential
• 19:20
  Speaker 1: that we need to to be at. And that's where
• 19:22
  Speaker 1: the the federal government's role, UM hypothetically then should be
• 19:26
  Speaker 1: to really come in induce that entire process with more money. So, Michael,
• 19:31
  Speaker 1: I'm a resident of New Jersey. I take the train
• 19:33
  Speaker 1: every day back and forth under the Hudson River tunnels,
• 19:36
  Speaker 1: and I fully expect them to cave in on me
• 19:38
  Speaker 1: one day. Let's talk about the Gateway project. What is
• 19:42
  Speaker 1: the status of that? Because that is going to be
• 19:44
  Speaker 1: a state and federal partnership to get that done. What's
• 19:48
  Speaker 1: the status of that? Yeah, also a resident of New Jersey. Uh, So,
• 19:52
  Speaker 1: I understand where you're coming from. UM. I think this
• 19:56
  Speaker 1: is a situation where the need for that projects largely
• 20:01
  Speaker 1: already been improved. Um, it's been somewhat delayed over the
• 20:06
  Speaker 1: last couple of budget rounds uh and what appears to
• 20:09
  Speaker 1: be sort of a personal disagreement between the President and
• 20:13
  Speaker 1: Chuck Schumer. Uh. So, I think there's a situation where
• 20:18
  Speaker 1: the money, because it's already been approved, will eventually make
• 20:20
  Speaker 1: it to its target, but it's being delayed for largely
• 20:26
  Speaker 1: reasons of politics, which is not particularly comforting understand. But um,
• 20:32
  Speaker 1: this appears to be a situation where the money has
• 20:33
  Speaker 1: already approved for it. Yeah. Um, we're speaking with Michael
• 20:37
  Speaker 1: Z's chief US public policy I mean strategist at Morgan Stanley.
• 20:40
  Speaker 1: I want to just let you know that William Barr,
• 20:42
  Speaker 1: Attorney General, is currently giving his opening statement in front
• 20:46
  Speaker 1: of the Senate, discussing, of course, the Robert Mueller report
• 20:51
  Speaker 1: that he did release UH with with redactions and did summarize.
• 20:55
  Speaker 1: There is obviously a concern on the part of Robert Muller,
• 20:59
  Speaker 1: is expressed by I letter released earlier today that it
• 21:01
  Speaker 1: was not fully represented in the summary. We will bring
• 21:05
  Speaker 1: you all of that when we get it. Michael. We
• 21:07
  Speaker 1: want to continue the conversation here because as much as
• 21:10
  Speaker 1: perhaps a two trillion dollar infrastructure spending plan is not
• 21:13
  Speaker 1: realistic or feasible politically, there is a question of the
• 21:17
  Speaker 1: municipal markets right now, and given how much money has
• 21:19
  Speaker 1: gone in and I'm wondering from your perspective, especially where
• 21:23
  Speaker 1: we are in the economic cycle, and given the tax cuts,
• 21:27
  Speaker 1: I'm wondering from your perspective, which areas do you see
• 21:30
  Speaker 1: as the strongest and the weakest right now from an
• 21:33
  Speaker 1: investing standpoint. Yeah, Well, for us that we think the
• 21:39
  Speaker 1: opportunity still lies more in the enterprise segments of the
• 21:44
  Speaker 1: municipal market as opposed to the state and local government
• 21:47
  Speaker 1: segments of the municipal market. Right. So that's uh, the
• 21:51
  Speaker 1: public enterprises like airports and toll roads and not for
• 21:55
  Speaker 1: profit hospitals and higher education institutions. UM. And that not
• 22:00
  Speaker 1: necessarily because there's more yield to be captured in those areas,
• 22:04
  Speaker 1: but more because we remain concerned the the overhang of
• 22:09
  Speaker 1: liabilities UH that continue to pressure state and local governments. Uh,
• 22:14
  Speaker 1: and that the next time we have a recession, we
• 22:15
  Speaker 1: think will exert a fair amount of pressure on budgets. Right.
• 22:19
  Speaker 1: So that is deferred capital needs that is underfunded, retiree liabilities,
• 22:24
  Speaker 1: the types of things that in good economic times, uh
• 22:29
  Speaker 1: you have you know, strong and growing tax revenues and
• 22:31
  Speaker 1: so you can kind of deal with the cost of
• 22:34
  Speaker 1: those things as they come. But when tax revenues are
• 22:37
  Speaker 1: declining in a recession, that financial leverage becomes operating leverage,
• 22:42
  Speaker 1: which creates a budget deficit and forces some really tough choices.
• 22:46
  Speaker 1: We don't think the market is properly a uh priced
• 22:49
  Speaker 1: in that segment for that. But the key there is,
• 22:53
  Speaker 1: if you're looking for the market to weaken on that
• 22:56
  Speaker 1: future dynamic, it requires you to place a high probability
• 23:01
  Speaker 1: on there being a recession, and that's just not in
• 23:03
  Speaker 1: our base case right now. And obviously I think investors
• 23:06
  Speaker 1: don't really have that in their base case right now.
• 23:08
  Speaker 1: So the market um in our view, even though it's
• 23:10
  Speaker 1: pretty rich, can keep coming, keep humming along. Michael Jesus,
• 23:13
  Speaker 1: thank you so much for spending the time with us.
• 23:15
  Speaker 1: Michael Z's chief US public policy and municipal strategist for
• 23:18
  Speaker 1: Morgan Stanley joining us in New York. Switching gears, Let's
• 23:37
  Speaker 1: go back to the financial markets. You know, we think
• 23:40
  Speaker 1: about the melt up in the financial markets so far
• 23:43
  Speaker 1: in one sector that has certainly participated has been the
• 23:46
  Speaker 1: US high old market. We welcome Ken Monahana Mundy, pioneer
• 23:50
  Speaker 1: co director of hi Yield Ken, thanks so much for
• 23:52
  Speaker 1: joining us here in our Bloomberg Interactor Brooker studio. What
• 23:55
  Speaker 1: are you seeing in the high old market so far
• 23:58
  Speaker 1: this year? It's been a great rebound off of that
• 24:00
  Speaker 1: December low Thank you for having me again. And a
• 24:02
  Speaker 1: melt up is the correct phrase for this, because we've
• 24:04
  Speaker 1: certainly had a dramatic rally. Spreads have tightened in dramatically
• 24:08
  Speaker 1: since um they're there their wives of December when we
• 24:12
  Speaker 1: were trading in about five and fifty basis points over
• 24:15
  Speaker 1: and we're now down to about three seventy five. And
• 24:17
  Speaker 1: that means that high yields made almost nine percent year
• 24:20
  Speaker 1: to day. It's been a big year. Like equities. Yeah,
• 24:23
  Speaker 1: so it's made almost nine percent of this year. That
• 24:25
  Speaker 1: is the best return for the first four months of
• 24:26
  Speaker 1: a year since two thousand and nine, when the market
• 24:30
  Speaker 1: was rebounding from the worst financial crisis since the Great Recession.
• 24:32
  Speaker 1: I'm just wondering, what do you think the full year
• 24:34
  Speaker 1: twenty nine total return is going to be for US
• 24:36
  Speaker 1: hild bonds. Well, I think that if you look at
• 24:39
  Speaker 1: the prognosticators out there right now, they're talking about a
• 24:42
  Speaker 1: double digit return for the year, and that makes sense.
• 24:45
  Speaker 1: If you kind of layer in four percent plus current
• 24:48
  Speaker 1: yield for high yield UH for the remaining eight months
• 24:51
  Speaker 1: of the year, it can get up to a double return.
• 24:53
  Speaker 1: Double digits could be, it could be what are you
• 24:57
  Speaker 1: talking about? Forties? Hard? It's really hard to get to
• 25:01
  Speaker 1: twelve to thirteen is is certainly within the range. That's
• 25:04
  Speaker 1: that's certainly, and that's assuming we can straight line it.
• 25:07
  Speaker 1: And obviously markets don't generally move in a straight line UM.
• 25:10
  Speaker 1: But so I'm not saying that there's not going to
• 25:12
  Speaker 1: be any disruption between now and the end of the year,
• 25:14
  Speaker 1: but it's certainly achievable. So given that great performance, almost
• 25:17
  Speaker 1: nine percent off of the low, where are you seeing
• 25:20
  Speaker 1: value today in the HOW market? Well, you know, it's
• 25:22
  Speaker 1: it's it's harder to find value. So if we look
• 25:23
  Speaker 1: at double B s, which is a significant portion of
• 25:26
  Speaker 1: the market, UH spreads are only about sixteen basis points
• 25:30
  Speaker 1: or so wider than they were at their October troughs,
• 25:34
  Speaker 1: which is when early October we hit the post recession
• 25:37
  Speaker 1: trough UH and we're a little wider, but not dramatically so.
• 25:41
  Speaker 1: Triple c's, on the other hand, are significantly wider and
• 25:44
  Speaker 1: is one of your reporters has written recently written, Um
• 25:47
  Speaker 1: that there are opportunities perhaps in the triple D spay
• 25:49
  Speaker 1: a triple C space where one of those who's looking
• 25:52
  Speaker 1: for value there. That doesn't mean that we're we're buying them, uh,
• 25:56
  Speaker 1: you know, without any um selectivity at all, Um, you're
• 26:00
  Speaker 1: having to kind of really go and look for that
• 26:02
  Speaker 1: proverbial needle in the haystack. And the market's very bifurcated
• 26:06
  Speaker 1: between triple ceas we wouldn't touch with a ten foot pole,
• 26:09
  Speaker 1: and those that look more attractive, and those are harder
• 26:11
  Speaker 1: to find. Yesterday we were speaking with Bearing CEO Tom Fink,
• 26:14
  Speaker 1: and he said that he is seeing the pendulum switch
• 26:17
  Speaker 1: a little bit up more towards leveraged loans over hiled bonds,
• 26:20
  Speaker 1: given how much highled that is rallied and the loans
• 26:23
  Speaker 1: that kind of lagged behind. Do you agree, Well, you've
• 26:25
  Speaker 1: certainly seen a pick up and returns to her for
• 26:27
  Speaker 1: loans as well, because they had gotten beaten up. Having
• 26:30
  Speaker 1: said that, there is a much higher percentage of the marketplace.
• 26:33
  Speaker 1: That's leverage loans that are training above par right now. Uh.
• 26:37
  Speaker 1: And with leverage loans, you don't have a whole lot
• 26:39
  Speaker 1: further to go than par because that's what they're gonna
• 26:41
  Speaker 1: pay you back, and there's no prepayment penalty. UM, So
• 26:44
  Speaker 1: that's the problem. And uh, leverage loans particularly look particularly cheap.
• 26:49
  Speaker 1: UH in the fourth quarter of last year when they
• 26:51
  Speaker 1: got beaten up, is did HI yield bonds. And I
• 26:53
  Speaker 1: know that there are a lot of structured products or
• 26:55
  Speaker 1: cello managers that were quite excitedly picking up loans at
• 26:59
  Speaker 1: that point, and and and and banking them for new
• 27:02
  Speaker 1: transactions that have been priced this year, which ought to
• 27:04
  Speaker 1: do quite well. But I think leverage loans, your upside
• 27:08
  Speaker 1: is limited, and that's the problem. So we're we're ten
• 27:11
  Speaker 1: years into this economic cycle. How is when you take
• 27:14
  Speaker 1: a look at your portfolio or some of the issues
• 27:16
  Speaker 1: that you're looking at, how was a credit quality given
• 27:18
  Speaker 1: where we are in the cycle right now. Well, you know,
• 27:21
  Speaker 1: it's interesting if you if you look at it, um,
• 27:24
  Speaker 1: you're not seeing the types of things at least yet
• 27:27
  Speaker 1: that you would typically see that are aggressive behaviors. So
• 27:30
  Speaker 1: you talk about zero coupon bonds paying kind bonds, a
• 27:34
  Speaker 1: large number of dividend transactions where companies are borrowing money
• 27:38
  Speaker 1: just to repay the private equity sponsor. Now there are
• 27:41
  Speaker 1: some of those in the offing. It's clearly because we're
• 27:42
  Speaker 1: hearing some rumors of some of them right now. And uh,
• 27:45
  Speaker 1: that may indicate that, you know, we're kind of closer
• 27:48
  Speaker 1: to the ninth ending and than we are the sixth
• 27:50
  Speaker 1: or seventh. This recovery has certainly gone on for a
• 27:53
  Speaker 1: long period of time, where one in the hundred and
• 27:55
  Speaker 1: seventeenth or eighteenth month at this point, um since the
• 28:00
  Speaker 1: end of the recession in online um. But as we know,
• 28:03
  Speaker 1: recessions don't, excuse me, recoveries don't die of old age.
• 28:06
  Speaker 1: So you said that there are some deals on tap
• 28:08
  Speaker 1: dividend payment payment deals right there are, yeah, and I've announced.
• 28:13
  Speaker 1: But the deals that they're out there also pick toggle deals.
• 28:16
  Speaker 1: I haven't seen any pick toggles yet. That would be
• 28:18
  Speaker 1: an interesting one to see come back. I'm not saying
• 28:20
  Speaker 1: that won't, but you know, that kind of is the
• 28:22
  Speaker 1: kind of aggressive transaction structure you tend to see at
• 28:25
  Speaker 1: the end of the cycle where people are trying to
• 28:27
  Speaker 1: figure out how do I make a little bit extra
• 28:28
  Speaker 1: return in my portfolio. Yeah, just before whatever. Everything's glowed
• 28:33
  Speaker 1: and I'm not suggesting that either, but don't worry. Uh well,
• 28:37
  Speaker 1: we've tried on to to push with that. Ken Monahan,
• 28:39
  Speaker 1: thank you so much. As always, we love your insights.
• 28:41
  Speaker 1: Ken Monahan, I'm aun new Pioneer, co director of High Yield.
• 28:45
  Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
• 28:47
  Speaker 1: You can subscribe and listen to interviews at Apple Podcasts
• 28:50
  Speaker 1: or whatever podcast platform you prefer. Paul Sweeney, I'm on
• 28:53
  Speaker 1: Twitter at pt Sweeney. I'm Lisa abram Woids. I'm on
• 28:56
  Speaker 1: Twitter at Lisa A. Bramwod's one before the podcast. You
• 28:58
  Speaker 1: can always catch us worldwide on Bloomberg Radio m