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Tech, Banks, Markets, and Marijuana (Podcast) · Bloomberg Intelligence

0:00
Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
0:04
Speaker 1: my co host Matt Miller. Every business day we bring
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Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
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Speaker 1: with essential market moving news. Find the Bloomberg Markets podcast
0:15
Speaker 1: called Apple Podcast or wherever you listen to podcasts, and
0:18
Speaker 1: at Bloomberg dot com slash podcast. Folks, this is going
0:22
Speaker 1: to be an interesting week for You're supposed to say
0:24
Speaker 1: good stuff when John Tucker has done. You're supposed to
0:26
Speaker 1: always say good stuff, Good stuff, John Tucker, good stuff,
0:30
Speaker 1: Justina does it? Oh my gosh, okay um. Moving on
0:34
Speaker 1: from John Tucker, also good stuff. On the Techer Innings front,
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Speaker 1: We're gonna get Netflix later this week. We're gonna get
0:40
Speaker 1: a lot of MidCap names as well. And who better
0:43
Speaker 1: to dive into what to expect and all the jazz
0:46
Speaker 1: around these tech companies right now than our very own
0:49
Speaker 1: Bloomberg Technology senior analysts on Grana and man Deep sing
0:53
Speaker 1: A lot to digest here ONAG. I want to start
0:56
Speaker 1: with you on the big tech names here, because to
0:59
Speaker 1: have a ainable equity market rally, you have to have
1:03
Speaker 1: your Apples, your Microsoft's, on your side. Why aren't they
1:07
Speaker 1: right now? So the big question is what's going to
1:09
Speaker 1: be guidance for the rest of the year. Um, we
1:11
Speaker 1: all know that things are slowing down in enterprise to expending.
1:15
Speaker 1: Cloud is going to slow down. PC sales are bad.
1:18
Speaker 1: We even expect enterprise you know course software to start decelerating.
1:22
Speaker 1: But the question is, you know how much of that
1:24
Speaker 1: is already baked into the stock price. So I think
1:27
Speaker 1: guidance is going to be extremely critical when we go
1:29
Speaker 1: onto the next owning season from all these vendors, hang
1:32
Speaker 1: on when are they coming out with earnings? Microsoft's next week,
1:36
Speaker 1: Apples the week after that, and Apple is going to
1:38
Speaker 1: be very different as well because of supply chain you
1:41
Speaker 1: know issues we have seen that they may miss on
1:44
Speaker 1: the iPhone side. So the question really is how's the
1:46
Speaker 1: buy side going to treat that, because you know, in
1:49
Speaker 1: our view, whatever we lose in this quarter, we're gonna
1:52
Speaker 1: gain back in the next quarter. Mandeep, what are you
1:55
Speaker 1: looking for in the companies you I can never sort
1:57
Speaker 1: out which companies You guys cover what you do social
2:01
Speaker 1: media and like the internet stuff? More consumer tech, say
2:05
Speaker 1: more enterprise tech. So consumer tech is very different enterprise tech.
2:09
Speaker 1: Is a code word for what's enterprise tech actually means
2:13
Speaker 1: just business to business stuff. Got it. Okay, so you
2:17
Speaker 1: have Alphabet, you have Meta, Uh, Uber, Airbnb? Are they
2:21
Speaker 1: all coming out next week or in the next two weeks?
2:25
Speaker 1: And uh, Look, I think when I say it, and
2:29
Speaker 1: I mentioned this before on your show, that there was
2:31
Speaker 1: a massive pull forward when it comes to a lot
2:34
Speaker 1: of consumer tech companies during COVID times. We had a
2:39
Speaker 1: period where they are resetting the comps. Next year, the
2:42
Speaker 1: comps are going to be easier. The problem for a
2:46
Speaker 1: company like Alphabet is they're operating profit grew hud so
2:52
Speaker 1: they went from forty billion inter operating profit to eight billion.
2:56
Speaker 1: Now that is the sort of comp I mean, it
2:59
Speaker 1: will take them probably two years to reset that. So
3:02
Speaker 1: they pull forward two years of operating profit growth in
3:05
Speaker 1: one year during that COVID time, and I think that
3:07
Speaker 1: is a challenge for someone like Alphabet to an extent
3:11
Speaker 1: Meta as well. But when you say pull forward, that
3:14
Speaker 1: means they took it from two and three and put
3:19
Speaker 1: it in one. Is it really the case? I mean,
3:23
Speaker 1: are the the revenue they get from ads? Right? For
3:27
Speaker 1: the most part ad spending. It's not like companies that
3:30
Speaker 1: we're spending a lot in are gonna not spend in three.
3:35
Speaker 1: So you have a confluence of negative factors right now.
3:39
Speaker 1: Notably the Apple I d f A changes. That was
3:41
Speaker 1: a ten billion dollar drag on Meta's revenue for two
3:46
Speaker 1: same thing. It's not going to dissipate anytime soon. Then
3:49
Speaker 1: AD pricing in general is coming down because we are
3:52
Speaker 1: headed for slower growth or probably a recession. So during
3:55
Speaker 1: times like this, ad pricing compresses. It will bounce back,
4:00
Speaker 1: but it's very cyclical. And then businesses in general, small businesses,
4:04
Speaker 1: which is the bulk of Meta's ads spent, they are
4:07
Speaker 1: pulling back again a slow growth times. And that's what
4:11
Speaker 1: I mean by pull forward because during the COVID phase,
4:17
Speaker 1: Meadows revenue grew almost average. The reason why that happened
4:22
Speaker 1: is small businesses did very well. It was all online.
4:25
Speaker 1: They were spending a lot of money on ads to
4:27
Speaker 1: acquire customers. Well, you're running into tough comps. Plus, businesses
4:31
Speaker 1: are pulling back because ad spending is the easiest thing
4:34
Speaker 1: to pull back on when times are tough. So UM
4:37
Speaker 1: HONORAG we were talking earlier. There's a story in the
4:40
Speaker 1: Bloomberg about UM executives at Davos. Their expectations are for
4:45
Speaker 1: horrendous and awful recession. But that's because the survey was
4:48
Speaker 1: done in October and November. Right in December and January,
4:52
Speaker 1: we've turned a lot more positive. Um is that the
4:55
Speaker 1: case for these companies as well. So typically what happens is,
4:58
Speaker 1: you know, take spending is sometimes driven by the sentiment
5:02
Speaker 1: that we see in the NASTAC how the NASTAC performs.
5:04
Speaker 1: Now I did this correlation many many years ago, but
5:07
Speaker 1: if you look at it just on the spending side
5:10
Speaker 1: of it, last five years have been phenomenal for software spending.
5:13
Speaker 1: You know, the top twenty software companies grew at an
5:16
Speaker 1: average in that time frame. So it's going to be
5:19
Speaker 1: very difficult to come up with that level of performance
5:22
Speaker 1: again this year. Now, our big thesis is that whatever
5:26
Speaker 1: we lose this year, you know, we will recover it
5:28
Speaker 1: the next year or the year after, depending on how
5:31
Speaker 1: long this slowdown is. And and partially the reason why
5:33
Speaker 1: we think is, you know, we think there are still
5:36
Speaker 1: a lot of very old systems out there that need
5:39
Speaker 1: to be upgraded. I mean point in time, you know, Southwest,
5:42
Speaker 1: the f a A, all those things, I mean legacy,
5:45
Speaker 1: it T spending dominates total I T spending. So all
5:48
Speaker 1: those companies slowly and slowly need to upgrade their systems,
5:52
Speaker 1: which is a bull case for software, but perhaps not
5:55
Speaker 1: in three Well, that's exactly where I want to go.
5:58
Speaker 1: I think we had me and Deep on Bloomberous Valance
6:00
Speaker 1: radio months ago. I remember you coming up with a
6:02
Speaker 1: stat uh and it was something like in the next
6:05
Speaker 1: ten years. I think it's like, I can't remember, was
6:07
Speaker 1: billions or trillions? It was like four or five billion
6:10
Speaker 1: or trillion, I can't remember. I know those are different
6:11
Speaker 1: numbers UM spending on cloud infrastructure. So I'm wondering. And
6:16
Speaker 1: that's something you're hearing from these bank earnings as well.
6:18
Speaker 1: That sure, some of these compensation expenses are coming down,
6:20
Speaker 1: but the tech expenses are coming up. How long does
6:24
Speaker 1: that bowl case or that tail when A was just
6:27
Speaker 1: talking about take to actually play out. Well, I would
6:30
Speaker 1: say there are certain things that are secular in nature
6:33
Speaker 1: in this market. Cloud spending is one of them, and
6:36
Speaker 1: that when when these secular trends play out, they play
6:40
Speaker 1: out ten twenty years, It's gonna take years before we
6:43
Speaker 1: are fully migrated to cloud. And plus there is a
6:46
Speaker 1: lot of new innovation going on a lot of AI.
6:49
Speaker 1: You know, machine learning is being done on cloud. These
6:52
Speaker 1: are I mean very expensive workloades to run Chat GPT's
6:57
Speaker 1: waiting to see would bring that up a one month
6:59
Speaker 1: bill of jack chief. It would be way above then
7:02
Speaker 1: how much a traditional it costs to run. So that's
7:05
Speaker 1: where I think cloud infrastructure is a real secular tail wind.
7:09
Speaker 1: And look, there are certain structural headwinds for a lot
7:11
Speaker 1: of these companies. And that's where you're gonna pick winners
7:14
Speaker 1: and losers is which ones are exposed to the circular
7:17
Speaker 1: trends and which ones aren't. So let's go near term
7:21
Speaker 1: the man deep in the next few weeks when we
7:23
Speaker 1: get some of these earnings roll out, who's gonna get
7:25
Speaker 1: it right, who's gonna get it wrong? I think you've
7:27
Speaker 1: seen a lot of negative revisions already. So a name
7:31
Speaker 1: like Snapchat has seen top line come down, estimates come
7:34
Speaker 1: down by about consensus numbers are down a lot, same
7:38
Speaker 1: thing for a lot of other small caps like Roudblocks
7:41
Speaker 1: now with large caps, Google estimates are down ten percent.
7:44
Speaker 1: That doesn't mean they're gonna crush it or the you know,
7:47
Speaker 1: the sentiment will be positive after the report, So that's
7:49
Speaker 1: where you have to really match how far the expectations
7:53
Speaker 1: have come down. They haven't come down, and uh like
7:56
Speaker 1: for a name like Airbnb. Now, I do think there
8:00
Speaker 1: was a pope forward even with airbnbs growth because of reopening,
8:04
Speaker 1: it lasted two years. Guess what there will be a
8:07
Speaker 1: slowdown period after that, and I think that's where they're exposed.
8:11
Speaker 1: We've been waiting to hear about this a lot in
8:14
Speaker 1: the last six months as while we started this an
8:15
Speaker 1: Apple and Microsoft as well at this slowdown is already here.
8:19
Speaker 1: To what extent are we going to see more pain
8:22
Speaker 1: in the first quarter or is this is so the
8:25
Speaker 1: way we look at it right now, the estimates look fair.
8:28
Speaker 1: We don't see a bigger downdraft on that, which is
8:31
Speaker 1: why I said guidance going into the next quarter or
8:34
Speaker 1: next this earning is going to be very critical. If
8:36
Speaker 1: the count these companies are income, they come report and
8:40
Speaker 1: able to match the expectations of the buy side on
8:43
Speaker 1: the south side, and then you could see them rivers
8:45
Speaker 1: you know, the trend of the stock prices going downwards. However,
8:49
Speaker 1: if they come back and say, you know, things are
8:50
Speaker 1: really getting even worse, then you have another leg down.
8:53
Speaker 1: But one of the big things that I've said is,
8:55
Speaker 1: you know, for us, the big you know, I'm not
8:57
Speaker 1: truly concerned about the length of the cloud cycle or
9:01
Speaker 1: the funding behind it that I'm very happy or very
9:04
Speaker 1: comfortable about it. But but I do not know that
9:07
Speaker 1: where the ten year is going to be by the
9:08
Speaker 1: end of the year. If the ten year is around
9:10
Speaker 1: where it is, then tech stocks should be fine. But
9:13
Speaker 1: if it starts to go up inflation creeps back again,
9:16
Speaker 1: then tech is going to have a horrendous second half.
9:18
Speaker 1: So it's there is a lot that's tied up with
9:20
Speaker 1: the interest rates rather than just the earning side operating business.
9:24
Speaker 1: What are the typical valuations that you see on the
9:27
Speaker 1: enterprise side, So it depends on who you're looking at,
9:30
Speaker 1: and you know, you look at somebody like a Microsoft
9:33
Speaker 1: eighteen nineteen times. You know, a couple of years ago
9:36
Speaker 1: it was thirty times earnings. But that all the all
9:39
Speaker 1: the you could say, the squeeze and the valuation has
9:41
Speaker 1: to do with the with the ten year climbing up
9:43
Speaker 1: quite a bit. You could say the same thing about
9:46
Speaker 1: Apple apples. Now in eighteen nineteen times it used to
9:49
Speaker 1: be over thirty times for for a while. So if
9:51
Speaker 1: ten year keeps on going up, that number keeps on
9:54
Speaker 1: coming down. I mean that's really where we are at
9:56
Speaker 1: this point. Sorry, men Deep, you what kind of valuations
10:00
Speaker 1: do you see or does it matter? And the companies
10:02
Speaker 1: you cover because they don't necessarily make profits, well yes
10:06
Speaker 1: that is a factor. But for a name like Alphabet,
10:08
Speaker 1: you know you have to ask yourself when will they
10:11
Speaker 1: grow operating profit? Because that is going to determine the
10:14
Speaker 1: floor in terms of valuation. Right now, the market isn't clear.
10:17
Speaker 1: They aren't believing the consensus numbers that they can grow
10:20
Speaker 1: operating profit even low singles did. If they prove that,
10:23
Speaker 1: I think that may be very well. All right, Man
10:25
Speaker 1: Deep Sing Senior Analysts Technology at Bloomberg Intelligence. Honoragu Raga,
10:28
Speaker 1: also at Tech Analysts, Bloomberg Intelligence, Thanks very much, always
10:31
Speaker 1: great your round table. Speaking of four twenty, we are
10:37
Speaker 1: going to talk about weed right now. Chris Violas, the
10:42
Speaker 1: CEO of Blaze, joins us to talk about technology platform
10:47
Speaker 1: that they that they operate um or or at least
10:53
Speaker 1: get to businesses to operate in order to sell uh
10:58
Speaker 1: marijuana products. And I think it's such a fascinating story.
11:02
Speaker 1: We cover this a lot in this program because it's
11:04
Speaker 1: like we're watching the beginning of an industry, you know,
11:07
Speaker 1: the end of prohibition, and we can see the kind
11:11
Speaker 1: of revenue that this generates, not just for the businesses,
11:15
Speaker 1: but also for states. We recently covered this right the
11:19
Speaker 1: very well, the first the first one in New York.
11:22
Speaker 1: UM and I believe they use Blaze technology. Chris, let's
11:25
Speaker 1: get over Chris right now, Chris Viola's CEO Blaze. Tell
11:28
Speaker 1: us about your product, what what what do you offer
11:31
Speaker 1: that's helping this budding industry. Man. Well, thank you, Creety,
11:36
Speaker 1: thanks for having me on. I'm really excited to be here.
11:39
Speaker 1: But to get to the point, Blaze is a retail
11:42
Speaker 1: point of soap platform really empowering about sixteen percent of
11:45
Speaker 1: North America dispensaries today. So anything from inventory control to
11:50
Speaker 1: checking out and actually facilitating that transaction to the compliance
11:55
Speaker 1: that goes on behind it, that's all Blaze powering these
11:58
Speaker 1: beautiful retailers that are doing such work, including Housing Works. Yeah.
12:02
Speaker 1: Housing Works is of course the charity that opened the
12:05
Speaker 1: first marijuana dispensary, recreational dispensary in New York, and there
12:09
Speaker 1: are I think twenty three other states where marijuana is legal, um,
12:15
Speaker 1: but it's not federally and that presents a problem for
12:18
Speaker 1: these retailers in terms of taking credit cards, in terms
12:21
Speaker 1: of you know, the payment point systems, how does how
12:24
Speaker 1: does that work? How do you kind of get around
12:26
Speaker 1: the federal law. Yeah, it's obviously there's a conflict there.
12:31
Speaker 1: So when it comes to these payment types, really there's
12:34
Speaker 1: only a few options we have. UM. As with anything
12:38
Speaker 1: we do, we want to be as open and transparent
12:40
Speaker 1: and complying as possible. So credit cards are off the table.
12:43
Speaker 1: We don't touch that except for in Canada where it
12:46
Speaker 1: is federally legal. But when we're talking about the US,
12:49
Speaker 1: we really only have two options at this point. Obviously
12:52
Speaker 1: we can take cash. I guess three options. That's one.
12:55
Speaker 1: The second would be a c H So you know,
12:57
Speaker 1: this is really likened too when you go on to
13:00
Speaker 1: then though, when you connect your bank account um and
13:02
Speaker 1: start to send money either directly to a person or
13:06
Speaker 1: directly to another business. We can certainly facilitate that today.
13:10
Speaker 1: That's a direct to direct type of transaction. And then
13:13
Speaker 1: the second is our Blaze pay program, which is the
13:16
Speaker 1: pin debit based solution where the user, the consumer go
13:20
Speaker 1: ahead and insert their card with a chip, entering their
13:23
Speaker 1: pin number, and then from there we can directly transact
13:26
Speaker 1: against that specific bank account. So how does that work?
13:28
Speaker 1: More specifically, I noticed that at Empire, at the Empire
13:32
Speaker 1: Cannabis Club, if you ring up a hundred thirty five dollars, right,
13:38
Speaker 1: they'll debit you for one forty and then actually give
13:42
Speaker 1: you the five dollars and change. I don't know what's
13:44
Speaker 1: going on there, So that's a that's a different solution
13:47
Speaker 1: than what we like to to use here at Blaze.
13:49
Speaker 1: That is called cashless a t M. And essentially what
13:52
Speaker 1: they're doing with that specific solution is are actually turning
13:56
Speaker 1: that debit terminal into what we call an a a
13:58
Speaker 1: t M. And there's your round up, right, each time
14:02
Speaker 1: you withdraw from an ATM machine, it's got to be
14:05
Speaker 1: specific denominations. In this case, you know by by five,
14:10
Speaker 1: so by one forty you'll get five dollars back on
14:13
Speaker 1: that transaction. That being said, um, why that solution is functional,
14:18
Speaker 1: it's not our what we consider to be the most
14:20
Speaker 1: optimal solution requires that to spend. Sure, you carry more
14:23
Speaker 1: cash on hand to facilitate the cash back. UM, but
14:27
Speaker 1: it is relatively straightforward the same concept of a direct
14:30
Speaker 1: withdrawal from that bank, So it is an option there.
14:34
Speaker 1: So then when you're looking at the long term for
14:37
Speaker 1: you for your own company, what kind of timeline are
14:39
Speaker 1: you looking at where you don't have to have these
14:42
Speaker 1: workarounds when it comes to payments. A pretty great question.
14:45
Speaker 1: I wish I had that magic ball, m But at
14:48
Speaker 1: the end of the day, we feel that with such
14:51
Speaker 1: explosive growth in this industry, we're all trying to be compliant,
14:54
Speaker 1: both the operators and the service providers that that obviously
14:57
Speaker 1: service them. So my hope is in the next you know,
15:00
Speaker 1: three or four years, UM, we we see some movement.
15:04
Speaker 1: Obviously there's a talks from the Safe Banking Act obviously
15:06
Speaker 1: not going through this last quarter, but in general we
15:10
Speaker 1: are hopeful. Um. We really feel like Canada's also, you know,
15:13
Speaker 1: set the stage in terms of normalizing that the payment systems.
15:17
Speaker 1: So we're hopeful. Um. That being said, we still have
15:19
Speaker 1: a long way to go, and I wouldn't say we
15:21
Speaker 1: have a direct line of site just yet. But does
15:24
Speaker 1: it annoy you that we haven't gotten safe banking or
15:26
Speaker 1: is it actually better for your business? Because hear me
15:30
Speaker 1: out well, or maybe you know this is clear to you.
15:34
Speaker 1: The longer it doesn't pass, the more these dispensaries need
15:38
Speaker 1: you and you get to kind of dig your heels
15:40
Speaker 1: in in terms of market share. Yeah, look, it's a
15:43
Speaker 1: great question. Obviously we're balancing both the business ablaze as
15:47
Speaker 1: well supporting our retailers. At the end of the day,
15:50
Speaker 1: though this business was started by myself and then a
15:52
Speaker 1: few other founders were formal operators, so you know, our
15:56
Speaker 1: ethos series really to enable those retailers and make sure
15:59
Speaker 1: that as successful as possible. So I do hope you
16:02
Speaker 1: can reduce the cash I do hope we can uh
16:05
Speaker 1: reduce some of the work around. So yes, while that
16:07
Speaker 1: may not might not help our margins directly, I think
16:10
Speaker 1: it's the right thing for the industry and the right
16:12
Speaker 1: thing to really move this forward. Um you see anywhere
16:15
Speaker 1: outside of cannabis, folks being able to use Apple Pay
16:18
Speaker 1: and some of these really cool techniques to transact and
16:21
Speaker 1: obviously reduce that friction at checkout. That is really our
16:25
Speaker 1: main goal here is to help enable retailers to sell
16:28
Speaker 1: more and part of that's reducing the friction wherever the
16:30
Speaker 1: consumer wants to check out and whatever they want to
16:32
Speaker 1: check out with. So what kind of opposition are are
16:35
Speaker 1: you facing right now? I mean on your day to
16:37
Speaker 1: day how much pushback are you really getting UM with
16:41
Speaker 1: regards to the payment solutions or just competit the payments socritions. Yeah,
16:47
Speaker 1: not not much. I mean, look, these operators understand that
16:49
Speaker 1: they're in a difficult situation. It's really about finding that
16:52
Speaker 1: local banking provider that first off, go ahead and have
16:56
Speaker 1: a depository account with you and be able to to
16:58
Speaker 1: just facilitating well day to day banking needs, but at
17:01
Speaker 1: the same time UM being able to supply not just
17:04
Speaker 1: the payment side, but we also Ablaze Capital, which is
17:06
Speaker 1: an aventory finance and solutions. So we understand there's a
17:10
Speaker 1: lot of barriers for these for these retailers. So wherever
17:13
Speaker 1: we can use our economies of scale and you know,
17:15
Speaker 1: our FI plus dispensaries to help benefit and bring a
17:18
Speaker 1: solution forward, we obviously want to do that. So I
17:21
Speaker 1: would say between us and the and the retailers is
17:23
Speaker 1: not much friction. UM. They're looking for help and so
17:26
Speaker 1: whatever we can do to provide them with some assistance,
17:28
Speaker 1: I mean, they're usually pretty open to it. Any plans
17:32
Speaker 1: for an IPO what's the capital structure look like. Yeah,
17:35
Speaker 1: I know we're private today. UM have raised this in
17:37
Speaker 1: or nineteen million across the board, all through um VC
17:44
Speaker 1: type of funding. UM. But you know, as with everybody
17:47
Speaker 1: in this economy, we're really focused on profitability, and so
17:50
Speaker 1: we do a blinding site this year to profitability and
17:53
Speaker 1: we want to control our future. And so when the
17:55
Speaker 1: markets do turn, UM, do you turn around and look
17:58
Speaker 1: upward for and I on the positive, you know, it's
18:01
Speaker 1: definitely something that we're not going to rule out. But
18:03
Speaker 1: at this point, you know, I'd say it's been a
18:05
Speaker 1: benefit for us to stay private. Thank you to you
18:08
Speaker 1: next to you on our plan? All right, Chris, thanks
18:10
Speaker 1: so much for joining us. Fascinating stuff. Chris violis there,
18:13
Speaker 1: CEO of Blaze. They help cannabis dispensaries sell more WED
18:21
Speaker 1: Let's bring in our guests right now to talk about
18:24
Speaker 1: what's going on in these markets, a lot of it
18:26
Speaker 1: dictated by bank earnings. We've just seen the final of
18:29
Speaker 1: the Big six UM report. Brent Shooty joins US chief
18:32
Speaker 1: investment strategists from Northwestern Mutual UH chief investment officer, sorry
18:37
Speaker 1: from Northwestern Mutual, as well as Alice and Williams, Senior
18:40
Speaker 1: Global Banks and Asset Managers analysts from Bloomberg Intelligence. Brent,
18:45
Speaker 1: let me first ask you your take on the bank
18:49
Speaker 1: earnings UM Goldman Sachs falling by the most since well
18:53
Speaker 1: in a year, I guess today after missing UM revenue estimates.
18:59
Speaker 1: How do you see this batch of bank earnings changing
19:02
Speaker 1: your strategy or informing your strategy. Yeah, I don't think
19:06
Speaker 1: it's changing it too much. I mean, to me, the
19:08
Speaker 1: macro so what's happening in the global economy matters much
19:10
Speaker 1: much more than earnings, not to say that they're not important.
19:13
Speaker 1: They do kind of represent who's gonna win and who's
19:15
Speaker 1: going to lose from a relative perspective, But overall, the
19:18
Speaker 1: most important thing right now is where is the economy headed?
19:20
Speaker 1: In three where's inflation headed? And what is the FED
19:23
Speaker 1: going to do? And I think that the better tone
19:26
Speaker 1: that you've had to the start of the year is
19:28
Speaker 1: because you are seeing inflation come down and certainly expectations
19:31
Speaker 1: of FED future tightening is coming down against the backdrop
19:34
Speaker 1: of an economy that hasn't yet fallen into recession. I
19:36
Speaker 1: think that's where you're seeing optimism. Alison hop On in
19:39
Speaker 1: here because as Matt pointed out, the what feels like
19:42
Speaker 1: the driving story at least for the TAO is going
19:44
Speaker 1: to be those bank earnings. How much of what we've
19:47
Speaker 1: gotten from them is a sector specific story as opposed
19:51
Speaker 1: to a macroeconomic store and both. I mean they're going
19:54
Speaker 1: in completely different directions, right, Morgan Stanley is up seven. Yeah,
19:58
Speaker 1: I think the news today is a little bit more
20:01
Speaker 1: company specific UM. And to your point, Matt, it is
20:04
Speaker 1: interesting the economy and performance, and that is because Goldman
20:09
Speaker 1: Sachs reporting a comprey show which is UH the highest
20:12
Speaker 1: in several years. UH. Solomon had warned that the coast
20:17
Speaker 1: to compete was not coming in UM as much as
20:20
Speaker 1: would be expected UM, but perhaps the results were even
20:24
Speaker 1: more dramatic than we expected in terms of the increase
20:27
Speaker 1: in comp comp was down for the year, but only
20:31
Speaker 1: something like while revenue is down, and so I think
20:35
Speaker 1: comp and head count that's that's really the story of Goldman.
20:38
Speaker 1: Provision for credit costs, which is a broad MACO macro
20:41
Speaker 1: economic indicator, was a bit worse. I'll come back to
20:43
Speaker 1: that in one second. For Morgan Stanley, it was really
20:47
Speaker 1: the wealth business, which is the crown jewel for that
20:50
Speaker 1: company out performing if you will, um and and sort
20:53
Speaker 1: of negative expectations coming into the quarter. Net interest income
20:59
Speaker 1: for which we heard about last week. I don't know
21:01
Speaker 1: if I would call that macro. I mean, it is
21:03
Speaker 1: tied to monetary policy, but not interesting come coming in
21:07
Speaker 1: softer for most of the biggest lenders, and that's really
21:10
Speaker 1: just due to the costs of their deposits rising. Think
21:13
Speaker 1: of that, as their costs of good sold rates are
21:15
Speaker 1: going up. They've gotten the benefit. Now they have to
21:17
Speaker 1: start passing some of that onto customers. Morgan Stanley's not
21:21
Speaker 1: interest income did hold up a little bit better. That
21:23
Speaker 1: feels pretty macro. I mean the broader theme we've been
21:27
Speaker 1: talking about with banks CEOs for years. I was stationed
21:31
Speaker 1: in Germany for the past six years, and they really
21:34
Speaker 1: complained about the lack of net interest income and low rates.
21:37
Speaker 1: I mean, zerp or Nerve was really problematic for these banks. Sprent.
21:42
Speaker 1: You know, it's a point that I think is really interesting.
21:45
Speaker 1: We can get kind of back to business as usual
21:47
Speaker 1: now that we get away from extraordinary monetary policy. Does
21:50
Speaker 1: that mean something to you? Absolutely? I mean, I mean
21:54
Speaker 1: to me, I still think we're going to have a recession.
21:56
Speaker 1: This year, and so you know, I do think that
21:59
Speaker 1: the fet is you know, intently focused on the labor
22:01
Speaker 1: market and not going to stop until they actually see
22:04
Speaker 1: the labor market crack, which I guess, I don't know
22:07
Speaker 1: if it's good or bad. I think it's probably closer
22:08
Speaker 1: than further away. But certainly, the the large rate hikes
22:13
Speaker 1: are a thing of the past, and I think they're
22:14
Speaker 1: gonna start coming down. Uh. And if you think about
22:17
Speaker 1: the last couple of years, I mean, we had maximum
22:19
Speaker 1: policy to the upside, and then I think last year
22:21
Speaker 1: was maximum policy to the downside. I think this is
22:24
Speaker 1: a bit of a transition year where we slow the
22:25
Speaker 1: hikes and hopefully stop the hikes when that labor market
22:28
Speaker 1: does crack. Um. But certainly I think I think from
22:30
Speaker 1: a volatility standpoint, that will bring down volatility, especially towards
22:34
Speaker 1: the end of the year, when we finally see that, yes,
22:37
Speaker 1: we are likely to have a recession, but it will
22:39
Speaker 1: be short, mild, and uneven. So you mentioned macro back
22:42
Speaker 1: and forth. Some sectors will win, some sectors will lose. Uh.
22:46
Speaker 1: And I think the other side of this is better
22:47
Speaker 1: days ahead. But certainly, until we get to that point,
22:50
Speaker 1: I think you're gonna see a back and forth volatility perspective,
22:53
Speaker 1: but not as much as it was last year when
22:55
Speaker 1: the FED was at certainly on the elevator up on
22:58
Speaker 1: the rate hike cycle. Provisions. Alison, you said, you get
23:01
Speaker 1: back to I think this is well for me. I'm
23:03
Speaker 1: watching very closely to see how barish these banks are
23:08
Speaker 1: in terms of their recession forecast. Can you read that?
23:12
Speaker 1: Can you read that into big low and lost provisions? Generally,
23:15
Speaker 1: the provisions that we've seen a lot of the grow,
23:18
Speaker 1: A lot of the provisions has been due to loan
23:20
Speaker 1: growth because card is the seasonally strongest in the fourth quarter,
23:25
Speaker 1: we saw balances. It's also the highest charge of rates,
23:27
Speaker 1: so that generally portends to have somewhat higher provisions we
23:32
Speaker 1: have seen. I would say that the banks in general
23:35
Speaker 1: have signaled some weakening of an economic outlook, but nothing dramatic.
23:40
Speaker 1: City Group saying on Friday that they were reserving to
23:44
Speaker 1: sort of a five to five point one percent unemployment rate,
23:48
Speaker 1: so um some positioning there in terms of UH and
23:52
Speaker 1: giving you some detail around around their outlook. Imagine a
23:56
Speaker 1: five and a half percent unemployment rate, well five to
23:58
Speaker 1: five point one percent, five but still um and Uh,
24:04
Speaker 1: so I think that, and and JP Morgan has said,
24:08
Speaker 1: you know that five to six percent unemployment would be
24:10
Speaker 1: five to six billion of reserve building for them. They
24:14
Speaker 1: did reserve build reserves by about one point four billion
24:17
Speaker 1: this quarter. About one billion was that was consumer. That
24:20
Speaker 1: relates to some of the growth that I mentioned. Um,
24:22
Speaker 1: but they said that part of the other part of
24:24
Speaker 1: that is marking to market towards those you know, other expectations,
24:29
Speaker 1: just as we're seeing some weakening. So not calling for
24:31
Speaker 1: that yet, but just reserving towards that. So let's let's
24:34
Speaker 1: fold in what what Brent was just talking about when
24:37
Speaker 1: it comes to what the sector as a whole is
24:39
Speaker 1: trading off of. Is it really taking its que I
24:41
Speaker 1: mean naturally from the brown market, but is it taking
24:43
Speaker 1: its que from something like uh the two stents bread
24:46
Speaker 1: for example, and then compressed margins in that direction, or
24:49
Speaker 1: is it taking its cue from say cap yields as
24:53
Speaker 1: a result of FED cuts priced into the market. What
24:55
Speaker 1: what does the stock trade off of the stocks tend
24:58
Speaker 1: to trade off of tues tends that's not really the
25:01
Speaker 1: yield curve that impacts that's that most meaningful to their earnings,
25:04
Speaker 1: but that tends to be the biggest UM indicator for
25:08
Speaker 1: the stocks. I think in general, when they've been reacting
25:12
Speaker 1: to earnings, it has been the initial reaction has been
25:15
Speaker 1: to the net interest income. We talked a little bit
25:17
Speaker 1: about some of the reactions UM today. I do think
25:21
Speaker 1: that in the months ahead, really the focus is on
25:24
Speaker 1: unemployment and credit costs. Even though these banks will argue
25:30
Speaker 1: and part of the reason why they talk about how
25:32
Speaker 1: their reserves is just show look we have, like are
25:35
Speaker 1: the pre tax pre provision profits so profit before these
25:38
Speaker 1: losses is so strong, it's well covered. UM capital is
25:44
Speaker 1: very strong. They've built that up. UM, it's still uncertain,
25:47
Speaker 1: and it's hard for bank stocks to outperform as you're
25:50
Speaker 1: sort of going into things. They need to sort of
25:53
Speaker 1: see the other side or see things getting better. Brent,
25:56
Speaker 1: how does the China reopening or the better than expect
26:00
Speaker 1: to numbers out of Europe influence your your position? I mean,
26:04
Speaker 1: have you gotten less bearish in the last few months
26:07
Speaker 1: because it seems like others have have shifted. Yeah. I
26:12
Speaker 1: mean I've been optimistic because inflation is coming down a
26:14
Speaker 1: certainly trying to reopening to put up our pressure on commodities.
26:17
Speaker 1: But I think in general the US, you are seeing
26:19
Speaker 1: inflation pull back, and I don't know if people have
26:22
Speaker 1: made enough of this, but if you look at all
26:23
Speaker 1: in CP I uh less shelter, So the part that's
26:27
Speaker 1: lagging the it's actually negative over the last six months,
26:31
Speaker 1: and so you're starting to see that inflation come down,
26:33
Speaker 1: which to me is still the most important variable that's
26:35
Speaker 1: out there. I think it accelerates, but as I mentioned before,
26:38
Speaker 1: I do think you're going to kind of shift to
26:40
Speaker 1: recession worries because I do think you're going to start
26:43
Speaker 1: seeing the labor market crack just a bit. But tying
26:45
Speaker 1: it into what was just said, I think the other
26:48
Speaker 1: side of this is nearer rather than further away, because
26:50
Speaker 1: I think inflation will fall quite a bit, which will
26:52
Speaker 1: allow the Federal Reserve to potentially pivot if they need to,
26:55
Speaker 1: to keep any such recession short and mild, which I
26:59
Speaker 1: think is the most important variable for anybody's outlook. How
27:02
Speaker 1: How deep do you think the recession is, how long
27:04
Speaker 1: do you think it lasts? And I don't stilln't think
27:06
Speaker 1: it's either deep or long, which informs kind of a
27:08
Speaker 1: positive outlook towards the back half of the year, which
27:11
Speaker 1: unfortunately I think is consensus, but certainly I think still
27:15
Speaker 1: likely given that I think inflation is starting to create her.
27:18
Speaker 1: But to be cleared, you don't expect the FED to
27:21
Speaker 1: cut rates this year, do you. This is where I'm
27:24
Speaker 1: not I'm not for sure. I mean this is where
27:26
Speaker 1: I think it's more important that I think they'll be
27:27
Speaker 1: able to pause and then if they need to to
27:30
Speaker 1: keep any recessions from being deeper, they will be able
27:33
Speaker 1: to cut rates because inflation expectations are actually right where
27:36
Speaker 1: they want them. I find it ironic that we came
27:39
Speaker 1: into this time pere. I think people forget that the
27:41
Speaker 1: FED was trying to get inflation expectations up and the
27:44
Speaker 1: five to ten year universe missions at three percent, that
27:47
Speaker 1: is exactly where it was when times are more normal,
27:49
Speaker 1: not the past five or six years. We're worried about deflation.
27:52
Speaker 1: So this is where I think that that needs to
27:53
Speaker 1: cut our stop. All right, Brent Shooty from Northwestern Mutual.
27:57
Speaker 1: Alice Williams from Blue Word Intelligence, thanks very much for
27:59
Speaker 1: joining us. This is Bloomberg. Let's bring in Ira Jersey
28:06
Speaker 1: right now, Bloomberg Chief rates correspondent for Bloomberg Intelligence. Ira, Uh,
28:12
Speaker 1: what do you make of the change in. UM, I
28:16
Speaker 1: guess perception we've gone from we just heard Dennis Gartman
28:20
Speaker 1: say bearish to at least mildly bullish, and we've changed
28:24
Speaker 1: our expectations a bit for the FED as well. We've
28:27
Speaker 1: even had FED speakers come out and say, you know what,
28:28
Speaker 1: twenty is cool in February. Yeah, we've I was expecting
28:33
Speaker 1: a downshift in after the December meeting. Actually, you know,
28:36
Speaker 1: the FED and FED speakers have been talking about the
28:40
Speaker 1: fact that they need to kind of calibrate where ultimately
28:44
Speaker 1: the FED FUNDRAI is going to end up. And I
28:47
Speaker 1: think we are nearing that point. You know, then markets
28:49
Speaker 1: certainly pricing for you know, two maybe three more um,
28:53
Speaker 1: three more hikes of twenty five bases points. So so
28:56
Speaker 1: so it's not a big surprise. I think that they're
28:57
Speaker 1: going to go twenty five in at the February meeting. UM.
29:02
Speaker 1: You know, today's price action is interesting in and of
29:04
Speaker 1: itself because initially we were, um, we were initially bear stepening,
29:10
Speaker 1: and now we're bull stepening. So so two year yields,
29:13
Speaker 1: you know, have rallied quite a lot in in over
29:16
Speaker 1: the last couple of hours, and UH, in particular after
29:19
Speaker 1: that Empire survey. It's like the lack of news is
29:22
Speaker 1: just pushing the market around quite a lot. That's exactly
29:26
Speaker 1: what I want to ask you about that Empire survey.
29:28
Speaker 1: It was like the worst since May, the worst data
29:31
Speaker 1: going back to I think the global financial crisis as well,
29:34
Speaker 1: that coming from a camera Cris on our Markets Live
29:37
Speaker 1: blog as well. But do we really need to take
29:40
Speaker 1: stock in that data set? Yeah, I'm I'm not sure.
29:44
Speaker 1: I think that a lot of the volatility we're seeing
29:46
Speaker 1: as position based, and you just have people who don't
29:49
Speaker 1: want to take big positions one way or the other,
29:51
Speaker 1: so you wind up seeing outside moves even when you
29:54
Speaker 1: get you know, data that is kind of second tier.
29:57
Speaker 1: I mean, i'd say that the Empire Survey typically doesn't
30:01
Speaker 1: move the treasury market more than a basis point or
30:04
Speaker 1: two um after its release. But but I do think, yes,
30:07
Speaker 1: it was very weak. You saw the inflation components, so
30:10
Speaker 1: the price is paid and the prices receives component um
30:13
Speaker 1: falls significantly. But but as someone noted to me earlier today, um,
30:17
Speaker 1: we had this this head fake in uh the Empire
30:21
Speaker 1: Survey last September as well, and and things just bounced
30:23
Speaker 1: right back. So so I don't know if we can
30:25
Speaker 1: take a lot out of this one number, but that
30:27
Speaker 1: seems to be one of the big drivers of the
30:29
Speaker 1: market at least today, so Irah. Matt Miller, in addition
30:34
Speaker 1: to buying one ticket for himself and one ticket for
30:36
Speaker 1: his motorcycle in Europe, also says, you know, look, the
30:39
Speaker 1: Federal Reserve is going to be the bigger meeting um
30:43
Speaker 1: next to the e c B in about two weeks time.
30:46
Speaker 1: But Ira, can I take the flip side on that?
30:48
Speaker 1: Is it fair to say that maybe the e c
30:51
Speaker 1: B is kind of the bigger spotlight right now? Well,
30:56
Speaker 1: I think I think they're almost equally as important, and
30:58
Speaker 1: certainly from a market follow hilogy standpoint, I think that
31:01
Speaker 1: the pick you can't pick your favorite child. Come on, well,
31:06
Speaker 1: I mean, the Fed's my favorite child. I mean us
31:09
Speaker 1: right strategists. But um, but but I think the ECB
31:12
Speaker 1: is is a little bit more doubtful. I think at
31:15
Speaker 1: this point, Um, it's mostly baked in the cards that
31:19
Speaker 1: that the Fed's gonna go five. And you look at
31:21
Speaker 1: the market pricing right now and it's it's more or
31:24
Speaker 1: less twenty five with a small chance of fifty um.
31:27
Speaker 1: Whereas the e c b people just aren't sure not
31:30
Speaker 1: only you know, how quickly they're going to go, but
31:32
Speaker 1: how high they're actually going to ultimately hike. And and
31:35
Speaker 1: I think the um there's a lot of uncertainty around
31:40
Speaker 1: around Europe because their economy is much weaker than the
31:42
Speaker 1: US economy, but their inflation continues to run much higher
31:46
Speaker 1: than the U S and than U S inflation. So
31:49
Speaker 1: so I think there's just a lot more doubt around
31:51
Speaker 1: what's going on in Europe, and that's going to generate
31:54
Speaker 1: more volatility, um you know, not only in things like
31:57
Speaker 1: German bombs and the periphery, but also in also in
32:02
Speaker 1: global developed market rates. So here and even Japan and
32:05
Speaker 1: Japan is an interesting interesting well, I mean they got
32:11
Speaker 1: to be the most interesting, um you know, if not
32:14
Speaker 1: the most biggest mover. Yeah, so huge, huge mover relative right, Matt.
32:20
Speaker 1: Because one of the things that remember that the job
32:25
Speaker 1: the Bank of Japan had been doing is buying ten
32:27
Speaker 1: year Japanese government bonds at ten basis points, right, So,
32:32
Speaker 1: so they didn't let it float, and then they let
32:34
Speaker 1: it float a little bit more up to basis points.
32:36
Speaker 1: Now it's fifty basis points and right now, as of
32:39
Speaker 1: overnight um ten year Japanese government bonds actually are trading
32:43
Speaker 1: above half percent, above fifty basis points, and that means
32:48
Speaker 1: that that the Bank of Japan is going to have
32:49
Speaker 1: to intervene and come in and buy more bonds. But
32:51
Speaker 1: there's a lot of talk they're going to get rid
32:53
Speaker 1: of that buying program altogether, and that could even generate
32:55
Speaker 1: even more about what happens then, I because you know,
32:59
Speaker 1: the rate spen above fifty basis points for three of
33:01
Speaker 1: the last four trading sessions, not including today, and so
33:05
Speaker 1: I guess four out of five now, and they've bought
33:08
Speaker 1: more than a hundred billion dollars worth of jgbs in
33:11
Speaker 1: the last four sessions. So what happens if they just
33:15
Speaker 1: let go? Yeah? So I think that you wind up seeing,
33:19
Speaker 1: you know, maybe something not that similar to what happened
33:22
Speaker 1: in UH in the guilt market UH last year, where
33:26
Speaker 1: you wind up seeing maybe a fourty or fifty basis
33:28
Speaker 1: points sell off in a hurry in ten year tenure
33:31
Speaker 1: Japanese notes. But but interestingly, I think, and and look,
33:34
Speaker 1: I'm not an expert on the Japanese government bond market,
33:36
Speaker 1: but what I what I do know and what I
33:39
Speaker 1: have seen, is that thirty year Japanese government bond yields
33:43
Speaker 1: have gone up significantly because that's not what the Bank
33:47
Speaker 1: of Japan was targeting, and they haven't been buying that sector.
33:49
Speaker 1: So anyone who needed to hedge long term interest rate
33:51
Speaker 1: risk was selling thirty years. So I think you could
33:54
Speaker 1: have this weird dynamic where thirty year Japanese yields might
33:58
Speaker 1: actually rally a little bit as people start selling more
34:00
Speaker 1: ten years, and you can actually see the ten year
34:03
Speaker 1: thirty year curve actually actually flattened quite a lot, with
34:07
Speaker 1: the ten year sector really underperforming on that curve, and
34:11
Speaker 1: and that will generate volatility globally. Now I think ultimately
34:14
Speaker 1: in the US it might be worth ten or fifteen
34:16
Speaker 1: basis points in the tenure. But we'll but but but
34:20
Speaker 1: that will stabilize and we'll focus on domestic issues here.
34:22
Speaker 1: Ira Jersey, our chief US rate Strategies for Bluebery Intelligence.
34:26
Speaker 1: Thanks very much for joining us. Thanks for listening to
34:30
Speaker 1: the Bloomberg Markets podcast. You can subscribe and listen to
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34:38
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34:45
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