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Netflix Shares At Risk As New Competition Heats Up (Podcast) · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg Penl Podcast. I'm Paul swing you
• 0:05
  Speaker 1: along with my co host Lisa Brahma Wicks. Each day
• 0:07
  Speaker 1: we bring you the most noteworthy and useful interviews for
• 0:10
  Speaker 1: you and your money. Whether at the grocery store or
• 0:12
  Speaker 1: the trading floor. Find a Bloomberg Penil 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. Well, one of the big stories
• 0:22
  Speaker 1: in media and entertainment investing is can anybody compete with Netflix?
• 0:27
  Speaker 1: And we're seeing some companies make some big moves. We've seen,
• 0:30
  Speaker 1: most notably the Walt dis new company by twenty one
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  Speaker 1: century Fox from more than seventy billion dollars in an
• 0:35
  Speaker 1: effort to compete against Netflix. So let's talk media and
• 0:38
  Speaker 1: entertainment stocks. We are pleased to welcome Lara Martin. Lar's
• 0:41
  Speaker 1: senior analyst for Needham Company. She's based in l a
• 0:44
  Speaker 1: but she joins us here in a Bloomberg eleventh three
• 0:46
  Speaker 1: oh studio in New York. Laura, thanks for being with us.
• 0:49
  Speaker 1: So can anybody compete with Netflix? What is your view
• 0:53
  Speaker 1: on Netflix? To begin with? Because you are one of
• 0:55
  Speaker 1: the few analysts out there that is not planning the
• 0:58
  Speaker 1: table on Netflix. Yeah, right, So I find it's hard
• 1:00
  Speaker 1: to make money when you agree with the crowd, So
• 1:02
  Speaker 1: I take the hate mail that comes with being negative
• 1:04
  Speaker 1: on Netflix. Um. So my concern about Netflix is that, um,
• 1:09
  Speaker 1: they're get about to get They've been a monopolist with
• 1:11
  Speaker 1: other people's programming for most of the last seven years,
• 1:14
  Speaker 1: and now they're going to get companies competing with them
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  Speaker 1: that not only have deeper pockets, but also have a
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  Speaker 1: lower marketing cost and a lower content cost because they
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  Speaker 1: own their own libraries. So in the case of Disney
• 1:25
  Speaker 1: and Warner Brothers, which is now owned by A T
• 1:27
  Speaker 1: and T, they have fifty years of program and they've
• 1:30
  Speaker 1: already paid for an amortized so it's a lower cost
• 1:32
  Speaker 1: of content because Netflix has to pay cash for all
• 1:34
  Speaker 1: their original content. And then each of those companies has
• 1:37
  Speaker 1: sisters subsidiaries that they can advertise for free. So Disney
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  Speaker 1: owns ABC, they can put their own thirty second spot
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  Speaker 1: telling you that Disney Entertainment exists. Netflix has to buy
• 1:46
  Speaker 1: every single spot of paid media, so it's so they
• 1:50
  Speaker 1: so both of those companies have a lower cost of
• 1:52
  Speaker 1: content and a lower marketing cost in the case of Apple,
• 1:55
  Speaker 1: which spent ninety minutes sort of talking about their news
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  Speaker 1: streaming service. They do fifty billion dollars a year free
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  Speaker 1: cash flow. Netflix spends thirteen and has to borrow three
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  Speaker 1: of it. If actually Apple started spending thirteen billion, you
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  Speaker 1: wouldn't notice because they still have forty billion to buy
• 2:09
  Speaker 1: in shares or paid dividends. Well, which raises a question,
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  Speaker 1: because this is speculation that we've heard from a number
• 2:15
  Speaker 1: of people. Could Apple end up buying Netflix? Could Netflix
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  Speaker 1: actually get some sort of cash infusion from a third party? Um,
• 2:24
  Speaker 1: maybe I think it is. I think it would be
• 2:26
  Speaker 1: more likely that in the end, Apple will try to
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  Speaker 1: do it itself at the highest brand level. And it's
• 2:31
  Speaker 1: much more likely that the brand consistency is because of
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  Speaker 1: the Walt It was would be with the Walt Disney company,
• 2:35
  Speaker 1: which it could buy, and they're similar brand strength. And
• 2:38
  Speaker 1: as you know, you know, Bob Iger's on the Apple
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  Speaker 1: board and Steve Jobs was on, So more likely that
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  Speaker 1: Apple would buy Disney. And the problem with Netflix is
• 2:45
  Speaker 1: the day you buy Netflix, you lose read hastings at
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  Speaker 1: Ted Surranda's So I don't know what you think the
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  Speaker 1: value of Netflix is without those top five managers that
• 2:52
  Speaker 1: founded it twenty five years ago. But it's a lot
• 2:55
  Speaker 1: less because those people are extraordinary, and they won't be
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  Speaker 1: employees because they're gonna be with billions of dollars. So
• 3:01
  Speaker 1: let's go back to that Walt Disney deal, probably the
• 3:03
  Speaker 1: biggest M and A trade we've seen in the media
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  Speaker 1: space in a long time. We never thought we'd see
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  Speaker 1: Rubert Murdoch sell. At least I didn't think we'd ever
• 3:09
  Speaker 1: see Rupert Murdoch sell this company. Do you think Disney
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  Speaker 1: now has the assets to compete against Netflix and the
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  Speaker 1: Amazons and the facebooks and the Apples of the world.
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  Speaker 1: And I'll point out that Disney has an investor meeting
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  Speaker 1: next week April eleven, world presumably they'll unveil some more
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  Speaker 1: details about their streaming business. Yes, I do. I do
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  Speaker 1: think it's large enough because actually content creation is a
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  Speaker 1: core competence of Disney. I do think you need twenty
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  Speaker 1: four by seven programming. What we've seen with ww E,
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  Speaker 1: which went first into the over the top streaming, is
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  Speaker 1: you have to have ten thousand hours in your library.
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  Speaker 1: When you launch, Disney had all Triple A titles, but
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  Speaker 1: it didn't have any ten thousand hours. Now they have
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  Speaker 1: that ten thousand hours, so I think they have a
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  Speaker 1: really legitimate streaming service. And a lot of the content
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  Speaker 1: that you guys everybody's watching on Netflix is coming off
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  Speaker 1: and moving to the Walt Disney Entertainment channel while Netflix
• 4:00
  Speaker 1: is raising their price to you. So the concerns about
• 4:02
  Speaker 1: Netflix are legitimate, and there's something that we've heard from
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  Speaker 1: other people as well. Uh, The question is how does
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  Speaker 1: an investor value those risks, because right now we're looking
• 4:11
  Speaker 1: at Netflix shares uh that are valued at three give
• 4:16
  Speaker 1: or take, and I'm just wondering where the correct value
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  Speaker 1: should be given some of these pressures that really are
• 4:21
  Speaker 1: coming more online now in a way that they never
• 4:24
  Speaker 1: have before. Right Well, the number that I think is
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  Speaker 1: the most telling is Netflix trades at ten times revenue.
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  Speaker 1: Apple trades at sixteen times earnings. So if you had
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  Speaker 1: to back one of them, anything that goes wrong at
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  Speaker 1: Netflix and your ten times, the next closest fang is
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  Speaker 1: eight times, and that's Facebook, so it's gonna stop at eight.
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  Speaker 1: And then you know, Disney trades at three. Interesting, so
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  Speaker 1: it's just really overvalue. It's interesting. One of the things
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  Speaker 1: that you know about Netflix, I think I think it's
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  Speaker 1: been driving this stock really over the years has been
• 4:53
  Speaker 1: the subscriber growth. So the question is they have, you know,
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  Speaker 1: some hundred fifty millions some subscribers globally. That seems like
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  Speaker 1: a heads start, even for an Apple, even for a Disney.
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  Speaker 1: Um do you think there's room in this streaming market
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  Speaker 1: for multiple streamers? I mean, how many checks are people
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  Speaker 1: going to be writing every month? Well, so I think
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  Speaker 1: that actually is the best question in media right now,
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  Speaker 1: because the average home gets three over the top services,
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  Speaker 1: including skinny bundles. If you think that number stays at three,
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  Speaker 1: then what happens is the incumbent Netflix, which has sixty
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  Speaker 1: million U S subs, must be losing subs to Warner
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  Speaker 1: or Apple or Disney, which means their U sub growth
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  Speaker 1: goes negative. Now, can you sustain atten multiple of revenue
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  Speaker 1: when your U S subs are negative, even if you
• 5:35
  Speaker 1: can grow, even if you can grow your international subs
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  Speaker 1: fasterd offset, which you might not be able to. And
• 5:41
  Speaker 1: I don't think a growth investor can take a negative
• 5:43
  Speaker 1: sub growth, even if it's just in the US. But
• 5:45
  Speaker 1: these are a lot of ifs, right, And there's a
• 5:47
  Speaker 1: question of the cost point too. And the fact that
• 5:50
  Speaker 1: Netflix has developed a lot of original programming that a
• 5:53
  Speaker 1: lot of people really like, right, I mean, it's not
• 5:54
  Speaker 1: that they're completely reliant on Disney subscriptions. So what do
• 5:58
  Speaker 1: you think I mean, is there any kind of early
• 6:00
  Speaker 1: indication of how many individual packages customers are willing to
• 6:06
  Speaker 1: pay for? Well, I think here's here's a logical consumer behavior.
• 6:09
  Speaker 1: There is no incentive for you to sign up for longer,
• 6:12
  Speaker 1: more months for Netflix. So when bird Box comes out
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  Speaker 1: and it's hit, you can pay ten dollars watch it all,
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  Speaker 1: turn it off, go to the Walt Disney Company, watch
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  Speaker 1: all the stuff you want to watch. Turn it off.
• 6:22
  Speaker 1: Go to Warner Brothers for ten dollars, watch it turn
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  Speaker 1: it off. You know that the marketers in the room
• 6:27
  Speaker 1: are going to give you a discount if you buy
• 6:29
  Speaker 1: a bundle, if you take three months or six months,
• 6:31
  Speaker 1: they're going to try to lock you in for longer
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  Speaker 1: because that's a better business model. Netflix gives you no
• 6:36
  Speaker 1: incentive not to come watch what's hot and leave after
• 6:39
  Speaker 1: thirty days. Laura Martin, thank you so much for joining us.
• 6:42
  Speaker 1: We will not be setting you hate mail. We think
• 6:44
  Speaker 1: your views are really compelling. Thank you, Laura Martin is
• 6:46
  Speaker 1: senior analystic need Um and Company, joining us here in
• 6:49
  Speaker 1: our Bloomberg Interactive Broker's studios. Let's talk oil. W t
• 7:08
  Speaker 1: I is up nearly from its December load to over
• 7:11
  Speaker 1: sixty two a barrel. What's driving this rise and how
• 7:15
  Speaker 1: high can it go? Fortunately, our next guest has an
• 7:17
  Speaker 1: opinion on that. We welcome Jason Shanker. Jason as president
• 7:21
  Speaker 1: of Prestige Economics, also chairman of the Futurist Institute and
• 7:25
  Speaker 1: a Bloomberg Opinion contributor contributor. He's based in Austin, Texas,
• 7:29
  Speaker 1: Keep it weird, but he joins us in our Bloomberg
• 7:31
  Speaker 1: eleventh three Yoh studios. Jason, welcome. So again we've had
• 7:34
  Speaker 1: this big roller coaster for oil, you know, crashing there
• 7:39
  Speaker 1: in the fourth quarter last year, but then staging is
• 7:41
  Speaker 1: really strong rally here. What's driving it? Well, I think
• 7:44
  Speaker 1: there's a couple of fundamental things we need to look
• 7:46
  Speaker 1: at with oil, and the first is really important. Here's
• 7:50
  Speaker 1: what's going on with Chinese growth. China's the biggest net
• 7:52
  Speaker 1: importer in the world at grood Oil. Uh there were
• 7:54
  Speaker 1: a few months of consecutive monthly contractions in Chinese manufacturing.
• 7:58
  Speaker 1: If you look at the private compiled Session Manufacturing Index,
• 8:01
  Speaker 1: and we actually closed in November sort of mid November,
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  Speaker 1: below levels that we hadn't seen on the downside uh
• 8:09
  Speaker 1: in terms of a down trend since the last Chinese
• 8:12
  Speaker 1: manufacturing recession started in December. So crossing below those technicals
• 8:18
  Speaker 1: in the middle of November of and really important, we
• 8:22
  Speaker 1: rose above those levels just this past week because that
• 8:26
  Speaker 1: Chinese manufacturing p m I number that came out on
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  Speaker 1: Sunday night surprising number back above fifty after three contractions,
• 8:33
  Speaker 1: So should be no surprise. Biggest net importer in the
• 8:35
  Speaker 1: world of crude oil is expanding again and crude oil
• 8:38
  Speaker 1: prices close above those recessionary type prices. So how much
• 8:42
  Speaker 1: upside does oil have from here, given the fact that
• 8:46
  Speaker 1: China does seem to be at least stopping the slowdown
• 8:50
  Speaker 1: if you will, well, I think there's a little bit
• 8:52
  Speaker 1: more upside here. We actually saw upside for price during
• 8:55
  Speaker 1: the year, even though this Chinese manufacturing recession was going
• 8:57
  Speaker 1: on all the all the brief a quarter long. We
• 9:01
  Speaker 1: think that the really most important thing people need to
• 9:03
  Speaker 1: know is that the U S summer driving season is
• 9:05
  Speaker 1: one of the most critical things that drives oil prices
• 9:08
  Speaker 1: presented was always presenting upside risk. I you want to
• 9:10
  Speaker 1: qu two. We now see a little more upside risk.
• 9:12
  Speaker 1: So before we would have set prices maybe sixties sixty five,
• 9:14
  Speaker 1: now sixty five to seventy just reference, we're talking w
• 9:18
  Speaker 1: T I, which is currently sixty two and a half
• 9:20
  Speaker 1: sixty two fifty in terms of price prepared. So you
• 9:23
  Speaker 1: see that going up to a range of six to seventy. Yeah,
• 9:26
  Speaker 1: we could easily see that because this summer's driving season
• 9:29
  Speaker 1: is likely to be the biggest summer driving season in history.
• 9:32
  Speaker 1: Last year was the biggest. This year is gonna be
• 9:33
  Speaker 1: even bigger. Right, we think wage inflation most recent job
• 9:36
  Speaker 1: report up three point four percent year on year, unemployment
• 9:39
  Speaker 1: rate three percent. Everybody's got jobs, everybody's got money. They're
• 9:42
  Speaker 1: gonna be going places this summer with their families. So
• 9:45
  Speaker 1: no matter what happens with China, you were always going
• 9:47
  Speaker 1: to get some support at least until the September contract
• 9:50
  Speaker 1: role in the middle of July. All right, So that's demand.
• 9:52
  Speaker 1: Very bullish on the demand from your perspective, But isn't
• 9:55
  Speaker 1: there a lot of supply? Aren't they pumping up this
• 9:57
  Speaker 1: shale oil faster and they can even get it to
• 9:59
  Speaker 1: the terminal. Right, So there's a lot of supply for oil,
• 10:01
  Speaker 1: which is why oil was slower to recover than a
• 10:03
  Speaker 1: number of industrial medals after the Chinese manufacturing recession that
• 10:06
  Speaker 1: lasted from December until June. Other things rose faster because
• 10:11
  Speaker 1: there was a lot more supply of oil, but it's
• 10:13
  Speaker 1: still rose on trend from mid until uh we saw
• 10:18
  Speaker 1: that pull back then and significantly in October and the November.
• 10:22
  Speaker 1: So yeah, it's gonna be a bit more dampen than
• 10:24
  Speaker 1: other commodities because we have a higher supply situation, but
• 10:28
  Speaker 1: commodities are bought and not sold, and so big summer
• 10:30
  Speaker 1: driving season means refineries are going to be consuming a
• 10:34
  Speaker 1: lot of oil to meet that demand. And of course,
• 10:36
  Speaker 1: if China can even remain just above fifty, we're gonna
• 10:39
  Speaker 1: be in in this uh all arranging Q two Why
• 10:42
  Speaker 1: not higher than well? This is right? So could we
• 10:46
  Speaker 1: in spike to see things higher. Yeah, it's possible, but
• 10:50
  Speaker 1: part of the reason we we may not see it
• 10:52
  Speaker 1: higher is because we still have China in a um
• 10:57
  Speaker 1: right in still tepid growth. There's still questions what's gonna
• 10:59
  Speaker 1: happen and trade ward things still going on, right, that's
• 11:02
  Speaker 1: a deal. And of course in Europe, right, Eurozone manufacturing
• 11:05
  Speaker 1: contracted significantly for a second consecutive month. This is a
• 11:09
  Speaker 1: bigger concern. This is obviously outside the Brexit stuff, but
• 11:11
  Speaker 1: this is Eurozone manufacturing was an all time recording. Because
• 11:15
  Speaker 1: you know that we don't necessarily want to talk about Brexit, right,
• 11:17
  Speaker 1: well yeah, you know, but but but what's going into
• 11:19
  Speaker 1: the Eurozone is is much more than than what's going
• 11:22
  Speaker 1: on with Brexit, right, you're being monetary union kind of
• 11:24
  Speaker 1: a separate deal. But euros of manufacturing was an all
• 11:27
  Speaker 1: time record high in December, slid all last year, and
• 11:32
  Speaker 1: that wasn't because of bregit concerns. So that was the
• 11:34
  Speaker 1: end of quantitative ease incoming and the Europeans couldn't do it.
• 11:37
  Speaker 1: And they still have negative deposit rates. And so now
• 11:40
  Speaker 1: we see the ECB going more devish. They're gonna kick
• 11:43
  Speaker 1: it back up later in the year. And but but
• 11:46
  Speaker 1: between now and then, um, you know, there's some risk
• 11:49
  Speaker 1: and that's something that kind of limits some of the
• 11:51
  Speaker 1: upside for say commodities that are consumed on a global basis. Yes,
• 11:54
  Speaker 1: sounds I'm glad you brought up Europe because you know,
• 11:56
  Speaker 1: obviously that looks like China is stabilizing and maybe getting
• 11:59
  Speaker 1: some green shoots of growth there. But Europe, as you
• 12:02
  Speaker 1: just mentioned, very weak across your being, including Germany. So
• 12:07
  Speaker 1: to what extent, what's the risk in your opinion that
• 12:10
  Speaker 1: European growth could weaken even further? Yeah, so there there
• 12:14
  Speaker 1: is the potential for this. We saw this a few
• 12:16
  Speaker 1: years ago when the European Central Bank tried to reduce
• 12:19
  Speaker 1: the central bank balance sheet from around three point one
• 12:22
  Speaker 1: trilling euros to two and as we know now it's
• 12:25
  Speaker 1: closer to four and a half because that failed miserably.
• 12:28
  Speaker 1: Even apparently trying to slow the expansion of the balance
• 12:31
  Speaker 1: sheet or stopping it is failing miserably. So this means
• 12:35
  Speaker 1: that more quantitative ease in coming. Until, though that happens,
• 12:40
  Speaker 1: you could see a bit more downside, very responsive economy
• 12:44
  Speaker 1: to that stimulus. Very What's interesting to me is everyone
• 12:48
  Speaker 1: sort of just expects the US economy as a given
• 12:51
  Speaker 1: to continue chugging along and accelerating this year. And I
• 12:55
  Speaker 1: actually I was looking this morning at the City US
• 12:59
  Speaker 1: Economic Surprise Index, which is at its lowest level since
• 13:02
  Speaker 1: two thousand seventeen, which sort of, uh, to put this
• 13:04
  Speaker 1: into English, means that the greatest proportion of economic reports
• 13:10
  Speaker 1: are coming out below analysts expectation in the United States, UH,
• 13:15
  Speaker 1: since two thousand and seventeen. And I'm just wondering, you know,
• 13:18
  Speaker 1: especially given the FEDS reluctance to make any move whatsoever,
• 13:23
  Speaker 1: is the U s economy weaker than people expect or
• 13:26
  Speaker 1: think right now? So I think there are some concerns
• 13:30
  Speaker 1: people need to be aware of. I would hearken back
• 13:34
  Speaker 1: to Ben Bernanke's quote at beginning of January that business
• 13:36
  Speaker 1: cycles don't die, they get murdered or don't have old age,
• 13:39
  Speaker 1: they get murdered. And if we were to um, like inspector,
• 13:43
  Speaker 1: we know around up the usual suspects, what would they be, Well,
• 13:46
  Speaker 1: the usual suspects might be. Um, you know the fact
• 13:49
  Speaker 1: that in twenty eight team we had more I p
• 13:50
  Speaker 1: o s of companies with negative earnings than in in
• 13:52
  Speaker 1: the history of ever. Right, So that's you know that
• 13:56
  Speaker 1: that's something right, So so these these you know, that's
• 13:59
  Speaker 1: maybe a thing. Right. If we were to say, okay,
• 14:01
  Speaker 1: we learned our lesson in the housing bubble, right, and
• 14:03
  Speaker 1: the financial crisis, but maybe we forgot the lessons of
• 14:06
  Speaker 1: two thousand, two thousand one. It was a long time ago,
• 14:09
  Speaker 1: times ago. A lot of folks on the street, we're
• 14:12
  Speaker 1: not working time right, So that that's the thing. The
• 14:15
  Speaker 1: other thing, of course, is if we look at some
• 14:17
  Speaker 1: of the economic data, we we also do see slower
• 14:19
  Speaker 1: growth in October. You know, we have seen these higher
• 14:23
  Speaker 1: interest rates. We were expecting four rate hikes last year
• 14:25
  Speaker 1: because of a year and year base effect for inflation.
• 14:27
  Speaker 1: This year we were expecting zero. We're not gonna get
• 14:30
  Speaker 1: any of this year. And that's also a base on
• 14:33
  Speaker 1: a year on year effective inflation. That the other usual
• 14:35
  Speaker 1: suspect than there is the FED where they behind the curve,
• 14:38
  Speaker 1: now they ahead of the curve. Are they responding to
• 14:41
  Speaker 1: slowly to inflation risk? You know that that's also a thing.
• 14:44
  Speaker 1: But I think business investment is at risk this year,
• 14:47
  Speaker 1: and we saw a recession in business investment. Most people forget,
• 14:50
  Speaker 1: and we could see a US business investment investment recession
• 14:54
  Speaker 1: sometime this year. But we still spec one potent GDP
• 14:57
  Speaker 1: overall for the year, far below some of the higher
• 15:01
  Speaker 1: expectations of economists. But growth nonetheless, that's fairly solid. Jason Shanko,
• 15:05
  Speaker 1: president of Prestige Economics, also the chairman of the Futurist
• 15:09
  Speaker 1: Institute and a Bloomberg Opinion contributor. In June of two
• 15:28
  Speaker 1: thousand twelve, Roja Gupta, a former CEO of McKinsey, was
• 15:31
  Speaker 1: convicted of insider trading associated with a Galleon hedge fund
• 15:35
  Speaker 1: scandal and sentenced to two years in prison. The Galleon
• 15:38
  Speaker 1: founder was also convicted and sent to prison. Mr Gupta
• 15:42
  Speaker 1: was released in two thousand sixteen and has since published
• 15:45
  Speaker 1: his new memoir, Untiled Mind Without Fear. We sat down
• 15:48
  Speaker 1: with Mr Gupta earlier this week to discuss his conviction
• 15:51
  Speaker 1: and time in prison, and started things off by asking
• 15:54
  Speaker 1: him why write the book? Well, let me first say
• 15:57
  Speaker 1: why is not written? Which is not try to relitigate
• 16:01
  Speaker 1: the case or to convince lots of people. I'm innocent.
• 16:05
  Speaker 1: I just wanted to present my viewpoint which I had
• 16:08
  Speaker 1: steadfastly maintained my silence because the matter was sub judice
• 16:12
  Speaker 1: till the beginning of this year, and I wanted to
• 16:15
  Speaker 1: honor the tradition of not saying anything while my appeals
• 16:19
  Speaker 1: were going on. So I decided to write my story,
• 16:23
  Speaker 1: uh one to you know, get my story out in
• 16:27
  Speaker 1: my own words. Second, I actually wanted to write a
• 16:32
  Speaker 1: broader story than just the trial, because in many ways,
• 16:37
  Speaker 1: I've had an interesting life. Everybody has an interesting life,
• 16:40
  Speaker 1: but I also had an interesting life, and there many
• 16:44
  Speaker 1: lessons learned from it. There were many ups and downs,
• 16:47
  Speaker 1: and I wanted to write it for young people who
• 16:50
  Speaker 1: could relate to pieces of it, you know. And I
• 16:53
  Speaker 1: wanted to write in a very direct, you know, personal style,
• 16:58
  Speaker 1: giving what I was feeling and going through these experiences,
• 17:02
  Speaker 1: and hopefully some lessons will come out of that, not
• 17:06
  Speaker 1: only in terms of this last few years, but also
• 17:09
  Speaker 1: my own professional career and my childhood, my my life philosophy.
• 17:14
  Speaker 1: And you did have a dramatic rise to the top
• 17:17
  Speaker 1: of the corporate world until this, uh, this conviction one
• 17:21
  Speaker 1: of the largest insider trading cases in the United States.
• 17:24
  Speaker 1: Who you say in the book that you felt wronged
• 17:27
  Speaker 1: by what happened and that you feel like the true
• 17:31
  Speaker 1: villains of the crisis and of financial markets have not
• 17:35
  Speaker 1: been prosecuted. Who are the real villains? I mean, those
• 17:39
  Speaker 1: of your report on the financial markets would know better.
• 17:42
  Speaker 1: I mean I can say one simple fact. You know,
• 17:46
  Speaker 1: all we did in the aftermath of the financial crisis
• 17:50
  Speaker 1: is h make big fines for banks, which of course
• 17:55
  Speaker 1: the shareholders ended up paying for, and the executives kept
• 17:59
  Speaker 1: all the abovenesses and all their money they made. And
• 18:03
  Speaker 1: this was the biggest crisis in American history for a
• 18:06
  Speaker 1: long time. Thousands and thousands of people lost their jobs,
• 18:12
  Speaker 1: they lost their pensions, they lost their homes, and banks
• 18:17
  Speaker 1: were held accountable for misdeeds fraud even and yet no
• 18:23
  Speaker 1: one in the senior management of any of the banks
• 18:27
  Speaker 1: who found accountable. Do you think that senior bank executive,
• 18:31
  Speaker 1: senior financial executives should in fact going to jail. You
• 18:36
  Speaker 1: tell me when when a bank is find billions of
• 18:38
  Speaker 1: dollars in admits to fraud human beings? Do that right?
• 18:42
  Speaker 1: No machines are doing this fraud or this bad practices.
• 18:46
  Speaker 1: So yes, of course I don't think we've held the
• 18:51
  Speaker 1: executives at that time had been held accountable to this day,
• 18:55
  Speaker 1: you maintain your innocence. What do you believe the courts
• 18:57
  Speaker 1: got wrong? What? As you know, well, insider trading implies
• 19:03
  Speaker 1: that actual insider information was passed, second, that there was
• 19:09
  Speaker 1: criminal intent, Third, that there was consequential benefit and they
• 19:15
  Speaker 1: couldn't prove any of it. There was only some circumstantial
• 19:19
  Speaker 1: evidence in timing of calls, but there was They recorded
• 19:23
  Speaker 1: rather Rutnam for eighteen months. There was not a single
• 19:27
  Speaker 1: conversation between us that passed any insider information. There was
• 19:32
  Speaker 1: no emails, there were no witnesses, so there was Yet
• 19:37
  Speaker 1: they convicted you, you appealed. I'm saying, you're saying, you
• 19:41
  Speaker 1: know what they got wrong. They didn't meet any of
• 19:43
  Speaker 1: the criteria right. And second, there were twenty two people
• 19:48
  Speaker 1: convicted in the Galleon case or related I don't know
• 19:50
  Speaker 1: what the exact number is. Every one of them had
• 19:52
  Speaker 1: a quid pro co arrangement with raj. How is it
• 19:56
  Speaker 1: that I'm the only person who had no benefit, no arrangement, nothing.
• 20:00
  Speaker 1: It was jail like jail by and large was okay,
• 20:05
  Speaker 1: except for the fact that you know, as they say,
• 20:09
  Speaker 1: power corrups and absolute power cerrups absolutely, and the prison
• 20:14
  Speaker 1: system is run as if they have absolute power. And
• 20:17
  Speaker 1: they sent me to solitary confinement three times, one time
• 20:24
  Speaker 1: for seven weeks with no severn wis why, uh, you
• 20:30
  Speaker 1: can buy towels in the commissary in prison? Right? I
• 20:34
  Speaker 1: had a bad back, So when you sit in chairs.
• 20:36
  Speaker 1: I rolled up two towels and stitched them for a
• 20:40
  Speaker 1: little pillow support pillow. And they came and searched my
• 20:45
  Speaker 1: my little bunk area, and they found nothing except that pillow.
• 20:50
  Speaker 1: The towel rolled up was sitting on the bottom of
• 20:53
  Speaker 1: my bed. And the guy said, well, this is tampering
• 20:58
  Speaker 1: with government property. And so they sent me to salitary
• 21:02
  Speaker 1: confinement for seven weeks. And you know, if there is
• 21:08
  Speaker 1: anything I would say, please get that out to the
• 21:12
  Speaker 1: world that this the prison system is run like that.
• 21:16
  Speaker 1: It's terrible. They want you to, you know, go and
• 21:20
  Speaker 1: hang your head and be repentant, and you know, they
• 21:22
  Speaker 1: don't treat you like human beings. In many of the time,
• 21:26
  Speaker 1: solity confinement you would think is a very quiet kind
• 21:30
  Speaker 1: of place. Everybody is in a single cell and so on. No,
• 21:34
  Speaker 1: it's absolutely the noisiest place in prison because there are
• 21:38
  Speaker 1: steel doors and walls, and people are going crazy. They're
• 21:41
  Speaker 1: banging streel doors, they're shouting there right now. It's it's
• 21:46
  Speaker 1: u and defines more than two weeks a solitary confinement
• 21:50
  Speaker 1: as severe torture and had seven at seven and this
• 21:55
  Speaker 1: goes on. This does not not just me as a
• 21:57
  Speaker 1: CEO of Mackenzie. You had every CEO and speed out.
• 22:00
  Speaker 1: What's it like now? What happened to your friends? No,
• 22:04
  Speaker 1: there's many no, no, no, many people have stayed by me.
• 22:07
  Speaker 1: I mean, you know, no, vast majority of people have
• 22:13
  Speaker 1: stayed by me. Some have turned away. But you know,
• 22:17
  Speaker 1: also I was, you know, in a retirement mode. I
• 22:20
  Speaker 1: was spending most of my time in philanthropic things. So
• 22:23
  Speaker 1: when I came out after this seven years, I have
• 22:27
  Speaker 1: no particular desire to go back into the commercial world
• 22:31
  Speaker 1: and in the way I was before or way back
• 22:35
  Speaker 1: when I was fully engaged in the commercial world. So
• 22:37
  Speaker 1: I had no particular reason. And many of the CEOs
• 22:40
  Speaker 1: have honestly retired. It's been now seven nine years. That
• 22:45
  Speaker 1: was Jacque Groupta, a former chief executive officer of Mackenzie
• 22:49
  Speaker 1: who spent two years in prison for insider treating. His
• 22:53
  Speaker 1: new memoir, Mind Without Fear, is available now and one
• 22:56
  Speaker 1: of the things that he is committing himself to, as
• 22:59
  Speaker 1: we discussed to in that interview and afterwards, was to
• 23:03
  Speaker 1: prison reform because of his experience in solitary confine them well,
• 23:22
  Speaker 1: for many executives, the global economic outlook became more clouded
• 23:25
  Speaker 1: in the first quarter in the U S. A disappointing
• 23:27
  Speaker 1: February jobs reports still concerns over the stability and sustainability
• 23:31
  Speaker 1: of a strong economy, and key foreign markets like China
• 23:34
  Speaker 1: and Germany continued to struggle. So how are companies reacting
• 23:37
  Speaker 1: to these uncertain conditions. Our next guest has some very
• 23:40
  Speaker 1: interesting data to answer that question. We welcome Sandy Cockrell,
• 23:43
  Speaker 1: Global CFO program leader for Deloitte. He joins us in
• 23:47
  Speaker 1: our Bloomberg Interactive Broker Studio. Sandy, thanks so much for
• 23:50
  Speaker 1: joining us. I know Deloitte does our quarterly CFO survey
• 23:54
  Speaker 1: where you survey a hundred and fifty So CFOs, what's
• 23:57
  Speaker 1: the survey telling you? Now? Very interesting? Uh? You start
• 24:00
  Speaker 1: off with the view of the macro economies. Uh. Eight
• 24:03
  Speaker 1: percent of the survey CFO said that the North American
• 24:05
  Speaker 1: economy was actually good today, but when you look out
• 24:08
  Speaker 1: a year, only eight percent expected it to approve. So
• 24:11
  Speaker 1: that really lines up with some of the findings around
• 24:13
  Speaker 1: what we're thinking about where the economy goes. About eight
• 24:16
  Speaker 1: percent of the CFOs said that we would either have
• 24:19
  Speaker 1: a slowdown or a recession by the end of Now.
• 24:23
  Speaker 1: The interesting thing that we found when you compare that
• 24:25
  Speaker 1: to other surveys and especially what economists are saying. Only
• 24:29
  Speaker 1: fifteen percent of those said we would actually have a recession,
• 24:33
  Speaker 1: So most of the CFOs are expecting to slow down.
• 24:35
  Speaker 1: We thought that was pretty important. When you look at Europe,
• 24:38
  Speaker 1: only sixteen percent of the survey CFO said your condy
• 24:42
  Speaker 1: is good right now and only eight percent expected to
• 24:45
  Speaker 1: approve in a year. Now, if Brexit works out, we
• 24:48
  Speaker 1: would expect those numbers to move up a little bit,
• 24:50
  Speaker 1: but still very very low. With respect to China, only
• 24:55
  Speaker 1: see that see see that that economy is basically performing
• 24:58
  Speaker 1: well today and and when six better in a year.
• 25:02
  Speaker 1: So those are really low numbers when you think about
• 25:04
  Speaker 1: projecting into that. Okay, so can you go into the
• 25:07
  Speaker 1: mind of a chief financial officer right now? This sort
• 25:10
  Speaker 1: of archetypical typical uh CFO. Are they a pessimistic bunch? No,
• 25:15
  Speaker 1: not really, but I think what what the backdrop think
• 25:17
  Speaker 1: about what they're having to deal with. The number one
• 25:20
  Speaker 1: concern is around trade and tears. Uh. This this survey
• 25:24
  Speaker 1: really does capture multinational companies who has supply chains all
• 25:28
  Speaker 1: over the world, who are trading in foreign markets. So
• 25:30
  Speaker 1: trade and tariff is incredibly important. So if you go
• 25:34
  Speaker 1: back through or four months ago when they put their
• 25:35
  Speaker 1: fiscal year twenty nineteen budgets in place, now they're having
• 25:39
  Speaker 1: to execute against those, and there's still this cloud of
• 25:42
  Speaker 1: uncertainty that they've got to deal with. Okay, So then
• 25:45
  Speaker 1: here's my question. Are they actually acting on their pessimism
• 25:49
  Speaker 1: by pulling back some of the potential investments? In other words,
• 25:53
  Speaker 1: is is actually the sort of uncertainty directly affecting the
• 25:57
  Speaker 1: economy and you're seeing that through this service. Well, one
• 26:00
  Speaker 1: of the things that we ask is is it a
• 26:01
  Speaker 1: good time to take on risk? And only of the
• 26:05
  Speaker 1: survey age CFO says now would be a good time
• 26:07
  Speaker 1: to take on risk. That's a relatively low number in
• 26:10
  Speaker 1: the context of the history of our survey, So that
• 26:12
  Speaker 1: really kind of makes your point. Second, when you think
• 26:14
  Speaker 1: about own company optimism, we ask a question about compared
• 26:18
  Speaker 1: to three months ago, are you more optimistic about the
• 26:20
  Speaker 1: next twelve months or less optimistic? That stands at a
• 26:24
  Speaker 1: net sixteen percentage points, which again is pretty low. So yes,
• 26:28
  Speaker 1: those things are certainly affected. They're thinking, um, they're having
• 26:32
  Speaker 1: to make decisions without clarity, without all information. They would
• 26:35
  Speaker 1: like Secondly, they cited a numbers concerns that drive this
• 26:38
  Speaker 1: thinking just the natural kind of flow of business and
• 26:41
  Speaker 1: credit cycles where we are right there. Um. And then
• 26:45
  Speaker 1: last they cited the slowing growth in China and Europe
• 26:49
  Speaker 1: is something that they're very concerned about. Well, say, how
• 26:51
  Speaker 1: about internal to their own companies. One of the things
• 26:54
  Speaker 1: that you know where the good news we've seen over
• 26:56
  Speaker 1: the last several years is the economy is approaching or
• 26:58
  Speaker 1: at full employment, some waging increase. Are the CFO is
• 27:01
  Speaker 1: concerned that they just can't find good people? Yes, that
• 27:04
  Speaker 1: that parenthical quarter to quarter for the last three years.
• 27:07
  Speaker 1: The number one internal concern is basically the acquisition retention
• 27:11
  Speaker 1: of talent. And it's not just in the financial organization,
• 27:14
  Speaker 1: it's across the enterprise. And it's really exacerbated by the
• 27:18
  Speaker 1: fact that moving to digital technologies and tools, um having
• 27:22
  Speaker 1: the people that actually utilize those things. So you're seeing
• 27:25
  Speaker 1: a really a transformation in the workforce and it's a
• 27:28
  Speaker 1: huge concern to CFOs because they're really the ones that
• 27:30
  Speaker 1: watch productivity. Were you surprised by these results? No? No,
• 27:36
  Speaker 1: not really. The thing I was surprised about was was
• 27:39
  Speaker 1: on the recession, I would have expected more of the
• 27:41
  Speaker 1: CFOs in line with what we hear from leading economists
• 27:44
  Speaker 1: to expect a true technical recession by the end of
• 27:48
  Speaker 1: that surprised us a little bit. And and with respect
• 27:50
  Speaker 1: just sort of putting some historical perspective, Is there sort
• 27:53
  Speaker 1: of a size and scope and how pessimistic CFOs are
• 27:56
  Speaker 1: about one year out? I mean, it's like the most pessimistic.
• 27:59
  Speaker 1: These These are very low numbers. I'm compared. These are
• 28:02
  Speaker 1: well below our two your averages in terms of that index,
• 28:04
  Speaker 1: that optimism index UM with respect to business metrics, forecast
• 28:09
  Speaker 1: of revenue growth, earnings growth, capex, hiring, and dividends, all
• 28:13
  Speaker 1: those are below their two your two your averages in
• 28:16
  Speaker 1: terms of twelve month projections. So city, how are the
• 28:19
  Speaker 1: CFOs as a group in terms of kind of projecting
• 28:22
  Speaker 1: the future if they're calling for a slow down, maybe
• 28:24
  Speaker 1: a recession, are they any good at predicting this stuff? Well,
• 28:26
  Speaker 1: what I'd say is over well over half about six
• 28:29
  Speaker 1: of the CFOs actually have created downturn plans, which is good.
• 28:33
  Speaker 1: So they've got scenarios they can pull off the to
• 28:36
  Speaker 1: pull levers in those things, the two levers that they'll
• 28:38
  Speaker 1: pull if we get further into this year and things
• 28:41
  Speaker 1: don't begin to turn around or or deteriorate, are gonna
• 28:44
  Speaker 1: be number one moving to cost reduction programs and second,
• 28:48
  Speaker 1: look at a headcount. Those will be the two levers
• 28:50
  Speaker 1: as you start seeing pulled, which is going to be
• 28:52
  Speaker 1: concerning when we talk about the strength and the jobs
• 28:54
  Speaker 1: market that could weaken materially if there is some sort
• 28:59
  Speaker 1: of downturn learn or perceived downturn in the relatively near future.
• 29:03
  Speaker 1: Sandy Cockroll, thank you so much for being with us.
• 29:05
  Speaker 1: Fabulous having you here. Sandy Cockroll is Global CFO program
• 29:08
  Speaker 1: leader for Detroit, joining us here in studio. Thanks for
• 29:12
  Speaker 1: listening to the Bloomberg P and L podcast. You can
• 29:14
  Speaker 1: subscribe and listen to interviews at Apple Podcasts or whatever
• 29:17
  Speaker 1: podcast platform you prefer. I'm Paul Sweeney. I'm on Twitter
• 29:20
  Speaker 1: at pt Sweeney. I'm Lisa Abram Woods. I'm on Twitter
• 29:23
  Speaker 1: at Lisa abram woits one before the podcast, you can
• 29:26
  Speaker 1: always catch us worldwide. I'm Bloomberg Radio