Latest / Bloomberg Intelligence / McDonalds Sales Fall, US Tech Earnings

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McDonalds Sales Fall, US Tech Earnings · Bloomberg Intelligence

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Speaker 2: Just men sitting in for Alex Steele here today. I'm
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Speaker 2: Earnings Day, Big Earning, State's Big earnings week actually coming
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Speaker 2: up a lot of tech names. We'll keep an eye
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Speaker 2: on that. The story of the morning is, I think
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Speaker 2: kind of just from the earning's perspective, is Ben McDonald's.
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Speaker 2: It's been in the news a lot recently with Coli breakout,
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Speaker 2: cole Ye break up. Anyway, Stock put out some numbers today.
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Speaker 2: I thought they were okay, but some international weakness. Same
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Speaker 2: store sales still negative. That's a challenge for them. They
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Speaker 2: try to build traffic there. Again, this quarter does not
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Speaker 2: include some of the concerns that they've seen over recent weeks.
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Speaker 2: Michael Halen joins US senior restaurant in food service analysts
1:02
Speaker 2: for Bloomberg Intelligence. Hey Mike, what did you make from
1:05
Speaker 2: McDonald's in the latest quarter, and then like, maybe more importantly,
1:08
Speaker 2: what is management saying about kind of what they expect
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Speaker 2: their fourth quarter traffic.
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Speaker 3: To look like.
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Speaker 4: Yeah, Unfortunately, they didn't give us too much information about
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Speaker 4: the fourth quarter. I'd say the biggest takeaway from this
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Speaker 4: call and the reason why the stock is up right now,
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Speaker 4: although it's you know, not knocking to cover off the ball,
1:27
Speaker 4: is the fact that they their initiatives, including the five
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Speaker 4: dollar value meal Buntdill, the five dollars meal deal I
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Speaker 4: should say, the Chicken Big Mac, and some of the
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Speaker 4: other initiatives better operations, had actually led to a mid
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Speaker 4: single digit same store sales increase and positive traffic for
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Speaker 4: the first three weeks of October, and so the streets
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Speaker 4: kind of taken that as a positive. Right now, in
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Speaker 4: terms of the fourth quarter, it was, you know, they
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Speaker 4: didn't give us much information. We did get a nice
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Speaker 4: report from Bloomberg second measured Data yesterday that showed Seamstar
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Speaker 4: sales were down nine percent last week, so that basically
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Speaker 4: wiped out the mid signal digit gain and they're probably
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Speaker 4: a little bit from like flat to upp modestly here
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Speaker 4: in October, right And so yeah, it's it was kind
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Speaker 4: of a good news bad news last couple of days
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Speaker 4: for McDonald's.
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Speaker 2: Well, John, you were asking, what is a five dollars
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Speaker 2: meal deal include? It includes a micdouble or a McChicken sandwich,
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Speaker 2: small fries, four piece chicken, McNuggets, and a small soft
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Speaker 2: drink that's.
2:34
Speaker 5: Solid for five dollars.
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Speaker 6: So that's what I missed. The proper dollar menu, Yes
2:41
Speaker 6: they were, but I was always a big fan of
2:43
Speaker 6: that in college. But I would point out, like in
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Speaker 6: twenty fifteen, you saw other companies like Chipotle that were
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Speaker 6: hit by E. Coli outbreaks and unfortunately at that time,
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Speaker 6: chapotely had to temporary close a number of restaurants on
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Speaker 6: the West Coast. What do you think we can glean
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Speaker 6: from other instances when this has happened in the restaurant
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Speaker 6: industry and how quickly this could be cleared up?
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Speaker 4: Yeah, well we think this is very different than Chipotle.
3:04
Speaker 4: So a big part of it is just the operational differences.
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Speaker 4: You know, McDonald's is a clothes kitchen. You know, it
3:11
Speaker 4: turned out to be the slivered onions, and so it
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Speaker 4: was one item it wasn't you know, beef patties spread
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Speaker 4: across many different products. Right, it was just the onions
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Speaker 4: served in the quarter pounders with cheese. So we think
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Speaker 4: this outbreak will be smaller than we saw with a
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Speaker 4: lot of other chains. Chipotle was also unique. Chipotle same
3:31
Speaker 4: star sales dropped for five straight quarters. They were down
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Speaker 4: twenty percent that first year. But you know, their food
3:38
Speaker 4: is out in the open, right, it's behind a sneeze guard,
3:41
Speaker 4: but you know it can get you know, contaminated by
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Speaker 4: multiple different employees, even some of the customers potentially, right.
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Speaker 4: So it's a much harder operation to get right at Chipotle,
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Speaker 4: And for some of those reasons, we think it's gonna
3:56
Speaker 4: be a lot shorter, and it's gonna be a lot shallower,
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Speaker 4: you know. That being said, I think fourth quarter same
4:01
Speaker 4: store sales are definitely going to take a hit. I
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Speaker 4: think people are going to be turned off from McDonald's.
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Speaker 4: I think it will probably spread a little bit into
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Speaker 4: the first quarter next year. But McDonald's is working hard
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Speaker 4: to get those same US same store sales kind of
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Speaker 4: back on the right trunk. You know, it's gonna be
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Speaker 4: about value. There's gonna be more, you know, the five
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Speaker 4: dollars meal deal is going to go through your end
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Speaker 4: and expect to see more of those type promotions next year.
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Speaker 4: They're gonna roll out in everyday Value menu in the
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Speaker 4: first quarter. That's should should help boost results next year.
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Speaker 4: You know, better operations, more chicken sales like the Chicken
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Speaker 4: Big Mac, more digital sales, and they even hinted at
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Speaker 4: some fourth quarter food innovation coming out. So they're working
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Speaker 4: hard to try to try to course correct here.
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Speaker 6: Something with McDonald's I always like to keep an eye
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Speaker 6: on for a telltale sign of consumer confidence is the
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Speaker 6: French fry indicator because you can tell if how French
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Speaker 6: fries are done and how the number of people or
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Speaker 6: fries can indicate sort of sentiment, what do you think
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Speaker 6: with sort of the latest earnings and what you can
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Speaker 6: glean from that and what that really means when it
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Speaker 6: comes to what consumer confidence can tell us when the
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Speaker 6: French freredicator.
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Speaker 4: Well, listen, I'm not looking at the French fry indicator
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Speaker 4: to be honest, you know, but but you know what
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Speaker 4: we're seeing and what we think will continue to see
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Speaker 4: is low income consumers struggling. And so McDonald's that their
5:19
Speaker 4: strong result in the first three weeks of October. A
5:21
Speaker 4: lot of that was driven by being able to track
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Speaker 4: low income consumers in with a very strong price point.
5:27
Speaker 4: And you know, but inflation continues to hurt these low
5:31
Speaker 4: income consumers. Right we see this ke shaped economy where
5:35
Speaker 4: low income consumers are really pulling back on their restaurants spending.
5:38
Speaker 4: But right now, asset prices are near you know, a
5:41
Speaker 4: lot of them are near all time high. Stock the
5:43
Speaker 4: US stock markets near an all time high, Gold and
5:46
Speaker 4: silver have been ripping higher, bitcoins approaching another all time high.
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Speaker 4: Home prices have held in throughout the higher rates and
5:52
Speaker 4: everything else in our near all time highs. And so
5:55
Speaker 4: we think, you know, upper middle income, middle income, high
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Speaker 4: higher income consumers are all doing well and spending, and
6:02
Speaker 4: you know, our chains are trying to attract those customers.
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Speaker 2: So, Mike, you, in your research coverage universe, what's kind
6:08
Speaker 2: of the best name or two or three that kind
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Speaker 2: of standout as or sector in a restaurant business that
6:12
Speaker 2: you like better than others?
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Speaker 1: Yeah?
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Speaker 4: Yeah, Well, I think past Casual is kind of outperformed
6:21
Speaker 4: a bit that some of the names we cover anyway,
6:23
Speaker 4: not that the entire industry, but Wingstop has done a
6:28
Speaker 4: great job attracting both younger and higher income consumers into
6:33
Speaker 4: their brand and they're absolutely knocking to cover off the ball.
6:37
Speaker 4: You know, Chipotle has done a great job with their
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Speaker 4: digital sales and strategic part pricing and they're continuing to
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Speaker 4: draw consumers that see value on the plate there. And
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Speaker 4: then Texas Roadhouse is another one that's absolutely crushed it.
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Speaker 5: You know, we're not super.
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Speaker 4: High on casual dining, but they've been a machine man.
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Speaker 4: They're they're driving people into the restaurant with a lot
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Speaker 4: of value on that plate, right, and a very good experience.
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Speaker 4: And that's another one that's that's killing it. I think
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Speaker 4: there's Seams sourch sales are actually even better than Chipotle's
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Speaker 4: over the last five years, trailing.
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Speaker 3: So okay, all.
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Speaker 1: Right, Mike.
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Speaker 2: Always good to catch up with you and get the
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Speaker 2: latest on the restaurant biz. And McDonald's here today with
7:13
Speaker 2: their earnings stock trading a little bit higher. Here McMichael Halem.
7:17
Speaker 2: He's a senior restaurant and food service analysts for Bloomberg Intelligence.
7:21
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7:48
Speaker 2: Big Tech Earnings it starts today after the close with
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Speaker 2: your friends at Google, and then we're gonna hear from
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Speaker 2: you know, Meta and everybody else along the line, Apple
7:56
Speaker 2: and Amazon and all that kind of good good stuff.
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Speaker 2: So when you want to talk tech company, you want
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Speaker 2: to talk tech earnings, you need to talk to Gene Monster,
8:02
Speaker 2: managing partner and co founder at Loop Ventures. I think
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Speaker 2: one of the more tenured reasonable voices on all things technology. Gene,
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Speaker 2: thanks so much for joining us here. Let's start with Google.
8:13
Speaker 2: We're gonna hear from them after the close. Year This
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Speaker 2: stacks ABO up a little over twenty percent, but it
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Speaker 2: just feels like there's some concerns around Google in their
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Speaker 2: core search business, perhaps under some type of threat from AI.
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Speaker 2: How do you position the Google story here and what
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Speaker 2: will you be looking for?
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Speaker 7: Paul, you nailed it. I mean that is what I
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Speaker 7: would identify as the pressure point, the single piece that
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Speaker 7: matters the most. This is more important than the Google
8:37
Speaker 7: Cloud number. A lot of investors are going to be
8:39
Speaker 7: focusing on the Google Cloud, but keep in mind clouds
8:43
Speaker 7: call it twelve percent of revenue. Search is just over
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Speaker 7: fifty and cloud is not in front of some existential
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Speaker 7: threat related to AI. And so the quick backstory is
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Speaker 7: that Google Search in the March quarter was up fourteen
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Speaker 7: percent year of year. It was up fourteen percent in
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Speaker 7: the June quarter, so showed some surprising strength quarter to quarter.
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Speaker 7: There the streets looking for plus twelve. But this is
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Speaker 7: where the plot thickens is that in the September quarter,
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Speaker 7: this will be the first full quarter where AI overviews
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Speaker 7: powered Google Search in the US. They launched in May,
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Speaker 7: so it got a partial quarter in the June quarter,
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Speaker 7: but we're going to see the first full quarter. And
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Speaker 7: then they launched another one hundred countries in the month
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Speaker 7: of October, so that's going to impact the December results.
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Speaker 7: But the reason why this search number is so important
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Speaker 7: is that if in fact the US search business holds
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Speaker 7: together for the first full quarter, that would be the
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Speaker 7: most I think substantial data point that Google investors can
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Speaker 7: have to feel comfortable about how this transition over the
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Speaker 7: next one two five years is going to go for Google,
9:54
Speaker 7: that they're not going to lose share to the likes
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Speaker 7: of Open Ai, and so I'm really focused on that number.
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Speaker 7: Just one other kind of the inside baseball here. Google
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Speaker 7: doesn't break out US search revenue, so we're not going
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Speaker 7: to get really a clean look at that number. It's
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Speaker 7: just a global number. They do break out Google revenue
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Speaker 7: in the US. It was up eighteen percent in the
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Speaker 7: Just Reporter quarter. It's expected to be up twelve percent
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Speaker 7: in the September quarter. So if they do better than
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Speaker 7: that twelve I think it's going to be a good
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Speaker 7: view of AI overviews and keep Google investors confident that
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Speaker 7: this company can navigate this seismic change.
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Speaker 6: Of course, as you know, Gene, we're going to have
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Speaker 6: meta platforms after the bell on Wednesday, And when you
10:39
Speaker 6: look here to date for Meta up about sixty six
10:41
Speaker 6: percent compared to about twenty percent roughly for Google. What
10:45
Speaker 6: are you watching when it comes to meta and the
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Speaker 6: AI story.
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Speaker 7: I mean, then the bars much higher the plus twenty
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Speaker 7: four the streets looking for I think eighteen percent growth
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Speaker 7: for this quarter or twenty two I should say it
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Speaker 7: peaked at twenty four percent. Growth is at twenty two percent.
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Speaker 7: I mean, it really comes down to their advertising growth
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Speaker 7: and ultimately if they can continue to keep that going,
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Speaker 7: you know, as impacting all their business. Another important factor
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Speaker 7: is their daily active users three point three billion. I mean,
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Speaker 7: this remarkable number, up six percent year of a year,
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Speaker 7: is up seven percent in the previous quarter. They just
11:21
Speaker 7: keep cranking, and I think it's testimony to how addictive
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Speaker 7: Metas products are just really incredible.
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Speaker 2: And the stock market agrees with the genius stocks up.
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Speaker 2: You know, it's been one of the best performers of
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Speaker 2: kind of the big tech.
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Speaker 7: It games, particularly twenty four percent YEP over the past
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Speaker 7: three months, NAZEKX up seven Paul, Yeah, and it's just
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Speaker 7: continued to power forward. And I just I would stress
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Speaker 7: that point that the bar is high from Meta going
11:47
Speaker 7: into this earnings UH trades at twenty four times. But
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Speaker 7: this is just an overall revenue growth story. And Zuckerberg
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Speaker 7: has kind of made the case to investors more recently
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Speaker 7: at their dev day that you know, they're just going
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Speaker 7: to be AI across all of their.
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Speaker 2: Products and gene There was a time not too far
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Speaker 2: ago long ago when people are worre concerned about the
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Speaker 2: spending at Meta, particularly on the metaverse, what's the thinking
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Speaker 2: now about how management's thinking about that.
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Speaker 7: Well, they've gotten to pass because the growth is accelerated
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Speaker 7: essentially to a kind of had bottom that right around
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Speaker 7: twelve percent and then accelerated up to twenty four percent
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Speaker 7: over the past year and a half. And so that
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Speaker 7: kind of, as I think, kept investors in a comfortable place.
12:33
Speaker 7: But the spending on reality labs, this is the group
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Speaker 7: that's predominantly working on some form of AI glasses, something
12:41
Speaker 7: that's more like the ray bands that they have. They're
12:43
Speaker 7: very different than Apple's Vision Pro, but the spending on
12:46
Speaker 7: that group continues to be aggressive, and specifically is that
12:49
Speaker 7: they're expected to lose about twenty billion dollars this year.
12:54
Speaker 7: I mean to put that into perspective is that on
12:57
Speaker 7: a similar type of initiative for Vision Pro, Apple will
12:59
Speaker 7: spend about two billion dollars in development a year. And
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Speaker 7: so we're talking about kind of a ten x magnitude
13:05
Speaker 7: of investment that they're making. And the answer question, Paul,
13:08
Speaker 7: is that investors are giving Meta a pass right now.
13:12
Speaker 7: I see their aggressive spending in reality labs as a
13:16
Speaker 7: win win for Meta long term. If in fact these
13:20
Speaker 7: wearables do take off with their oryan project in the
13:22
Speaker 7: next few years, then you're going to see some revenue
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Speaker 7: growth and that would be viewed as a positive. And
13:27
Speaker 7: if they don't, if this doesn't take off, they're going
13:30
Speaker 7: to cut spending and that should be good for earnings.
13:32
Speaker 7: And so, in kind of a strange twist of events,
13:36
Speaker 7: this Reality Labs is actually setting up to be a
13:39
Speaker 7: positive for the stock in the next couple of years
13:41
Speaker 7: when it comes.
13:42
Speaker 6: To people talking about the AI potential slowdown in growth.
13:46
Speaker 6: But of course there are all those base effects right
13:48
Speaker 6: when it comes to big tech, because in twenty twenty two,
13:51
Speaker 6: obviously there was such a low bar. We were in
13:53
Speaker 6: a bear market. Earnings projections were a lot lower than
13:56
Speaker 6: obviously last year. Once in Nvidia had that gangbuster revenue
13:59
Speaker 6: forecast last May in twenty twenty three, obviously the base
14:03
Speaker 6: effects were a lot more dramatic. So when you're looking
14:05
Speaker 6: at the kind of year over year growth, the numbers
14:07
Speaker 6: around twenty percent for the BAG seven obviously not quite
14:10
Speaker 6: as high as the average more than thirty percent growth
14:13
Speaker 6: in twenty three, But what do you make of that
14:15
Speaker 6: when you see more of the growth stocks and in
14:17
Speaker 6: the projections for their profit growth coming more in line
14:20
Speaker 6: with the rest of the S and P five hundred
14:22
Speaker 6: next year.
14:24
Speaker 7: I think investors are missing this. I think that this
14:28
Speaker 7: may be kind of an uncomfortable I believe this is
14:31
Speaker 7: going to be an uncomfortable truth around AI, and what
14:34
Speaker 7: it means for big tech is that this is going
14:36
Speaker 7: to be more significant than what I think. Investors believe.
14:40
Speaker 7: It's going to grow faster for longer, and I think
14:43
Speaker 7: what you just described agree with all those facts, and
14:46
Speaker 7: ultimately there's this sense for investors that were just one
14:49
Speaker 7: quarter away from some sort of data point that's going
14:52
Speaker 7: to show that AIS the substance is not going to
14:55
Speaker 7: reach the hype, and I suspect that, well, we may
14:58
Speaker 7: get occasional data points that are to kind of the
15:02
Speaker 7: barish case of AI. The overwhelming body of evidence we're
15:05
Speaker 7: going to see in the quarters ahead are going to
15:07
Speaker 7: suggest that this trend is unstoppable. And that's some pretty
15:13
Speaker 7: high bars I like to be measured in my expectations,
15:15
Speaker 7: but I do believe that these companies, most of them,
15:18
Speaker 7: are going to see growth higher than what investors think.
15:21
Speaker 7: I'm already tuned into the twenty twenty six growth numbers.
15:24
Speaker 7: Most of them for these big companies are kind of
15:26
Speaker 7: in the low teens range, and I suspect that the
15:28
Speaker 7: growth will be mid to high teens.
15:30
Speaker 2: Gene, thanks so much for joining us. Really appreciate getting
15:32
Speaker 2: a few minutes of your time. As always, Gene Mounster.
15:35
Speaker 2: He's a managing partner. He's a co founder at Loop
15:37
Speaker 2: Ventures based in Minneapolis.
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15:55
Speaker 2: Custumer competence data came out one away point seven. The
15:58
Speaker 2: consensus was ninety nine point five prior period was revised
16:02
Speaker 2: up to ninety nine point two. So a big, big
16:04
Speaker 2: jump here relative to expectations in the last period. Let's
16:07
Speaker 2: break it down. Jess re checking with Dana Peterson, chief
16:10
Speaker 2: economists at the Conference Board. Dana put this number into
16:14
Speaker 2: context for us. It seems certainly really good relative to
16:16
Speaker 2: what the market was expecting.
16:19
Speaker 8: Yes, definitely, consumers were on the whole pretty happy in
16:23
Speaker 8: October certainly they think the present situation is better. And
16:27
Speaker 8: also expectations and notably expectations for jobs were positive for
16:31
Speaker 8: the first time in almost a year and a half.
16:34
Speaker 8: So there's really good news out there.
16:37
Speaker 6: So what do you think this means as far as
16:38
Speaker 6: the direction of the economy here, Well, the.
16:42
Speaker 8: US economy has been doing quite well, and indeed consumers
16:45
Speaker 8: have been driving it. We saw on the tracking data
16:47
Speaker 8: from retail sales and also from the BEA that consumers
16:52
Speaker 8: are buying goods, they're buying services. That's certainly supporting growth,
16:55
Speaker 8: and we're seeing that finally show up in confidence. Indeed,
16:58
Speaker 8: consumers were getting a little bit worried about the labor
17:00
Speaker 8: market over the summer, but then we had those blockbuster
17:03
Speaker 8: payrolls numbers. Most consumers are seeing their incomes rise because
17:07
Speaker 8: wages are elevated. Most consumers are working. We are seeing
17:10
Speaker 8: a little bit of layoffs here and there, but again,
17:12
Speaker 8: the predominant sense among consumers, at least for this month,
17:15
Speaker 8: is that they're okay.
17:18
Speaker 2: How much data do you think is impacted at all
17:21
Speaker 2: by the Fed cutting rates? Does that come into your
17:24
Speaker 2: calculation here?
17:26
Speaker 8: Absolutely? We have one question where we ask about interest
17:29
Speaker 8: rate expectations, and that measure actually ticked up. And we
17:33
Speaker 8: do have items where consumers said that they're not as
17:36
Speaker 8: convinced that rates are going to come off. But then
17:38
Speaker 8: we did see some who were saying, look, the Fed
17:40
Speaker 8: has cut interest rates. We're seeing a little bit of
17:42
Speaker 8: improvement in that. So certainly we're going to need more
17:46
Speaker 8: interest rate cuts before consumers pretty come out, probably come
17:49
Speaker 8: out strongly and say yes, we're confident in this rate
17:52
Speaker 8: cutting cycle. But consumers are starting to get out there
17:54
Speaker 8: and buy big ticket items because they're cheaper, not so
17:57
Speaker 8: much because interest rates are lower, but as streets ball,
18:00
Speaker 8: we think they'll buy more cars and furniture, things that
18:03
Speaker 8: they need to finance.
18:04
Speaker 2: All right, some pretty solid numbers also know the Conference
18:06
Speaker 2: Board Expectations data point came in at eighty nine point one.
18:10
Speaker 2: That's versus revised eighty two point eight from last month.
18:13
Speaker 2: So also in terms of expectations, better than expected. Dana Peterson,
18:16
Speaker 2: thanks so much for joining us. Dana Peterson a chief
18:18
Speaker 2: economist at the Conference Board.
18:22
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19:13
Speaker 2: Our next guest. This is how it's gonna work post.
19:15
Speaker 2: I'm gonna ask a question and I'm gonna turn off
19:17
Speaker 2: my Mike and John and I are going to sit
19:19
Speaker 2: here and listen and try to get a little bit
19:20
Speaker 2: smarter and take notes and take notes. Neil Grossman. He's
19:22
Speaker 2: a co founder and former CIO of K n G
19:25
Speaker 2: Capital joints us here in our Bloomberg Interactive Broker studio.
19:28
Speaker 2: We're in a suit today. Can remember last time I
19:29
Speaker 2: saw you in a suit?
19:31
Speaker 3: Neil.
19:31
Speaker 2: We got a lot of economic data, we got right
19:33
Speaker 2: smack in the middle of earnings. All that's important. But
19:36
Speaker 2: I think since we have you here, I would just
19:37
Speaker 2: love to get your opinions about how you think the
19:40
Speaker 2: markets are digesting a big, pretty big election next Tuesday.
19:46
Speaker 2: Are you when you talk to clients, are you saying, hey,
19:48
Speaker 2: if Trump wins, think this, if Harris wins, think that,
19:52
Speaker 2: how are you kind of positioning all that?
19:55
Speaker 3: Well? I think there's two levels to this. But by
19:58
Speaker 3: the way, thank you very much for having me. It's
19:59
Speaker 3: a pleasure as always. At least as a start, both
20:05
Speaker 3: of the platforms seemed to be talking about spending a
20:08
Speaker 3: lot of money. So the first question is what's the
20:12
Speaker 3: impact of that on the economy, on the FED? And
20:16
Speaker 3: then you can try and maybe zero in on what
20:20
Speaker 3: the theoretical differences are between the two. Look, if you look
20:26
Speaker 3: at the economy and where we are and where we've been,
20:31
Speaker 3: I would look at the July September FED meetings and
20:35
Speaker 3: just scratch my head we had functionally two fairly when
20:40
Speaker 3: one fairly weak and one moderate job number job numbers
20:44
Speaker 3: that propelled the FED to what looked to me like
20:47
Speaker 3: they were panicking. And it turned out, of course, with
20:50
Speaker 3: the revision, that that really wasn't the case. So I
20:53
Speaker 3: think where we find ourselves right now is a couple
20:56
Speaker 3: of things. One, the labor market is fine. There are
21:00
Speaker 3: going to be some real unusual impacts over the next
21:06
Speaker 3: number two because of the Boeing strike and the hurricanes,
21:10
Speaker 3: which really affected a pretty significant part of the population.
21:13
Speaker 3: And I don't know how to read the employment numbers now,
21:16
Speaker 3: but I will tell you this. You know, I think
21:18
Speaker 3: you know my daughter lives in Saint Pete. If you
21:20
Speaker 3: go down to Saint Petersburg and you drive, and the
21:23
Speaker 3: miles and the miles and the miles of people's lives
21:26
Speaker 3: have been destroyed but have to be rebuilt. There is
21:29
Speaker 3: an enormous amount of money that is going to be
21:31
Speaker 3: put to work in this economy. Forget the fact that
21:33
Speaker 3: we're running eight or nine percent, you know, deficits, which
21:37
Speaker 3: is historically staggering. The biggest question you might ask yourself
21:42
Speaker 3: is can they actually address the deficits without having a
21:45
Speaker 3: significant economic impact, because to go from a deficit growth
21:49
Speaker 3: rate of eight or nine to back to traditional three
21:51
Speaker 3: percent probably will be a very difficult task.
21:54
Speaker 9: I've heard candidates promising the world, and I don't know
21:58
Speaker 9: how they're going to fund it. Liz Trust kind of
22:01
Speaker 9: ran into the same problem. Where are the bond vigilantes
22:04
Speaker 9: and all this? You're starting to see it a bit.
22:06
Speaker 9: Look the yield curve. I mean, I think the last
22:10
Speaker 9: time we were on we were talking about yield curve
22:11
Speaker 9: structure and it steepened a lot. Yeah, and I suspect
22:15
Speaker 9: that the long, long, this is one of the problems
22:17
Speaker 9: with the FED did. I mean, there was absolute panic
22:20
Speaker 9: in the way they did things. And I mean this
22:23
Speaker 9: concept of recalibration to me, it's an awful, laughable world word.
22:27
Speaker 9: It's going to be recalibration is going to become the
22:30
Speaker 9: new transitory.
22:33
Speaker 3: You know. The bottom line is they don't really know
22:36
Speaker 3: what a neutral rate is, and they certainly don't know
22:39
Speaker 3: what a neutral rate is when we're spending money fiscally
22:42
Speaker 3: like its rain. So if they really wanted to try
22:47
Speaker 3: and ease in and understand the impact, this would have
22:49
Speaker 3: been a very slow, elongated process. Watching in the meantime,
22:53
Speaker 3: what happened They not only cut fifty, but they've sort
22:57
Speaker 3: of promised that they think you're going to be another
22:59
Speaker 3: two hundred points in short order. And the first thing
23:02
Speaker 3: that happened, of course, is the yield curves started to
23:04
Speaker 3: steepen like this note tomorrow if you really want to
23:07
Speaker 3: look at things. To me, you know, we've the FED
23:10
Speaker 3: focuses on short rates, but at the end of the day,
23:12
Speaker 3: long term interest rates are an indicator and a measure
23:15
Speaker 3: of what you should be expecting for long term growth
23:19
Speaker 3: and how you manage, you know, the investment and capital
23:24
Speaker 3: allocation decisions. And I don't see any reason to think
23:28
Speaker 3: that if they keep cutting with liquidity or already its
23:31
Speaker 3: just beyond imagination. Stocks at all time highs, very high deficits.
23:36
Speaker 3: We're still at relatively low rates of unemployment. A lot
23:39
Speaker 3: of the wage settlements have been very large, by the way,
23:42
Speaker 3: I mean the last one, which is and we have
23:44
Speaker 3: not seen most of the government workers union workers ask
23:48
Speaker 3: can you imagine I mean, I think there are twenty
23:50
Speaker 3: five million people employed by governments in this country, which
23:53
Speaker 3: is about one in six. Can you imagine if these
23:56
Speaker 3: if those union workers are going to insist in the
23:59
Speaker 3: same nature of wage agreements going forward. I mean, this
24:05
Speaker 3: can't be.
24:05
Speaker 2: Handled so, but I mean in terms of the deficits
24:09
Speaker 2: in the national debt. I started working on Wall Street
24:11
Speaker 2: in June of nineteen eighty six. It was an issue.
24:14
Speaker 2: Then it's still an issue.
24:18
Speaker 9: Debt clock, Yes, it is.
24:21
Speaker 3: And do you know what do you know what the
24:23
Speaker 3: unfunded liabilities are? Stud of three hundred trillion, which is
24:27
Speaker 3: I mean that's dwarfs all the problems. Yes, and part
24:30
Speaker 3: of that is Look, social Security is going to run
24:31
Speaker 3: out of money trust fund and then that will go
24:34
Speaker 3: on to the budget as well.
24:35
Speaker 9: So there.
24:36
Speaker 3: Look, I don't know if there's time left to solve
24:39
Speaker 3: the problems or not. I think I don't think history
24:42
Speaker 3: teaches you that you can avoid reality. And our deficits
24:46
Speaker 3: relative to the nation's capacity are are certainly put causing
24:54
Speaker 3: the seams or may cause the seams to burst. And
24:58
Speaker 3: you know, the sooner you deal with a problem, the
25:00
Speaker 3: less you usually have to do to solve it, and
25:03
Speaker 3: the easier the transit.
25:05
Speaker 2: But there's just no political there's never ever ever been
25:08
Speaker 2: in political will to do well.
25:09
Speaker 3: How do you, Paul, how do you? How do you look?
25:11
Speaker 3: I think something on the order of sixty five percent
25:13
Speaker 3: of the of the working populations pays no net taxes.
25:17
Speaker 2: And since they pay no net taxes.
25:18
Speaker 3: Yes, when you look at all the benefits and add
25:20
Speaker 3: it all together, how do you tell people? And I
25:24
Speaker 3: have this discussion with a lot of people. I mean,
25:26
Speaker 3: how do you tell them that they can't they're going
25:29
Speaker 3: to lose something. That's a very difficult thing to start with.
25:32
Speaker 3: And then you end up with these discussions about well,
25:35
Speaker 3: you're social Security and Medicare Medicaid need to be cut
25:37
Speaker 3: and they said, well I paid for this, said, well,
25:39
Speaker 3: you really didn't pay for it when you look at
25:41
Speaker 3: the projections. The problem is you're relying on the future
25:46
Speaker 3: to continue to pay for your problem. And I don't
25:48
Speaker 3: know the answer to this. I think we've missed opportunity
25:51
Speaker 3: after opportunity to address it.
25:54
Speaker 2: And you know, and again, as john said, I don't
25:56
Speaker 2: hear either candidate talking about that.
25:58
Speaker 3: Nobody can directly even their problem. What's his name? McCarthy
26:02
Speaker 3: and Mike Johnson, both of them, when asked every time
26:06
Speaker 3: they sit down to negotiate, the first thing they say,
26:08
Speaker 3: or entitlements are sacricient, they won't be touched that's functionally
26:13
Speaker 3: I think. I think the actual number is we historically
26:17
Speaker 3: take in eighteen percent of GDP and traditionally spend twenty
26:20
Speaker 3: one percent. And by the way, that eighteen percent is
26:25
Speaker 3: consistent across almost every tax regimen we've ever seen. But
26:30
Speaker 3: if you went back twenty years ago, one third of
26:33
Speaker 3: government spending of that eighteen percent was entitlements. We're beginning
26:37
Speaker 3: to push. I think we're very close to where almost
26:39
Speaker 3: every dollar coming into the government is going out in
26:43
Speaker 3: the form of entitlements, and we're not. You know, so
26:46
Speaker 3: the extra eight or nine percent or above that or
26:50
Speaker 3: you know, actually, I guess it's about nine percent of
26:52
Speaker 3: incremental spending is all deficit funded, and it's going to
26:57
Speaker 3: get to be it's going to be a very painful.
27:00
Speaker 9: There was a time where you had bipartisan kind of consensus,
27:03
Speaker 9: like a committee Simpson bulls the balls, But I suspect
27:08
Speaker 9: that environment is long gone though.
27:10
Speaker 3: What was Phil Graham's partner's name, and the same thing, Graham.
27:13
Speaker 9: Graham, the same thing, you know.
27:18
Speaker 3: That's the way. I mean, it's sort of kick it
27:19
Speaker 3: down and put it to it some sort of you know,
27:22
Speaker 3: under the counter committee and hopefully you listen.
27:26
Speaker 9: But again it doesn't.
27:27
Speaker 3: It doesn't.
27:27
Speaker 2: Given that dire what do you do in the financing world?
27:30
Speaker 2: What do you do in the economic the investing world?
27:33
Speaker 2: How do you think about it?
27:34
Speaker 3: Field curve number one. I believe if the FED is
27:37
Speaker 3: going to continue easing, the long end of the Yeld
27:40
Speaker 3: curve is going to be under pressure. How high it goes,
27:44
Speaker 3: that's up to that will be a function of inflation.
27:47
Speaker 3: I do think you're going to start to see inflation
27:49
Speaker 3: in ways you don't want to want to. For example,
27:51
Speaker 3: again the Southeastern issue, used cart prices are already being
27:54
Speaker 3: pushed very high down there, cost of construction materials going high,
27:59
Speaker 3: Probably labor calls are going up in those ways. So
28:02
Speaker 3: some of the broader pictures. That's not the whole United States, obviously,
28:05
Speaker 3: but there is likely to be cost of housing, by
28:07
Speaker 3: the way. So I think that there is a lot
28:10
Speaker 3: of risks that you are going to see higher inflation
28:14
Speaker 3: numbers over the next six to eighteen months just from that. Now,
28:18
Speaker 3: was that going to be from a two and a
28:19
Speaker 3: quarter in two and a half or is it going
28:21
Speaker 3: to be from a three or is it two? I
28:23
Speaker 3: don't know, but I suspect that the progress towards lower
28:27
Speaker 3: inflation is going to find itself struggling for the moment.
28:31
Speaker 2: So what does the Fed do November seventh, here, two
28:34
Speaker 2: days after the election. We probably won't know, you know,
28:37
Speaker 2: who's the one.
28:38
Speaker 3: I suspect they have more room to say, look things
28:41
Speaker 3: of the data since we talked about this has been
28:44
Speaker 3: well above expectations. We'll see what the employment problem is.
28:47
Speaker 3: The employment data could be really weak, and so they
28:50
Speaker 3: could take say, look that number is really bad, or
28:53
Speaker 3: they could say that number is sort of distorted by
28:57
Speaker 3: factors beyond our control. My suspicion is as supposed to
29:01
Speaker 3: say that unless you see an inflation rate drop to
29:06
Speaker 3: two percent or below, and that includes a core rate
29:09
Speaker 3: which is still above three, that say, drops the two
29:11
Speaker 3: six all of a sudden. I think they're supposed to say,
29:14
Speaker 3: we need to you know, we've already had a significant impact,
29:18
Speaker 3: and other things being equal, we have time to take
29:22
Speaker 3: our take our time. I don't know if they feel
29:24
Speaker 3: that they can do that, because I think there are
29:27
Speaker 3: things like stock markets that they worry about more than
29:29
Speaker 3: other things.
29:30
Speaker 2: And they kind of it's almost like they did set
29:31
Speaker 2: the expectations for it.
29:33
Speaker 9: But that's the problem.
29:34
Speaker 3: They shouldn't be setting an expect when they tell you
29:36
Speaker 3: the data dependent, I guess that's you can laugh about it.
29:40
Speaker 3: But when they tell you the data the dependent and
29:42
Speaker 3: the data is up in opposition to what they thought
29:46
Speaker 3: it was going to be, that they're supposed to, you know,
29:49
Speaker 3: take a step back and try and understand what they
29:52
Speaker 3: were doing. So I don't know what they do, but
29:55
Speaker 3: I suspect given all the current data that nine months
29:58
Speaker 3: from now, whatever you thought there, we're going to be
30:01
Speaker 3: in the absence of a significant change. They're going to
30:03
Speaker 3: be harder than what you thought at the front end,
30:05
Speaker 3: and they're going to be harder than what your thought
30:07
Speaker 3: at the back end.
30:07
Speaker 2: All right, Neil, great stuff, as always Neil Grossman. He's
30:10
Speaker 2: the co founder and he's a former CIO of k
30:12
Speaker 2: n G Capital. Coming into our Bloomberg Interactive Brokers studio.
30:15
Speaker 2: Just give us some thoughts here as we parse out
30:18
Speaker 2: this market.
30:20
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30:34
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30:38
Speaker 2: Let's look at crude oil here. We've had a kind
30:40
Speaker 2: of a de risking of crude oil in the last
30:43
Speaker 2: week or so, I guess on the backs of Israel's
30:46
Speaker 2: retaliation against around was a little bit less than expected,
30:50
Speaker 2: maybe dialing down the tensions a little bit there. But
30:52
Speaker 2: whenever we talk about global oil, we want to talk
30:54
Speaker 2: to Ellen Wald. She's a president of Transversal Consulting. Ellen,
30:58
Speaker 2: what do you make of kind of what's happening the
31:00
Speaker 2: global crude oil prices here? Is it's simply kind of
31:03
Speaker 2: taking maybe a little bit of that geopolitical risk out
31:06
Speaker 2: of the price of oil.
31:08
Speaker 10: Yeah, that's what I think we're seeing. At least yesterday
31:13
Speaker 10: was quite the day for de risking. I think it's
31:17
Speaker 10: Israel really made a very concerted effort to let people
31:21
Speaker 10: believe that they were about to attack Iran's oil production
31:26
Speaker 10: and export infrastructure, and it seemed that the market was
31:31
Speaker 10: really taken with this, and there was definitely.
31:33
Speaker 11: A lot of talk about, you.
31:35
Speaker 10: Know, Israel potentially doing this and the effect it might
31:38
Speaker 10: have on the market. And so I think that now
31:40
Speaker 10: that that risk seems to have passed or at least
31:44
Speaker 10: been postponed for a while. We're seeing oil prices really
31:48
Speaker 10: come down as a result.
31:49
Speaker 11: I do think that that fear was totally misplaced.
31:52
Speaker 10: I think Israel cultivated an image that it was going
31:55
Speaker 10: to do this, even though the likelihood that they would
31:58
Speaker 10: do that was actually quite small. Also for people who
32:01
Speaker 10: didn't actually think that that this was going to happen,
32:04
Speaker 10: there was definitely the possibility to kind of ride this
32:07
Speaker 10: in in an interesting way. But now that we're past
32:10
Speaker 10: this you know, kind of hump at least right now, Uh,
32:14
Speaker 10: there's more of an opportunity for the supply and demand
32:18
Speaker 10: issues to you know, to come to the forefront.
32:21
Speaker 11: And I think that's what we're seeing in oil prices now.
32:23
Speaker 6: I'm glad you brought up supply because walk us through
32:26
Speaker 6: how oil traders are really split right now and whether
32:28
Speaker 6: OPEC will hike supply in December.
32:31
Speaker 10: Yeah, this is I think the really big issue that
32:35
Speaker 10: you know, oil traders are looking at now because OPEK
32:38
Speaker 10: has already you know, pushed its plans off once they
32:41
Speaker 10: made they set up this, this whole plan for these
32:44
Speaker 10: very gradual increases, they set it up, they announced it.
32:47
Speaker 11: They've given the market ample time to get.
32:50
Speaker 10: Used to this, and yet we're still seeing it being
32:52
Speaker 10: pushed off and pushed off. Initially, OPEC's forecasters had a
32:56
Speaker 10: much much more optimistic picture for what demand was going
33:00
Speaker 10: to look like this year. I think then other people
33:02
Speaker 10: did and they've really had to trim that forecast for
33:05
Speaker 10: for demand growth back. And so as a result, the
33:08
Speaker 10: group has pushed off its planned to increase production and
33:12
Speaker 10: to implement this kind of gradual plan. They already pushed
33:15
Speaker 10: it off, but they're set to start doing this December January,
33:18
Speaker 10: and so, you know, the big question is now that
33:21
Speaker 10: demand is looking pretty weak. You know, we're still waiting
33:23
Speaker 10: to see what's.
33:24
Speaker 11: Going on with China.
33:26
Speaker 10: Is the group going to you know, make another another
33:30
Speaker 10: push it off again? And I think that's a really
33:32
Speaker 10: big question. There definitely seems to be a split. I
33:35
Speaker 10: think OPEK itself doesn't know. They did recently issue a revision,
33:39
Speaker 10: a downward revision in their forecast, which could be an
33:41
Speaker 10: indication that they're setting things up for another uh, you know,
33:46
Speaker 10: another uh to push it off again when they meet
33:48
Speaker 10: in December, but you know, no one really knows.
33:52
Speaker 2: So Ellen, you mentioned China, What is the feeling about
33:55
Speaker 2: demand coming out of China here, it's I guess in
33:58
Speaker 2: the margin it's been weaker than expected. Is that something
34:00
Speaker 2: that the market things could go into next year.
34:04
Speaker 11: I think it is at this point.
34:06
Speaker 10: It's very interesting because there's definitely a lot of skepticism
34:09
Speaker 10: about demand.
34:10
Speaker 11: At China where it's going.
34:11
Speaker 10: What this stimulus plan that they've been talking about, is
34:15
Speaker 10: that really going to actually result in higher demand? Is
34:19
Speaker 10: that really going to provide the kind of economic stimulus
34:22
Speaker 10: that is needed to really, you know, push oil demand higher.
34:27
Speaker 10: I think that there's a lot of skepticism about that.
34:29
Speaker 10: What's interesting, though, is that the CEO of a Ramco
34:33
Speaker 10: recently spoken he's much more optimistic about demand from China.
34:38
Speaker 11: I think that that may impart come from.
34:40
Speaker 10: The fact that he's very much focused on crude oil
34:44
Speaker 10: products and petrochemicals as opposed to just straight crude oil demand.
34:48
Speaker 11: The market has been very focused on.
34:51
Speaker 10: The diesel the distillate demand in China, which has been
34:55
Speaker 10: rather rather disappointing, whereas I think he's much more focused
35:00
Speaker 10: on the petrochemical demand, which he sees as growing as
35:03
Speaker 10: opposed to just straight crude oil. Which is why there's
35:06
Speaker 10: kind of disconnect between what a Ramco sees for China
35:09
Speaker 10: and maybe what other forecasters are are looking at for China.
35:13
Speaker 6: As you know, especially when it comes to looking what
35:15
Speaker 6: oil could mean for the trajectory of the global economy.
35:18
Speaker 6: I mean, just looking right now, the Atlanta fed GP
35:20
Speaker 6: model just got updated. It's actually for the third quarter
35:23
Speaker 6: to two point eight percent, revised slightly lower from three
35:26
Speaker 6: point three percent recently as well, but still nonetheless it's
35:30
Speaker 6: been trending higher over the past month as we get
35:32
Speaker 6: more of the third quarter data coming in here. But
35:34
Speaker 6: when it comes to OPEC and if whether or not
35:36
Speaker 6: they push again off those plan increases, what do you
35:39
Speaker 6: think that could translate when we're looking kind of more
35:41
Speaker 6: globally and especially US economic growth.
35:44
Speaker 11: Yeah, I think.
35:44
Speaker 10: It's it's really a big question right now. You know,
35:48
Speaker 10: I don't think that you can't say, you know, it's
35:50
Speaker 10: not bad economic growth. We're not you know, we're not
35:53
Speaker 10: in a depression. We're not we're not seeing things go backwards.
35:56
Speaker 10: But it's just not the kind of growth numbers that
35:58
Speaker 10: we were expecting, or they that a lot of people
36:00
Speaker 10: were expecting to happen. I do think, you know, growth
36:04
Speaker 10: is cyclical, you know, there are these cycles and you know,
36:08
Speaker 10: it's not like this is, you know, kind of the
36:10
Speaker 10: end or anything like that. There's still a lot of
36:13
Speaker 10: opportunity for growth out there. I do think it, you know,
36:16
Speaker 10: depends on where you're looking, what indicators are looking at.
36:19
Speaker 10: Different sectors, you know, are experiencing different different issues right now.
36:24
Speaker 10: When it comes to crude oil, I do think that
36:27
Speaker 10: we are seeing a big shift to increased petrochemical production
36:32
Speaker 10: and and so there's a lot.
36:34
Speaker 11: More crew that's going to that, and also.
36:36
Speaker 10: A lot more natural gas feedstuck that's going to that
36:38
Speaker 10: as opposed to just straight crude for transportation fuels. And
36:42
Speaker 10: so I do think that that we're seeing this as
36:45
Speaker 10: a shift and a change in the market, and so
36:47
Speaker 10: we need to maybe look at the numbers a little
36:50
Speaker 10: bit differently than how we were looking at them previously.
36:54
Speaker 2: Ellen, how's the US or the North American oil producer
36:58
Speaker 2: behaving these days, mournering? Are they are they supportive of
37:03
Speaker 2: the market or are they, you know, drill baby, Drill's
37:06
Speaker 2: what's going on with the North American supply source.
37:09
Speaker 10: That's a really good question, especially because there's a lot
37:12
Speaker 10: of speculation about kind of the fracking industry starting to
37:16
Speaker 10: fall off, the production is gonna you know, start to
37:18
Speaker 10: decline or at least a second grow. We're really at
37:21
Speaker 10: a high point right now. I mean we're we're having
37:23
Speaker 10: massive amounts of production. The US is the largest producer
37:26
Speaker 10: in the world. You know, the question is can it
37:29
Speaker 10: go higher or should it go higher?
37:31
Speaker 11: And I think that US crew.
37:33
Speaker 10: To oil producers are at a very different position now
37:36
Speaker 10: than they were two years ago, three years ago, five
37:38
Speaker 10: years ago, certainly, And so there's a lot less emphasis
37:42
Speaker 10: on you know, we need to drill, baby drill.
37:44
Speaker 11: We don't need to drill, baby drill.
37:46
Speaker 10: We've got much more complicated production techniques that can get
37:51
Speaker 10: a lot more out of every well. So there isn't
37:53
Speaker 10: a need to necessarily drill new wells all the time
37:56
Speaker 10: in order to produce those barrels. And I think that
37:59
Speaker 10: because of the map amount of consolidation that we've seen,
38:03
Speaker 10: they can be a lot more strategic about it. And so, no,
38:06
Speaker 10: that doesn't mean the US oil entry is abst to
38:07
Speaker 10: follow a cliff, but it does mean that they are
38:10
Speaker 10: making more strategic decisions about production and how production is
38:14
Speaker 10: going to come online, when it's going to come online,
38:17
Speaker 10: whether it's worthwhile and that can maybe look like fewer
38:21
Speaker 10: wells being drilled, but it doesn't necessarily mean that, you know,
38:25
Speaker 10: we're about to hit a cliff and production's going to
38:27
Speaker 10: necessarily decline.
38:28
Speaker 5: Hail.
38:28
Speaker 6: Whenever you're talking with oil traders, what are some of
38:31
Speaker 6: the key sort of technical levels they're looking at, whether
38:33
Speaker 6: it's a WTI or brint well.
38:36
Speaker 10: I think that there's a lot of discussion about, you know, okay,
38:39
Speaker 10: what's the point that wt t I has to hit
38:42
Speaker 10: when it's going down in order for the US to
38:44
Speaker 10: start buying barrels to refill the SPR, because that has
38:47
Speaker 10: definitely resulted in some you know, increasing in the price today.
38:52
Speaker 10: Just today the US said, oh we'd like to you know,
38:55
Speaker 10: we're thinking about buying some more oil for the SPR,
38:57
Speaker 10: and the prices go up.
38:58
Speaker 11: So there's there's.
38:59
Speaker 10: Certain it's there. I do think also that there's this
39:02
Speaker 10: indicator for Opek. You know, Opek wants you know, ex
39:05
Speaker 10: price per barrel and they're going to do whatever they
39:07
Speaker 10: have to do.
39:07
Speaker 11: To get it.
39:08
Speaker 10: I think that that's that's not necessarily the case.
39:12
Speaker 11: I do think that Opek and certainly Saudi Arabia would
39:15
Speaker 11: love to keep Brent around eighty dollars a barrel.
39:17
Speaker 10: But I do think they realized that they may not
39:20
Speaker 10: get that, and they're willing to work with, you know,
39:22
Speaker 10: within the confines of what they can. But there's certainly
39:24
Speaker 10: this idea that they'd like it to be a bit higher.
39:28
Speaker 10: They'd like it to be more closer to eighty than seventy.
39:32
Speaker 2: Ellen, thank you so much for joining us. Really appreciate it,
39:34
Speaker 2: Ellen Waller. She is the president of Transversal Consulting and
39:37
Speaker 2: a Senior Fellow at the Atlanta Council. Joining us via
39:40
Speaker 2: zoom talking about global oil.
39:43
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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39:49
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39:52
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40:01
Speaker 2: This is a story I've been wanting to read for
40:04
Speaker 2: the longest time. In chess. Men's here sitting in fra
40:06
Speaker 2: Alex Steel and Paul Sweeney, Triple A bonds go bust
40:10
Speaker 2: and revealed depths of US office market crash. This is
40:13
Speaker 2: exactly what I've been waiting for.
40:15
Speaker 6: We're all about the office.
40:17
Speaker 2: Yeah, and I just looked down Third Avenue and I
40:19
Speaker 2: say empty, empty, empty, half empty. Somebody owns the mortgages
40:24
Speaker 2: on those things. Yeah, it's gonna have to come home
40:26
Speaker 2: to roost at some point. Carmen Arroyo and her team
40:29
Speaker 2: at Bloomberg News. She's a credit reporter for Bloomberg News.
40:31
Speaker 2: They have this story out here today, Karmer, what are
40:33
Speaker 2: you finding on some of these bonds that were triple
40:37
Speaker 2: A rated, which means I don't have any real risk here?
40:41
Speaker 2: What's happening to some of these real estate backed bonds
40:43
Speaker 2: that were triple A rated?
40:45
Speaker 12: Sure? So in May we saw the first triple A
40:49
Speaker 12: bond commercial mortgage, triple A bond being hit backed by
40:53
Speaker 12: a single office property, and then we started like digging
40:56
Speaker 12: into basically the data to see what other buildings could
40:58
Speaker 12: get hit. And the results there's a few a ton
41:02
Speaker 12: of Like the office properties across across the US have
41:05
Speaker 12: been distressed for years. It just takes a long time
41:09
Speaker 12: for that to reach bond holders, and now it's starting
41:12
Speaker 12: to get there. So we kind of like analyze the data.
41:15
Speaker 12: We saw at least like twelve other buildings are said
41:18
Speaker 12: to have some type of loss some will be at
41:20
Speaker 12: the TRIPLEA level, some will be just the investment grade portion.
41:24
Speaker 12: There's definitely a lot of more pain to come.
41:26
Speaker 6: Which regions across the US are most vulnerable.
41:30
Speaker 12: It's all over, It's all over the US. Actually we
41:33
Speaker 12: saw there's buildings in New York, of course, Chicago, La
41:35
Speaker 12: San Francisco, but there's also buildings in Kansas City. Like
41:38
Speaker 12: it's it's kind of everywhere.
41:41
Speaker 2: But if I'm holding a triple A bond, I expect
41:44
Speaker 2: to get paid back here. So what's happening to these bonds?
41:48
Speaker 2: Are they coming up for maturity and then the owner
41:50
Speaker 2: has to refinance the bond or house this soft playing out?
41:54
Speaker 12: Sure, so every triple A bone holder thinks they're going
41:56
Speaker 12: to get paid back. Actually that's why you buy it.
41:59
Speaker 12: But they, like a lot of these buildings have not
42:03
Speaker 12: been receiving interest on the bonds for a while, and
42:06
Speaker 12: the minute like the presoul's drop and kind of like
42:09
Speaker 12: the owners of the buildings get rid of them or
42:11
Speaker 12: like sell them. The losses are realized, and the gist
42:17
Speaker 12: of it is that the buildings are worth like a
42:19
Speaker 12: fraction of what they were worth like a few years ago.
42:21
Speaker 12: So there's just not enough money to pay back everyone,
42:24
Speaker 12: not even the Triple A holders, and that that's the
42:26
Speaker 12: whole issue, Like the real estate is just not worth it.
42:29
Speaker 6: When you're speaking to triple A bondholders, what are they
42:32
Speaker 6: telling you as far as why they might still be
42:34
Speaker 6: holding onto that and what's the risk reward.
42:37
Speaker 12: I A lot of the Triple A bondholders will get
42:40
Speaker 12: some money back, like the lower trenches won't. And I'm
42:45
Speaker 12: not sure if there's some market for that type of
42:47
Speaker 12: like those type of bonds at the bit they may
42:50
Speaker 12: want them.
42:51
Speaker 2: And I'm looking at I mean, you have a big
42:53
Speaker 2: take story, which means it has great graphics in addition
42:55
Speaker 2: to being well reported, well sourced. Some of these buildings,
42:58
Speaker 2: I mean New York Chicago, Las, I mean five fifty
43:01
Speaker 2: five West fitth Street, seven twenty five South Figaroa. I
43:03
Speaker 2: know that building. But these things are being valued at
43:06
Speaker 2: significant discounts, right, and some not even covering the amount
43:10
Speaker 2: of the outstanding loan. So that's where the that's where
43:13
Speaker 2: the problems come in.
43:14
Speaker 12: Yeah, that's the problem. And it's also like a lot
43:17
Speaker 12: of those buildings depend on one single tenant. So the
43:19
Speaker 12: minute that tenant's like, look my lease is up, I'm leaving.
43:22
Speaker 12: I want a newer office. This building is really old.
43:26
Speaker 12: The bond's just shoppen price because that's where they're getting
43:29
Speaker 12: the income.
43:30
Speaker 6: I think anytime it comes to anything revolving around real estate,
43:33
Speaker 6: as we know very well, people want to harken back
43:35
Speaker 6: to the global financial crisis in two thousand and eight.
43:37
Speaker 6: But this is a very different situation, especially coming out
43:40
Speaker 6: of the pandemic, and talk to us more about how
43:42
Speaker 6: this is a very small subset of the bond market
43:45
Speaker 6: when you're looking at this.
43:46
Speaker 12: Yes, definitely, like there's definitely some type of eco to
43:48
Speaker 12: the like similar to the financial crisis in the sense
43:51
Speaker 12: that like you don't really see losses on the principal
43:53
Speaker 12: level and triple A bonds like that hasn't happened since oaight.
43:57
Speaker 12: But again, like it's just a few bonds with the
44:00
Speaker 12: commercial mortgage backed securities market.
44:02
Speaker 6: Right, So when you're speaking with your sources, I mean,
44:04
Speaker 6: what are the risks of other broader ripple effects or
44:07
Speaker 6: any sort of other red flags potentially brewing. And then
44:09
Speaker 6: maybe the off side of that where there's more optimism
44:12
Speaker 6: of what could happen.
44:14
Speaker 12: Yeah, I think like the risk is mainly for any
44:16
Speaker 12: building that's old like and that the tenants are walking,
44:20
Speaker 12: there's going to be issues. But if any new building that,
44:23
Speaker 12: like you know, has a great reputation has a lot
44:26
Speaker 12: of tenants, like there's that market is kind of booming
44:29
Speaker 12: like right now in new issue markets, like buyers are
44:31
Speaker 12: like just gobbling up the dead like, So it really
44:34
Speaker 12: depends on the building.
44:35
Speaker 9: I used to work in one of those buildings in
44:37
Speaker 9: the Garments Center.
44:38
Speaker 13: Really and talk about old. The elevators would break down
44:43
Speaker 13: at least once a week, and the elevator, the shaft,
44:46
Speaker 13: the gears were all made out of wood.
44:49
Speaker 6: Did you ever get stuck in one?
44:50
Speaker 2: Oh?
44:51
Speaker 6: Yeah, all the how long were you?
44:54
Speaker 5: Oh?
44:54
Speaker 9: I don't remember. Ago Fly had some beers with us.
44:57
Speaker 2: So find back in the day karma. Is there any
45:00
Speaker 2: sense from your reporting that the office real estate market
45:03
Speaker 2: is at or near bottom or is anybody calling that
45:06
Speaker 2: or too?
45:06
Speaker 12: Yeah, a lot of people are calling that. Like when
45:08
Speaker 12: we start to see the office buildings get sold, that's
45:12
Speaker 12: that's where we've reached the bottom and then everything is
45:15
Speaker 12: going to go up.
45:15
Speaker 6: Is there a time period timeline as far as how
45:18
Speaker 6: long that could take.
45:19
Speaker 12: Yeah, it could take a long time because the leases
45:22
Speaker 12: are so long that tenants may be locked in for
45:25
Speaker 12: like years, but most people are saying it's between now
45:28
Speaker 12: in the next few months.
45:29
Speaker 1: Wow.
45:30
Speaker 2: Interesting because you know there's some iconic buildings here in
45:33
Speaker 2: your thing. I mean, six hundred California Street in San Francisco,
45:36
Speaker 2: fifteen hundred Market Street, market in Fifteenth Street in Philly.
45:40
Speaker 2: These are some big ones. The Aon Center, which was
45:43
Speaker 2: the former Sears Tower in Chicago. Look at it, I mean,
45:46
Speaker 2: basically half of it's underwater, so crazy, crazy stuff there.
45:49
Speaker 2: We knew it was coming, but you just somebody's gonna
45:52
Speaker 2: have to pay, unfortunately. Carmen Arroyal credit reporter for Bloomberg News,
45:56
Speaker 2: joining us here on a Bloomberg interactive broker studio. You
45:58
Speaker 2: can read story and more stories from Bloomberg on at
46:03
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46:06
Speaker 2: Take again. The Big Take stories come out every day
46:09
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46:13
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46:16
Speaker 2: highlighting them whenever we can.
46:18
Speaker 9: It's a great read.
46:19
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