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Banks Reveal Concerning Credit Deterioration: Peabody · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg PENL Podcast. I'm Paul Sweene. You,
• 0:05
  Speaker 1: along with my co host Lisa Brahma Waits, each day
• 0:07
  Speaker 1: we bring you the most noteworthy and useful interviews for
• 0:10
  Speaker 1: you and your money, whether at the grocery store or
• 0:12
  Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
• 0:15
  Speaker 1: podcast or wherever you listen to podcasts, as well as
• 0:17
  Speaker 1: at Bloomberg dot com. This morning, JP Morgan and Wells
• 0:25
  Speaker 1: Fargo kicked off earnings for the biggest banks, and in
• 0:28
  Speaker 1: some ways the divergence between these two behemoths really highlights
• 0:32
  Speaker 1: the bifurcation of the banking industry. Right now, joining us
• 0:36
  Speaker 1: to talk about that and just the results in general.
• 0:39
  Speaker 1: Charles Peabody, president of Portala's Partners ll l C, Thank
• 0:43
  Speaker 1: you so much for being with us. Charles, We always
• 0:45
  Speaker 1: love having you on. So let's start with JP Morgan
• 0:48
  Speaker 1: shares up more than four percent after reporting better than
• 0:51
  Speaker 1: expected earnings benefiting from consumer banking and the gap between
• 0:56
  Speaker 1: how much they pay depositors and how much they're earning
• 1:00
  Speaker 1: from loans. What was your biggest takeaway from the report? Well,
• 1:04
  Speaker 1: you're right, it was a very solid quarter and You're right,
• 1:07
  Speaker 1: there is a real bifurcation between what JP Morgan and
• 1:11
  Speaker 1: Wells reported. In the case of JP Morgan, this is
• 1:14
  Speaker 1: a company that has been investing in its businesses and
• 1:16
  Speaker 1: growing revenues. In the case of Wells Fargo revenues are shrinking. UM.
• 1:21
  Speaker 1: The biggest takeaway I think UM going forward is that
• 1:26
  Speaker 1: this is probably the peak year over year quarter and
• 1:29
  Speaker 1: net interest income UM number one, and that's your highest
• 1:32
  Speaker 1: pe source of revenue. And the second biggest takeaway is
• 1:36
  Speaker 1: you're beginning to see credit deterioration. Okay, so let's let's
• 1:41
  Speaker 1: unpack both of those issues. That this is the peak
• 1:44
  Speaker 1: year for net interest income, so quarter this peak quarter.
• 1:50
  Speaker 1: I'm trying to figure out whether that is simply due
• 1:54
  Speaker 1: to the Federal reserve being on hold, or if it
• 1:57
  Speaker 1: has to do with the rate of loan growth slowing
• 2:01
  Speaker 1: or or what you're seeing there. Yeah, it is a combination.
• 2:05
  Speaker 1: For example, JP Morgan was growing their core loans at
• 2:09
  Speaker 1: a seven to eight percent rate in the first half
• 2:11
  Speaker 1: of eighteen. By the fourth quarter of eighteen, their core
• 2:15
  Speaker 1: loan growth was around a six percent annual rate. Here
• 2:18
  Speaker 1: in the first quarter it slowed to five. Now JP
• 2:21
  Speaker 1: Morgan's doing that on purpose, and it is very wise
• 2:24
  Speaker 1: and prudent of them because of where we are in
• 2:26
  Speaker 1: the in the economic cycle. UM so you're getting less
• 2:30
  Speaker 1: loan growth driving an I I. The flat yield curve
• 2:35
  Speaker 1: is also going to put pressure on net interest margins UM.
• 2:40
  Speaker 1: And so for example, in this morning, um Wells Fargoes
• 2:43
  Speaker 1: stock started up in the morning, but as the conference
• 2:46
  Speaker 1: call went on and they lowered their NII growth forecast
• 2:50
  Speaker 1: to a you know, a fall of two to five,
• 2:54
  Speaker 1: then the stock tanked. So one other aspect of net
• 2:57
  Speaker 1: interest income that I want to unpack before move on
• 3:00
  Speaker 1: to credit deterioration is this idea that banks have been
• 3:03
  Speaker 1: able to The biggest banks have gotten away with not
• 3:07
  Speaker 1: passing along the extra yield extra rate UH that they
• 3:12
  Speaker 1: get from the Fed funds rate as well as just
• 3:14
  Speaker 1: in general on loans to the depositors, and they paid
• 3:18
  Speaker 1: their depositors almost nothing, even as online firms credit unions
• 3:22
  Speaker 1: have offered higher yields for that money. I'm just wondering
• 3:27
  Speaker 1: at what point you're going to actually see some kind
• 3:28
  Speaker 1: of migration of deposits away from the biggest banks to
• 3:32
  Speaker 1: some of the smaller ones that actually are paying them
• 3:35
  Speaker 1: for their money. I think that's a very good point, Lisa,
• 3:39
  Speaker 1: because the more bullish analysts are saying that the deposit
• 3:43
  Speaker 1: beta will slow as the year progresses because the FED
• 3:46
  Speaker 1: is on pause. If you look at JP Morgan's projection
• 3:50
  Speaker 1: for deposit growth for the industry this year, they're expecting
• 3:53
  Speaker 1: to slow it about two So there's going to be
• 3:56
  Speaker 1: an increased um bidding for the quidity in the form
• 4:01
  Speaker 1: of deposits. The non bank system and the small regional
• 4:05
  Speaker 1: banks are the ones that really need the liquidity, and
• 4:07
  Speaker 1: so I think you're gonna see much more aggressive bidding
• 4:10
  Speaker 1: for those deposits from those two entities, and I think
• 4:13
  Speaker 1: eventually the big banks like JP Morgan are going to
• 4:16
  Speaker 1: have to pay up, which I don't expect. The depositated
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  Speaker 1: is slow as much as others do. Interesting. Okay, so
• 4:21
  Speaker 1: let's move on to the credit terieration. Where in either
• 4:25
  Speaker 1: Wells Fargo or JP Morgan's earnings, did you see this
• 4:28
  Speaker 1: in the most in the most pronounced way, and how
• 4:31
  Speaker 1: significant is it? Well, you saw it on a number
• 4:34
  Speaker 1: of fronts, and I think it's very significant. You know,
• 4:37
  Speaker 1: we've been waiting for signs of credit deterioration for two
• 4:40
  Speaker 1: years now, and I think we've grown immune to those
• 4:43
  Speaker 1: early signs. But I'll tell you where I saw it,
• 4:46
  Speaker 1: all right, Net charge offs and long lost provisions for
• 4:49
  Speaker 1: both Morgan Wells, Fargo and p n C, which report
• 4:52
  Speaker 1: this morning, came in higher than expected non accruel loans,
• 4:56
  Speaker 1: particularly on the corporate side. UM rose in the is
• 5:00
  Speaker 1: the second quarter in a row that it's rose. UM
• 5:03
  Speaker 1: p n C raised their future for guidance for UM
• 5:07
  Speaker 1: provisioning levels by about twenty five million. That doesn't sound
• 5:12
  Speaker 1: like much, but it is significant, and all three banks
• 5:15
  Speaker 1: added to their reserves for future losses. In the past,
• 5:18
  Speaker 1: they were releasing reserves. So you saw it on so
• 5:21
  Speaker 1: many fronts. And then prior to this quarter, you were
• 5:24
  Speaker 1: beginning to see the inflow of new problem masst's starting
• 5:28
  Speaker 1: to outstrip the return to performing status and that was
• 5:32
  Speaker 1: a sign that there was organic credit detriation starting to
• 5:35
  Speaker 1: take place. Where are we seeing the detrioration most pronouncedly?
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  Speaker 1: In other words, is it corporate? Is a consumer? Is
• 5:42
  Speaker 1: a specific consumer loans? It's definitely corporate. And you know,
• 5:47
  Speaker 1: it's hard to say that there's a theme in terms
• 5:50
  Speaker 1: of industry, but you're seeing it in manufacturing, you're seeing
• 5:53
  Speaker 1: it in retail, and you're seeing in commercial real estate.
• 5:56
  Speaker 1: That's so interesting at a time when credit is still
• 5:58
  Speaker 1: so free and certainly equity markets reflect a certain enthusiasm.
• 6:04
  Speaker 1: Does this give you Yeah, I'm perplexed by the lack
• 6:08
  Speaker 1: of reaction to what I see, as you know, the
• 6:12
  Speaker 1: seeds of credit cycle developing. Um you know. To me,
• 6:17
  Speaker 1: today's action is somewhat curious and it doesn't have the
• 6:21
  Speaker 1: steel of true institutional you know, Corbine. It has the
• 6:27
  Speaker 1: feel of someone goosey in the market in terms of
• 6:32
  Speaker 1: banks docs. Charles Peabody, thank you so much for taking
• 6:35
  Speaker 1: the time with us. We always love your insights. Charles Peabody,
• 6:38
  Speaker 1: president of Portala's Partners, joining us in our Bloomberg intera
• 6:57
  Speaker 1: active broker studios. I'm so pleased to say Tara Chappelle,
• 7:01
  Speaker 1: who covers all things media and deals and telecom for
• 7:04
  Speaker 1: Bloomberg Opinion Tera, I find this deal fascinating. They unleashed
• 7:08
  Speaker 1: Disney Plus, which is the answer to Netflix. But can
• 7:13
  Speaker 1: we start with just how limited is this offering? At first? Right?
• 7:18
  Speaker 1: I mean this offering it's six a month, and a
• 7:20
  Speaker 1: lot has been made of the price, but it's because
• 7:22
  Speaker 1: there's not gonna be a whole lot on it to
• 7:23
  Speaker 1: begin with. If you're a really big Star Wars fan,
• 7:26
  Speaker 1: perhaps there's a draw there because they are going to
• 7:28
  Speaker 1: be able to have all the old Star Wars films,
• 7:31
  Speaker 1: which wasn't a sure thing. We didn't know that. There
• 7:33
  Speaker 1: was a big surprise last night because Disney It actually
• 7:35
  Speaker 1: sold the rights to those movies to turn her a
• 7:37
  Speaker 1: while back, so they probably had to pay a big
• 7:39
  Speaker 1: time to get those rights back for the Disney Plus app.
• 7:42
  Speaker 1: So if you like Star Wars, okay, you've got that,
• 7:44
  Speaker 1: a Star Wars series is going to be on it,
• 7:46
  Speaker 1: the Mandalorian, and then a lot of old Disney movies.
• 7:49
  Speaker 1: So if you have young kids, perhaps it's good for
• 7:51
  Speaker 1: that because we know kids don't mind watching the same
• 7:53
  Speaker 1: movies over and over again. It's a great way to
• 7:55
  Speaker 1: to keep them busy. But other than that, you know,
• 7:59
  Speaker 1: it's spilled a sort of the family app complement to
• 8:02
  Speaker 1: ESPN Plus and Hulu, which are this, you know, sports
• 8:05
  Speaker 1: and more of the adult content. I guess you could say,
• 8:08
  Speaker 1: but to me, it really is for super fans of Disney,
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  Speaker 1: and at six, you know you're really not getting a
• 8:14
  Speaker 1: whole lot for that price at first? What's the vision
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  Speaker 1: for Disney Plus. I think Disney Plus is sort of
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  Speaker 1: the the product at the center of the future of Disney,
• 8:23
  Speaker 1: which is kind of amazing. And I made the point
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  Speaker 1: in my column today that, you know, that's why the
• 8:28
  Speaker 1: name kind of concerns me, because Disney Plus implies it's
• 8:30
  Speaker 1: sort of like an add on, a supplement to the
• 8:32
  Speaker 1: real Disney, when really they're staking their future on this app,
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  Speaker 1: and it's not going to be profitable into until two
• 8:39
  Speaker 1: thousand twenty four, which is going to be a few
• 8:41
  Speaker 1: years after CEO Bob igor who's leading this mission, is
• 8:44
  Speaker 1: long gone. He's retiring in one So there's still a
• 8:47
  Speaker 1: lot of questions about what this is going to look like,
• 8:50
  Speaker 1: how it's going to disturb the rest of the empire
• 8:53
  Speaker 1: as an increasing amount of content goes to the app
• 8:56
  Speaker 1: and not to Disney's other properties. How is this going
• 8:58
  Speaker 1: to be the future though? I mean, is if I
• 9:01
  Speaker 1: assume that eventually it will have more content. You're talking
• 9:03
  Speaker 1: about the limited offerings in the initial rollout, What is
• 9:07
  Speaker 1: the content eventually and how does this end up being
• 9:10
  Speaker 1: the monster revenue driver that Disney really needs? So I
• 9:14
  Speaker 1: think what they're envisioning is, as we've sort of seen
• 9:16
  Speaker 1: this balkanization of the TV industry, that Disney is increasingly
• 9:20
  Speaker 1: going to keep anything that comes that's made by Disney
• 9:24
  Speaker 1: on Disney Plus. That's where you're gonna have to subscribe
• 9:26
  Speaker 1: to to get it, or to ESPN Plus and Hulu,
• 9:28
  Speaker 1: and maybe there'll be some sort of bundle of those
• 9:30
  Speaker 1: three apps. But basically, if you if you're a Star
• 9:33
  Speaker 1: Wars fan, if you like Marvel movies, if you want
• 9:36
  Speaker 1: Pixar movies, if you want national geographic content, you're going
• 9:39
  Speaker 1: to have to subscribe to Disney Plus. So they're really
• 9:42
  Speaker 1: sort of uh, monopolizing that content for their own app,
• 9:46
  Speaker 1: and it's not going to be available in other places.
• 9:48
  Speaker 1: I mean, you can still you know, big big films
• 9:51
  Speaker 1: will still go to the movie theaters and and maybe
• 9:52
  Speaker 1: people will still pay to go see those, you know,
• 9:55
  Speaker 1: Marvel big productions. Maybe that still draws people out to
• 9:58
  Speaker 1: pay and go to the movie years. But at the
• 10:00
  Speaker 1: end of the day, I think what they're saying is
• 10:02
  Speaker 1: the app is going to be the new home of Disney,
• 10:04
  Speaker 1: and you need to subscribe if you want anything Disney.
• 10:07
  Speaker 1: So people are focusing on Netflix today and Netflix shares
• 10:10
  Speaker 1: are are slightly lower, but to me, the real losers
• 10:14
  Speaker 1: here are potentially the big cable networks absolutely. I mean,
• 10:17
  Speaker 1: Disney right now is very dependent on the traditional bundles still,
• 10:21
  Speaker 1: and you know, they're not fully moving away from that
• 10:23
  Speaker 1: by any means with this Disney Plus app. Yet they
• 10:26
  Speaker 1: I was hearing from Kegan part of SMP Global Market
• 10:29
  Speaker 1: Intelligence that Disney gets about fifteen dollars a month per
• 10:34
  Speaker 1: subscriber from its top twelve TV networks, which is a
• 10:37
  Speaker 1: ton of money, and they're gonna have this app for SI.
• 10:39
  Speaker 1: They generated about three billion dollars in box office ticket
• 10:43
  Speaker 1: sales last year from its films and Avengers endgame opening
• 10:46
  Speaker 1: later this month could be the biggest opening ever. So
• 10:49
  Speaker 1: they are still very dependent on these former revenue streams.
• 10:53
  Speaker 1: But I think Disney Plus will accelerate this cord cutting
• 10:57
  Speaker 1: trend because if you are such a Disney and why
• 11:00
  Speaker 1: would you subscribe to cable at you know, a hundred
• 11:02
  Speaker 1: dollars some hundreds of dollars a month or you could
• 11:05
  Speaker 1: just get Disney for six nine. And I think that's
• 11:07
  Speaker 1: what they're really hoping for, Although can you really get
• 11:09
  Speaker 1: it for six nine? My question is when they actually
• 11:11
  Speaker 1: start to incorporate more offerings onto Disney Plus, can they
• 11:15
  Speaker 1: possibly stay at this price that undercuts Netflix. I mean
• 11:18
  Speaker 1: that's the reason why people kind of were so odd
• 11:21
  Speaker 1: by it, because it just you know, blows Netflix out
• 11:23
  Speaker 1: of the water in terms of in terms of discounts, right,
• 11:27
  Speaker 1: I mean, they've left themselves a lot of wiggle room
• 11:29
  Speaker 1: to raise the price. At six ninety nine, it's much
• 11:31
  Speaker 1: cheaper than Netflix. But again, Netflix has more i would say,
• 11:34
  Speaker 1: diversity of content for adults at least um. But yeah,
• 11:38
  Speaker 1: they've left themselves a lot of room, and I would
• 11:40
  Speaker 1: imagine the company hasn't said anything about this, but I
• 11:42
  Speaker 1: would imagine that over time, as bigger hits make it
• 11:46
  Speaker 1: to that app and there are increasing number of originals,
• 11:48
  Speaker 1: they will have both the wherewithal and the need to
• 11:51
  Speaker 1: raise the price. Okay, So going forward for Netflix, what
• 11:56
  Speaker 1: is sort of the key test about whether this will
• 11:58
  Speaker 1: actually draw people away from it? Yeah? Because I think
• 12:02
  Speaker 1: right now that the draw with Netflix is that it's
• 12:04
  Speaker 1: good enough for the price. Right. You know, maybe it
• 12:07
  Speaker 1: doesn't have always the best quality movies, and you know,
• 12:10
  Speaker 1: it doesn't have some of the TV shows you like
• 12:12
  Speaker 1: to watch on cable, But at the end of the day,
• 12:14
  Speaker 1: at you know, thirteen dollars a month, it's kind of
• 12:16
  Speaker 1: a great deal. The question is, over time does it
• 12:19
  Speaker 1: lose that appeal as Disney Plus comes on board, and
• 12:22
  Speaker 1: then a T and T launches some app around HBO
• 12:25
  Speaker 1: and the other assets it bought from Time Warner, and
• 12:27
  Speaker 1: then there's all these other free, ad supported apps coming
• 12:30
  Speaker 1: coming out now this year, And that question is, you know,
• 12:33
  Speaker 1: do people still need to pay for Netflix? I think
• 12:35
  Speaker 1: for a lot of people, it's going to be sort
• 12:37
  Speaker 1: of the base case. It's kind of like what you
• 12:39
  Speaker 1: need and then what else can you afford to pay for?
• 12:42
  Speaker 1: But for others, you know, for parents, maybe Disney Plus
• 12:45
  Speaker 1: solves a lot of their problems and they don't need Netflix,
• 12:47
  Speaker 1: And that'll be interesting to see over time does Netflix
• 12:49
  Speaker 1: lose sort of that that premium. I honestly want to
• 12:53
  Speaker 1: use that quote for the rest of my life. Maybe
• 12:55
  Speaker 1: for parents, Disney Plus solves all of their problems. There
• 12:58
  Speaker 1: are a lot of Chapelle, Thank you for being here
• 13:01
  Speaker 1: with Sarah La Chapel is a Bloomberg opinion columnist focused
• 13:05
  Speaker 1: on deals, telecom and media. Disney Plus definitely giving a
• 13:09
  Speaker 1: lift Disney shares. When you look at the global outlook today,
• 13:30
  Speaker 1: there are a lot of concerns on the horizon Broxit,
• 13:33
  Speaker 1: you have the European unions slowing down, you have rising
• 13:36
  Speaker 1: strains of populism threatening uh the trade backdrop, But really,
• 13:41
  Speaker 1: how bad is it? Joining us now to discuss Mike Buchanan,
• 13:44
  Speaker 1: Deputy Chief Investment Officer for Western Asset Management Co. Which
• 13:49
  Speaker 1: is an independent affiliate of le Mason and overseas about
• 13:53
  Speaker 1: four hundred and thirty billion dollars. He joins us from Pasadena, California.
• 13:57
  Speaker 1: Mike love having you on. I want to start there.
• 14:00
  Speaker 1: Do you think that there is just too much pessimism
• 14:03
  Speaker 1: baked into risk assets right now? Even as they continue
• 14:07
  Speaker 1: to rally? Do you think that there's still is too
• 14:09
  Speaker 1: much pessimism baked in? Yeah? I would say that there's
• 14:13
  Speaker 1: certainly a lot to worry about, and those worries get
• 14:18
  Speaker 1: a lot of attention and a lot of focuses. We
• 14:21
  Speaker 1: think they should um But as you said, the markets
• 14:23
  Speaker 1: continue to UH to march in a positive direction, and
• 14:27
  Speaker 1: actually I think that's that's validated. I think when you
• 14:29
  Speaker 1: look at fundamentals, when you look at valuations right now,
• 14:33
  Speaker 1: when you look at relative value UM. We still think
• 14:36
  Speaker 1: there's a pretty compelling case for riskt risk assets within
• 14:41
  Speaker 1: fixed income. Obviously, we had a very very strong first quarters,
• 14:45
  Speaker 1: so you know, the magnitude or the trajectory of the
• 14:48
  Speaker 1: rally is unlike unlikely to sustain. But I think, you know,
• 14:53
  Speaker 1: from where we are now through the end of the year,
• 14:55
  Speaker 1: I still think you can get reasonable returns UM and
• 14:58
  Speaker 1: a lot of the risk sectors within extinct. Okay, are
• 15:01
  Speaker 1: you talking about US hild bonds, Uh, that would certainly
• 15:05
  Speaker 1: be one US high yield UM. You know, we have
• 15:08
  Speaker 1: been uh favorable on US high yield we uh we
• 15:12
  Speaker 1: thought that that sell off that we witnessed in the
• 15:15
  Speaker 1: fourth quarter, where you saw spreads go from you know,
• 15:17
  Speaker 1: a little over three hundred basis points over treasuries at
• 15:20
  Speaker 1: the beginning of the quarter all the way out to
• 15:22
  Speaker 1: almost five D and fifty, we really felt like that
• 15:25
  Speaker 1: created a very uh compelling buying opportunity, and in a
• 15:31
  Speaker 1: lot of our portfolio strategies, we added to HI yield
• 15:34
  Speaker 1: late last year, early in January UM. And again, you know,
• 15:38
  Speaker 1: we've been surprised at how quickly the market has recovered UM.
• 15:42
  Speaker 1: But even where we are right now, Lisa, I would
• 15:44
  Speaker 1: still say, you know, again, you're you're at a yield
• 15:47
  Speaker 1: north of six percent UH. You know, defaults very very
• 15:50
  Speaker 1: low UM fundamentals, like I said earlier, very strong. So
• 15:54
  Speaker 1: I'm looking right now at us HILED that returns of
• 15:57
  Speaker 1: eight point two percent so far here to date. It
• 16:00
  Speaker 1: does raise a question, especially as yields go to the
• 16:02
  Speaker 1: lowest UH since October of last year, or tracing all
• 16:06
  Speaker 1: of the losses, are all of the rise and yields
• 16:08
  Speaker 1: and the and the in the decline in prices that
• 16:10
  Speaker 1: we saw over November December, how much more upside is there? Though? Yeah,
• 16:16
  Speaker 1: I think with with high yield, you know, it's it's
• 16:19
  Speaker 1: not necessarily about more spread tightening. So you know, one
• 16:23
  Speaker 1: of the great things about high yield is that it
• 16:26
  Speaker 1: is a really nice carry trade. If you just have
• 16:29
  Speaker 1: it on, you're clipping a you know, a nice coupon,
• 16:32
  Speaker 1: You're you're clipping a north of six percent yield. So
• 16:36
  Speaker 1: I don't think you necessarily need to get UH spread
• 16:40
  Speaker 1: compression or spread tightening and capital gains. I think just
• 16:43
  Speaker 1: simply holding it and earning that carrier, earning that yield
• 16:48
  Speaker 1: UH still translates into a pretty good return profile in
• 16:52
  Speaker 1: a in a world where you know you looked at UM,
• 16:55
  Speaker 1: you know there's over ten billion of negative, negative yielding
• 16:57
  Speaker 1: assets out there. What about emerging markets, Uh, We've liked
• 17:02
  Speaker 1: emerging markets, continue to like emerging markets, uh, in in
• 17:06
  Speaker 1: many different forms. Local currency probably our most passionate overweight
• 17:12
  Speaker 1: within the spread sectors. There, we just think, you know,
• 17:16
  Speaker 1: you've got very high nominal yields, you've got inflation trends
• 17:20
  Speaker 1: that are trending lower, just as they are in developed markets.
• 17:23
  Speaker 1: And then when you look at real yields, the differential
• 17:27
  Speaker 1: between developed markets and developing markets that's abnormally high. So
• 17:30
  Speaker 1: we think that's a very attractive sector within emerging markets.
• 17:35
  Speaker 1: But we also have some favorites in the hard dollar
• 17:40
  Speaker 1: e M space as well, the dollar denominated So I
• 17:44
  Speaker 1: see that you just spearheaded the firm's new global outlook,
• 17:47
  Speaker 1: which is very beautiful. So congratulations. It has like not
• 17:50
  Speaker 1: lots of pretty graphics. Um. The most contrarian call that
• 17:54
  Speaker 1: I thought in here was that people are too pessimistic
• 17:57
  Speaker 1: on Europe, and this has actually gone from control are
• 18:00
  Speaker 1: into a little bit more accepted that that already there's
• 18:02
  Speaker 1: so much negativity based in baked into asset prices in
• 18:06
  Speaker 1: Europe that there could be potentially opportunities there. Where are
• 18:10
  Speaker 1: you seeing opportunities in Europe given that backdrop, Yeah, I
• 18:15
  Speaker 1: think you know that's that's rightly so you said it
• 18:17
  Speaker 1: the right way that um, you know that it's just
• 18:19
  Speaker 1: really about the bar being set so low in Europe
• 18:22
  Speaker 1: and the outlook is so gloomy that the likelihood that um,
• 18:27
  Speaker 1: you could see some positive surprises we think is very real.
• 18:31
  Speaker 1: We think you could get a a catalyst once if
• 18:36
  Speaker 1: we get a trade agreement worked out with China, that
• 18:39
  Speaker 1: that could have some follow through for Europe and Germany
• 18:42
  Speaker 1: in particular. UM. But we would really say this, we
• 18:45
  Speaker 1: would say the opportunities, um that you get by identifying
• 18:51
  Speaker 1: a stronger Europe aren't necessarily in Europe. It really it's
• 18:54
  Speaker 1: really about how that translates to global growth, and Europe
• 18:58
  Speaker 1: is a is a key component of global growth. So
• 19:01
  Speaker 1: our story really is that, you know, if you put
• 19:03
  Speaker 1: the main ingredients of global growth together, whether it's China
• 19:07
  Speaker 1: US Europe, that Europe is that one piston or that
• 19:12
  Speaker 1: one cylinder that you know, everyone has a lot of
• 19:14
  Speaker 1: doubts on and we just think that it could be
• 19:17
  Speaker 1: a little better than very gloomy expectations. So given all
• 19:21
  Speaker 1: of that, and it seems like you're pretty optimistic and
• 19:24
  Speaker 1: constructive just generally on all things risk, I'm trying to
• 19:28
  Speaker 1: understand whether that necessarily translated translates into higher developed market
• 19:34
  Speaker 1: government bond yields, because right now we're not seeing inflation
• 19:38
  Speaker 1: tick up. You do see that negative yielding debt backdrop,
• 19:42
  Speaker 1: and that's kind of what's driving the risk asset rally. Right. Yeah,
• 19:48
  Speaker 1: that's a fair that's a fair question, and I do
• 19:50
  Speaker 1: think that, um, when you look longer term the prospects
• 19:54
  Speaker 1: for for for rates within Europe, certainly, you know, you
• 19:59
  Speaker 1: have to think they're going higher. It's it seems like
• 20:01
  Speaker 1: they're at unsustainable levels where they are right now. UM,
• 20:05
  Speaker 1: But we do think there's quite a bit of time
• 20:07
  Speaker 1: between now and when that ultimately takes place. The FED
• 20:10
  Speaker 1: has been very clear about, um, you know, they're they're
• 20:14
  Speaker 1: dug in right now and very very unlikely we think
• 20:17
  Speaker 1: to see a hike anytime within two thousand nineteen UM.
• 20:22
  Speaker 1: And we do think that Europe. I mean, you know,
• 20:24
  Speaker 1: you're talking very very slow growth, so you know, in
• 20:27
  Speaker 1: inflation that's well below target. So you really have to
• 20:31
  Speaker 1: get those factors moving in the right direction, but before
• 20:34
  Speaker 1: you'd have to be overly concerned about, you know, an
• 20:37
  Speaker 1: upward trajectory in the overall rate environment. So not a
• 20:41
  Speaker 1: thing we don't think. So we think, you know, you're
• 20:44
  Speaker 1: probably looking out you know, past two two thousand, twenty
• 20:47
  Speaker 1: or even later for rates become a real material risk
• 20:51
  Speaker 1: to the upside. Mike Bikannan, wonderful getting your point of view.
• 20:55
  Speaker 1: Thank you so much. Mike b. Cannan's Deputy Chief Investment
• 20:58
  Speaker 1: Officer for Western Asset Management UH, an independent affiliate of
• 21:01
  Speaker 1: Like Mason, overseeing about four hundred and thirty billion dollars
• 21:05
  Speaker 1: from Pasadena, California. How does one value Uber? This becomes
• 21:27
  Speaker 1: important as it prepares it's initial public offering that is
• 21:30
  Speaker 1: expected to raise about ten billion dollars. Joining us to
• 21:33
  Speaker 1: discuss Shia Ovid, a technology columnist for Bloomberg Opinion, joining
• 21:37
  Speaker 1: us here in our interactive brokers studios. So, Serre, we
• 21:41
  Speaker 1: got the S one filing, so we got some financial
• 21:44
  Speaker 1: information for the first time about Uber. What did it
• 21:48
  Speaker 1: show us? Well, it showed us that Uber is a
• 21:51
  Speaker 1: complex business, which we knew. But the S one was
• 21:56
  Speaker 1: three hundred and fifty some odd pages, including financial statements,
• 22:00
  Speaker 1: which is, you know, pretty meaty. And so I learned
• 22:04
  Speaker 1: a couple of things. One, did you read the whole thing? Okay,
• 22:08
  Speaker 1: skimmed a lot of it, but you know, I read
• 22:11
  Speaker 1: the important bits. So a couple of things were evident. Look,
• 22:14
  Speaker 1: this is basically two businesses. Two main businesses, the on
• 22:19
  Speaker 1: demand rides, which is eight percent of revenue, and then
• 22:23
  Speaker 1: Uber Eats, which is their food younger food delivery business,
• 22:26
  Speaker 1: which is fifteen percent or so of revenue. And the
• 22:30
  Speaker 1: on demand ride business is large, but also not growing
• 22:34
  Speaker 1: very fast, at least by kind of current tech startup standards.
• 22:38
  Speaker 1: That the the it's in the sort of twenty plus
• 22:42
  Speaker 1: percent range right now, which is again maybe not the
• 22:46
  Speaker 1: growth rate that investors have come to expect from young
• 22:49
  Speaker 1: companies going public. We also have to remember that look,
• 22:52
  Speaker 1: Uber is basically not a startup by any conventional definition
• 22:56
  Speaker 1: of that term. It has eleven plus billion dollars in
• 22:58
  Speaker 1: annual revenue. It is going to be valued at something
• 23:01
  Speaker 1: like a hundred billion dollars, which is a pretty unheard
• 23:04
  Speaker 1: of range. And despite being pretty big and pretty old
• 23:09
  Speaker 1: by startup standards, it lost It had an operating loss
• 23:12
  Speaker 1: of three billion dollars last year, So what's the mitigating
• 23:15
  Speaker 1: factor here? I mean, I was also reading about how
• 23:18
  Speaker 1: their actual ride sharing business, which is the mainstay, is slower.
• 23:23
  Speaker 1: It is indeed it isn't it's it's now kind of
• 23:26
  Speaker 1: growing at the twenty plus percent range. So I would
• 23:28
  Speaker 1: assume that that is going to be a significant concern
• 23:32
  Speaker 1: for investors. And the thing I wonder about is how
• 23:36
  Speaker 1: big is demand really in that business? And I think
• 23:39
  Speaker 1: I had the same question coming out of Lift and
• 23:43
  Speaker 1: is it economically viable through the unit economics work, And
• 23:46
  Speaker 1: I don't think we have I don't think we really
• 23:48
  Speaker 1: know for sure about either one of those um, either
• 23:53
  Speaker 1: one of those essential questions about the on demand ride business.
• 23:55
  Speaker 1: So then the question really becomes from the investors standpoint. Uh.
• 23:59
  Speaker 1: There was a law out of talk earlier in the
• 24:01
  Speaker 1: week about the incredible enthusiasm around the Uber ip o,
• 24:04
  Speaker 1: how this is going to be the biggest one of
• 24:05
  Speaker 1: the year. UM, and now we're looking at LIFT shares
• 24:09
  Speaker 1: down another four percent today. Uh in US trading. I'm
• 24:14
  Speaker 1: just struggling to see whether there will be the same
• 24:16
  Speaker 1: demand that people had expected for Uber's IPO. I think
• 24:21
  Speaker 1: that's a really good, great question. The thing I can't
• 24:24
  Speaker 1: figure out is, you know, is what we're seeing with
• 24:27
  Speaker 1: lifts trading that the I p O went well, but
• 24:30
  Speaker 1: it's it's traded down significantly in the aftermarket since then.
• 24:33
  Speaker 1: Is that a reflection of Look, there's a relatively small
• 24:37
  Speaker 1: percentage of shares available to trade, there's been kind of
• 24:40
  Speaker 1: more short interest activity than we typically see in a
• 24:43
  Speaker 1: company like this, Or does this reflect doubts about Lift specifically,
• 24:49
  Speaker 1: or lift relative to Uber, or does it just reflect
• 24:52
  Speaker 1: doubts about the viability of this whole category, which of
• 24:55
  Speaker 1: course affects Uber as well. Right, I think these are
• 24:58
  Speaker 1: really good points. So moving onto Uber's business model and
• 25:02
  Speaker 1: Uber eats the whole food delivery system, how profitable is that?
• 25:06
  Speaker 1: I mean, is that the holy grail? Right now? We
• 25:08
  Speaker 1: don't really know because they don't necessarily break out the
• 25:11
  Speaker 1: profitability of Uber Eats, but I think it's fair to
• 25:13
  Speaker 1: say that that business is kind of the incubating business,
• 25:18
  Speaker 1: one of the incubating businesses inside of uh inside of
• 25:22
  Speaker 1: Uber's basically, look, all of their businesses are unprofitable, but
• 25:25
  Speaker 1: Eats is more unprofitable than the others. Okay, that's not great,
• 25:29
  Speaker 1: not great. So not great, bub not great. Yeah, I
• 25:31
  Speaker 1: guess that one person fast, but rowing fast. And look,
• 25:34
  Speaker 1: there is there is some some comparisons out there for
• 25:39
  Speaker 1: food delivery businesses. Right in the US, we have a
• 25:42
  Speaker 1: company like grubhub, which is, you know, a fast growing,
• 25:45
  Speaker 1: quite profitable company that does the same thing that Uber
• 25:48
  Speaker 1: eats does. Okay, so just quickly um an existential question,
• 25:51
  Speaker 1: which is can rod sharing companies be profitable without self
• 25:55
  Speaker 1: driving cars? I don't know, that's my answer, Okay, right,
• 26:01
  Speaker 1: but I don't know, But like, isn't that essentially the
• 26:03
  Speaker 1: question here because that's sort of the what these businesses
• 26:05
  Speaker 1: are predicated on is that they don't have to pay
• 26:07
  Speaker 1: a driver, correct, I think, so they're gonna two things
• 26:11
  Speaker 1: have to happen. At least two things have to happen.
• 26:13
  Speaker 1: One is the fares for on demand rides need to
• 26:17
  Speaker 1: come down, and some of that is technology, some of
• 26:19
  Speaker 1: that is driverless cars. But they can do other things
• 26:21
  Speaker 1: to write push more people into these kind of car
• 26:24
  Speaker 1: pooling services like uberpool, um make more efficient routes, get
• 26:30
  Speaker 1: more efficient in all aspects of the business, and drive
• 26:33
  Speaker 1: fares down and get people out of cars and onto
• 26:36
  Speaker 1: scooters and bikes. But I think that is an open
• 26:38
  Speaker 1: question about whether this whether delivering a ride on demand
• 26:42
  Speaker 1: with a driver um is going to be a nicely
• 26:45
  Speaker 1: profitable business. Ever. Sure Overday always wonderful speaking with you.
• 26:50
  Speaker 1: Sure Overday is Bloomberg columnists covering all things tech. She's fabulous.
• 26:55
  Speaker 1: Follow her work Bloomberg dot com, uh slash opinion. She
• 26:58
  Speaker 1: is a terrific column Thanks for listening to the Bloomberg
• 27:01
  Speaker 1: P and L podcast. You can subscribe and listen to
• 27:04
  Speaker 1: interviews at Apple Podcasts or whatever podcast platform you prefer.
• 27:07
  Speaker 1: Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa
• 27:10
  Speaker 1: abram Woyit's I'm on Twitter at Lisa abram woits one
• 27:13
  Speaker 1: before the podcast. You can always catch us worldwide on
• 27:15
  Speaker 1: Bloomberg Radio