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Trump and China’s Xi Heading Towards Superficial Treaty (Podcast) · 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 Wicks. Each day
0:07
Speaker 1: we bring you the most noteworthy and useful interviews for
0:10
Speaker 1: you and your money, whether at the grocery store or
0:12
Speaker 1: the trading floor. Find a Bloomberg 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. Well, China's Vice Premier Loui is
0:23
Speaker 1: coming to d C. He's actually in d C right
0:25
Speaker 1: now as we speak to talk to US Trade Representative
0:27
Speaker 1: Bob Leidheiser to resume trade talks. Tell us kind of
0:31
Speaker 1: preview what we might see coming out of these discussions.
0:34
Speaker 1: Is Dr Sam Napoff. He has president of Empire Global Ventures.
0:37
Speaker 1: He joins us in studio here in the Bloomberg Interactive
0:40
Speaker 1: Broker Studio. So, Sam, we've been down this road before.
0:44
Speaker 1: They've been talking for a while. The rhetoric has been
0:46
Speaker 1: very high, very heated. What should reasonable expectations be coming
0:51
Speaker 1: out of these trade talks? What are you looking for?
0:53
Speaker 1: In the words of William Shakespeare, nothing shall come of nothing.
0:57
Speaker 1: These trade talks are nothing. The Chinese are desperate to
1:02
Speaker 1: get this trade war over with because the Chinese economy
1:05
Speaker 1: is now running at its lowest rate since recording of
1:08
Speaker 1: that economy has happened in They're at the lowest industrial
1:12
Speaker 1: level in decades. President g has had to sideline multiple
1:16
Speaker 1: domestic policy initiatives because his economy is running slow. He
1:20
Speaker 1: needs this over with without bowing and scraping to Donald Trump.
1:24
Speaker 1: Donald Trump needs this over because the U s economy
1:26
Speaker 1: is slowing. Three key members of his coalition, agriculture, oil,
1:31
Speaker 1: and autos are all suffering. And he just got his
1:33
Speaker 1: hat handed to him by Nancy Dallassandro Pelosi, and he
1:36
Speaker 1: needs a public win. Okay, So what's a win from
1:40
Speaker 1: this meeting? What could happen? It's a win for both sides.
1:42
Speaker 1: For both sides, The Chinese will probably offer somewhere in
1:45
Speaker 1: the region of a hundred and fifty to two hundred
1:46
Speaker 1: billion dollars worth of purchases of US goods in those
1:49
Speaker 1: three sectors that I mentioned earlier. Today, the Beijing legislature
1:54
Speaker 1: passed a law that banned forced technology transfer from foreign
1:59
Speaker 1: companies inside China, which has been a sore point for
2:02
Speaker 1: the American government for some time. But the question is
2:07
Speaker 1: will will Donald Trump choose the path that the Chinese
2:10
Speaker 1: government wants, which is a superficial treaty which means nothing,
2:13
Speaker 1: or will he go the path of his U S.
2:15
Speaker 1: Trade representative Robert Leitheiser, who really wants to address structural
2:19
Speaker 1: inequalities and market access issues. And my guess is he'll uh,
2:23
Speaker 1: He'll split the difference. So that is really the key issue.
2:27
Speaker 1: If you talk to just as as Lisa and I
2:29
Speaker 1: talked to trade negotiators and people who followed this issue,
2:32
Speaker 1: the real some of the real meat of the matter
2:35
Speaker 1: is some of these technology issues in the you know it,
2:38
Speaker 1: those are really hard to talk about technology and intellectual
2:41
Speaker 1: property and all those issues. Your suggestion is those are
2:45
Speaker 1: off the table at least for now. Absolutely, and not
2:48
Speaker 1: only that, this is becoming exponentially more complicated with the
2:51
Speaker 1: emergence of Huawei as a legal issue in the United States,
2:54
Speaker 1: not simply an issue of economic competition. Right now, what
2:57
Speaker 1: we're seeing the United States used to of a Cold
3:00
Speaker 1: War with the Soviet Union, the United States in the
3:02
Speaker 1: middle of a Gold War with China. This is about
3:05
Speaker 1: money and technology, not I C B MS and West
3:08
Speaker 1: Berlin and Huawei is putting it right in the center
3:12
Speaker 1: of uh what two different economies look like, a command
3:16
Speaker 1: economy and an open one. And the command economy can't
3:19
Speaker 1: let go of control of technology. I don't understand how
3:23
Speaker 1: the technology aspect can be completely divorced from the just
3:27
Speaker 1: sort of soybeans and oil and cars aspect. Because even
3:30
Speaker 1: if they do come up with some narrow trade agreement
3:33
Speaker 1: out of this meeting that begins in just a few
3:36
Speaker 1: minutes in Washington, d C. I mean, how can President
3:40
Speaker 1: Trump face the questions of you still gave away the
3:43
Speaker 1: store because you didn't really crack down on these other issues.
3:46
Speaker 1: And China, meanwhile, how can they go back and say,
3:49
Speaker 1: how can you make a treaty with a with a
3:50
Speaker 1: country that's going after one of your biggest and best assets. Well,
3:55
Speaker 1: remember President Trump ran on in on getting fair trade
4:00
Speaker 1: agreements and about the U. S. China trade deficit. If
4:03
Speaker 1: he lowers that deficit, he can declare victory the way
4:06
Speaker 1: a U. S. Senator said, let's get out of Vietnam
4:08
Speaker 1: back in the day. Let's just declare victory. It may
4:11
Speaker 1: not be victory, but we'll call it that. Then you
4:14
Speaker 1: flip it over on the other side, on the China side,
4:16
Speaker 1: President she wants us to go away so we can
4:18
Speaker 1: focus inside China. Most people, most companies in China are
4:21
Speaker 1: not focusing on this except to know that their economy
4:24
Speaker 1: is slowing down. Remove that impediment and China can get
4:27
Speaker 1: back to work the way they want to. Okay, so
4:29
Speaker 1: maybe we get a light trade deal here. Is there
4:32
Speaker 1: a scenario in the remainder of this administration to revisit
4:36
Speaker 1: it on a more substantial, you know, substantial level? And
4:39
Speaker 1: what would be the catalyst to get us there? Well, again,
4:41
Speaker 1: we've got thirty days before President Trump will raise tariffs
4:45
Speaker 1: on two hundred billion dollars worth of Chinese goods from ten.
4:49
Speaker 1: That's a pretty good sort of damocles. Now, this is
4:52
Speaker 1: a temporary treaty and the and President she understands that
4:55
Speaker 1: Donald Trump needs public wins. The question is how much
4:58
Speaker 1: will he give them that? And it's that negotiation we're
5:01
Speaker 1: really going to find out whether Donald Trump is the
5:03
Speaker 1: king of the art of the deal. All Right, You
5:05
Speaker 1: talked about China's economy and how it is slowing down.
5:08
Speaker 1: That seems to be weighing on a lot of people's
5:11
Speaker 1: expectations for global growth, but perhaps more importantly, Europe has
5:16
Speaker 1: really slowed, and I want to shove the focus a
5:17
Speaker 1: little bit over to Europe. And I'm just wondering, you
5:22
Speaker 1: know what, was we look at Brexit and sort of
5:24
Speaker 1: the debacle that continues being a debacle. Are we getting
5:27
Speaker 1: any more clarity here or is it just getting more
5:29
Speaker 1: and more muddied uh and only becoming more of a
5:32
Speaker 1: drag on the broader euroeconomy. Well, when it comes to Brexit,
5:36
Speaker 1: two things happened yesterday that are incredibly important. One is
5:39
Speaker 1: is that Theresa May said that she will attempt to
5:42
Speaker 1: reopen the exit deal with the European Union. This won't work.
5:46
Speaker 1: Not only that several months ago she said this wouldn't work,
5:50
Speaker 1: but now she's going to do it anyway because she
5:51
Speaker 1: suffered the worst loss in the history of British politics
5:54
Speaker 1: and she's licking her wounds and trying to woo her
5:56
Speaker 1: party back to her. Now. That's the first thing that happened.
5:59
Speaker 1: The other thing that happened yesterday is that a series
6:01
Speaker 1: of amendments to Brexit were voted on the House of Commons.
6:05
Speaker 1: One of them was called the Cooper Amendment, which was
6:07
Speaker 1: going to essentially eliminate a no deal Brexit that lost
6:10
Speaker 1: by by about twenty three votes. There was another amendment
6:13
Speaker 1: called the Grieve and then a Grieve amendment which said
6:16
Speaker 1: they wanted to explore alternatives to the May plan for Brexit,
6:19
Speaker 1: that also lost by twenty three votes. Those lost while,
6:24
Speaker 1: you know, while Theresa May was defeated by two votes
6:27
Speaker 1: two weeks ago, because the Conservative Party came back to
6:30
Speaker 1: Theresa May because now she's blaming Europe for the problems
6:33
Speaker 1: and not Britain. This is irresponsible, it is irrational, and
6:37
Speaker 1: that's why she won her party back. Okay, so let
6:39
Speaker 1: me put you on a spot which I know there's
6:41
Speaker 1: no answer, but that's my job. How do you think
6:43
Speaker 1: this plays out? Now? She's going to go back to Brussels.
6:46
Speaker 1: As for renegotiation, the EU has already said they do
6:49
Speaker 1: not want to renegotiate. I'm kind of running out of
6:52
Speaker 1: options for Theresa May in the in the UK government.
6:55
Speaker 1: The EU government said no today about four hours ago,
6:58
Speaker 1: right after the debate, So that that door is closed.
7:01
Speaker 1: What you know what, investors and business people, clients of
7:04
Speaker 1: my company, Empire Global Ventures, are astling. What's gonna happen?
7:07
Speaker 1: A big step towards a no deal brexit. Scott happened yesterday. Um,
7:11
Speaker 1: the pounds at one dollar thirty today. It could go
7:13
Speaker 1: to one thirteen if they go to a no deal brexit.
7:16
Speaker 1: That's what we're looking at. Wow, alright, one thirteen really interesting.
7:20
Speaker 1: We love having you, Thank you so much for coming on,
7:22
Speaker 1: and really we love we love the enthusiasm as well
7:25
Speaker 1: as also the insights, you know, and and really it's
7:27
Speaker 1: interesting to think about, uh, this sort of split discussions
7:31
Speaker 1: with China in the US and all the expectations, they're
7:34
Speaker 1: all the Brexit hubbub and we just continue getting like
7:38
Speaker 1: unresolved resolutions, unresolveds, and you start to hear it. I
7:41
Speaker 1: think this quarter with some of the CEOs when they
7:43
Speaker 1: talk about their guidance one and they you know, they
7:45
Speaker 1: maybe they had a decent fourth quarter, but when they
7:47
Speaker 1: talk about twenty nineteen, it's a nice way to just say,
7:50
Speaker 1: you know, we're a little bit cautious on twenty we're
7:52
Speaker 1: just not sure what's going to happen. And two major
7:54
Speaker 1: trading blocks. Yeah, there have been a couple of earnings
7:56
Speaker 1: reports that are just big shrug emojis. Dr Sam not
7:59
Speaker 1: have Pp thank so much for being with us. Dr
8:01
Speaker 1: Sam not Aff is President of Empire Global Ventures joining
8:05
Speaker 1: us here in our Bloomberg Interactive Broker's studios. We've been
8:22
Speaker 1: talking a lot about Apple's earnings, but let's talk about
8:27
Speaker 1: what happened A T and T. They added a net
8:30
Speaker 1: thirteen thousand US monthly wireless subscribers. Uh, they just reported
8:35
Speaker 1: that is compared to projections of about two hundred and
8:39
Speaker 1: fifty two thousand monthly wireless subscribers. What happened, John, So,
8:44
Speaker 1: first I'll clarify that's thirteen thousand contracts US. So those
8:48
Speaker 1: are the plans that you were in Iran as opposed
8:52
Speaker 1: to the prepaid business. And frankly, contract is what people
8:57
Speaker 1: focus on. So it was not a good number. Uh,
9:00
Speaker 1: it's part of what the stock is reacting to this morning,
9:04
Speaker 1: would be my guess, Um, And it's worrisome for me
9:07
Speaker 1: to see that because at its core, A T and
9:10
Speaker 1: T still relies very, very heavily on that wireless business.
9:15
Speaker 1: And I think I think at least part of this
9:18
Speaker 1: had to do with um competitive losses. You know, you
9:22
Speaker 1: saw a great number out of horizon for the quarter.
9:24
Speaker 1: So I think overall the industry is it's very low growth,
9:29
Speaker 1: but it's healthy. It's not like the whole industry took
9:32
Speaker 1: everyone down. I think this is an a T and
9:35
Speaker 1: T problem, and um, it may relate to a little
9:39
Speaker 1: bit of management distraction with the with the integration and
9:42
Speaker 1: Time Warner as well. They have an awful lot of
9:44
Speaker 1: balls in the air right now. John Butler's joining US
9:47
Speaker 1: senior Telecom Services and Equipment anals and Bloomberg Intelligence here
9:50
Speaker 1: in the Bloomberg Interactive Broker Studio. I was so excited
9:53
Speaker 1: to get to a T and T and sociate, just like,
9:56
Speaker 1: oh my god, John speak So Johnson, we had a
9:59
Speaker 1: big us on the wireless side. And that's obviously for
10:02
Speaker 1: a T and T a core business for them, competitive marketplaces.
10:06
Speaker 1: As you mentioned, let's look at the pay TV business.
10:08
Speaker 1: They acquired direct Tv several years ago for a gazillion
10:12
Speaker 1: dollars and I think since the day they closed, they've
10:14
Speaker 1: been losing subscribers at a rate that's more than maybe
10:17
Speaker 1: even the most pessimistic investors thought, what is going on
10:20
Speaker 1: with their direct TV business. So satellite in general is
10:24
Speaker 1: a bad business. Um, it is suffering from the same
10:29
Speaker 1: trends that pay TV is. Right, anyone in the cable business,
10:33
Speaker 1: as you know well, Paul is they're suffering from this
10:36
Speaker 1: cord cutting trend. Um. I don't think satellite has ever
10:41
Speaker 1: been a big focus for A T and T. Part
10:44
Speaker 1: of the rationale for buying direct TV at the time
10:48
Speaker 1: was to get access to the content contracts and renegotiate
10:53
Speaker 1: them to be able to display content or distribute content
10:58
Speaker 1: to UH to wireless vices, in particular to smartphones. So
11:03
Speaker 1: in that sense, they achieve their goal. Um, will it
11:06
Speaker 1: ever pay off for them is still the big question.
11:10
Speaker 1: We had a big loss on the direct TV Now side.
11:14
Speaker 1: Direct TV Now being that pay TV streaming product that
11:18
Speaker 1: A T and T created sort of out of that
11:21
Speaker 1: whole satellite business, and that is direct to smartphone content distribution.
11:27
Speaker 1: It's a package of there are a lot of different options,
11:30
Speaker 1: but call it sixty to two D fifty channels, and
11:33
Speaker 1: they lost two hundred sixty thousand subs store in the quarter.
11:37
Speaker 1: That's a big number and a big loss, and it
11:40
Speaker 1: reflects them moving off that introductory promotional pricing that we
11:45
Speaker 1: had last year and now they're beginning to walk it
11:49
Speaker 1: back to full prices and we're seeing, um, we're seeing
11:52
Speaker 1: the effect of that A hundred and seventy nine billion
11:55
Speaker 1: dollars that is how much debt A T and T has.
11:58
Speaker 1: So as we look at its box which are falling
12:01
Speaker 1: about four percent today after these earnings numbers, I just
12:05
Speaker 1: have to wonder does this get A T and T
12:08
Speaker 1: closer to a junk rating because right now it has
12:10
Speaker 1: close to the lowest investment grade credit scores. And this
12:14
Speaker 1: matters tremendously given that they are a massive obligory. They
12:20
Speaker 1: owe so much debt. They do, and that's the risk
12:23
Speaker 1: here is you know, if there if they were too
12:27
Speaker 1: if the rating agencies were to re rate them and
12:30
Speaker 1: move them out of that investment grade category, that would
12:35
Speaker 1: be devastating for mob bel A T and T. Right,
12:38
Speaker 1: So really their only option, as some people see it,
12:43
Speaker 1: is to cut the dividend. They address that on the
12:46
Speaker 1: call and they said, look, we have a lot of assets,
12:49
Speaker 1: a lot of assets that we can sell. Front and
12:52
Speaker 1: center was their ten percent steak in Hulu and Paul,
12:56
Speaker 1: you probably have a better guess as to what that
12:58
Speaker 1: might be worth than on there's but there's some value there.
13:00
Speaker 1: But that but that's not going to get them where
13:02
Speaker 1: they need to be. Our Yeah, but that seems like
13:04
Speaker 1: the future, So why would they be trying to get
13:07
Speaker 1: exactly sort if they're I mean, they have basically an
13:09
Speaker 1: option to the future. There, it's a minority stake, you know,
13:13
Speaker 1: one could argue that it's better to be sold. You know,
13:16
Speaker 1: it is I think and so, and they generate ample
13:20
Speaker 1: free cash flows. So the question is can they hit
13:23
Speaker 1: their cash flow targets for the year. And if they
13:26
Speaker 1: do and they pay down debt with that, where does
13:29
Speaker 1: that get them in terms of a leverage ratio? Their
13:33
Speaker 1: goal is two point five times. We'll see if they
13:36
Speaker 1: get there. The races on, so to speak, which under
13:39
Speaker 1: the clock is ticking exactly. So, you know, they just
13:41
Speaker 1: spent a hundred billion dollars enterprise value buying Time Warner
13:45
Speaker 1: arguably some of the best media assets on the planet.
13:47
Speaker 1: Did they articulate any further the strategy for trying to
13:51
Speaker 1: generate a return on that investment. So there's a lot
13:55
Speaker 1: of moving parts at a T and T right now,
13:58
Speaker 1: including the content strategy due to a degree, But I
14:01
Speaker 1: would say that the key pillars of that are number One,
14:05
Speaker 1: they're trying to build a programmatic advertising platform and take
14:09
Speaker 1: analytics that they're gathering on the wireless side and begin
14:14
Speaker 1: to apply that to the ad inventory at the Turner
14:18
Speaker 1: properties to get a higher CPM, as they call it,
14:22
Speaker 1: a higher cost per eyeballs in that ad business using
14:26
Speaker 1: analytics and that. UM, that whole process is well underway.
14:31
Speaker 1: I think they're doing that. I think they're going to
14:33
Speaker 1: get higher AD rates out of Turner and UM, I
14:37
Speaker 1: really feel good about that. I think the other thing
14:41
Speaker 1: they want to do on the content side is, just
14:44
Speaker 1: as we were alluding to a moment ago, they want
14:46
Speaker 1: to get into that streaming pay TV business and make
14:50
Speaker 1: money not only from subscription revenue, but also make money
14:54
Speaker 1: on the ad side. They'll have ad inventory to sell there.
14:58
Speaker 1: So how how difficult is the hand right now given
15:01
Speaker 1: the fact that they need to expand in these areas,
15:03
Speaker 1: but they really do need to reduce their deadload. They do.
15:06
Speaker 1: There's a lot of pressure on them this year. This
15:09
Speaker 1: is a key year of integration and also execution on
15:14
Speaker 1: the plan that I just talked about. UM, there's a
15:17
Speaker 1: lot of money at stake, there's a big investment there.
15:21
Speaker 1: They have a great management team. Actually, I really think
15:24
Speaker 1: they can pull it off. But the pressure is on.
15:26
Speaker 1: What did they articulate just one you know, everybody's talking
15:29
Speaker 1: about getting into the streaming business what is their streaming strategy.
15:33
Speaker 1: So I think the key strategy there is to really
15:37
Speaker 1: target current A T and T wireless subscribers. Every other
15:42
Speaker 1: word out of their mouth is bundling. And so if
15:45
Speaker 1: they can bundle a streaming pay TV product with a
15:49
Speaker 1: wireless subscription, maybe with a satellite subscription, along with some
15:54
Speaker 1: broadband in their fiber markets, then you know, perhaps they
15:59
Speaker 1: have a good strategy on their head. I love the
16:01
Speaker 1: idea of you know, would you like a bundle phone
16:04
Speaker 1: bundle by the bundle? Uh? John Butler, thanks so much
16:10
Speaker 1: for helping us pass through the A T and T
16:13
Speaker 1: our results. John Butler, Senior Telecommon Service Equipment analyst at
16:17
Speaker 1: Bloomberg Intelligence here today with us in the Bloomberg Interactive
16:20
Speaker 1: broker studios. Well. Apple stock is up about four and
16:39
Speaker 1: early trading here today. Despite reporting first holiday quarter sales
16:43
Speaker 1: decline in nearly twenty years, analysts viewed the results as
16:47
Speaker 1: quote better than many had feared. According to Piper Jaffrey
16:50
Speaker 1: analyst Michael Olsen, so I guess we have that um
16:52
Speaker 1: to kind of dig into the numbers a little bit.
16:54
Speaker 1: We have Michael Scanlon on the phone. Michael's a portfolio manager,
16:57
Speaker 1: a Manu Life Asset Management in Boston. My cool. Thank
17:00
Speaker 1: you for joining us. I wonder if you could just
17:02
Speaker 1: start us out and kind of give us your view
17:05
Speaker 1: on the Apple story. A lot of has changed over
17:07
Speaker 1: the last couple of years. How are you guys viewing
17:09
Speaker 1: this story and did you see anything in this quarter's
17:11
Speaker 1: numbers to change that outlook? Well, good morning and thanks
17:15
Speaker 1: for having me. Uh. I think when you look at
17:17
Speaker 1: the results last night, definitely very negative expectations going into
17:21
Speaker 1: the results in light of the guide in the pre
17:26
Speaker 1: announcement that they did at the beginning of January. I
17:28
Speaker 1: think ultimately the reaction that you're seeing today is that
17:31
Speaker 1: the guide for the next quarter was less bad than
17:35
Speaker 1: people were expecting. Um. And I also think if you
17:38
Speaker 1: think back to the beginning of the year when they
17:40
Speaker 1: did give that pre announcement, you know, you had a
17:42
Speaker 1: quarter where they were pre announcing negative numbers, and they
17:45
Speaker 1: were also going to be changing their UH segment disclosure
17:48
Speaker 1: where they're just giving you products and services now instead
17:51
Speaker 1: of the granular data on each one of their devices.
17:54
Speaker 1: So I think you had the sort of multiplicative effect
17:57
Speaker 1: of those two things at the same time, which led
18:00
Speaker 1: to the sell off and the shares earlier in the year. Michael,
18:03
Speaker 1: are you more positive or more negative on Apple shares
18:05
Speaker 1: after these earnings? So? I think when you look at
18:09
Speaker 1: the business last night, they Tim Cook spent a lot
18:12
Speaker 1: of time and gave a fair amount more disclosure than
18:15
Speaker 1: typical UH into the insights and the revenues. And you know,
18:19
Speaker 1: when you look at some of the contributing factors to
18:21
Speaker 1: the slowdown that led to the fiftcent year every year
18:24
Speaker 1: drop off in iPhone sales, you know, certainly China was
18:27
Speaker 1: a well known one. The battery replacement cycle was also
18:31
Speaker 1: a head wind, and then they gave good data in
18:34
Speaker 1: terms of the impact of subsidies that they're seeing overseas.
18:37
Speaker 1: So I think when when you look at the business,
18:40
Speaker 1: I mean, there's no doubt that it's more mature than
18:42
Speaker 1: it was a handful of years ago. That's undeniable. But
18:45
Speaker 1: when you look at Apple, I mean, they still have
18:47
Speaker 1: this at one point four billion device install base that
18:50
Speaker 1: they're going to be able to monetize, nine million of
18:53
Speaker 1: which are iPhones, UH. And the focus on doubling the
18:56
Speaker 1: services services business to fifty billion dollars, which is gross
19:00
Speaker 1: margin positive for them. You know, I still think that
19:02
Speaker 1: there's a lot to like there in addition to the
19:04
Speaker 1: capital return profile. So Michael, that's I think you very
19:08
Speaker 1: nicely summarize kind of more the bullish case for a
19:11
Speaker 1: longer term bullish case for Apple, which is, you know, yes,
19:15
Speaker 1: the Apple the phone is a mature business and that
19:18
Speaker 1: has been six That is the revenue. But we've got
19:20
Speaker 1: some other businesses that are growing nicely. Let's focus on
19:23
Speaker 1: one of them which I think most bulls hang their
19:25
Speaker 1: hat on, and that is the services business. And you
19:28
Speaker 1: talked about doubling the services revenue. Do you think that
19:31
Speaker 1: can ever be a driver for this company in the
19:34
Speaker 1: stocks the way phones have been over the last ten years.
19:39
Speaker 1: I do, uh, And you know, frankly, I expect they
19:42
Speaker 1: talked last night about some of the lineup that they
19:45
Speaker 1: have in terms of innovation going forward. But you know,
19:48
Speaker 1: some of the more important parts of innovation going forward
19:51
Speaker 1: will be how they continue to monetize the install base
19:55
Speaker 1: in that relates directly to the services side of the business.
19:58
Speaker 1: You know, there's been countless data points of speculation on
20:01
Speaker 1: some sort of a TV offering, our streaming video offering
20:06
Speaker 1: and those kind of things, and I think that that
20:08
Speaker 1: is likely to come. And frankly, again, if you've got
20:11
Speaker 1: this install base that they have, and even if you
20:13
Speaker 1: want to stay well, it's only the nine million of
20:15
Speaker 1: iPhones that matter because everything else is just an incremental device.
20:19
Speaker 1: That's fine. That's still a pretty solid install base that
20:21
Speaker 1: they have the ability to monetize going forward. And we
20:24
Speaker 1: never know what Apple is going to come up with
20:25
Speaker 1: in terms of innovation. They just don't give you a
20:27
Speaker 1: lot talking about the install base. Some people think it's
20:30
Speaker 1: interesting that Tim Cook did give the install base and
20:33
Speaker 1: really emphasize it's such degree as certainly is helpful with
20:36
Speaker 1: respect to services, but also potentially with content. Uh and
20:41
Speaker 1: Dana Ives of web Bush Securities was on Bloomberg Television
20:44
Speaker 1: earlier this morning and he thinks that within the next
20:47
Speaker 1: three to six months, Apple will make an announcement about
20:50
Speaker 1: some kind of acquisition of another sort of content provider,
20:54
Speaker 1: say Sony or one of these others. And I'm just wondering,
20:58
Speaker 1: how likely do you expect that and would that be
21:00
Speaker 1: a positive in your opinion for Apple shares? Yeah, very
21:06
Speaker 1: very tough to speculate on M and A And frankly,
21:08
Speaker 1: that's just not how Apple has built their business. Right.
21:11
Speaker 1: Their biggest acquisition ever was Beat, and I think that
21:14
Speaker 1: was about three billion dollars. If you're talking about buying
21:17
Speaker 1: some sort of a production studio h of size that
21:21
Speaker 1: would matter to Apple, you'll be talking about a much
21:24
Speaker 1: bigger number. So I would say that's a low probability event.
21:27
Speaker 1: I think what they'll continue to do is some of
21:30
Speaker 1: what they're doing right now and investing in some original content,
21:33
Speaker 1: but not sort of a bet the farm type amount
21:35
Speaker 1: or a huge M and a cycle um. But you know,
21:39
Speaker 1: that is where the trends are going, and they have
21:41
Speaker 1: this install base that they can monetize. So I do
21:44
Speaker 1: expect that they're going to try to do more on
21:45
Speaker 1: that front. I'm just not sure it's going to be
21:47
Speaker 1: driven by some transformative acquisition. So Michael, just in twenty seconds,
21:52
Speaker 1: do you expect them to pivot at all as it
21:54
Speaker 1: relates to emerging markets and maybe go down market to
21:56
Speaker 1: try to you know, compete more stay in the Indias
21:59
Speaker 1: of the world. Uh So, if they did decide to
22:04
Speaker 1: do that, I don't think the stock reacts positively because
22:06
Speaker 1: that's likely going to be a gross margin deluded for them,
22:09
Speaker 1: so they'd just be chasing revenue for the stake of
22:12
Speaker 1: chasing revenue with lower priced iPhones. UM. I think what
22:15
Speaker 1: you'll continue to see is, you know, maybe they do
22:17
Speaker 1: something at the margin in terms of pricing these devices
22:20
Speaker 1: and emerging markets or other areas where it's a little
22:22
Speaker 1: bit more cost prohibitive. UM. But you know, they buy
22:26
Speaker 1: themselves a lot of time. I mean, this company kicks
22:28
Speaker 1: off a tremendous amount of cash flow, they buy a
22:30
Speaker 1: ton of stock, they pay a dividend, so they can
22:32
Speaker 1: kind of weather these periods of disruption that they have
22:35
Speaker 1: in terms of their growth trajectory. Michael Scanlon, thank you
22:37
Speaker 1: so much for being with us and you're your insight
22:40
Speaker 1: on Apple. Michael Scanlon is portfolio manager for Manu Life
22:43
Speaker 1: Asset Management. We're gonna hear from the FED today. It's
23:01
Speaker 1: going to be an exciting announcement or it won't be.
23:04
Speaker 1: I'm so I'm sure that FED Chair J. Powell hopes
23:06
Speaker 1: that it won't be. We're hoping that it will be.
23:08
Speaker 1: In our jersey joining us now to talk about what
23:11
Speaker 1: some of the iterations of fedspeak, we might just be
23:14
Speaker 1: hearing our jersey chief US interest rate strategist for Bloomberg
23:17
Speaker 1: Intelligence joining us here in our interactive brokers studios. So
23:21
Speaker 1: IRA focus is really on the balance sheet. What is
23:26
Speaker 1: the absolute lowest amount that the balance sheet could be
23:31
Speaker 1: for markets to continue to function in a normal way. Yeah,
23:34
Speaker 1: so our estimate for that is about another six billion
23:37
Speaker 1: dollars lower. So you're talking about about three point two
23:40
Speaker 1: ish three point three trillion dollars on the Fed's balance sheet.
23:44
Speaker 1: And and the mechanism as to why that number is
23:46
Speaker 1: important is because banks hold these reserves. They have to
23:50
Speaker 1: hold them. So there's this fallacy that says banks aren't
23:53
Speaker 1: using their reserves. Well, banks are using their reserves. Reserves exist,
23:57
Speaker 1: um and the only way that the that reserve. It's
24:00
Speaker 1: very philosophical, so it sort of feels like they exist.
24:03
Speaker 1: It's like decartes, you know. It's like you know, air
24:06
Speaker 1: or something. Right, it's just a matter of who's using
24:08
Speaker 1: it at any given moment. Right, if you're holding your
24:10
Speaker 1: breath and I'm breathing, then I'm using the air you're not.
24:12
Speaker 1: But but reserves are the same way, right. So so
24:15
Speaker 1: some banks hold a lot of reserves, other banks hold
24:18
Speaker 1: very few, But those reserves exist and and they get
24:21
Speaker 1: traded between between banks. Um So, but there is a
24:24
Speaker 1: point when And these reserves are used in some calculations
24:28
Speaker 1: for bank capital ratios. Right, so this thing called liquidity
24:32
Speaker 1: coverage ratio where banks hold these and if they whole
24:35
Speaker 1: held less than UM a trillion issue of them, then
24:39
Speaker 1: banks would have to replace those reserves with something else,
24:41
Speaker 1: and the most likely candidate would be treasury bills. And
24:44
Speaker 1: you're not seeing significant buying of treasury bills by banks,
24:47
Speaker 1: so UM to me that that tells us we're not
24:50
Speaker 1: at this constraint level yet. And I think that constraint
24:53
Speaker 1: level is about another another six hundred billion dollars of runoff,
24:57
Speaker 1: which basically gets you into let's just let's I think
25:01
Speaker 1: for the last two weeks, we've asked that question, i e.
25:04
Speaker 1: Where do you think the FED is going to take
25:06
Speaker 1: its balance sheet? To maybe a dozen different analysts and
25:10
Speaker 1: portfolio managers and pupundance, and we get nothing. IRA right
25:15
Speaker 1: off the bat gives us a number three point three billion,
25:18
Speaker 1: reflecting thank you, corporate government world is trillions, right, so
25:24
Speaker 1: six billion right off? What is your sense of timing
25:27
Speaker 1: of that roll off? And and and tell us how
25:30
Speaker 1: the timing, whether it's impacts the markets, whether it's slower, faster,
25:33
Speaker 1: than when the market's discounting. Sure. So, so the way
25:35
Speaker 1: that that runoff is for the treasury portfolio is that
25:38
Speaker 1: we know what it's going to be for the next
25:40
Speaker 1: year and a half um so because if the Treasury
25:43
Speaker 1: uh has issued these bonds, the Fed's purchased them, and
25:46
Speaker 1: they mature at various points. So the FED balance runoff
25:49
Speaker 1: actually peaks in May and June of this year, and
25:52
Speaker 1: then after that it actually slows down quite substantially, just
25:55
Speaker 1: because the FED reserve doesn't own as many treasuries that
25:58
Speaker 1: are maturing, say November this year and December this year,
26:02
Speaker 1: as they do right now, so so it actually slows
26:05
Speaker 1: down as as the year goes on. That being said,
26:07
Speaker 1: it's about four hundred billion dollars in in calendar another
26:11
Speaker 1: three hundred plus billion dollars in. So it's still a
26:16
Speaker 1: big number, right, and there still is. And if we're
26:18
Speaker 1: if I'm right, and we need to get down to
26:21
Speaker 1: about a trillion dollars of excess reserves from the one
26:23
Speaker 1: point six trillion today, you're saying in the first or
26:26
Speaker 1: second quarter of next year, the FED is going to
26:28
Speaker 1: be done, and it might even be done before that,
26:31
Speaker 1: because you know, banks are gonna say, hey, we're getting
26:34
Speaker 1: to this constraint where we're going to have to start
26:36
Speaker 1: replacing reserves with T bills and things like that, and
26:39
Speaker 1: that's when you start to get market disruptions. I I
26:42
Speaker 1: want to go further with even why it matters why
26:45
Speaker 1: the banks should basically be handed free money from the
26:47
Speaker 1: FED and why they shouldn't have to go out and
26:49
Speaker 1: make markets. But I want to just go a little
26:50
Speaker 1: bit broader here. I want to ask about just how
26:54
Speaker 1: unusual of a situation this is. I mean, we've been
26:57
Speaker 1: speaking with person after person yesterday David Kota saying the
27:00
Speaker 1: fete is in the dark and they're playing with fire.
27:02
Speaker 1: We don't even know what the consequences of this balance
27:05
Speaker 1: sheet rolloff really is. I mean, what do we know?
27:09
Speaker 1: And just how unchartered is this? So it's a percent
27:11
Speaker 1: unchartered because quantitative easing was was first done by the
27:15
Speaker 1: Japanese and then it has subsequently been done in the
27:18
Speaker 1: US and in the UK and in Europe, but no
27:21
Speaker 1: one's ever tried to do the opposite. No one's tried
27:23
Speaker 1: quantitative tightening before, so none of us really know, Like, yes,
27:26
Speaker 1: I have my estimate, but you can't take that as gospel.
27:29
Speaker 1: I mean that is a we take everything you say
27:32
Speaker 1: as gospel preach they exist. You know, I'm pretty good
27:36
Speaker 1: at I can certainly give my opinions without too much difficulty.
27:41
Speaker 1: UM So, I do think that the FETE is kind
27:43
Speaker 1: of flying blind and they're going to have to And
27:45
Speaker 1: I think this is something that J. Pal has to
27:47
Speaker 1: say in as press conference today, which is, remember we
27:49
Speaker 1: have a January press conference first whatever, um J Pow
27:53
Speaker 1: will say something like, look, we're paying attention to the
27:55
Speaker 1: balance sheet. If we see these frictions, if we see
27:59
Speaker 1: things like the Federal funds rate trading above interest paid
28:03
Speaker 1: on excess reserves, which would be one big thing. If
28:05
Speaker 1: we see volume in the Fed funds market pick up
28:09
Speaker 1: significantly because banks are demanding reserves, and if we see
28:13
Speaker 1: banks starting to buy a lot of Treasury bills because
28:16
Speaker 1: they need them because of what I said earlier that
28:19
Speaker 1: that reserve balances are getting so low. Those are some
28:22
Speaker 1: of the warning signs that the Federal be looking at.
28:24
Speaker 1: And as soon as they see one of those, they'll
28:26
Speaker 1: probably say, no, Moss, We're done. All right. Where could
28:29
Speaker 1: Fed Chairman Pal today in his press conference or his
28:32
Speaker 1: statement throw a curveball to the market. So I mean
28:36
Speaker 1: it could you know that that's there's a wide range
28:39
Speaker 1: of what he could do. Um I think that he
28:42
Speaker 1: I think that the surprise would be if he was
28:45
Speaker 1: significantly more dovish than the markets expecting. Markets expect them
28:48
Speaker 1: to be a little bit dovish. A lot of the
28:50
Speaker 1: comments from a lot of the other FED speakers over
28:52
Speaker 1: the last month, we're pretty dovish. He was pretty dovish
28:55
Speaker 1: in his last couple of comments. I think if he's
28:57
Speaker 1: even more dovish than that. So, for example, if he
29:00
Speaker 1: takes away all optionality and basically says, hey, we're done
29:03
Speaker 1: hiking until we know that the economy is back on track,
29:07
Speaker 1: that would be something that I think would get risk
29:09
Speaker 1: asset's really happy. That would mean that, you know, treasury yields,
29:12
Speaker 1: you know, ten year yields probably go back up to
29:13
Speaker 1: three percent pretty quick. Jersey, thank you so much for
29:16
Speaker 1: being with us. Great to be here, Iro Jersey, chief
29:18
Speaker 1: US interest rate strategist for Bloomberg Intelligence, Chief US interest
29:22
Speaker 1: rate philosopher for US here at Bloomberg LP. Thanks for
29:26
Speaker 1: listening to the Bloomberg P and L podcast. You can
29:28
Speaker 1: subscribe and listen to interviews at Apple Podcasts or whatever
29:31
Speaker 1: podcast platform you prefer. Paul Sweeney, I'm on Twitter at
29:34
Speaker 1: pt Sweeney, I'm Lisa abram Woyd's I'm on Twitter at
29:37
Speaker 1: Lisa A. Bram Woit's one before the podcast. You can
29:40
Speaker 1: always catch us worldwide on Bloomberg Radio