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Qualcomm's Dual Business Model Remains A Risk: Ovide · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg Penl Podcast. I'm Paul swing you
• 0:05
  Speaker 1: along with my co host Lisa Brahma wits. Each day
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  Speaker 1: we bring you the most noteworthy and useful interviews for
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  Speaker 1: you and your money, whether at the grocery store or
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  Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
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  Speaker 1: podcast or wherever you listen to podcasts, as well as
• 0:17
  Speaker 1: at Bloomberg dot com. Qualcom is really a mysterious story
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  Speaker 1: right now, Shares down more than two and a half
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  Speaker 1: percent today after a nearly eleven percent tumble yesterday. A
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  Speaker 1: question is whether their business model is being fundamentally challenged
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  Speaker 1: right now in court and whether basically, uh, they have
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  Speaker 1: an existential threat that is looming down on them. I'm
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  Speaker 1: sure overday joining us here at our Bloomberg Interactive Broker
• 0:48
  Speaker 1: Studios Technology calumnists with Bloomberg Opinion. So just lay out
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  Speaker 1: the issue here. There was a core case that was
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  Speaker 1: particularly punitive why Yes. So this was a court case
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  Speaker 1: that the US Federal Trade Mission brought. It was an
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  Speaker 1: antitrust case and then um overnight on Tuesday, uh U
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  Speaker 1: S District Court judge ruled that basically, um, the way
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  Speaker 1: that qualcomn has conducted business is in fact a violation
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  Speaker 1: of antitrust law. The way that the company basically, if
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  Speaker 1: you want Qualcomms chips, you need to license a set
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  Speaker 1: of of patent technologies from the company. So there's no license,
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  Speaker 1: no chips. And also, even if you're not using qualcoms chips,
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  Speaker 1: you still need to pay the company for these kind
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  Speaker 1: of collection of patents that are really essential to the
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  Speaker 1: functioning of modern smartphones and other computing devices. And the
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  Speaker 1: judge that that's not legal. Well, I had to admit
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  Speaker 1: I was very confused by the judges ruling today and surprised,
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  Speaker 1: and I guess so was the market. The stock sold
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  Speaker 1: off so much yesterday because when they had their Apple
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  Speaker 1: resolution um a couple of weeks ago, the stock rallied
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  Speaker 1: and I thought, Okay, that's it, the qual tom story.
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  Speaker 1: It's off to the races. But there was still the
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  Speaker 1: FTC issue out there, So this is something that's still
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  Speaker 1: fundamentally on the radar for this company. Yes, and frankly
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  Speaker 1: I thought the same thing about the Apple case. So
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  Speaker 1: the Apple brought suit against qualcom over almost exactly the
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  Speaker 1: same issues that the judge ruled on this week, and
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  Speaker 1: so you're right. When Qualcom and Apple reached a legal settlement,
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  Speaker 1: I think a lot of investors thought, well, that's behind them.
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  Speaker 1: But look, this issue about Qualcom's dual sided business model,
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  Speaker 1: the selling of chips and the licensing of its patents,
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  Speaker 1: and the links between them. It's been an issue over
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  Speaker 1: and over and over again and repeated litigation, in repeated
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  Speaker 1: regulatory um investigations and finds all over the world. It
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  Speaker 1: is kind of a fundamental aspect of Qualcoms business, but
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  Speaker 1: it's also under constant assault. Well, and so I guess
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  Speaker 1: that then the larger question here is what is Qualcom
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  Speaker 1: as a business without the stream of patent revenues. Because
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  Speaker 1: you were saying, we were speaking earlier this morning, that
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  Speaker 1: those patent revenues account for more than fifty percent of
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  Speaker 1: the firm's income. Well, I guess we may see what
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  Speaker 1: what Qualcom looks like if if you sort of untangle
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  Speaker 1: the two halves of the company's business. But we should
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  Speaker 1: say that, look, this may not be kind of the
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  Speaker 1: nuclear option in this in this legal ruling that Qualcom
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  Speaker 1: hasn't disagrees with the judges' decision. Of course, the company
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  Speaker 1: has asked for an expedited appeal. I assume the litigation
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  Speaker 1: is going to the appeal process is going to take
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  Speaker 1: many years to resolve. They are there may be ways
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  Speaker 1: for Qualcom to sort of adjust its relationships with customers
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  Speaker 1: in a way that doesn't mean dumping one or or
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  Speaker 1: or the other half of its business model. So there
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  Speaker 1: could be some kind of middle ground that is not
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  Speaker 1: kind of Qualcom blowing up how it does business. Is
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  Speaker 1: there any chance for a settlement or the fact or
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  Speaker 1: have we just passed that point now? Between the you
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  Speaker 1: know Qualcom in the FTC, I I mean, I think
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  Speaker 1: the f you know since the FTC one this case,
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  Speaker 1: I can't. I mean, I don't know, is the short answer.
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  Speaker 1: But I find it hard to believe there would be
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  Speaker 1: a settlement. But again, there could be um some kind
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  Speaker 1: of resolution assuming the judges judges decision holds up on appeal,
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  Speaker 1: that falls short of Qualcom having to blow up everything
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  Speaker 1: and subject itself to government scrutiny, government oversight for seven years.
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  Speaker 1: So we were talking about how Apple had their lawsuit
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  Speaker 1: against Qualcom. Who is the biggest sort of I don't
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  Speaker 1: want to use the word victims since that's loaded, But
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  Speaker 1: who's on the other side of some of these suits.
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  Speaker 1: Who's most angry, Well, certainly the customers, including UM, including
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  Speaker 1: smartphone makers like Samsung and Apple and Huawei. The latter
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  Speaker 1: two had various litigation pending against Qualcom. And look, I
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  Speaker 1: think what the FTC argued in its litigation was that
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  Speaker 1: the ultimate victim is the competitiveness of of the US
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  Speaker 1: chip industry. That the judge agreed that the way the
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  Speaker 1: Qualcom does bus nous of the way was able to
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  Speaker 1: sort of leverage its power in the chip market to
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  Speaker 1: sort of overcharge basically for its patents. It forced other
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  Speaker 1: companies either out of business, other potential competitors to Qualcom
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  Speaker 1: force them out of business, or kind of hindered their
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  Speaker 1: ability to compete. So ultimately, you know, the competitive the
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  Speaker 1: competitiveness of US technology may have been the ultimate victim here.
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  Speaker 1: And one of the things I remember, if I can
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  Speaker 1: think all the way back to the Apple settlement just
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  Speaker 1: a few weeks ago, Uh, they were hailing it as
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  Speaker 1: you know, this kind of pro five G or pro technology. UM.
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  Speaker 1: Is that an argument you think Qualcom is gonna make
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  Speaker 1: here as they try to, you know, fight back against
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  Speaker 1: this ruling. Yeah, I think the five G argument is
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  Speaker 1: going to be very interesting. So we saw last year
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  Speaker 1: the US government stepped into essentially block Broadcoms proposed um
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  Speaker 1: takeover offer of Qualcom that would have been a hundred
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  Speaker 1: billion dollar plus deal, and the government. The US government's
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  Speaker 1: reasoning was, if Broadcom succeeds in this takeover, Qualcom is
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  Speaker 1: gonna be gutted. They're gonna slash costs, and that's gonna
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  Speaker 1: hurt qual Comms competitiveness in five G, this next generation
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  Speaker 1: of wireless standard that is considered sort of this essential
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  Speaker 1: national security priority, which is weird because I mean, look,
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  Speaker 1: it's a technology standard, but the US government and the
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  Speaker 1: Chinese government to have now basically made five G this
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  Speaker 1: political football. And so one thing that I wonder is
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  Speaker 1: will the US government step in uh in this litigation
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  Speaker 1: that the FTC one and basically seek to blunt it
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  Speaker 1: against citing the ability of Qualcom to remain competitive in
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  Speaker 1: five G. I have to wonder what qual Comms side
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  Speaker 1: of this is, because I hear what you're saying, and
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  Speaker 1: I thought that it was a really salient comment that
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  Speaker 1: you made. The competitiveness of US technology may have been
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  Speaker 1: the biggest victim here. What does Qualcomms say to that
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  Speaker 1: what qual Comms argument is the opposite that it says,
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  Speaker 1: look that their business model is not unusual, that the
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  Speaker 1: chip industry is competitive, and if you look at some
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  Speaker 1: some estimates of market share, Qualcom is losing some market share,
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  Speaker 1: which shows that there is competition out there. And Qualcom's
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  Speaker 1: basic fundamental point is, look the way that we have
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  Speaker 1: set up our business model, including this patent licensing stream,
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  Speaker 1: we plow that back into tens of billions of dollars
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  Speaker 1: in research and development spending to come up with the
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  Speaker 1: next big technologies in the future. And look, it is
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  Speaker 1: true that particularly in areas around cellular internet technology, Qualcom
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  Speaker 1: has been a leader, and there would be no smartphone
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  Speaker 1: industry without Qualcom. It's interesting. I think if I'm a guess,
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  Speaker 1: if I'm a Qualcom investor, I just have to live
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  Speaker 1: with this litigation risk going forward. I guess kind of
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  Speaker 1: the business model just licensing technology, and you're always gonna
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  Speaker 1: have that issue. I think, are you're gonna bett in
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  Speaker 1: the Trump put with five G and that I think
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  Speaker 1: it's really going to be a big bet underpitting some
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  Speaker 1: people who might dive in and buy the shares as
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  Speaker 1: they fall to day. Yeah. Interesting share of a day.
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  Speaker 1: Thank you so much for joining us once again. Shearer's
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  Speaker 1: Technology Comms for Bloomberg Opinion. Joining us here in our
• 8:06
  Speaker 1: Bloomberg Interactive Broker studio, Paul. We like to laugh when
• 8:27
  Speaker 1: company after company blames the weather for disappointing earnings. But
• 8:31
  Speaker 1: it turns out they may not have that same excuse
• 8:34
  Speaker 1: going forward, at least if Cameron Clayton has anything to
• 8:37
  Speaker 1: do with it. He joins us here in our Blooberator
• 8:39
  Speaker 1: Active broker studios. He's the general manager for the IBM
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  Speaker 1: Wattson Media and Weather Unit with IBM and Cameron. Can
• 8:47
  Speaker 1: you just first start by how IBM and the Weather
• 8:51
  Speaker 1: Channel are using artificial intelligence to help these executives get
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  Speaker 1: away from just simply blaming the whims of weather. Well,
• 9:00
  Speaker 1: thanks for having me, Watson. An artificial intelligence is really
• 9:06
  Speaker 1: about a big data and so just give you a
• 9:09
  Speaker 1: sense of the scale of the data. So on Wednesday, uh,
• 9:13
  Speaker 1: we had thirty four billion data requests of our infrastructure
• 9:18
  Speaker 1: asking about weather. And the reason that number is so
• 9:21
  Speaker 1: large is because of all the tornadic activity we had
• 9:24
  Speaker 1: you know this week in the in the Midwest. But
• 9:27
  Speaker 1: when there is that much data being generated every single day.
• 9:32
  Speaker 1: The only way to sort of get insights out of
• 9:35
  Speaker 1: that data to help people make better decisions, to help
• 9:38
  Speaker 1: integrate into their supply chain, et cetera, is using artificial intelligence.
• 9:42
  Speaker 1: And so that's where Watson has come to bear and
• 9:45
  Speaker 1: and it's just something that wouldn't be possible without official intelligence.
• 9:48
  Speaker 1: Al Right, So let's talk about this weather signals product.
• 9:52
  Speaker 1: What is it and who are you trying to sell
• 9:55
  Speaker 1: it to? I guess yeah, So we're basically selling it
• 9:59
  Speaker 1: to prizes around the world by industry, and so whether
• 10:03
  Speaker 1: you're a retailer trying to sell inventory, So I'll use
• 10:08
  Speaker 1: home depot as an example, right, and and the torn
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  Speaker 1: netic activity this week. Uh, they've got inventory of top holands,
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  Speaker 1: but they might be in Los Angeles or in Florida.
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  Speaker 1: They're not in Kansas and Oklahoma where they need to be,
• 10:21
  Speaker 1: and so we can tell them a hit of time
• 10:23
  Speaker 1: where to deploy their stock. Uh. Similarly, you know, we
• 10:27
  Speaker 1: help drive consumption, right, so weeks in advance, we can say,
• 10:31
  Speaker 1: you know, beer sales are going to increase by when
• 10:36
  Speaker 1: weather conditions are X and so that ends up integrating
• 10:41
  Speaker 1: into all kinds of companies into the supply chain. For
• 10:45
  Speaker 1: the logistics as well as the stock but also how
• 10:47
  Speaker 1: to staff your company. Right, So I guess that one
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  Speaker 1: thing that as you talk sort of surprises to me.
• 10:54
  Speaker 1: It surprises me. How is this so much different than
• 10:57
  Speaker 1: looking at the weather and saying, oh, there's going to
• 10:59
  Speaker 1: be a big storm, it's going to be forecast to come.
• 11:01
  Speaker 1: Everyone's going to go to the local grocery store and
• 11:04
  Speaker 1: buy off, you know, everything that they possibly can. I mean,
• 11:06
  Speaker 1: haven't companies been able to do that forever or not forever,
• 11:10
  Speaker 1: but for you know decades. So companies have had access
• 11:14
  Speaker 1: to weather data from US and others for you know, decades.
• 11:18
  Speaker 1: But this is really about making very specific recommendations of
• 11:22
  Speaker 1: decisions that they should make specifically for their business. And
• 11:26
  Speaker 1: so it integrates into the different software they use. Already
• 11:30
  Speaker 1: in retails, a lot of retailers use Tableau as a
• 11:33
  Speaker 1: as a software tool. Uh, it integrates into that and
• 11:36
  Speaker 1: it makes specific recommendations of exactly what to do. How
• 11:39
  Speaker 1: many people should you have come into work in your
• 11:43
  Speaker 1: office tomorrow, how many people should not come to work
• 11:48
  Speaker 1: on Saturday? Um, and so you know, use this weekend
• 11:52
  Speaker 1: is a long weekend for for travel, for example, So
• 11:55
  Speaker 1: we will actually in advance, help airlines change their flights
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  Speaker 1: a jules to accommodate the what we know is an
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  Speaker 1: increase in traffic UH that's coming. Tie that to the
• 12:06
  Speaker 1: weather data and make it very prescriptive. Right, this flight
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  Speaker 1: going out of this airport to this destination needs to
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  Speaker 1: be adjusted by thirty minutes, you know, a week or
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  Speaker 1: two in advance. So give us a sense that this
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  Speaker 1: weather signals product that you're talking about that incorporates AI,
• 12:21
  Speaker 1: it's a relatively new product for you guys. What's been
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  Speaker 1: the uptake And just give us some examples of maybe
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  Speaker 1: some companies who who have you know, chosen go this
• 12:29
  Speaker 1: round and kind of what they use it for specifically. Yeah,
• 12:32
  Speaker 1: so you know, uh, the biggest retailers uh the probably
• 12:38
  Speaker 1: shouldn't name, but uh essentially using it today. Uh. And
• 12:43
  Speaker 1: so retail is probably the largest category for where the
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  Speaker 1: signals specifically right now. The second big category is aviation, right,
• 12:52
  Speaker 1: so they're adding it to existing solutions that we provide
• 12:55
  Speaker 1: an aviation uh. And then you know, we're also bringing
• 12:58
  Speaker 1: it all the way up all the way down the
• 13:01
  Speaker 1: supply chain, if you like, uh, to agriculture as well.
• 13:04
  Speaker 1: And so we're starting to see large scale farms UH
• 13:07
  Speaker 1: using it to help make decisions on the farm UH
• 13:11
  Speaker 1: in addition to retailers and transportation company. It's so interesting
• 13:16
  Speaker 1: to me because most recently you're a chief executive officer
• 13:19
  Speaker 1: and general manager of the Weather Company UH and including
• 13:23
  Speaker 1: Weather Underground, which I check every morning when I have
• 13:26
  Speaker 1: to take the kids to school and have to figure
• 13:28
  Speaker 1: out how painful it's going to be. And I guess
• 13:30
  Speaker 1: that I'm wondering whether you see the future of weather
• 13:34
  Speaker 1: forecasts as being part of this is a sort of
• 13:38
  Speaker 1: generating revenue from actually helping the prescriptive to businesses UH
• 13:43
  Speaker 1: in a way that perhaps is different than just looking
• 13:46
  Speaker 1: at the hourly weather forecast. What I think one of
• 13:49
  Speaker 1: the one of the things that's you know, interesting to
• 13:52
  Speaker 1: me and I asked about all the time, is accuracy, right,
• 13:55
  Speaker 1: And so fifteen years ago, where the forecasting was about
• 13:59
  Speaker 1: a not much better than a coin flip, it's about accuracy.
• 14:04
  Speaker 1: Jump forward to today, it's about accurate. In the last
• 14:09
  Speaker 1: year with the accuracy is improved more than in ten
• 14:11
  Speaker 1: years prior. AI is a huge part of that, and
• 14:15
  Speaker 1: so we hope that we're gonna be able to take
• 14:17
  Speaker 1: these recommendations for decisions all the way down to individuals
• 14:21
  Speaker 1: like you write is literal leagu practice is going to
• 14:23
  Speaker 1: be canceled. And you know this in the morning. You
• 14:26
  Speaker 1: don't find out thirty minutes before you You have to
• 14:29
  Speaker 1: adjust your schedule h and every decision in between. Cameron Clayton,
• 14:33
  Speaker 1: thanks so much for joining us. Cameron's a general manager
• 14:36
  Speaker 1: IBM Watson Media and Weather. Joining us here in our
• 14:39
  Speaker 1: Bloomberg Interactive Broker studio. Well, I really can't get over
• 14:58
  Speaker 1: the statistics that this statistic that automakers globally have it
• 15:02
  Speaker 1: announced at least thirty eight thousand job cuts in the
• 15:06
  Speaker 1: past six months, and I really I wonder what this
• 15:09
  Speaker 1: says about auto sales going forward and how much they
• 15:12
  Speaker 1: are poised to decline. Joining us now, Michelle Krabs, executive
• 15:15
  Speaker 1: analyst at auto trader dot Com based in Detroit. Michelle,
• 15:20
  Speaker 1: thank you so much for joining us. Let's start there.
• 15:22
  Speaker 1: How much do you expect auto sales to decline going forward?
• 15:26
  Speaker 1: And we're talking on a global basis, Um, Well, we
• 15:29
  Speaker 1: expect them to slip a little bit. We do not
• 15:32
  Speaker 1: expect any kind of collapse in the market, but we
• 15:35
  Speaker 1: do expect it to edge downward. You know, We've been
• 15:38
  Speaker 1: on a great run here, almost ten years of a
• 15:41
  Speaker 1: year over year increases, and you know it's the market's
• 15:45
  Speaker 1: kind of peaked. We expect sales for in the US
• 15:49
  Speaker 1: to be down two or three percent. So, Michelle, what's
• 15:53
  Speaker 1: the impact. I know it's probably early, but what are
• 15:55
  Speaker 1: you hearing from some of the manufacturers and some of
• 15:57
  Speaker 1: the dealers that you talk with about terror of It
• 16:00
  Speaker 1: seemed to be on again, off again for the automobile sector. Well, yes,
• 16:04
  Speaker 1: you know, I think everyone would like certainty and they
• 16:07
  Speaker 1: would like certainty that there there are no terroriffs. Um,
• 16:10
  Speaker 1: we see interesting patterns when there's a lot of talk
• 16:13
  Speaker 1: leading up to it, like last summer, we saw a
• 16:15
  Speaker 1: little bit of stockpiling of inventory, stockpiling of used cars
• 16:19
  Speaker 1: by dealers as they thought that tariffs would happen, and
• 16:22
  Speaker 1: then they didn't. And again here we are in a
• 16:24
  Speaker 1: waiting period for six months, and we if it really
• 16:28
  Speaker 1: becomes looks like they will happen, we expect we'll see
• 16:31
  Speaker 1: some more of that stockpiling of inventory, both new and
• 16:34
  Speaker 1: used vehicles going forward. So Memorial Day weekend is definitely
• 16:40
  Speaker 1: a big one for selling cars. And I'm just wondering
• 16:44
  Speaker 1: what kind of discounts you're expecting this year because this
• 16:47
  Speaker 1: has sort of been one big point of contention for
• 16:50
  Speaker 1: the big automakers. How much do you give incentives to
• 16:52
  Speaker 1: people to get in the door versus give up profits
• 16:56
  Speaker 1: and rather than just sort of sell things at full
• 16:58
  Speaker 1: price your right. Memorial Day weekend traditionally has been a
• 17:03
  Speaker 1: big sales lift weekend for automakers. We don't think it
• 17:06
  Speaker 1: will be as much so this year because of that
• 17:08
  Speaker 1: overall decline in the market and the fact that car
• 17:12
  Speaker 1: prices are at their highest level. UM, auto loan rates
• 17:16
  Speaker 1: are at a nine year high, and UM we are
• 17:18
  Speaker 1: not seeing a lot of uh laboring on of incentives.
• 17:22
  Speaker 1: They're very targeted, and automakers have been showing a lot
• 17:26
  Speaker 1: of restraint in terms of going for profit versus incentives.
• 17:30
  Speaker 1: So there aren't going to be fabulous deals out there,
• 17:34
  Speaker 1: uh for consumers. So we'll see how the weekend ends up. So, Michelle,
• 17:39
  Speaker 1: talk to us a little bit about the used car market.
• 17:41
  Speaker 1: I'm always surprised when I see, like you know, the
• 17:43
  Speaker 1: number of like sixty or six people are leaning towards
• 17:46
  Speaker 1: a used car versus a new car. What's the status
• 17:48
  Speaker 1: of that market? Well, it is an interesting market. We
• 17:51
  Speaker 1: focus all our energy on the new car market, which
• 17:54
  Speaker 1: is about seventeen million sales a year. Typically used car
• 17:58
  Speaker 1: sales are almost four million every year and a pretty
• 18:01
  Speaker 1: consistent UM. There's a lot of interest in used cars
• 18:05
  Speaker 1: for some of the reasons I mentioned before. New car
• 18:07
  Speaker 1: prices are at record highs uh and there are a
• 18:11
  Speaker 1: huge number of fabulous used cars because we had record leasing,
• 18:16
  Speaker 1: those cars are coming back onto the used car market,
• 18:19
  Speaker 1: and there's a richer mix of the kinds of vehicles,
• 18:22
  Speaker 1: so there's not only cars which used to be the
• 18:24
  Speaker 1: only thing that was leased released and then UH sport
• 18:27
  Speaker 1: utili vehicles which are really in favor with consumers and
• 18:30
  Speaker 1: and a hugely discounted prices because they're three years old.
• 18:34
  Speaker 1: That's what I was going to ask, is the used
• 18:36
  Speaker 1: car values. I know this was something that was really
• 18:39
  Speaker 1: UH sinking Hurts and Avis a couple of years ago
• 18:42
  Speaker 1: because of the glut of leasing and then the cars
• 18:45
  Speaker 1: that went into the used car market. I'm just wondering
• 18:48
  Speaker 1: whether we've seen a real firming up there of those
• 18:50
  Speaker 1: resale values. Yes, we have and UH and interestingly, you know,
• 18:54
  Speaker 1: cars are kind of about a favor on the new
• 18:56
  Speaker 1: car side, uh, and so we've seen a lot of
• 18:59
  Speaker 1: discount there, but if you look at the used car side,
• 19:02
  Speaker 1: there's that used car prices I've actually risen higher because
• 19:06
  Speaker 1: there's such high demand. And of course some of the
• 19:08
  Speaker 1: automakers have gotten out of the traditional car business and
• 19:11
  Speaker 1: so there's uh, there's less availability there, so tremendous interest
• 19:16
  Speaker 1: and use cars and that keeps prices strong. So, Michelle,
• 19:19
  Speaker 1: you mentioned that the you know, the market has really moved,
• 19:22
  Speaker 1: certainly in the US and new car markets and trucks
• 19:24
  Speaker 1: and SUVs, and UM, it give us a sense of
• 19:27
  Speaker 1: how sensitive those sales are too. Changes in gasoline prices
• 19:32
  Speaker 1: were just noting earlier today that oil is down about
• 19:35
  Speaker 1: five percent today, So it's kind of fluctuating. But boy,
• 19:38
  Speaker 1: it just seems like the U s consumers trucks and SUVs.
• 19:41
  Speaker 1: But that's not just the US. Globally, the shift is
• 19:44
  Speaker 1: more towards sport utility vehicles. That's true in China, that's
• 19:47
  Speaker 1: true true in uh Europe as well. UM. I think
• 19:51
  Speaker 1: the automakers don't get enough credit that they have done
• 19:54
  Speaker 1: an amazing job of improving fuel economy of sport utility vehicles.
• 19:59
  Speaker 1: It used to be that was the reason people didn't
• 20:02
  Speaker 1: buy them. That's kind of gone away. There's there's not
• 20:04
  Speaker 1: this huge penalty for in terms of fuel price at
• 20:10
  Speaker 1: fuel efficiency, and yet there's a ton of other advantage
• 20:13
  Speaker 1: of you know, various combinations of passengers and cargo and
• 20:19
  Speaker 1: that higher seating position, which is what everybody likes because
• 20:22
  Speaker 1: they feel safer, they can see better, So it offsets
• 20:26
  Speaker 1: the advantages understood. Michelle Krebs, thanks so much for joining us.
• 20:29
  Speaker 1: Michelle's executive analyst at auto trader dot com based in Detroit. Well,
• 20:47
  Speaker 1: the FED seemingly has navigated the US economy to what
• 20:50
  Speaker 1: can be described as perhaps a soft landing with modest
• 20:54
  Speaker 1: economic growth and limited inflation. To get some insight as
• 20:57
  Speaker 1: to the FEDS thinking, returned to Danielle di Martino Booth.
• 21:00
  Speaker 1: Danielle CEO and director of Intelligence for Quill Intelligence. She's
• 21:03
  Speaker 1: also a former advisor that Dallas Fed to Reserve, and
• 21:06
  Speaker 1: she's a Bloomberg opinion columnist. Danielle, thanks so much for
• 21:09
  Speaker 1: being with us. What is your sense of what you
• 21:13
  Speaker 1: think the FED will do next? I'm looking at the
• 21:16
  Speaker 1: w I RP function and we just chatted about briefly
• 21:18
  Speaker 1: before again a seventy nine, a chance for a rate
• 21:22
  Speaker 1: rate cut by the end of the year. Do you
• 21:24
  Speaker 1: agree with that, Well, it doesn't really matter if I
• 21:27
  Speaker 1: agree with it. What matters is FED history, and FED
• 21:29
  Speaker 1: history tells us really anytime you get over the line,
• 21:33
  Speaker 1: they really start talking about whatever direction it's going to be,
• 21:35
  Speaker 1: whether it's it's going to be easy or tightening. Once
• 21:38
  Speaker 1: you get past sixty probability, it's kind of in the bag.
• 21:42
  Speaker 1: So I would be surprised if between here and blackout,
• 21:46
  Speaker 1: before the June fo MC, we didn't start to see
• 21:49
  Speaker 1: a little bit more descent in terms of FED speak,
• 21:52
  Speaker 1: because they have been so consistent across the entire committee
• 21:57
  Speaker 1: they've had. They've all been towing the Clarita line about
• 22:01
  Speaker 1: we're gonna let inflation run too hot. Right now, the
• 22:03
  Speaker 1: market is telling us that there's there's nothing hot about it.
• 22:07
  Speaker 1: Inflation needs a pachmina. It's running so cold, and it's
• 22:10
  Speaker 1: looking more and more like and I think the bond
• 22:12
  Speaker 1: market is telling us break evens are telling us that
• 22:15
  Speaker 1: this is not transient and that the core PC is
• 22:17
  Speaker 1: going to be pulled down further. So let's dig into
• 22:20
  Speaker 1: that issue. Because according to the minutes that came out
• 22:23
  Speaker 1: yesterday of the last for MC meeting. It does seem
• 22:26
  Speaker 1: like members do believe that this is a transient sort
• 22:30
  Speaker 1: of dipping inflation in a weakening Why does the market disagree. Well,
• 22:35
  Speaker 1: it's interesting because not all participants on the Federal Open
• 22:39
  Speaker 1: Market Committee agree. There was there's some fine print in
• 22:43
  Speaker 1: the minutes yesterday that said several participants were concerned that
• 22:47
  Speaker 1: inflation was not transitory, and then in fact CORPC was
• 22:50
  Speaker 1: going to be pulled lower. But decoding FETE speak, participants
• 22:53
  Speaker 1: mean non voting federals or of district presidents. So again,
• 22:59
  Speaker 1: I think that the Fed wants for inflation to be transitory,
• 23:03
  Speaker 1: but wanting and getting are two different things. When you
• 23:06
  Speaker 1: start to see things like this morning's market composite data,
• 23:10
  Speaker 1: it's a composite. It's at fifty point nine new orders
• 23:13
  Speaker 1: in the manufacturing went negative for the first time. I mean,
• 23:16
  Speaker 1: that's about the clearest signal you can get. We'll see
• 23:18
  Speaker 1: if it's validated when the m numbers hit um. But
• 23:21
  Speaker 1: if you start to see bleeding from this kind of
• 23:25
  Speaker 1: isolated weakness that we've had in the factory sector sector
• 23:28
  Speaker 1: into services, you will have a downward poll on that
• 23:32
  Speaker 1: core PC. Let's talk about I want to talk about
• 23:35
  Speaker 1: one of your colums that you wrote just recently about
• 23:37
  Speaker 1: the consumers, because the consumers such an obviously a big
• 23:40
  Speaker 1: part of the economy, a big part of the growth story, um,
• 23:43
  Speaker 1: but you arguing that perhaps the consumer isn't as strong
• 23:47
  Speaker 1: as maybe we're led to believe. What are your thoughts
• 23:49
  Speaker 1: on that? Well, I think what you need to do
• 23:51
  Speaker 1: is to look at the composition of jobs that have
• 23:53
  Speaker 1: been created so last October, for example, the vast preponderance
• 23:59
  Speaker 1: of jobs that we're in high paying industries, and by
• 24:02
  Speaker 1: time we rolled around to the April data, you know,
• 24:05
  Speaker 1: we're seeing sixty pc of the jobs being created in
• 24:08
  Speaker 1: low paying industries. So it's not going to show up
• 24:12
  Speaker 1: yet in something like initial jobless claims. Employers have worked
• 24:16
  Speaker 1: so hard to source skilled workers that they're holding onto
• 24:21
  Speaker 1: them for dear life. But we're seeing weakness in the
• 24:23
  Speaker 1: number of hours that are worked. We're seeing a weakening
• 24:26
  Speaker 1: trend and temporary employment. And again, wage inflation has started
• 24:30
  Speaker 1: to come back in. As opposed to what most economists
• 24:33
  Speaker 1: were predicting, say six months ago, that we were finally
• 24:36
  Speaker 1: seeing traction and wage inflation. That is not the case.
• 24:39
  Speaker 1: But couldn't you argue, if you look at the consumers balance,
• 24:43
  Speaker 1: she looks pretty good. Interest payments are still fairly low.
• 24:47
  Speaker 1: The actual amount of debt relative to GDP hasn't climbed
• 24:50
  Speaker 1: that much. When you talk about the consumer, this isn't
• 24:53
  Speaker 1: a bad picture. And yes, we have seen dilinguacies take
• 24:55
  Speaker 1: up with credit card and auto loans, but not necessarily
• 24:58
  Speaker 1: to the extent where you start to get really concerned
• 25:00
  Speaker 1: about something. Couldn't you say this has been a very
• 25:02
  Speaker 1: unusual economic cycle, but one that is actually allowed things
• 25:06
  Speaker 1: to grow and to possibly soften at a slow and
• 25:10
  Speaker 1: steady pace. That's kind of healthy. It has been. But
• 25:15
  Speaker 1: I tend to think about the delta and the rate
• 25:18
  Speaker 1: at which servicing household credit has come up is extremely problematic.
• 25:25
  Speaker 1: Deutsche Banks done some good work on this, Torsten slock
• 25:28
  Speaker 1: And and right now you're getting to where households are
• 25:32
  Speaker 1: spending so much more of their income to service their debt,
• 25:36
  Speaker 1: and that's coming so quickly that that is becoming It's
• 25:40
  Speaker 1: not the absolute level of household debt, it's it's it's
• 25:43
  Speaker 1: it's the rate of which the increases is happening. I
• 25:46
  Speaker 1: have to wonder, though, how much is this an income
• 25:48
  Speaker 1: inequality story? Because how much is this uh the very
• 25:51
  Speaker 1: low end incurring debt and then sort of trying to
• 25:54
  Speaker 1: cycle and make payments versus an average story, a story
• 25:58
  Speaker 1: of averages. Well, you know, that's a good point, but
• 26:02
  Speaker 1: I would I would go back to a the the
• 26:05
  Speaker 1: economy that we have today, um and that in many ways.
• 26:10
  Speaker 1: Moodies did an interesting study at the end of last
• 26:12
  Speaker 1: year that said initial jobless claims are understated by about
• 26:16
  Speaker 1: because we have so many people who were self employed,
• 26:18
  Speaker 1: We have so many people who who drive for a living,
• 26:22
  Speaker 1: that particular area the self employed is getting crushed right now.
• 26:27
  Speaker 1: But if you work for yourself a, you're not gonna
• 26:30
  Speaker 1: put an ad out to hire yourself and be you're
• 26:32
  Speaker 1: not going to file unemployment insurance against yourself. So there's
• 26:36
  Speaker 1: an element I think that's not being picked up in
• 26:38
  Speaker 1: the averages right now that's harder to see, harder to discern.
• 26:42
  Speaker 1: And you put on top of that the tax season
• 26:44
  Speaker 1: that we've just come through and the fact that I
• 26:47
  Speaker 1: think a lot of middle income American families ended up
• 26:51
  Speaker 1: not getting a refund but actually having to pay taxes
• 26:54
  Speaker 1: that was unexpected as well. We've seen what a court
• 26:57
  Speaker 1: of American families are not have have decided against taking
• 27:00
  Speaker 1: a vacation this summer. Those types of anecdotes will show
• 27:04
  Speaker 1: up in the data. I mean, you're not canceling the
• 27:06
  Speaker 1: trip to Disney for no reason unless the taxes you
• 27:10
  Speaker 1: paid that you weren't expecting to pay were in fact
• 27:13
  Speaker 1: your vacation fund. Daniel, we're seeing wage inflation over the
• 27:17
  Speaker 1: last couple of reports of you know, low three percent
• 27:19
  Speaker 1: kind of range. To me, that seems low given where
• 27:22
  Speaker 1: I think we're really full of employment. What do you
• 27:25
  Speaker 1: think I think wage inflation should be much hotter than
• 27:29
  Speaker 1: what it is. Uh. And in fact, we've seen average
• 27:33
  Speaker 1: weekly earnings. I prefer to steer clear of average hourly
• 27:36
  Speaker 1: earnings because I don't take home and hours pay. I
• 27:38
  Speaker 1: take them a paycheck which I earn over a weekly period.
• 27:42
  Speaker 1: That particular number, again, since October, has shown serious deterioration
• 27:47
  Speaker 1: and weakening. So thank you so much for being here. Honestly,
• 27:51
  Speaker 1: you raised really good points, and especially right now as
• 27:53
  Speaker 1: we look at the market activity with a nearly eight
• 27:56
  Speaker 1: chance of a rate cut being priced into markets, a
• 27:59
  Speaker 1: real disagreement right now between markets and FED participants. Where
• 28:02
  Speaker 1: you've got fed saying you know what, inflation is just
• 28:06
  Speaker 1: simply cooling off as a temporary factor. The market saying
• 28:10
  Speaker 1: we're not buying it. Danielle di Martino Booth. She, of course,
• 28:13
  Speaker 1: is a Bloomberg opinion columnist. She's chief executive officer of
• 28:16
  Speaker 1: Quill Intelligence, former advisor to the Dallas Fed. Joining us
• 28:20
  Speaker 1: here in our Bloomberg Interactive Broker's Studios. Thanks for listening
• 28:24
  Speaker 1: to the Bloomberg P and L podcast. You can subscribe
• 28:27
  Speaker 1: and listen to interviews at Apple Podcasts or whatever podcast
• 28:29
  Speaker 1: platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney.
• 28:33
  Speaker 1: I'm Lisa abram Woit's I'm on Twitter at Lisa abram
• 28:36
  Speaker 1: woits one before the podcast. You can always catch us
• 28:38
  Speaker 1: worldwide on Bloomberg Radio.