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Hostage Deal, OpenAI Saga, and Deere Earnings · Bloomberg Intelligence

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Speaker 2: Let's flip gears. Let's head back to the geopolitics of
0:59
Speaker 2: it all impact it has on the market. You know,
1:01
Speaker 2: the news coming out of Israel that I'm reading out
1:04
Speaker 2: on the Bloomberg kerminal Here Israel and Hamas agreed to
1:08
Speaker 2: her short truce for hostage release. Agrees to free fifty hostages,
1:13
Speaker 2: possibly more in days ahead. The deal would mark the
1:17
Speaker 2: first lull in the war since the attacks on October seventh.
1:21
Speaker 2: So I guess if nothing else, that in and of
1:23
Speaker 2: itself is probably some good news. Bobby Ghost joins is
1:26
Speaker 2: he's an editor with Bloomberg Opinion. He joins his life
1:28
Speaker 2: here in our New York studio. Bobby, I mean, just
1:31
Speaker 2: to me, it feels like good news, maybe a little
1:33
Speaker 2: bit of thawing here. How do you read it?
1:36
Speaker 3: I wouldn't go quite so far as to say that
1:38
Speaker 3: there's a thought it is good news. Okay, Look, it's
1:42
Speaker 3: great news for the hostages and their families. It gives
1:46
Speaker 3: ordinary civilians in Gaza a break from the bombing. It's
1:49
Speaker 3: a cessation of hostilities for fort days. And Israel is
1:52
Speaker 3: already saying Prime Minisnetnya, who's already saying, moment that ends,
1:56
Speaker 3: we go back to bombing Gus, we go back to fighting.
2:00
Speaker 3: So there's you know, it's not really a thaw. It's
2:06
Speaker 3: a deal that was struck in Katar with very strong
2:10
Speaker 3: pressure from the United States on all parties to make
2:14
Speaker 3: this happen, and we should thank God for small mercies,
2:19
Speaker 3: as they say, and as I said, for the people
2:22
Speaker 3: who are benefiting the most from this deal, the mercies
2:24
Speaker 3: are not small.
2:25
Speaker 4: They're quite absolutely.
2:26
Speaker 5: Yeah, we're seeing fifty hostages from Gaza will be freed
2:29
Speaker 5: and the release of one hundred and fifty Palestinians who
2:32
Speaker 5: are in Israeli jails at the moment. But tell us fabi,
2:36
Speaker 5: because this is exactly what Israel has not wanted, in
2:40
Speaker 5: the sense that any pause is a chance for Hamas
2:43
Speaker 5: to regroup, get the military operations back together. I mean,
2:47
Speaker 5: this is that something to be feared then that there
2:50
Speaker 5: could really be maybe an escalation in the violence after this.
2:55
Speaker 3: I think it's I think this is why it's taken
2:57
Speaker 3: this long for the truth to happen. Israel had to
2:59
Speaker 3: be absolutely certain that the chances of Hamas regrouping and
3:04
Speaker 3: rearming we were as small as possible. If I mean,
3:09
Speaker 3: there's always that possibility. But Israel would not have made
3:12
Speaker 3: this deal if it didn't have a high degree of
3:15
Speaker 3: confidence that it can prevent that from happening, or it
3:17
Speaker 3: can manage how much Hamas rearms. Presumably this means it
3:23
Speaker 3: will be paying much closer attention to the borders, much
3:26
Speaker 3: closer attention to those tunnels through Egypt to make sure
3:29
Speaker 3: that Hamas does not get and it has already brought
3:33
Speaker 3: so much damage on Hamas infrastructure that there must be
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Speaker 3: a high degree of confidence that you know, Hamas's arms
3:40
Speaker 3: making facilities in Gaza City, for instance, will be will
3:45
Speaker 3: not easily be revived.
3:47
Speaker 2: That's kind of where I wanted to go, because I
3:49
Speaker 2: know that the stated objective of Israel is to destroy
3:52
Speaker 2: Hamas and its leadership. How do you define that? How
3:55
Speaker 2: do you know when it's happened? If I kind of
3:58
Speaker 2: fear it's like the drug cartel, tick out one kingpin
4:01
Speaker 2: and then the next person just rises right up again.
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Speaker 3: Yeah, this is not and they're not fighting a conventional military.
4:06
Speaker 3: This is a terrorist group. And you know, the leadership
4:12
Speaker 3: can change and has changed as well, has a long
4:15
Speaker 3: history of taking out top Hamas leaders. The thing just
4:18
Speaker 3: keeps coming back. And you also have to remember that
4:22
Speaker 3: in the process of trying to eliminate Hamas in this way,
4:26
Speaker 3: it's also creating the circumstances the for Hamas to be
4:31
Speaker 3: able to recruit. You've got sure hundreds of thousands of
4:34
Speaker 3: young Palestinians in Gaza and elsewhere who are outraged by
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Speaker 3: what they see, and a small proportion of that population
4:43
Speaker 3: will be more amenable to joining Hamas now, shall we say,
4:48
Speaker 3: than there were before. So it's you know, this is
4:50
Speaker 3: not this is not the kind of war where where
4:52
Speaker 3: which ends with people signing an armistice and making a
4:56
Speaker 3: peace deal. And that's been the problem. The Biden administration
4:59
Speaker 3: has said consistently from the beginning that they've been asking
5:03
Speaker 3: the Israelis to define what victory looks like and explain
5:07
Speaker 3: what happens the day after, and until now, the Israelis
5:12
Speaker 3: have not provided that information. They've not communicated it in
5:16
Speaker 3: private to the Biden administration. They certainly have not communicated
5:19
Speaker 3: it publicly.
5:20
Speaker 5: And of course whatever that timeline may be as well,
5:23
Speaker 5: is probably pretty daunting to think of, Like the task ahead,
5:27
Speaker 5: how long that may take makes me wonder if there
5:30
Speaker 5: could be perhaps the need for more cease fires in
5:35
Speaker 5: the time to get to that endpoint.
5:37
Speaker 3: Yeah, So we'll see if this one works and everybody
5:42
Speaker 3: shows good faith, and that then hopefully creates the circumstances
5:47
Speaker 3: for another one down the line, and another one, and
5:50
Speaker 3: maybe this is the kind of conflict where, because everyone
5:54
Speaker 3: is so painted into their own corners and the opposite
5:56
Speaker 3: ends of the room, that the advances that can only
5:59
Speaker 3: be incremental. It might be that this is the only way, slow, painful,
6:06
Speaker 3: deadly as it is, this might be the only way
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Speaker 3: we begin to move towards some kind of resolution.
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Speaker 2: Is there a scenario where Israel does not end up
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Speaker 2: occupying Gaza? I can't think of a scenario where they
6:17
Speaker 2: don't to preserve the piece. I mean, does a UN
6:20
Speaker 2: player role? I mean, what do we think about the
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Speaker 2: day after?
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Speaker 3: Well, so here's the thing. Now, Israel has a signal
6:26
Speaker 3: that it is willing to do that in order to
6:29
Speaker 3: make sure Hamas does not come back. But this is
6:32
Speaker 3: not a popular idea among Israelis. For a start. Israelis
6:36
Speaker 3: don't want an occupation of Gaza because they know what
6:39
Speaker 3: that will entail, not just in terms of costs, but
6:42
Speaker 3: also the risks that come with that. Nobody else wants
6:46
Speaker 3: to do that. Nobody else wants to perform that role.
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Speaker 3: I don't think any Western peacekeepers would have credibility there.
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Speaker 3: The United Nations will eventually have to play a role,
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Speaker 3: but until now, you know, Secret General gu terrorists has
7:02
Speaker 3: been sort of saying, look, we're not this is not
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Speaker 3: going to become a protectorate of the United Nations. The
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Speaker 3: Arab countries, who would logically be part of the biggest
7:15
Speaker 3: part of any peacekeeping effort. Their view is why should
7:19
Speaker 3: we clean up Israel's mess. This can't become a thing
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Speaker 3: where you go in and bomb Palestine or parts of
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Speaker 3: Palestinian territories to smithereens and expect us to come and
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Speaker 3: clean it up for you afterwards. So there's going to
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Speaker 3: be a lot of reluctance. The crucial question for everybody
7:37
Speaker 3: is peacekeeping toward what end? If there is a clear
7:42
Speaker 3: path after the fighting is over for a two state solution,
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Speaker 3: then I can see and their sort of cost iron
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Speaker 3: guarantees to that. Then I can see the Arab states
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Speaker 3: saying all right, we will take some of this responsibility
7:56
Speaker 3: if there is a clear path that this never happens again.
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Speaker 2: All right, So on that two state solution, who is
8:03
Speaker 2: the biggest impediment to that actually happening at this point?
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Speaker 3: I mean, there's so many impediments, and at different times
8:12
Speaker 3: their you know, their relative weight changes, but Israel is
8:17
Speaker 3: an impediment. The current administration Israel. The coalition government that
8:21
Speaker 3: Benjamin Ettania who has put together has no interest in
8:24
Speaker 3: a two states solution. Many of his partners have openly
8:28
Speaker 3: said that's not what they want, that they will oppose it.
8:32
Speaker 3: The Palaestine authority, which is deeply corrupt, deeply completely inept,
8:38
Speaker 3: and has not dared to test its popularity with an
8:41
Speaker 3: election in years and years and years. They are an impediment.
8:45
Speaker 3: And of course Hamas and hamas is enablers is Iran
8:49
Speaker 3: is a very big part of the piece problem too.
8:52
Speaker 3: So yeah, the problem a problem, this intractable and this complicated.
8:56
Speaker 3: There are lots of people who have to share the blame.
8:59
Speaker 5: Just really quickly. Hear Bobby in our last thirty if
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Speaker 5: you could just explain to us what this second stage
9:04
Speaker 5: could look like with a possible extension to free more hostages.
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Speaker 3: Well, so there's some talk that after these fifty, if
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Speaker 3: Hamas continues to release hostages in a sort of steady
9:17
Speaker 3: set of ten and day fifteen a day, then there's
9:20
Speaker 3: some hope that the cessation of hostility the truth can
9:24
Speaker 3: be extended again. This is something we should all hope
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Speaker 3: for and keep our fingers crossed. It it happens, but
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Speaker 3: we'll believe it when it happens.
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Speaker 2: Yeah, absolutely, all right, Bobby, thank you so much for
9:34
Speaker 2: joining us.
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Speaker 6: Bobby go.
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Speaker 2: She's a calmnist for Bloomberg Opinion, has got a tremendous
9:38
Speaker 2: amount of experience in international affairs reporting, certainly in that
9:42
Speaker 2: part of the world over there in the Middle East.
9:44
Speaker 2: We appreciate getting a few minutes of his time. Here.
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Speaker 2: All right, let's around table this open AI. I'm gonna
10:05
Speaker 2: call it a debacle, and that's editorializing, but that's just
10:08
Speaker 2: it just seems to me. It's a debacle, and I
10:09
Speaker 2: think Silicon Valley should be embarrassed by what's happened over
10:12
Speaker 2: the last four or five days. But we're gonna bring
10:15
Speaker 2: some smart people who analyze this stuff much better than
10:17
Speaker 2: I do. Man deep Seeing, he's a senior tech Analystrom
10:19
Speaker 2: Bloomberg Intelligence Ed Ludlow Bloomberg Technology hosts out in San Francisco,
10:25
Speaker 2: so that he has to take some of the blank
10:27
Speaker 2: He's part of the culture out there.
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Speaker 5: Ed.
10:29
Speaker 2: I mean, I guess we have Sam Altman going back
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Speaker 2: to open AI. I guess that's good news. The next
10:37
Speaker 2: question I think most people have is who's going to
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Speaker 2: be on this board and will it be an effective board?
10:41
Speaker 7: Yeah?
10:42
Speaker 8: Yeah, I mean the mechanics of it are that Brett Taylor,
10:46
Speaker 8: who was once the Coco of Salesforce, but he's I
10:50
Speaker 8: guess he's more famous for being the chairman of Twitter
10:53
Speaker 8: that's sold to Elon Musk, is taking a board seat.
10:57
Speaker 8: Then you have Larry Summers, well known to this program,
11:01
Speaker 8: this network. Reminder that Larry Summers is a pay contributor
11:05
Speaker 8: to Bloomberg Television. I'm supposed to say that, and then
11:11
Speaker 8: beyond that, The news for me is that and this
11:14
Speaker 8: is you know, we've covered the ins and outs of
11:16
Speaker 8: the negotiation pretty closely, right, guys that I know that
11:20
Speaker 8: Sam Altman and Greg Brockman were pushing really hard to
11:24
Speaker 8: get at least temporary board seats in this whole thing,
11:28
Speaker 8: but they didn't. So this thing's far from settled. The
11:32
Speaker 8: reason I'm late, and I apologize for that, is I
11:34
Speaker 8: was on the phone with the source who's involved in
11:36
Speaker 8: all of this, and Sam Altman goes back. Most people
11:39
Speaker 8: get what they wanted, but it ain't the end of
11:41
Speaker 8: the story. There's a lot we still have to find out.
11:43
Speaker 5: Well, you know, I would like to bring in Man
11:45
Speaker 5: Deep here because this has been, as Paul said, very
11:49
Speaker 5: chaotic four or five days. And for those of us
11:52
Speaker 5: who are maybe just joining Man Deep, if you could
11:55
Speaker 5: take us back to when Sam Alman was suddenly ousted
11:58
Speaker 5: from open Ai. Again, I don't think we have really
12:01
Speaker 5: a reason yet as to why that happened, but maybe
12:04
Speaker 5: if you could give us a timeline of what has
12:06
Speaker 5: transpired from them to now.
12:09
Speaker 4: Well, I mean clearly, you know, it was a shocker
12:12
Speaker 4: to everyone in terms of the way he was outid
12:15
Speaker 4: and there wasn't any transparency around the reasons. In fact,
12:18
Speaker 4: when they made the three new board member announcement today
12:22
Speaker 4: they said there will be an independent investigation. So clearly
12:26
Speaker 4: there's a lot to unpack. As Ed was alluding to,
12:29
Speaker 4: but look for a company like OpenAI that has a
12:32
Speaker 4: convoluted structure. So last week they I think it came
12:36
Speaker 4: into focus that they have a profit structure within a
12:39
Speaker 4: nonprofit and now we are trying to you know, make
12:43
Speaker 4: sense of what would a good governance structure look like.
12:47
Speaker 4: We have three board members. We know, this is pretty
12:50
Speaker 4: unusual the CEO not being on the board. So if
12:53
Speaker 4: Sam is going back to be the CEO and he's
12:55
Speaker 4: not on the board, who the other board members are?
12:58
Speaker 4: There is so much to you know, talk about here,
13:01
Speaker 4: and this is not the way it's going to pan out.
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Speaker 4: I mean, the reason why no one cared until last
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Speaker 4: week is because you know, open Aye was a startup
13:10
Speaker 4: and you know it had the backing of Microsoft, so
13:13
Speaker 4: corporate governance wasn't as big of a focus. But the
13:16
Speaker 4: way he was ousted, it's like, this is so unusual,
13:19
Speaker 4: and I'm sure a lot of the startups are thinking
13:22
Speaker 4: about their corporate structure now, you know, and their backers,
13:25
Speaker 4: the vcs and the early investors.
13:28
Speaker 2: Ed, what are you hearing from your sources out there
13:30
Speaker 2: as to maybe the value the impact on the value
13:35
Speaker 2: of this company here that's been really impacted negatively and
13:39
Speaker 2: how so.
13:41
Speaker 8: I love this question for me. This is the question
13:44
Speaker 8: because the story of the last five days is that
13:48
Speaker 8: open aiyes valuation, which right now, based on a transaction
13:52
Speaker 8: we can get into that's pending, is eighty six billion dollars.
13:55
Speaker 8: I reported a couple of months ago. Revenue has a
13:58
Speaker 8: run rate of about a billion dollar for this year
14:01
Speaker 8: billion dollars of sales, eighty six billion dollar valuation.
14:03
Speaker 5: Wow.
14:04
Speaker 8: And the basics of this for the audience listening all
14:06
Speaker 8: around the world is we care because open ai is
14:09
Speaker 8: the leading AI startup. Let's just accept that as a baseline.
14:14
Speaker 8: What we learned is that its value is intimately tied
14:17
Speaker 8: to the intellectual capital that's there. In other words, Sam Altman,
14:20
Speaker 8: Greg Brockman, and the seven hundred and sixty eight other
14:23
Speaker 8: people that work there, all of them started a mutiny
14:28
Speaker 8: to try and bring Sam back. They were successful, but
14:31
Speaker 8: there was a real threat that all seven hundred and
14:34
Speaker 8: seventy employees would just resign, They would just leave. Then
14:38
Speaker 8: what are you left with? A very large building in
14:40
Speaker 8: downtown San Francisco with incredible compute costs and no one
14:43
Speaker 8: in it. That's the way to frame it, right, I
14:46
Speaker 8: don't think that that's unreasonable. And sources this morning and
14:49
Speaker 8: keep phoning me and saying that's the story like on paper.
14:54
Speaker 8: You know the people behind this, there aren't that many
14:57
Speaker 8: of them, And I think, yeah, sorry, guys, you know
15:01
Speaker 8: I jump in, but for me, that's that's the kind
15:03
Speaker 8: of key point.
15:04
Speaker 5: Yeah, No, I think that's spot on. And I mean, Mandy,
15:07
Speaker 5: maybe you can help us, like, you know, break down
15:09
Speaker 5: this math a little bit here. As you know, as
15:12
Speaker 5: we're just hearing that we've got one billion in revenue
15:16
Speaker 5: to an eighty six billion valuation, I mean my head
15:19
Speaker 5: is spinning. What does that make sense to you?
15:22
Speaker 4: Well, so look at you know, all the startups and
15:25
Speaker 4: you can go back in time in terms of, you know,
15:27
Speaker 4: the companies that have ridden these technology waves. There is
15:31
Speaker 4: that promise. Okay, if you have a breakthrough technology, investors
15:35
Speaker 4: don't really focus that much on the revenue that you
15:38
Speaker 4: have right now, but the potential.
15:40
Speaker 2: And in the works problem.
15:42
Speaker 4: Well, I think this is different. Opening Eye does have
15:46
Speaker 4: an intellectual property and they are foundational. I mean think
15:49
Speaker 4: of Nvidia, right, they are foundational to what is going
15:52
Speaker 4: on in AI with their chips. Well, this is another
15:54
Speaker 4: foundational element in terms of you know, a lot of
15:58
Speaker 4: companies are standardizing on open Eeye's base model and they
16:03
Speaker 4: have embedded it in their tech stack. Everything is happening
16:06
Speaker 4: on top of what Opening Eye is offering at the baseline.
16:09
Speaker 4: In terms of a large anglid model. But now I
16:12
Speaker 4: think it puts doubts in the mind because think of
16:15
Speaker 4: operating system like Windows operating system was the standard on
16:19
Speaker 4: which all these applications were built. Opening Eye had that
16:22
Speaker 4: kind of aura, and suddenly that has put doubts and
16:25
Speaker 4: that's why there was this high valuation. So I'm not
16:29
Speaker 4: surprised by the evaluation, but the chain of events has
16:32
Speaker 4: kind of put doubts in people's mind right now.
16:34
Speaker 2: Hey, ed to be honest, before this, I really didn't
16:38
Speaker 2: know who Sam Altman was, and I certainly wasn't aware
16:41
Speaker 2: of the kind of the presence he really does command
16:44
Speaker 2: within a tech space and within Silicon Valley. How do
16:47
Speaker 2: you think, I mean, where does he go from here?
16:50
Speaker 2: I mean, it seems like he's gonna be the focus
16:52
Speaker 2: of now I'm gonna pay attention to whatever he says
16:54
Speaker 2: and does going forward. I mean, his role in all
16:57
Speaker 2: of this, it's taken a much higher profile.
17:00
Speaker 7: Yeah.
17:00
Speaker 8: Look, Sam Altman is a serial entrepreneur, a serial founder.
17:04
Speaker 8: He has been a name out here in Silicon Valley
17:07
Speaker 8: for some time. He has really been thrust to prominence
17:12
Speaker 8: as open Ai became the face of AI. You know,
17:15
Speaker 8: that's the reality of it. In the last year, you know,
17:19
Speaker 8: he's just beloved by the open Ai staff. You know,
17:23
Speaker 8: I'm not exaggerating. Almost the entirety of open aas entire
17:27
Speaker 8: company threatened to resign if he was not brought back.
17:30
Speaker 8: The investors love him. The investors were adamant that he
17:34
Speaker 8: came back, and that they were behind the scenes trying
17:37
Speaker 8: to do that, including Microsoft. Right Satya Nadella, the Microsoft CEO,
17:41
Speaker 8: was a real peace broker in all of this. We understand.
17:45
Speaker 8: And yet this is why I say that this story
17:48
Speaker 8: is not finished. There will be an independent investigation as
17:51
Speaker 8: to why the board fired him in the first place.
17:53
Speaker 8: We have got no idea, to be frank, why they
17:56
Speaker 8: did that. I just, you know, without being self serving,
18:00
Speaker 8: I did report on Saturday as an example, that he
18:04
Speaker 8: was out there weeks, within the last few weeks raising
18:07
Speaker 8: almost one hundred billion dollars for a new chip company
18:11
Speaker 8: to take on Nvidia make custom silicon for training AI models.
18:15
Speaker 8: One hundred billion dollars from a standing start. That's the
18:18
Speaker 8: kind of command he has, and the investors, like SoftBank,
18:22
Speaker 8: move battle La, they were willing to jump in.
18:25
Speaker 4: I mean, the one thing I would point out is
18:27
Speaker 4: you know, whenever a founder gets more attention than the company,
18:32
Speaker 4: that's never a good thing. If you go back in time,
18:34
Speaker 4: you know, the focus is just on the founder and
18:37
Speaker 4: what he's doing that hasn't been viewed very well by
18:41
Speaker 4: the investors. And if they are thinking about doing an IPO,
18:44
Speaker 4: that's the last thing you want is the founder getting
18:47
Speaker 4: all the focus and taking you know, the focus away
18:50
Speaker 4: from the core product, which is the large acred model
18:53
Speaker 4: they have developed.
18:54
Speaker 5: Could say it sounds like another sam perhaps of fts.
18:59
Speaker 2: Ed love, thank you so much for joining us, Ed Lolo.
19:01
Speaker 2: He's in our San Francisco office. He is embedded in
19:04
Speaker 2: that Silicon Valley space. And then man Deep Singh, he's
19:06
Speaker 2: our senior technology analysts here at Bloomberg Intelligence. He's seen
19:10
Speaker 2: it all. He's seen the tech come and go, he's
19:13
Speaker 2: seen the tech mobiles come and go. So we appreciate
19:15
Speaker 2: getting their perspective. So it seems like it's quieting down
19:19
Speaker 2: there in Silicon Valley in Open AI. And now we'll
19:23
Speaker 2: just see how it's kind of fleshes out the board
19:25
Speaker 2: and some governance issues and some ownership and you know,
19:28
Speaker 2: but I guess the last fridays it's kind of like
19:31
Speaker 2: a do over, so we'll keep on top of that.
19:33
Speaker 6: You're listening to the tape. Cat's are live program Bloomberg
19:37
Speaker 6: Markets weekdays at ten am Eastern on Bloomberg Radio, the
19:40
Speaker 6: tune in app, Bloomberg dot Com, and the Bloomberg Business App.
19:43
Speaker 6: You can also listen live on Amazon Alexa from our
19:46
Speaker 6: flagship New York station, Just say Alexa play Bloomberg eleven thirty.
19:53
Speaker 2: Street Kumark. He's the president of Street Kumar Global Strategies,
19:56
Speaker 2: former Chief Global Strategists and Chairman Asset Allocation Commitie at
20:00
Speaker 2: TCW Group. A little asset manager out there in LA.
20:03
Speaker 2: But the highlight on his extensive resume for me for
20:06
Speaker 2: your senior vice president at Drexel Burnham Lambert. Those folks,
20:11
Speaker 2: they were slinging it back in Maybe they were slinging
20:15
Speaker 2: it back in the day, folks, Shwi, thanks so much
20:16
Speaker 2: for joining us. You're based out in LA, but we're
20:19
Speaker 2: in New York, so we appreciate you. You coming in here
20:21
Speaker 2: to our New York studio. Talk to us about how
20:24
Speaker 2: you viewed twenty twenty three. We're closing out a pretty
20:27
Speaker 2: decent year here for most you know, most markets here
20:31
Speaker 2: closing out twenty twenty three, and how are you thinking
20:32
Speaker 2: about twenty twenty four.
20:34
Speaker 7: Paul, great questions, and I think twenty twenty three we
20:37
Speaker 7: had expected by now to be in recession, which is
20:40
Speaker 7: not come yep. The labor market is very strong, the
20:43
Speaker 7: consumer spending is very strong. I think what was underestimated
20:48
Speaker 7: was the extent of stimulus that was in the system,
20:52
Speaker 7: both in terms of the fiscal stimulus, which came from
20:54
Speaker 7: the final months of the Trump administration first few months
20:57
Speaker 7: of the Biden administration. And don't forget the balance sheet
21:02
Speaker 7: of the Federal Reserve doubled from bloated levels from the
21:06
Speaker 7: beginning of COVID to the beginning of twenty twenty two.
21:09
Speaker 7: And we had zero interest rates for a long period
21:12
Speaker 7: of fact, so everybody loaded up. And one and a
21:15
Speaker 7: half years later after the tightening began, I think we
21:18
Speaker 7: are still not back yet. But the point I make
21:21
Speaker 7: and I say to my clients is that recession is
21:24
Speaker 7: something that has been postponed, but it's been delayed, but
21:28
Speaker 7: it's not denied. So I think we are still going
21:31
Speaker 7: to see signs of a recession. And what is me
21:35
Speaker 7: the most is as you have interest rates, having risen
21:39
Speaker 7: and the balance sheet of the FED is still being tightened.
21:41
Speaker 7: It did not pause, and when the two of them
21:44
Speaker 7: go together, that there is something that's going to break
21:47
Speaker 7: in the system in the first half of twenty twenty four.
21:50
Speaker 5: So how do you then distinguish between what a lot
21:52
Speaker 5: of people will say right now are signs that we're
21:54
Speaker 5: heading towards soft landing, and that you're in the camp
21:58
Speaker 5: here that recession is so possibility.
22:01
Speaker 7: Yeah, I do not believe in soft landing, Molly, and
22:04
Speaker 7: I would think that when you look at what has
22:07
Speaker 7: happened in past history, it all looks very nice until
22:10
Speaker 7: the thing gets out of control. It happened with two
22:14
Speaker 7: thousand and seven, and toward the end of the year
22:17
Speaker 7: we had the FED Chairman Ben Bernanke say to us
22:21
Speaker 7: that the subprime mortgage situation was just a fifty two
22:24
Speaker 7: hundred billion dollar problem. We found out in the next year,
22:28
Speaker 7: two thousand and eight, it was just a terrible situation,
22:31
Speaker 7: not just a minor problem. Same thing happened in nineteen
22:35
Speaker 7: ninety eight when you had long term capital management, a
22:38
Speaker 7: small hedge fund which was never going to fail because
22:41
Speaker 7: two Nobel Prize winners.
22:43
Speaker 2: Ran its rank you.
22:46
Speaker 7: And it was done again with no leverage, it was thought,
22:51
Speaker 7: but then they had enormous amount of leverage and a
22:54
Speaker 7: lot of risk and it failed as well. So it
22:56
Speaker 7: is all I like to say that it is all
22:59
Speaker 7: lit up till it darkens, the opposite of what we
23:02
Speaker 7: normally say.
23:03
Speaker 2: Is there some event out there that you're concerned? Could
23:05
Speaker 2: be that long term capital management moment, or could be
23:08
Speaker 2: the subprime issue for in two thousand and seven two thousand,
23:12
Speaker 2: Is there something after that concerns you in terms of catalysts.
23:15
Speaker 7: Paul, I have a few candidates. One is I had
23:18
Speaker 7: said before the March regional banking crisis that might be
23:21
Speaker 7: a credit event, but we survived that it was a
23:25
Speaker 7: credit event. The next one, my top candidate is a
23:28
Speaker 7: bigger banking institution, maybe an institution which is medium sized,
23:34
Speaker 7: and why do they suffer. They suffer because they loaded
23:37
Speaker 7: up on long dated bonds when Jerome Powell told us
23:40
Speaker 7: inflation is going to be transitory. So in that case,
23:43
Speaker 7: I should buy ten year treasuries to two percent because
23:47
Speaker 7: I'm expecting it to go to one percent. Right it didn't.
23:50
Speaker 7: It went the other way. So that's one candidate.
23:52
Speaker 5: Commercip have already happened though by now if that were
23:55
Speaker 5: to blow up, you know, similar to the small banks
23:58
Speaker 5: that we saw in March.
24:00
Speaker 7: Not yet, Molly, And I'll tell you why I think
24:03
Speaker 7: it hasn't happened yet. If you look at the bank numbers,
24:07
Speaker 7: the deposits with the US banking system has been steadily
24:10
Speaker 7: going down, the delinquency rate is starting to pick up,
24:15
Speaker 7: and the balance sheet is being reduced. As far as
24:18
Speaker 7: the FED is concerned. When you put them all together,
24:22
Speaker 7: suddenly something clicks. It doesn't happen gradually, so which is
24:26
Speaker 7: why I think, timing wise, I would look for the
24:29
Speaker 7: first quarter of twenty twenty four is when something breaks again.
24:34
Speaker 7: So we talked about commercial real estate is the third.
24:37
Speaker 7: You can also have again a crunch on the credit side,
24:40
Speaker 7: which is already taking place. My final candidate is the
24:44
Speaker 7: repeat of what happened in the United Kingdom September October
24:48
Speaker 7: of twenty twenty two. Bond eels rise a lot. There
24:51
Speaker 7: it was the guilt eels, and here we are talking
24:54
Speaker 7: about treasury eels and pension funds incur huge losses. They
24:58
Speaker 7: have not done well into of general performance, and that
25:02
Speaker 7: situation worsens and puts pressure on the FED.
25:05
Speaker 2: One of the things as we think about this economy
25:07
Speaker 2: in a hard landing soft landing recession is the labor market.
25:10
Speaker 2: We got some more labor data today. Initial JAMAS claims
25:13
Speaker 2: came in at two hundred and nine thousand, below expectations,
25:16
Speaker 2: less than we saw last month. I mean, this labor
25:18
Speaker 2: market seems to defy most logic in how robust it is.
25:23
Speaker 2: What do you make of the US labor market.
25:26
Speaker 7: Yes, the labor market so far has been very robust,
25:29
Speaker 7: and I think the reason that has been the case
25:33
Speaker 7: once again traces back to the amount of stimulus. There
25:36
Speaker 7: is so much money that you were able to give,
25:38
Speaker 7: and also the shortage of labor which took place due
25:42
Speaker 7: to COVID with one part of the working force typically
25:45
Speaker 7: the wives who stayed behind to provide childcare, that in
25:49
Speaker 7: turn reduce the workforce. I think we are just coming
25:52
Speaker 7: back to it. But if you look at the layoff numbers, Paul,
25:56
Speaker 7: you're seeing that after a period of very strong now
26:00
Speaker 7: despite today's initial jobless claims, the unemployment has started to rise. Yep,
26:06
Speaker 7: and they don't. Once again, it doesn't rise gradually, and
26:10
Speaker 7: history tells you that when it rises, it just surges suddenly,
26:14
Speaker 7: and I wouldn't be surprised to see that happen in
26:16
Speaker 7: the next two to three months.
26:18
Speaker 5: So let's go back to these stimulus payments, because there
26:20
Speaker 5: right now is such a debate in economic circles of
26:24
Speaker 5: how much excess savings the consumer has. I feel like
26:27
Speaker 5: I see a different report on this every day that
26:30
Speaker 5: savings are dwindling, there's nothing left. Another one will say
26:33
Speaker 5: there's more than we really thought, and that's what's giving
26:35
Speaker 5: the consumer still a lot of gas right now to
26:38
Speaker 5: keep spending. And same with like the on the credit
26:42
Speaker 5: side as well. You mentioned delinquencies are picking up, and
26:44
Speaker 5: we've seen credit card balances getting higher, but as a
26:48
Speaker 5: share of total deposit's still very low. So how do
26:51
Speaker 5: you assess right now these conflicting messages about the health
26:54
Speaker 5: of the consumer.
26:56
Speaker 7: That's again a very timely question, and I would answer you,
26:59
Speaker 7: Molly by saying that while the aggregate numbers in terms
27:04
Speaker 7: of delinquency, the aggregate numbers still seem really benign. There
27:09
Speaker 7: is a difference across income groups, meaning the numbers are
27:14
Speaker 7: showing recently that even the consumer spending, a good chunk
27:17
Speaker 7: of the increase is coming from the highest one or
27:21
Speaker 7: ten percent maximum in terms of the income groups, and
27:24
Speaker 7: the lower income groups are actually cutting back delinquency wise.
27:29
Speaker 7: The credit card delinquencies are the first to show up.
27:32
Speaker 7: And the reason is it is easy for you not
27:34
Speaker 7: to pay. You don't have to go and ask anybody
27:37
Speaker 7: to give you a loan, and so that is starting
27:40
Speaker 7: to happen the next If it starts to happen also
27:43
Speaker 7: in terms of what happens to the payments to the banks,
27:46
Speaker 7: then I would be even more concerned. But it is
27:48
Speaker 7: already happening with low middle income groups. It's not happening
27:53
Speaker 7: yet with the high income groups.
27:54
Speaker 2: Hey, Swebaut thirty seconds left a lot of geopolitical issues
27:58
Speaker 2: out there for you know, investors to deal with. How
28:01
Speaker 2: concerned are you with again the Middle East in Ukraine
28:04
Speaker 2: and what that means for maybe the global economy.
28:06
Speaker 7: I'm concerned again to reply to you very quickly, Paul,
28:09
Speaker 7: that I'm concerned mostly from an economic side. What happens
28:14
Speaker 7: to inflation? Okay, And yes today we are seeing a
28:17
Speaker 7: big drop in oil prices. But if the Hamas Israel
28:21
Speaker 7: ceasefire doesn't happen, or if it does, if it breaks up,
28:25
Speaker 7: then you're talking about war escalating and that in turn
28:28
Speaker 7: would mean much higher oil prices. Oil prices are nothing
28:33
Speaker 7: or a huge problem, one extreme or the other. It
28:37
Speaker 7: either goes down or the oil price goes to one
28:39
Speaker 7: hundred and fifty dollars a battle, and that's a risk
28:41
Speaker 7: we run for the geopolitical situation.
28:43
Speaker 6: Absolutely.
28:44
Speaker 2: Shre thanks you so much for joining us. Shri Kumar.
28:46
Speaker 2: He's a president of Shri Kumar Global Strategies based somewhere
28:50
Speaker 2: in California and one of those beaches or something like that,
28:52
Speaker 2: but he's actually coming to the world capital, New York City,
28:56
Speaker 2: so we appreciate him coming into our Bloomberg Interactive Brokers studio.
28:59
Speaker 6: You're listening to the tape Can's are Live program Bloomberg
29:02
Speaker 6: Markets weekdays at ten am Eastern on Bloomberg Radio, the
29:06
Speaker 6: tune in app, Bloomberg dot Com, and the Bloomberg Business App.
29:09
Speaker 6: You can also listen live on Amazon Alexa from our
29:12
Speaker 6: flagship New York station Just say Alexa playing Bloomberg eleven thirty.
29:19
Speaker 2: Earnings Deer. They put out some numbers. I guess the
29:23
Speaker 2: beat current quarter results, but their guidance was very disappointing
29:26
Speaker 2: to the street. I see the stocks off about three
29:28
Speaker 2: and a half percent, but that's the high intra day
29:31
Speaker 2: high of the day, so it had been a lot
29:32
Speaker 2: lower earlier. Let's bring on the anasto follows this compedy
29:36
Speaker 2: Chris Chile, you know, he's the industrials analyst for Bloomberg Intelligence,
29:39
Speaker 2: joining us via zoom from Princeton, New Jersey. So Chris,
29:43
Speaker 2: talk to just about what we heard from your good
29:45
Speaker 2: friends at Deer.
29:46
Speaker 9: Fairly conservative guidance heading into the print, just given what
29:50
Speaker 9: we've seen with softer commodity prices, lower farm income, and
29:54
Speaker 9: I think it was pretty well anticipated that the cycle
29:57
Speaker 9: was turning, but this outlook is material below what we
30:01
Speaker 9: had anticipated. Deers projecting that income will drop to about
30:05
Speaker 9: eight point eight billion dollars at the midpoint next year.
30:08
Speaker 9: That implies roughly twenty eight twenty eight to fifty dollars
30:12
Speaker 9: in earnings, which is thirteen percent below the street. You know,
30:17
Speaker 9: commodity prices are still at historically high levels above long
30:21
Speaker 9: term averages, the edge of the fleet is still quite old,
30:24
Speaker 9: and farmer balance sheets are quite healthy, so we really
30:27
Speaker 9: see a more modest downturn. This really sets just a
30:30
Speaker 9: low bar and really an overly conservative outlook.
30:34
Speaker 5: Yeah, it looks like, you know, this sector here Chris
30:37
Speaker 5: is otherwise showing some other, you know, some other evidence
30:40
Speaker 5: of slowing. We saw that the rival over to Deer.
30:45
Speaker 5: CNH Industrial said that it's reducing salaried workers, that their
30:49
Speaker 5: equipment sales are slumping. In Corteva, which makes seeds, has
30:53
Speaker 5: also warned of a slow down in demand from farmers.
30:56
Speaker 5: So tell us you know the broader outlook of the
30:59
Speaker 5: farming sector right now and really why people should be
31:02
Speaker 5: paying attention.
31:03
Speaker 9: Yeah, I mean, we hit peak production this past year,
31:07
Speaker 9: so twenty twenty four will be a slower or lower
31:10
Speaker 9: growth year. This has been kind of well advertised by
31:15
Speaker 9: the pullback we've seen in commodity prices. CNH certainly cautioned
31:19
Speaker 9: when they reported that volumes will be down in twenty
31:23
Speaker 9: twenty four, and we actually saw a Deer reduced production
31:26
Speaker 9: too at their harvest Works factory in their fiscal four
31:29
Speaker 9: q In North America, inventory seem to be in good condition,
31:33
Speaker 9: but as you look globally Europe and particularly South America,
31:38
Speaker 9: they plan to underproduce retail demand next year, so further
31:41
Speaker 9: production cuts to come.
31:43
Speaker 2: What's the lead time? Like, tell to us about the
31:46
Speaker 2: cycle for a company like deer. I know it's a
31:48
Speaker 2: cyclical business and it's based upon farming, but just give
31:51
Speaker 2: us a describe as cycle for us.
31:54
Speaker 9: Yeah, I mean, ultimately they're driven by where crop prices
31:57
Speaker 9: are and that ultimately dictates farmer incomes. You know, we've
32:00
Speaker 9: had three very strong years here in North America. So
32:04
Speaker 9: we were roughly thirty percent above mid cycle in twenty
32:08
Speaker 9: twenty three, which was you know, pretty comparable to the
32:11
Speaker 9: twenty thirteen peak. So again it comes down to where
32:15
Speaker 9: crop prices are. They're still you know, supportive of making
32:18
Speaker 9: capital investments, just not at the level we had seen
32:21
Speaker 9: over the last two years.
32:22
Speaker 5: Tell us, Chris, about some other markets that are really
32:25
Speaker 5: important for the farming space that you know, Brazil probably
32:29
Speaker 5: being one of them, and maybe some other regions in
32:31
Speaker 5: the world that are really important when we're thinking about
32:35
Speaker 5: the outlook for farming.
32:37
Speaker 9: Yeah, if you think about the markets that matter most
32:39
Speaker 9: for deer, it's North America and it's Brazil. Those are
32:43
Speaker 9: the larger crop producing nations. They are more conducive to
32:48
Speaker 9: the larger high horsepower equipment, which which drives higher margins
32:53
Speaker 9: for deer. And ultimately it is corn, soybeans, and wheat.
32:58
Speaker 9: Those those are really move the needle.
33:01
Speaker 2: All right, Chris, I'm a farmer. I'm in Moline, Illinois.
33:06
Speaker 2: How often do I replace those big, big tractors that
33:09
Speaker 2: I love to drive to help me, you know, get
33:11
Speaker 2: my crops out of the ground.
33:13
Speaker 6: Yeah.
33:13
Speaker 9: So if you think about a piece of large farm equipment,
33:16
Speaker 9: you know, typically the useful life runs about fifteen years,
33:21
Speaker 9: but that includes a pretty robust trade cycle of four
33:24
Speaker 9: or five different users. You know, some of the larger
33:27
Speaker 9: operations we'll we'll swap out equipment more frequently, just given
33:30
Speaker 9: some of the technology and upgrades you know, really make
33:34
Speaker 9: farmers more productive and help lower some of the input costs.
33:38
Speaker 9: And combines, you know, tend to have a little bit
33:40
Speaker 9: shorter useful life, used a little bit more intensively, particularly
33:43
Speaker 9: down in regions like South America.
33:45
Speaker 2: So when I what's a combine? I gon to get
33:48
Speaker 2: one of us big combines that I see, you know
33:50
Speaker 2: with the big cabs and they got all the bells
33:52
Speaker 2: and whistles. What's that going to set me back?
33:54
Speaker 9: You're gonna have to break out the wallet, and you know,
33:57
Speaker 9: a large combine could run you know, close to all
34:00
Speaker 9: dollars with all the bells and whistles and the new technology.
34:05
Speaker 9: They are a large capital investment.
34:06
Speaker 2: And so I have to finance that, right, So if
34:09
Speaker 2: I got interest rates, they're no longer zero. So it's
34:13
Speaker 2: just like buying a car, isn't it's a lot more expensive.
34:16
Speaker 3: It is.
34:16
Speaker 9: But you know, interestingly enough, we've seen you know, higher
34:20
Speaker 9: interest rates, you know, to this point, really haven't had
34:22
Speaker 9: a detrimental impact on equipment sales. And I think a
34:26
Speaker 9: lot of that has to do with you know, crop
34:28
Speaker 9: prices were you know, historically elevated farm income. We set
34:31
Speaker 9: a record in twenty twenty two, so farmers have had
34:34
Speaker 9: a lot of money in their wallets, and we've actually
34:36
Speaker 9: seen a lot of farmers go out and buy equipment
34:39
Speaker 9: with cash, the exception being more at the smaller and
34:43
Speaker 9: more consumer driven products those had ten historically been a
34:47
Speaker 9: little bit more rate sensitive. That being said, now with
34:50
Speaker 9: the pullback and crop prices and lower farm incomes, you're
34:54
Speaker 9: starting to see some of that interest rates sensitivity deteriorate
34:57
Speaker 9: some of the buying power for the law larger operations.
35:01
Speaker 5: Let's go back to the deer earnings call that happened earlier. Today,
35:07
Speaker 5: management brought up labor costs a lot as mentioning that
35:11
Speaker 5: this is the largest inflationary item within their production bucket,
35:16
Speaker 5: and that a lot of it is contractual, mentioning that
35:18
Speaker 5: the labor contracts that they have in their factories have
35:21
Speaker 5: these scheduled step ups in the year. So is that
35:24
Speaker 5: saying that labor costs are going to get even more
35:28
Speaker 5: expensive for Deer?
35:30
Speaker 9: Yes, that being said, production costs we actually saw for
35:35
Speaker 9: the first time in three years this fiscal quarter turned
35:38
Speaker 9: into a tailwind. So while labor costs are going up,
35:42
Speaker 9: other costs are coming down, which is helping mitigate some
35:47
Speaker 9: of those higher and labor inflationary pressures. So net, they're
35:52
Speaker 9: anticipating twenty twenty four that production costs will actually be
35:55
Speaker 9: a tailwind.
35:57
Speaker 2: So how's the supply chain here? I mean, I know,
35:59
Speaker 2: for while they're like the automobile industry, you know, the
36:02
Speaker 2: industrial equipment guys couldn't get the chips, they couldn't get
36:05
Speaker 2: some of the parts they need to build these things,
36:09
Speaker 2: how is the supply chain these days?
36:11
Speaker 9: The supply base has you know, really normalized. It really
36:16
Speaker 9: is not a factor at this point anymore. There are
36:19
Speaker 9: pockets from time to time, but we've seen a normalized
36:22
Speaker 9: supply chain. I'd expect you get a little bit of
36:25
Speaker 9: tailwind some factory efficiencies as we move into next year.
36:29
Speaker 9: But it's normal course of business.
36:32
Speaker 5: A lot of times when we see companies set really
36:34
Speaker 5: low guidance. My initial reaction, and maybe this is just
36:38
Speaker 5: the cynical person in me, is thinking, oh, you know,
36:41
Speaker 5: setting the bar low so that they can what's that
36:44
Speaker 5: phrase to under expect to outperform?
36:47
Speaker 2: Yeah, under promise, over deliver.
36:48
Speaker 5: That there, thank you. I knew you would say everything
36:51
Speaker 5: is that? Is that, Chris? What you think is happening here?
36:53
Speaker 5: Or it really is as dire as Deer is making
36:56
Speaker 5: it out to be.
36:57
Speaker 9: No, I think that's exactly what's happening here. I think
37:00
Speaker 9: they set a very low bar, and I wouldn't be
37:02
Speaker 9: surprised to see beats and raises throughout the year. You know,
37:06
Speaker 9: we had an anticipated fairly conservative guidance just given some
37:10
Speaker 9: of the macro uncertainty, pharm economy uncertainty, so that was
37:14
Speaker 9: to be expected. But to see you know, double digit
37:17
Speaker 9: top line to crime declines across all businesses, pretty heavy
37:22
Speaker 9: decremental margins, you know, thirty five percent plus, that's more
37:26
Speaker 9: indicative of a more severe contraction. We just don't see
37:30
Speaker 9: that as a realistic scenario at this stage.
37:33
Speaker 2: I remember when Chris was young, he wasn't so cynical.
37:36
Speaker 2: He would take management's guidance at face value. But now
37:38
Speaker 2: he's calling him out, saying that maybe either kind of
37:41
Speaker 2: thrown in the kitchen sink here. That's that's a mark
37:44
Speaker 2: of a good analysts. He's become a great, great analyst
37:46
Speaker 2: for us. Chris Gielino, industrials analyst at Bloomberg Intelligence. He
37:49
Speaker 2: follows all the fun companies. I think like Deer. He
37:51
Speaker 2: gets a ride around on tractors and stuff like that.
37:54
Speaker 5: Is that part of the job.
37:54
Speaker 2: Oh yeah, you go to an analystate, you got to
37:57
Speaker 2: check out the merch so they take Yeah, it's okay. Yeah,
38:00
Speaker 2: so it's good stuff. They have good time. Now my
38:02
Speaker 2: job is better because I used to get to go
38:04
Speaker 2: to movie premieres for the Disney, go out on cruise
38:07
Speaker 2: ships with Disney and all that kind of fun stuff.
38:09
Speaker 5: And now you're here in the album here one of
38:11
Speaker 5: the biggest in person office proponents I've ever.
38:14
Speaker 2: Met, exactly, and I've thrown into talent that I've kind
38:18
Speaker 2: of figured it all out. My kids are saying forget
38:20
Speaker 2: about it. You've lost that fight.
38:24
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38:31
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38:38
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38:40
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