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Everyone Still Chasing Netflix For International Subs · Bloomberg Intelligence

0:02
Speaker 1: Welcome to the Bloomberg Penel podcast. I'm Paul swing you
0:05
Speaker 1: along with my co host Lisa Brahma Waits. Each day
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Speaker 1: we bring you the most noteworthy and useful interviews for
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Speaker 1: podcast or wherever you listen to podcasts, as well as
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Speaker 1: at Bloomberg dot com. It is times check in with
0:20
Speaker 1: our Bloomberg Opinion colleagues today, Tara la Chapelle, We are
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Speaker 1: so like lucky to have her darkening the doorway. As
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Speaker 1: Tom Keene would say. We're talking Netflix because Netflix is
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Speaker 1: reporting earnings after the bell, highly anticipated given how much
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Speaker 1: their shares have absolutely surged at how much competition they
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Speaker 1: face this year, Tara, what are you looking for when
0:42
Speaker 1: they report? So? I think a lot of people expect
0:45
Speaker 1: that the US numbers aren't going to be so great.
0:47
Speaker 1: They might miss on those. Um you could tell by
0:50
Speaker 1: sort of the ramp up and marketing they did towards
0:51
Speaker 1: the end of last year, and a lot of their
0:54
Speaker 1: newer movies and shows didn't get released until around the
0:56
Speaker 1: holidays anyway, so you might see an uptick in customers
1:00
Speaker 1: are up taking, customers leaving or a fewer sign ups
1:03
Speaker 1: in the US, but really the growth is coming internationally,
1:06
Speaker 1: so you can can kind of see how they're so
1:08
Speaker 1: far ahead of these other apps that are launching, and
1:10
Speaker 1: how these other companies like Disney A're going to have
1:12
Speaker 1: to catch up with that. Um But I think as
1:14
Speaker 1: far as the threat of you know, Disney Plus and
1:17
Speaker 1: Apple TV Plus, there shouldn't be too much of an
1:19
Speaker 1: impact on this quarters earnings yet because you know, these
1:23
Speaker 1: apps are so new, and I don't think that they
1:25
Speaker 1: had enough on them at launch for people to just
1:27
Speaker 1: go ahead and just cut Netflix. But it does point
1:30
Speaker 1: to you know, a higher rate of churn on all
1:33
Speaker 1: of these apps towards the middle and end of this
1:35
Speaker 1: year as more people become aware of these services and
1:38
Speaker 1: start to kind of bounce between them. What is Netflix
1:42
Speaker 1: management saying and Read Hastings, the co founder and CEO,
1:44
Speaker 1: has really always been I think, very forthright with how
1:47
Speaker 1: he used competition. What is he saying about how the
1:50
Speaker 1: streaming you know environment is likely to play out over
1:53
Speaker 1: the next few years. I mean, I think he thinks
1:55
Speaker 1: there's room for everybody, but it does mean more spending.
1:58
Speaker 1: You know, we're seeing that already. He said. You know,
2:00
Speaker 1: Netflix spending had gone up like on new content last
2:03
Speaker 1: year because you know, they can't make a show like
2:06
Speaker 1: House of Cards at a hundred million dollars anymore. You know,
2:08
Speaker 1: it's becoming very costly because there's just more studios and
2:11
Speaker 1: more services competing for talent, and there's more demand for content.
2:16
Speaker 1: So there's a lot more shows out today than there were,
2:18
Speaker 1: you know, ten years ago on regular cable TV. So
2:21
Speaker 1: I think it's just becoming very expensive. And I think
2:23
Speaker 1: that's why last week's release or unveiling of Comcast and
2:27
Speaker 1: bc US Peacock service was very interesting because they're going
2:31
Speaker 1: the ad supported route, and I think that tells you that,
2:34
Speaker 1: you know, Comcast realizes this isn't really a great business
2:36
Speaker 1: model the way the streaming apps are now, and maybe
2:39
Speaker 1: we're going to need to go to advertising to make
2:41
Speaker 1: these profitable. And you were to call them about how
2:44
Speaker 1: that's the right approach, I think. So, I mean, I
2:47
Speaker 1: don't think ads are enjoyable, but I think that when
2:50
Speaker 1: it comes down to price, and you know, just having
2:52
Speaker 1: all these different services and it's it's just becomes very expensive.
2:55
Speaker 1: I think at the end of the day. So I
2:56
Speaker 1: think if they could find a way to have ads
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Speaker 1: be less and true of and maybe keep the cost down,
3:01
Speaker 1: it would be good. Is there an opportunity here to
3:04
Speaker 1: have no cost or a very low cost, get enough
3:07
Speaker 1: of a critical mass? And if they're the only mover
3:10
Speaker 1: in this kind of model, they can command a higher
3:13
Speaker 1: premium from advertisers, and it's been shown that people would
3:16
Speaker 1: prefer a lower cost than no ads. Is that absolutely?
3:19
Speaker 1: They're going for eyeballs? And you know, Comcast even said
3:22
Speaker 1: this is going to be free for not just Comcast subscribers,
3:24
Speaker 1: but Cox subscribers as well, and they're hoping to talk
3:27
Speaker 1: to the other cable operators about this and have those
3:30
Speaker 1: operators make it free for their customers as well, because
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Speaker 1: this is all about getting eyeballs, not about getting a
3:35
Speaker 1: five dollar ten dollar month subscription fee. And that's a
3:38
Speaker 1: very different strategy than what these other companies are pursuing.
3:41
Speaker 1: You know, the margins on that look a lot better. Um.
3:44
Speaker 1: You know, Hulu makes more money off of its ad
3:46
Speaker 1: supported customers than it's higher subscription based customers. So I
3:49
Speaker 1: think that's what Comcast is looking at in China. Emulate.
3:52
Speaker 1: Isn't Netflix still a stock that's driven by subscriber numbers
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Speaker 1: as opposed to you know, profit margins and free cash
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Speaker 1: flow and things like that. I guess for now, I mean,
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Speaker 1: I think this year that's going to have to change,
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Speaker 1: right or maybe they'll have to talk up international more.
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Speaker 1: We're just not going to see the growth on the
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Speaker 1: U S side anymore. And you know, Netflix has kind
4:12
Speaker 1: of gone back and forth between talking about this goal
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Speaker 1: of getting to you know, cash flow positive versus well,
4:18
Speaker 1: maybe not now, you know, because there's all these other
4:20
Speaker 1: services and it's very expensive to stock this with content nowadays.
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Speaker 1: So I think I don't know what this story is
4:26
Speaker 1: going to be this year. You know, something's going to
4:27
Speaker 1: have to change in this business generally, Um, but right now,
4:31
Speaker 1: I don't think subscriber numbers are going to be super
4:33
Speaker 1: impressive tonight. Well, and shareholders don't care about cash burn
4:36
Speaker 1: at this point. Right for Netflix, UM, they're starting to
4:38
Speaker 1: care a little bit more. I think people are starting
4:40
Speaker 1: to care a little bit more because they're going to
4:42
Speaker 1: have competition for the first time, real competition. And as
4:45
Speaker 1: much as read Hastings says that, you know, their competition
4:47
Speaker 1: is still traditional cable TV and getting people to cut
4:50
Speaker 1: the cord, and he kind of used it as anyone
4:52
Speaker 1: who cuts the cord is good for the streaming industry.
4:54
Speaker 1: You know, Netflix does have rivals, and they may not
4:57
Speaker 1: be as great as Netflix, but they're gonna be out
4:59
Speaker 1: there in people are curious interesting. I'd be interesting to
5:02
Speaker 1: see to what extent these these stories can go from
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Speaker 1: being subscriber growth stories to kind of real business stories
5:08
Speaker 1: and p and L because I think we'll be interesting
5:10
Speaker 1: to see what Disney does if they start disclosing their subscribers,
5:13
Speaker 1: which we don't know whether they're gonna do that, but
5:16
Speaker 1: initially it seemed like they were subscriber numbers for Disney
5:18
Speaker 1: plus Lease in the first day, the first week, the
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Speaker 1: first month. We're we're pretty good. Teary La Chapelle Entertainment
5:23
Speaker 1: and telecommunications columns for Bloomberg Opinion. Thank joining us here
5:26
Speaker 1: in our Bloomberg in Actor Brooker studio. You can read
5:29
Speaker 1: more of terror stuff. It's awesome stuff which she covers
5:32
Speaker 1: the T M T space. You can read that on
5:33
Speaker 1: Bloomberg dot com, Slash Opinion and on the terminal by
5:37
Speaker 1: typing O P I N go. Well, the Senate impeachment
5:52
Speaker 1: trial begins in earnest later today to get a sense
5:56
Speaker 1: of how this could play out. We welcome Bob mince.
5:58
Speaker 1: Bob's a partner of Harder in English based in Newark,
6:01
Speaker 1: New Jersey. Bob, thanks so much for joining us. I
6:03
Speaker 1: guess the first question is will Senator McConnell allow witnesses
6:09
Speaker 1: to be called? Because that is really probably the first
6:12
Speaker 1: key issue here. Do anything. Yeah, That's ultimately what this
6:15
Speaker 1: entire trial will be about. We're not going to get
6:19
Speaker 1: that answer though, for several days, and I think people
6:22
Speaker 1: watching this ought to be paying close attention to these
6:25
Speaker 1: presentations given by the House managers and by the President's
6:29
Speaker 1: defense team, and everything that is said during that process
6:32
Speaker 1: should be viewed through the lens of the question of
6:35
Speaker 1: will it bring four or more senators closer to perhaps
6:39
Speaker 1: joining Democrats and asking for witnesses, or will it push
6:42
Speaker 1: them further away from that, because ultimately the climax of
6:46
Speaker 1: this trial will be that vote on whether to call
6:48
Speaker 1: witnesses and whether to ask for additional documents. Bob, there
6:51
Speaker 1: are a lot of discussions over the weekend about media
6:54
Speaker 1: access to the hearings, with even c Span, not normally
6:58
Speaker 1: thought of as a firebrand of of media outlets coming
7:02
Speaker 1: out and and really lobbying for better access. Can you
7:05
Speaker 1: talk a little bit about that and sort of in
7:07
Speaker 1: perspective how common it is for press not really be
7:11
Speaker 1: allowed into most of the proceedings. Well, we've obviously not
7:16
Speaker 1: had very many impeachment trials. This will be only the
7:19
Speaker 1: third and only the second in modern history since the
7:22
Speaker 1: Clinton impeachment trial, and so a lot of this stuff
7:26
Speaker 1: is really uncharted territory. What's going to be interesting here
7:29
Speaker 1: is that while senators do get to ask questions, even
7:33
Speaker 1: that process will be behind closed doors, so the media
7:36
Speaker 1: will not be there to listen to what the senators
7:38
Speaker 1: have to say. So there's a lot of pressure to
7:42
Speaker 1: have this brought to the public, to have the media
7:44
Speaker 1: there to watch what's going on, But there are also
7:47
Speaker 1: some kind of vailing forces there that are against that,
7:50
Speaker 1: such as the caucusing of senators privately to ask questions.
7:52
Speaker 1: And then there's also the fact that mc McConnell is
7:55
Speaker 1: pushing this twenty four hours of argument into a compressed
7:58
Speaker 1: two day period. So it's quite possible that we're going
8:01
Speaker 1: to see some of these presentations by the House managers
8:04
Speaker 1: and by the president's defense team late into the evening. So, Bob,
8:08
Speaker 1: what do you make of the White House defense brief,
8:11
Speaker 1: the kind of the the what they are laying out
8:13
Speaker 1: as the defense position. Well, what they're arguing essentially is
8:18
Speaker 1: that there's been no crime here that's been committed, and
8:22
Speaker 1: what's really being attacked here, uh, is the president's judgment
8:26
Speaker 1: that he was merely acting in the United States been
8:28
Speaker 1: interests and all of these charges are a little more
8:30
Speaker 1: than political attacks by presidents by Democrats. But but really,
8:36
Speaker 1: the most of the scholars out there who have looked
8:38
Speaker 1: at this don't agree with the position that Republicans are taking.
8:41
Speaker 1: They say that high crimes and misdemeanors do not have
8:44
Speaker 1: to include an actual criminal act. The problem is that,
8:48
Speaker 1: by by design, the framers gave very little guidance as
8:51
Speaker 1: to what would constitute a high crime and misdemeanor and
8:54
Speaker 1: really lifted up to the political process to be to
8:57
Speaker 1: decide what would be enough to remove a president from office.
9:00
Speaker 1: I'm curious about Chief Justice Roberts. What's his role exactly
9:04
Speaker 1: going to be here? Yeah, that's a great question. Again,
9:08
Speaker 1: the Constitution is very vague on what the role of
9:12
Speaker 1: the chief Justice was. When Chief Justice Rehnquist presided over
9:16
Speaker 1: the Clinton impeachment trial. He did very little. I think
9:20
Speaker 1: he was famously quoted as saying he did nothing in particular,
9:23
Speaker 1: and did it very well. So I don't think we're
9:26
Speaker 1: going to see a very critical role played by Chief
9:30
Speaker 1: Justice Roberts because one of the things that the impeachment
9:32
Speaker 1: process provides is that even if the Chief Justice makes
9:35
Speaker 1: a ruling, that ruling can be overturned by a simple
9:38
Speaker 1: majority of the Senate. That's obviously not something we would
9:42
Speaker 1: ever see in actual trial here, and it really sets
9:45
Speaker 1: the stage for the fact that the Senate is the
9:47
Speaker 1: one that will ultimately call the shots here. Last week, Bob,
9:51
Speaker 1: the Department of Accountability found that uh, the withholding Ukraine
9:57
Speaker 1: aid was in fact an issue a problem. Does that
10:01
Speaker 1: factor at all into this impeachment process, Well, it's certainly
10:06
Speaker 1: going to be something we're to see the Democrats arguing,
10:08
Speaker 1: but at the end of the day, that was not
10:10
Speaker 1: a finding of any criminal wrongdoing. And what the Republicans
10:13
Speaker 1: are trying to do is frame this as an argument
10:16
Speaker 1: that since no crime has been committed, President shouldn't be
10:20
Speaker 1: removed for something that doesn't even rise to the level
10:23
Speaker 1: of criminal conduct, and otherwise what we're doing is we're
10:26
Speaker 1: taking political differences and allowing Democrats to use that as
10:30
Speaker 1: a means to remove the president from office. Just taking
10:33
Speaker 1: a step back, I think a lot of people aren't
10:35
Speaker 1: following this as closely as people who are in the
10:39
Speaker 1: Beltway or in the media world, and I'm wondering what
10:41
Speaker 1: the big takeaway is going to be since we know
10:43
Speaker 1: what the outcome is going to be. The likely outcome
10:46
Speaker 1: is that the Senate will not vote to convict, and
10:49
Speaker 1: then probably it will be a very short trial and
10:52
Speaker 1: then everybody will move on. I'll be with a lot
10:54
Speaker 1: of noise on both sides, or at least certainly on
10:57
Speaker 1: the Democratic side. Is there a bigger legal takeaway from
11:01
Speaker 1: this whole affair that you think is important? Yeah, well,
11:05
Speaker 1: I think there is, and that is that for impeachment
11:09
Speaker 1: to really work, I think what we've seen is that
11:11
Speaker 1: there has to be at least some bipartisan buying. And
11:15
Speaker 1: even in the Clinton impeachment process, when they began the
11:18
Speaker 1: process and they adopted the rules for the trial itself,
11:22
Speaker 1: it was a vote of one hundred zero. That meant
11:25
Speaker 1: that every single senator brought into the process, even though
11:29
Speaker 1: they may have disagreed with what the outcome would be
11:32
Speaker 1: here we've seeing we're seeing just the opposite. We're going
11:35
Speaker 1: to see a complete party line vote as to the process.
11:38
Speaker 1: And if you don't have any buying from from the
11:41
Speaker 1: other side as to the process, it's very hard to
11:44
Speaker 1: believe that the outcome will be in any way bipartisan
11:47
Speaker 1: or objective. What is your sense of timing here, Bob,
11:50
Speaker 1: How should we think about this over the next few days. Well,
11:53
Speaker 1: I think the critical moment will come when we do
11:57
Speaker 1: have this decision about whether or not to callnesses. We're
12:00
Speaker 1: going to have the arguments from both sides that will
12:03
Speaker 1: occur over twenty four hour period that will still into
12:06
Speaker 1: the weekend, and then I think sometime early next week,
12:10
Speaker 1: after the Senate spends sixteen hours deliberating, they will call
12:14
Speaker 1: up this critical question of whether or not there will
12:17
Speaker 1: be witnesses here. And there are four senators on the
12:19
Speaker 1: Republican side that have expressed some interesting calling witnesses, So
12:24
Speaker 1: there's a possibility that four senators will swing over to
12:27
Speaker 1: the Democratic side to allow for at least some witnesses
12:30
Speaker 1: to be called. And if that happens, we go into
12:33
Speaker 1: an entirely new phase. Of this trial that will be
12:35
Speaker 1: unpredictable in terms of how we'll play out and how
12:38
Speaker 1: long will last, Bob just twenty seconds. How should it
12:41
Speaker 1: play out? From your perspective, Well, I think that we
12:45
Speaker 1: ought to at least have some witnesses called here, and
12:48
Speaker 1: I think that is a view of four senators. Whether
12:51
Speaker 1: or not they will ultimately buck MTS McConnell, buck the party,
12:56
Speaker 1: buck their base in order to do that, that remains
12:58
Speaker 1: a big open question. Bob Man's, Thank you so much
13:01
Speaker 1: for your perspective. Bob Men's is a partner at mcarter
13:04
Speaker 1: in English in Newark, New Jersey. Also former federal organized
13:08
Speaker 1: crime prosecutor and was assistant council to former New Jersey
13:11
Speaker 1: Governor Tom Keane, So a lot of experience when it
13:14
Speaker 1: comes Also Duke undergrad. This is I don't roll my
13:20
Speaker 1: eyes because I have anything against Duke. I think Duke
13:22
Speaker 1: is phenomenal school. We don't need to bring it up
13:24
Speaker 1: every time, is except except that you do, right, That's
13:27
Speaker 1: basically what you're saying. You're looking at me. Yes, we
13:29
Speaker 1: do have to bring that up every every time. Looking
13:46
Speaker 1: at the Brexit story, the never ending Brexit story, four
13:49
Speaker 1: years and still moving interesting things that relates to the
13:53
Speaker 1: equity markets. The good news is that the foot sea
13:55
Speaker 1: has been increasing, that's the UK stock market. But bad
14:00
Speaker 1: news is that the total value of that market is shrinking.
14:03
Speaker 1: I'm not sure how that work math works, but our
14:06
Speaker 1: next guest does, John Author, senior editor for Bloomberg Markets,
14:09
Speaker 1: joining us here in our Bloomberg Interactive Broker Studio. So
14:12
Speaker 1: reconcile those two things. For me, it's down to the
14:15
Speaker 1: concept of the equitization. That companies are increasingly swapping equity
14:23
Speaker 1: for debt for all the good reasons that debt is
14:26
Speaker 1: extremely cheap these days, and because they are less interested
14:30
Speaker 1: in raising capital from stock markets. So if a private
14:35
Speaker 1: equity company takes out a large British company, and that
14:39
Speaker 1: has been known to happen, that the index doesn't move
14:42
Speaker 1: down as a result of that take out, but the
14:44
Speaker 1: actual market cap of the companies in that index decreases
14:48
Speaker 1: by by the by whatever that the value of that
14:52
Speaker 1: stock company was when it was taken out. This is
14:54
Speaker 1: a really interesting trend because we haven't just seen it
14:56
Speaker 1: in the United Kingdom. We've seen it globally, with public
15:00
Speaker 1: markets shrinking, public equity markets shrinking as an increasing number
15:04
Speaker 1: of companies up to either stay or go private these
15:07
Speaker 1: take private deals, and the latest over in the United Kingdom,
15:10
Speaker 1: Warburg Pinkers is evidently a milling this deal to buy
15:13
Speaker 1: Quilter PLC, which would be a take private deal. Where
15:16
Speaker 1: is the potential consequence of this, I mean both when
15:19
Speaker 1: it comes to potential terms and public markets as well
15:22
Speaker 1: as the disclosures and the shareholder power when it comes
15:27
Speaker 1: to some of these companies exactly. I mean, that's that
15:29
Speaker 1: is the concern we've got to have here, is that
15:31
Speaker 1: we've got a model of capitalism that's basically built around
15:35
Speaker 1: shareholder capitalism for the last few decades, and it makes
15:38
Speaker 1: a great deal of sense. You don't need to socialize
15:41
Speaker 1: companies and have them open to the electric because they
15:45
Speaker 1: are answerable to their shareholders into the open public markets.
15:49
Speaker 1: If they're not so accountable in some general way through
15:54
Speaker 1: capitalism through through open markets, it becomes much more questionable
16:00
Speaker 1: how much public consents you're going to have in those companies,
16:03
Speaker 1: and you've got to be more concerned about whether you're
16:05
Speaker 1: really going to have the creative destruction that makes capitalism work.
16:11
Speaker 1: It is a it is an underlying deep consent or
16:14
Speaker 1: presumably these private equity players take these companies private, do
16:17
Speaker 1: whatever they need to do over the three to five
16:19
Speaker 1: year holding period, and then monetize exit through perhaps another
16:23
Speaker 1: initial public offering. So shouldn't it all even out over time?
16:27
Speaker 1: Well it maybe it should, but it doesn't or it
16:29
Speaker 1: hasn't been in the last decade or so. Um In
16:33
Speaker 1: many cases they're EXITINGCT to other private equity companies. Remember,
16:37
Speaker 1: and also in many cases that you know, the the
16:40
Speaker 1: actual assets that that emerge from the private equity process
16:44
Speaker 1: might be smaller. Even if they've generated a big return
16:48
Speaker 1: while they've been outside the public eye. They've they've generally
16:52
Speaker 1: they've they're generally not as big as they were before.
16:54
Speaker 1: So what's the issue here. Is it that the actual
16:57
Speaker 1: shareholder structure or something about public equity mark goods is
17:01
Speaker 1: insufficient to handle the needs of these companies right now?
17:05
Speaker 1: Or is it just that there's so much money flooding
17:06
Speaker 1: into debt markets based on what's happened from the central banks,
17:09
Speaker 1: it's just better to be private, and it's ample financing
17:12
Speaker 1: available both of the above, but I would But the
17:16
Speaker 1: point I think is that if you say it's just
17:18
Speaker 1: better to be private, which I think is true for
17:21
Speaker 1: a lot of companies. That's an alarming thing to be
17:24
Speaker 1: saying at this point because we have both an economy
17:31
Speaker 1: and an ecosystem for savers that's built around public companies. Um, yeah,
17:38
Speaker 1: that's it's a fair point. Basically, you're fur one K
17:41
Speaker 1: program or whatever else. You're basically funneling money into public equities.
17:44
Speaker 1: If that public pool of equities is shrinking, that means
17:47
Speaker 1: that you've got that much less access than the companies
17:49
Speaker 1: that choose to say private might be the ones that
17:51
Speaker 1: actually are growing the fastest and give you the biggest
17:53
Speaker 1: returns kind of thing. Right, We work for one that's yes, yes,
17:57
Speaker 1: all right, full disclosure. Bloom Regulpi is private. But I
18:00
Speaker 1: am I am wondering going forward? I mean, is the
18:02
Speaker 1: answer just to open up private markets more easily, to
18:06
Speaker 1: make it more easily accessible retail investor. I strongly believe
18:11
Speaker 1: that it should be. Obviously, you need to be very careful,
18:14
Speaker 1: indeed about how you regulate that. You don't want mom
18:17
Speaker 1: and pop investors getting into private equity unless they are
18:20
Speaker 1: having their hands held very gently indeed, But in general terms,
18:26
Speaker 1: if you're in your twenties and only putting a pretty
18:28
Speaker 1: small amount of money aside, but beginning to put money
18:32
Speaker 1: aside into something like a four oh one K there
18:34
Speaker 1: really shouldn't be anything much more sensible than private equity
18:37
Speaker 1: to to put it into its money you don't want
18:40
Speaker 1: for another forty or fifty years. You should be able
18:42
Speaker 1: to that. That should be exactly the kind of patient
18:46
Speaker 1: capital that would be good for that sector, and it
18:49
Speaker 1: should be a way to go to them safe. So
18:53
Speaker 1: certainly in the US we're starting to see that. We
18:55
Speaker 1: had Arthur Levitt, the former chairman of the Securities Exchange Commission,
18:58
Speaker 1: on over the last several weeks talking to us about
19:00
Speaker 1: some of these bills coming out of the administration, talking
19:02
Speaker 1: about making it easier for certain retail investors to get
19:06
Speaker 1: into private equity. But of course there's obviously all those risks.
19:09
Speaker 1: Um I want to switch switch gears real quickly. John,
19:11
Speaker 1: give us a sense as we get close to Brexit
19:14
Speaker 1: the next stage. What's the I'm seeing some articles about,
19:19
Speaker 1: you know, re re relocating people from London to Paris,
19:22
Speaker 1: for example, JP Morgan taking out HSBC's office space there.
19:27
Speaker 1: What's the mood in the city of London among the
19:30
Speaker 1: finance professionals. Is it like it's not going to be
19:33
Speaker 1: that bad, or like, we still don't know what's going
19:36
Speaker 1: to happen more. The latter I was in I was
19:39
Speaker 1: in London for a couple of weeks, just just at
19:41
Speaker 1: the beginning of the month. Um uh. I would mention
19:45
Speaker 1: Amsterdam as well as Paris. Um people many more people
19:50
Speaker 1: speak English. There, you've got the Skiffle Airport, which is
19:52
Speaker 1: a very well connected airport. UM the general senses, they
19:58
Speaker 1: still don't know exactly what's happening. But most of the
20:00
Speaker 1: large banks are braced for a pretty hard Brexit, which
20:04
Speaker 1: means that they're braced to move a lot of people
20:07
Speaker 1: over to the continents. But you know, three or four
20:10
Speaker 1: years ago people were rubbing their hands looking forward to
20:13
Speaker 1: living in Paris on expact contracts for a few years,
20:16
Speaker 1: and it doesn't look as though it's going to work
20:17
Speaker 1: out quite that well for them. John Authors, thank you
20:20
Speaker 1: so much for being with us. We really appreciated. John
20:22
Speaker 1: Arthurs is a Bloomberg opinion columnist and senior markets editor
20:27
Speaker 1: for Bloomberg News. Ob Jersey again, chief US interest rates
20:42
Speaker 1: strategist from Bloomberg Intelligent just joined us on the phone here,
20:44
Speaker 1: So I were good good to have you back talk
20:46
Speaker 1: to us about why the Treasury decided on the twenty
20:49
Speaker 1: year bond and maybe not the fifty year or the
20:51
Speaker 1: hundred year bond. Yeah, so, so I think a hundred
20:53
Speaker 1: year bond was always a pipe dream. Um, I don't
20:55
Speaker 1: think that that was ever going to realistically come about.
20:58
Speaker 1: I think it has to do with liquidity. So one
21:00
Speaker 1: of the things is at least bureaucratically, and the Treasury
21:03
Speaker 1: Department likes to be regular and predictable, and the issue
21:07
Speaker 1: with doing a fifty year it would be hard to
21:09
Speaker 1: be regular and predictable in the issuance of that because, um,
21:13
Speaker 1: while there might be a lot of demand, initially, UM,
21:16
Speaker 1: how deep that demand is from the likes of pension
21:18
Speaker 1: company of pension funds and insurance companies was a little
21:22
Speaker 1: bit questionable. So a twenty year kind of fits some
21:25
Speaker 1: other needs in that um it's still relatively long duration product.
21:29
Speaker 1: It fits within you know, the ten year and the
21:32
Speaker 1: third year. And quite frankly, and I think this is
21:35
Speaker 1: an underappreciated fact, is that there's also futures instruments that
21:39
Speaker 1: already trade in that context where you could use to
21:42
Speaker 1: hedge that that part of the yield curve. So because
21:45
Speaker 1: there's already these products that are liquid um it it'll
21:48
Speaker 1: make issuance of them easier because dealers, for example, could
21:52
Speaker 1: hedge the potential risk that they're going to take down
21:54
Speaker 1: a lot of bonds. So so I think it it
21:56
Speaker 1: fits a lot of those boxes where they can be
21:58
Speaker 1: regular and predictable and also of um kind of good
22:01
Speaker 1: execution and at the auctions I'm wondering just taking a
22:04
Speaker 1: broader look at the treasury market, we saw overnight the
22:07
Speaker 1: Bank of Japan coming out holding policy steady but increasing
22:11
Speaker 1: their growth expectations. We're seeing that kind of across the board,
22:15
Speaker 1: this view that central banks aren't moving any time soon
22:19
Speaker 1: and are going to allow inflation to run hot. What's
22:22
Speaker 1: the risk that they get what they ask for and
22:24
Speaker 1: that that disrupts the bond market. Well, certainly the bond
22:28
Speaker 1: market doesn't think that that's going to happen. I think
22:30
Speaker 1: that there is leads to the risk that you're talking about,
22:33
Speaker 1: where if inflation runs hot, because the expectation is that
22:37
Speaker 1: central banks are going to leave interest rates you know, lower,
22:40
Speaker 1: or say at this level, say the federal reserve, you know,
22:42
Speaker 1: we think the Federal Reserve will be on hold probably
22:44
Speaker 1: most of this year, if not all of this year,
22:46
Speaker 1: and if anything, that they they're more like the ease
22:48
Speaker 1: than hike. And so in an environment like that, if
22:51
Speaker 1: you do get inflation, particularly at the core level, creeping
22:55
Speaker 1: up above two percent, which right now core CPI has
22:58
Speaker 1: been printing above two a but core pc the that
23:02
Speaker 1: that's the Fed's preferred measure of inflation, that the personal
23:06
Speaker 1: consumption expenditure is the flator. UM. If that creeps up
23:09
Speaker 1: towards two two and a half, then you'd wind up
23:11
Speaker 1: seeing probably a significant increase in things like tips break even.
23:15
Speaker 1: So the inflation expectation built into the market right now
23:18
Speaker 1: has been very steady, and if that starts to creep up,
23:21
Speaker 1: that will wind up leading to a pretty big sell
23:24
Speaker 1: off probably in UH nominal nominal yields. And you know,
23:28
Speaker 1: an environment like that, UM twenty five basis point increase
23:31
Speaker 1: in inflation expectations might lead to a fifty basis point
23:35
Speaker 1: sell off and say ten year yields, So that would mean, um,
23:37
Speaker 1: you know, ten year yields back above two percent probably
23:40
Speaker 1: on a pretty persistent basis. UH. Give us an update
23:44
Speaker 1: if you will, on kind of the short end of
23:45
Speaker 1: the curve the repo market. Are we at a new
23:49
Speaker 1: level of stability or is the market still looking for
23:51
Speaker 1: perhaps a longer term solution to kind of stabilize the
23:54
Speaker 1: short end. Yeah, so so the Fed is still I
23:57
Speaker 1: think looking at um some kind of facility. They don't
24:00
Speaker 1: like doing the traditional open market operations given the size
24:04
Speaker 1: of their balance sheet right now. But we do have
24:06
Speaker 1: a lot of stability in the funt end. And you know,
24:09
Speaker 1: like we mentioned, and like I mentioned on your show,
24:11
Speaker 1: quite a lot ball is that you know, these these
24:13
Speaker 1: quarter end and these these kind of times when the
24:17
Speaker 1: balance sheet moves around a lot because of of things
24:20
Speaker 1: like tax receipts and UH and just natural functioning of
24:25
Speaker 1: the financial sector. Um. You'll see these jumps in things
24:29
Speaker 1: like the secured overnight financing rate or in the FED
24:31
Speaker 1: funds rate UM, but they tend to stabilize very quickly. UM.
24:35
Speaker 1: And and right now we're in this period of stability,
24:37
Speaker 1: But you get towards the end of March and you're
24:39
Speaker 1: gonna be back into a quarter end situation where you
24:41
Speaker 1: could wind up seeing you know, some more volatility in repo.
24:45
Speaker 1: But again, like that's normal, I mean that that happens
24:47
Speaker 1: all the time. It's just now we're hyper sensitive to it.
24:49
Speaker 1: Whereas you know, back in two thousand and five and
24:52
Speaker 1: two thousand four, UM, when things like this happened, it
24:55
Speaker 1: was only nerds like me that that actually paid attention.
24:57
Speaker 1: And just to put respective and I might be filed
25:01
Speaker 1: into the same category era. We did get the New
25:04
Speaker 1: York Feds term rebo operation results out today and it
25:07
Speaker 1: was undersubscribed, showing that there wasn't as much demand for
25:12
Speaker 1: the services of this operation. Just to sort of feed
25:15
Speaker 1: into the narrative that there isn't any kind of disruption, Hey,
25:18
Speaker 1: I are going forward. One thing that's really been kind
25:21
Speaker 1: of weighing on me is the lack of movement in
25:23
Speaker 1: all markets, but including in the treasury market. It's been
25:26
Speaker 1: really really steady and without really big moves. Does this
25:31
Speaker 1: worry you that the market is not positioned for some
25:35
Speaker 1: sort of disruption, albeit potentially something from inflation or potentially
25:40
Speaker 1: a policy policy move. Well, what's interesting I think in
25:43
Speaker 1: the treasury market in particular, and you're right, you know,
25:45
Speaker 1: we've been in basically a pretty narrow range from about
25:48
Speaker 1: one seventy broadly speaking for the last four months or
25:52
Speaker 1: so UM. But I think one of the one of
25:54
Speaker 1: the things that speculators are actually positioned very short. So
25:57
Speaker 1: you look at treasury futures positioning and there's a lot
26:00
Speaker 1: of long duration shorts in the market, and so I
26:03
Speaker 1: think that's one of the things that's kind of impeding
26:05
Speaker 1: more significant sell off that um So, it's it's a
26:09
Speaker 1: little bit easier for those guys to cover at this
26:11
Speaker 1: point if they don't think that the risk of higher
26:13
Speaker 1: rates is is UH is increasing. So um so, I
26:17
Speaker 1: think that that's actually kind of preventing a lot of
26:20
Speaker 1: big moves, particularly to to higher yields and lower prices
26:24
Speaker 1: in terms of the treasury market. Really interesting, especially at
26:26
Speaker 1: a time when the Move index, which is a measure
26:29
Speaker 1: of implied volatility in treasury yields going forward, is at
26:33
Speaker 1: the lowest levels since May two nine. Interesting to see
26:35
Speaker 1: the positioning isn't quite as vanilla as that range would suggest.
26:39
Speaker 1: I Oro Jersey, thank you so much for being with us, O,
26:41
Speaker 1: our Jersey chief US interest rate strategist for Bloomberg Intelligence,
26:44
Speaker 1: joining us from Princeton, New Jersey. Thanks for listening to
26:47
Speaker 1: the Bloomberg pan L podcast. You can subscribe and listen
26:50
Speaker 1: to interviews at Apple Podcasts or whatever podcast platform you prefer.
26:54
Speaker 1: Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa A.
26:57
Speaker 1: Bram Woyd's I'm on Twitter at Lisa Bramwoit's one before
27:00
Speaker 1: the podcast. You can always catch us worldwide on Bloomberg
27:03
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