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SCOTUS Tax Ruling, US Housing · Bloomberg Intelligence

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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. You're listening to the
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Speaker 1: Bloomberg Intelligence Podcast. Catch us live weekdays at ten am
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Speaker 1: or watch us live on YouTube.
0:24
Speaker 2: Along the watch for some Supreme Court rulings here today
0:27
Speaker 2: we did get one. The US Supreme Court up held
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Speaker 2: a twenty seventeen tax on American owned business foreign profits.
0:34
Speaker 2: June Grosso, Bloomberg Legal analyst that joins us here in
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Speaker 2: our studio.
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Speaker 3: Not one of the world.
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Speaker 4: Sexy ones, but not even on the most watch lists,
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Speaker 4: maybe on Bloomberg's most watch These are taxes right. Berties care,
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Speaker 4: but the average American citizen who's looking for the hot
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Speaker 4: button issues doesn't care about this. I mean, if they
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Speaker 4: had not ruled this way, it would have sent the
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Speaker 4: Internal Revenue Service into a frenzy trying to, you know,
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Speaker 4: restore taxes that were paid and also some of the
1:02
Speaker 4: you know, the rules that they have. So this basically
1:05
Speaker 4: was a two people who owned a minority stake in
1:08
Speaker 4: an Indian company in India, and they said that they
1:10
Speaker 4: shouldn't have to pay the taxes that were allocated to
1:13
Speaker 4: them because they hadn't gotten any profits from the company.
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Speaker 4: And you know, this is the sixteenth Amendment, which I
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Speaker 4: can't read. I think law school was the last time
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Speaker 4: I ever heard about the sixteenth Amendment. And so you know,
1:26
Speaker 4: the justice it says, this is no different than any
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Speaker 4: other tax. And the fear was that this would enable
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Speaker 4: a wealth tax, if a wealth tax ever comes. And
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Speaker 4: that was the only fear really from this case. So
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Speaker 4: it's seven to two. That tells you that there wasn't
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Speaker 4: much problem.
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Speaker 5: And what else are we waiting for?
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Speaker 4: What are those hot wepon issues over my gosh, we're
1:49
Speaker 4: waiting Well, first of all, we're waiting for the abortion
1:51
Speaker 4: case from Idaho about state law that basically, you know,
1:56
Speaker 4: makes it only possible to have an abortion if the
1:59
Speaker 4: life of the mother there's in jeopardy. We're waiting for
2:02
Speaker 4: a gun rights case, which is based on the Second Amendment,
2:05
Speaker 4: which is whether there's a there's a law, a federal
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Speaker 4: law that people who have domestic violence abuse charges against
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Speaker 4: them or who have this the man in this case
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Speaker 4: had a domestic violence temporary restraining order can't have a gun.
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Speaker 4: That's another one. There's there the Texas and Florida social
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Speaker 4: media cases. You know, whether or not social media companies
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Speaker 4: are allowed to look at what they have and pick
2:31
Speaker 4: from what they have and knock things off their platform.
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Speaker 4: There's also there's a case that will make people's eyes
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Speaker 4: sort of glaze over, but it's really really important. It
2:41
Speaker 4: involves something called Chevron defference. And this involves every agency agencies,
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Speaker 4: whether or not you're going to give deference to an
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Speaker 4: agency's interpretation of a law that's ambiguous, or whether the
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Speaker 4: court should be the one to interpret it. And so
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Speaker 4: if and the several of the Conservative justice have been
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Speaker 4: trying to get rid of Chevron deference for years and
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Speaker 4: the question is whether or not. And it's something that
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Speaker 4: conservatives have been trying to do because they don't like
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Speaker 4: agency authority isn't a.
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Speaker 5: Part because of the EPA, right, because the PLA has
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Speaker 5: like large light. I know, it goes all across it's.
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Speaker 4: The EPA, it's banking, social security, you name it. Would
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Speaker 4: anything involving an agency this would affect. And I think
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Speaker 4: the Labor Department is the department that has already started
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Speaker 4: not relying on Chevron deference in proposing rules because they're
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Speaker 4: afraid of what the Supreme Court may do here. I
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Speaker 4: have to look up, but I think it is a
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Speaker 4: labor department.
3:34
Speaker 3: June Grosso, Bloomberg Legal Analyst.
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Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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3:56
Speaker 2: You also want to get to some of that economic
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Speaker 2: data that broke earlier Today, new home construction in the
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Speaker 2: US slumped and made to the slowest pace in four years,
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Speaker 2: as higher for longer interest rates sapped the housing industry's momentum.
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Speaker 3: From earlier this year. Drew reading, we pay.
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Speaker 2: Him to do this stuff. He's a home builder analyst
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Speaker 2: at Bloomberg Intelligence. Drew what's happening in the home building business?
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Speaker 3: Construction?
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Speaker 6: Yeah, so a pretty big myths on the headline today
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Speaker 6: on the housing starts number, not all that surprising. You
4:24
Speaker 6: have to remember rates went up to seven and a
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Speaker 6: half percent last month and they're still hovering at around
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Speaker 6: seven percent. We also had some week data on the
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Speaker 6: home builder confidence side, you know, but these numbers are
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Speaker 6: also being impacted by you want to parse out what's
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Speaker 6: happening in this single family side versus the multifamily side,
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Speaker 6: and the way we tend to look at it is
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Speaker 6: non seasonally ad just on a year of a year basis.
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Speaker 6: So we had total starts down twenty percent, which is
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Speaker 6: a pretty big number, but single family starts were actually
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Speaker 6: up three percent and multi family is down fifty seven percent.
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Speaker 7: So that's a lot of.
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Speaker 6: The story right there. And if you look here to date,
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Speaker 6: starts are down about four percent, single families up nineteen,
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Speaker 6: multi families down forty. So that dynamic is one thing
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Speaker 6: at play. The other thing that we've talked about in
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Speaker 6: the past is the relative advantage of the big, well capitalized,
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Speaker 6: publicly traded home builders. And we just had some data
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Speaker 6: from Lenar who just reported results which lines up nicely
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Speaker 6: with what we got just got on housing starts, and
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Speaker 6: if you look at over the last six months, their
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Speaker 6: starts are up about twenty percent year every year. So
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Speaker 6: you know a couple of stories. It's the single family
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Speaker 6: side and then it's the big public builders.
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Speaker 5: Well, what do we learned from KB home on that front,
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Speaker 5: because that usually caters to sort of the entry level buyer.
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Speaker 5: Lenar are more high end.
5:40
Speaker 6: Yeah, KB had great results pretty much across the board.
5:44
Speaker 6: You know, their results told us that demands remained strong,
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Speaker 6: that buyers are still responding to the use of incentives.
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Speaker 6: It also tells us that incentives probably aren't going away
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Speaker 6: in the near term. You know, when we came into
5:56
Speaker 6: the first quarter, there was an expectation that, hey, look,
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Speaker 6: rates came down to you know, six and three quarters,
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Speaker 6: maybe builders are going to be able to pull back
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Speaker 6: on their use of incentives a little bit and that
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Speaker 6: would help margins in the back half of the year.
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Speaker 6: But it looks like with rates back at seven they're
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Speaker 6: going to remain elevated, which will put a little bit
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Speaker 6: of pressure on margin. So it's it's a demand versus
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Speaker 6: margin story, and buyers are still responding to incentives.
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Speaker 2: True kind of where are we in this country in
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Speaker 2: terms of supply of housing? I know for a while
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Speaker 2: the story had been we're at a deficit, there's not
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Speaker 2: enough housing.
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Speaker 3: Is that still the case?
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Speaker 6: Yeah, that's a great question. And you know, one of
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Speaker 6: the main speaking points for the builders was there's nothing
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Speaker 6: for sale on the existing home side. People don't want
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Speaker 6: to list their homes because they don't want to trade
6:42
Speaker 6: in their rate. We're starting to see a little bit
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Speaker 6: of a shift there. If you look across the country,
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Speaker 6: inventories are up about thirteen percent in the last month.
6:51
Speaker 6: That being said, if you take a step back, they're
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Speaker 6: still down about thirty percent from pre pandemic levels. But
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Speaker 6: what's interesting is kind of what's happening across the US
7:00
Speaker 6: and if you look at certain markets, you're starting to see,
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Speaker 6: you know, some warning signs and you know, some of
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Speaker 6: the ones that come to mind our Texas and Florida.
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Speaker 6: You know, in Florida you've got inventories in some cases
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Speaker 6: rising over fifty percent wow, and are actually above twenty
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Speaker 6: nineteen levels by you know, fifty to seventy five percent.
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Speaker 6: A lot of that's concentrated in some of the West
7:21
Speaker 6: and Southwest markets. But it's something certainly to keep an
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Speaker 6: eye on because you know, as that inventory increases, the
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Speaker 6: advantage builders have had diminishes.
7:30
Speaker 5: Huh, that's interesting. What are some of the other sort
7:33
Speaker 5: of hot spot areas. We had a great piece out
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Speaker 5: talking about was it Tennessee? Was a Tennessee that is
7:39
Speaker 5: attracting all the people from the west and east coast
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Speaker 5: and it's sort of pricing out all the people that
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Speaker 5: actually live there. Like, how do big waves like this
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Speaker 5: like we saw in Texas, like we did see in Florida,
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Speaker 5: how does that wind up affecting the housing market.
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Speaker 6: Yeah, there has been a lot of movement out of
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Speaker 6: some of those high cost markets, you know, from coastal
7:56
Speaker 6: California and maybe Inland and then it's like Las Vegas
8:00
Speaker 6: and Phoenix. But we're seeing from a demand perspective is
8:03
Speaker 6: kind of interesting. At the national level, demand in the
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Speaker 6: new home market has been relatively strong across the board,
8:09
Speaker 6: but we have seen markets kind of move in cycles.
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Speaker 6: So if you look at the hardest hit markets back
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Speaker 6: in you know, the second half of twenty twenty two
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Speaker 6: when rates really shot up, you had you know, California, Washington,
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Speaker 6: all the markets across the southwest. Those have actually come
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Speaker 6: back pretty strong. And it's now some of the markets
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Speaker 6: that were leading. You think about the Texas is and
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Speaker 6: the Florida's, which are the two largest markets, are now
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Speaker 6: starting to soften a little bit from both a pricing
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Speaker 6: and a sales perspective as inventories start to rise. So
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Speaker 6: you know, those markets big picture are still benefiting from
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Speaker 6: out migration into some of the lower cost markets. That's
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Speaker 6: why you've seen the Southeast and Florida do so well.
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Speaker 6: But at the same time we are starting to see
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Speaker 6: a little bit of slow down there.
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Speaker 2: You know, a friend of mine just put her house
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Speaker 2: on the market yesterday and I told her, I don't
8:56
Speaker 2: eve think you can get to your open house on Saturday.
8:58
Speaker 2: I think you can have like a Jillian Offers come
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Speaker 2: in and you're gonna get So we'll see.
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Speaker 3: I'll check in.
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Speaker 2: But just one of the things, you just don't see
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Speaker 2: existing inventory coming off to the market that much. When
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Speaker 2: it does, particularly in a you know, a pretty middle
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Speaker 2: of the road price range.
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Speaker 3: I got to think it's just going to be snapped.
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Speaker 5: Up, like versus six percent. Interest rate doesn't matter as
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Speaker 5: much anymore as what you're.
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Speaker 3: Saying, Yeah, yeah, yeah, I don't know. We'll have to see.
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Speaker 2: So, Drew, is there a sense that rates have to
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Speaker 2: come down for existing homes to really move well?
9:25
Speaker 6: I think you want to see rates get into that
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Speaker 6: six and a half percent at least to see things
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Speaker 6: start to loosen up a little bit. But what's just
9:32
Speaker 6: what's interesting, and Alex you mentioned it six verse seven.
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Speaker 6: There's not a whole heck of a lot of difference there.
9:37
Speaker 6: And you have to remember the people coming too the
9:40
Speaker 6: market now are coming with that higher rate mindset versus
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Speaker 6: you know what they were a couple of years ago.
9:47
Speaker 6: So people have certainly started to adjust. And at the
9:50
Speaker 6: same time, you know, we're still transacting at these higher
9:53
Speaker 6: interest rate levels, So that mortgage rate lock and effect
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Speaker 6: that we've talked about previously, you know, it starts to
9:59
Speaker 6: gradually loose in a little bit because you've had more
10:01
Speaker 6: buyers purchasing at higher rates.
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Speaker 5: All right, really great stuff drew you the best. We
10:07
Speaker 5: appreciate you, Adurenni. He covers home building for a Bloomberg Intelligence.
10:12
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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10:27
Speaker 2: Alex Delpaul swinging' live here on our Bloomberg Interactor Brokers Studio.
10:30
Speaker 3: I'm gonna story here. Denlt Technology shares rose Thursday.
10:34
Speaker 2: After chiefing the second officer, Michael Dell said the company
10:36
Speaker 2: is building a Dell AI factory for Elon Mus's startup
10:40
Speaker 2: XAI alongside Nvidio Corp. A lot of big names. In
10:44
Speaker 2: the first opening sentence there stick in with Woojin Hoo.
10:46
Speaker 2: He covers all the tech stuff for Bloomberg Intelligence, Which
10:49
Speaker 2: what's going on here with Michael Dell.
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Speaker 7: Yeah, so Michael actually posted a Twitter post on some
10:55
Speaker 7: of his AI server racks that's going to go over
10:58
Speaker 7: to XA, which is Elon musk AI startup. Uh. Elon
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Speaker 7: Mus actually followed up is saying, hey, yeah, this is happening,
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Speaker 7: but we're only gonna split. We're gonna split the deal
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Speaker 7: with both Dell and super Micro, and you're seeing super
11:14
Speaker 7: Micro rise as well.
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Speaker 5: Can you just walk me through like what this all
11:18
Speaker 5: looks like? Like when I hear that headline and they're
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Speaker 5: gonna plot provide servers for AI x tech whatever Twitter
11:24
Speaker 5: Musk thing?
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Speaker 3: What is that?
11:27
Speaker 6: Yeah?
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Speaker 7: So, so essentially you need specialized servers to help build
11:32
Speaker 7: or help support large language models. If you think about
11:35
Speaker 7: the AI build out over at Meta or at Google, uh,
11:38
Speaker 7: you need you know, hundreds, well thousands of GPUs to
11:42
Speaker 7: help support it. And each of these server racks are
11:45
Speaker 7: going from roughly one hundred thousand per rack for a
11:49
Speaker 7: traditional server rack, and what I calculate it is gonna
11:51
Speaker 7: go to about a million dollars per rack all closer together.
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Speaker 7: So you know, you know, we've published that this one
11:58
Speaker 7: deal could be upwards of billion dollars split two ways
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Speaker 7: between Dell and super Micro.
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Speaker 3: All right, I'm going to ask the out steal question.
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Speaker 2: As I'm looking at this photograph that was part of
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Speaker 2: the Twitter spot for mister Dell. I see a big factory, lights,
12:13
Speaker 2: air conditioning, all that kind of stuff. I mean, how
12:17
Speaker 2: are they going to power all this stuff? Did they
12:19
Speaker 2: ever have to talk about that?
12:20
Speaker 5: I love you asked this question.
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Speaker 7: Yeah, well, look, Elon Musk, I've actually seen some of
12:28
Speaker 7: the layouts or where this AI factory may be going to,
12:32
Speaker 7: and they've actually allocated the power for that. Now. Near term,
12:36
Speaker 7: I think the power needs should be fulfilled. You don't
12:41
Speaker 7: do the planning without the power. But longer term, I
12:44
Speaker 7: do think there might be some issues in terms of
12:47
Speaker 7: getting the land necessary, the data center land necessary to
12:50
Speaker 7: build out these AI data centers because of the amount
12:53
Speaker 7: of power that they're going to suck up. Some solutions
12:56
Speaker 7: may be nuclear, small nuclear power plants or set aside
13:01
Speaker 7: to these data centers. But there's some regulatory issues along
13:05
Speaker 7: with that.
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Speaker 5: I thought I was reading that potentially something might be
13:08
Speaker 5: sent to President Biden today that would make it easier
13:11
Speaker 5: for nuclear and I wonder if that's all sort of
13:13
Speaker 5: playing into the energy transition, but also the big data centers.
13:17
Speaker 5: So you said it could be worth as a three billion,
13:19
Speaker 5: So they enter into this agreement, when does like Adell
13:23
Speaker 5: and super Micro book that revenue, Like, does that show
13:26
Speaker 5: up on its order book?
13:28
Speaker 7: Well, I wouldn't be surprised. That's already in the backlog numbers. Okay,
13:32
Speaker 7: in their backlog numbers today. One of the things, the
13:35
Speaker 7: metric that I'll share with you is that they did
13:38
Speaker 7: one point Dell did one point five billion dollars in
13:40
Speaker 7: AI server sales in calendar twenty twenty three. I have
13:44
Speaker 7: them going in around seven point six billion dollars in
13:47
Speaker 7: calendar twenty twenty four. Super Micro they're probably on pace too,
13:51
Speaker 7: about eighteen billion dollars in calendar twenty twenty four. What
13:55
Speaker 7: this is telling me is that not only are you
13:58
Speaker 7: getting more AI or larger AI server deals, but you're
14:01
Speaker 7: getting more AI server deals going forward.
14:04
Speaker 2: So Dell, super Micro those are two ways to play.
14:08
Speaker 2: What else in your space kind of fits into that
14:10
Speaker 2: AI theme here?
14:12
Speaker 7: Well, I mean, you know, my colleague Countries Obiani, he
14:16
Speaker 7: covers the chip space Nvidia. Everyone knows Broadcom, which has
14:20
Speaker 7: rallied over the last few days. They are a leading
14:25
Speaker 7: AI chip player on the networking space of riskent Networks
14:30
Speaker 7: is one of the vendors. To know that. There are
14:32
Speaker 7: some other guys such as Cisco and Hpe, but there'll
14:34
Speaker 7: be more enterprise focused at least for the time being,
14:37
Speaker 7: and won't have as a sizeable impact from AI on
14:40
Speaker 7: their numbers, at least in the near term.
14:42
Speaker 5: So when I'm talking in panels and stuff and I
14:45
Speaker 5: hear people like, Okay, this is definitely a bubble. It
14:48
Speaker 5: will definitely burst. We don't know when and how and why.
14:50
Speaker 5: We definitely want to buy puts, Like, we're definitely in
14:53
Speaker 5: a bubble. We just don't know what that looks like.
14:55
Speaker 5: What do you who are coming through the numbers think?
14:58
Speaker 7: Yeah, So we publish our valuation though for super Micro today,
15:04
Speaker 7: and I'll tell you that, you know, much of the
15:06
Speaker 7: stock rise of the last couple of days or the
15:09
Speaker 7: last year or so has been more earning, straighter than
15:11
Speaker 7: anything else. And it goes back to the fact that
15:14
Speaker 7: a lot of these AI systems have this humongous aspos boost.
15:20
Speaker 7: I mentioned one hundred thousand dollars a rack. The latest
15:23
Speaker 7: generation of Nvidia's servers, they're going to be about three
15:26
Speaker 7: million dollars per rack, and that's going to support their
15:30
Speaker 7: twenty five billion dollars in fiscal twenty twenty five expectations.
15:36
Speaker 7: And I think that if you think about a housing boom,
15:40
Speaker 7: we are going through an AI housing boom right now.
15:44
Speaker 7: And this is going to last for the next couple
15:46
Speaker 7: of years. Now, when does this housing boom bust? Still
15:50
Speaker 7: too early to tell, because first it's going to be
15:52
Speaker 7: the cloud. The enterprise is going to start following. I
15:56
Speaker 7: don't know how big that enterprise opportunity is just yet.
16:00
Speaker 2: Sense there would how much are this incremental AI spending
16:04
Speaker 2: is in fact incremental to overall tech spending or is
16:08
Speaker 2: it just taking it from other buckets?
16:10
Speaker 7: Yeah, you know, you know, that's a good question. And
16:14
Speaker 7: if we look at the companies or the sectors from
16:18
Speaker 7: a sector basis, within hardware, we've seen some of the
16:22
Speaker 7: traditional hardware lag in terms of spending. I do blame
16:27
Speaker 7: some of the declines in hard traditional hardware spending to
16:32
Speaker 7: a mix shift to AI. But the other thesis that's
16:35
Speaker 7: going around right now in the investment circles is that, well,
16:39
Speaker 7: it could also mean that they're going to spend less
16:41
Speaker 7: on software as well. Right, So from from a larger
16:46
Speaker 7: from a from from a larger perspective, there might be
16:48
Speaker 7: spending that's being pulled away from software to build out
16:51
Speaker 7: the infrastructure. Over time, as more software becomes AI enabled,
16:56
Speaker 7: the investments are going to fall back to software.
17:00
Speaker 5: So the whole I think with Nvidia like trying to
17:02
Speaker 5: talk about software and not hardware as much.
17:06
Speaker 3: What is that?
17:08
Speaker 6: Oh?
17:08
Speaker 7: Yeah, so there actually is a more. Nvidia is also
17:14
Speaker 7: a software name, right, you actually need to build a
17:18
Speaker 7: code to drive the GPU chips very efficiently.
17:23
Speaker 2: Right.
17:24
Speaker 7: And the bigger the developer user base. Right. Think about
17:30
Speaker 7: it as a programmer for Microsoft or programmer for Oracle. Right,
17:37
Speaker 7: You're trying to build this big developer user base so
17:39
Speaker 7: you can have your your AI programmers to write to
17:44
Speaker 7: the Nvidia chipset. Right. There's two benefits to this one.
17:49
Speaker 7: The AI chip sets try to leverage the software to
17:52
Speaker 7: optimize the energy consumption, So there is an energy benefit
17:56
Speaker 7: to this and also two, you're trying to lock up
17:59
Speaker 7: more developers to write to the g Nvidia GPU so
18:03
Speaker 7: you can gain or grow your market share in the
18:06
Speaker 7: GPU space.
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Speaker 3: All Right, we're seeing more and more ways to play AI.
18:11
Speaker 3: I mean, there's the chips, there's the hardware of the software.
18:13
Speaker 5: Don't know how he keeps it. I don't know how
18:15
Speaker 5: would you keep it all straight?
18:16
Speaker 3: I gotta be honest. Helps, thanks so much for joining us.
18:19
Speaker 3: Wi Jinho.
18:19
Speaker 2: He's a senior technology analyst the Bloomberg Intelligency's down in
18:22
Speaker 2: our Princeton, New Jersey office here giving us some more
18:26
Speaker 2: views on how various companies within the tech stack is
18:30
Speaker 2: the tech geeks say this case Dell Computer, super micro
18:35
Speaker 2: stocks moving today on more servers being installed for the
18:41
Speaker 2: folks that can be running these big models.
18:43
Speaker 5: I guess and just go and it just goes again.
18:45
Speaker 5: And then you pair that with those that just watch
18:47
Speaker 5: momentum bubbles and they get increasingly worried. So it's it's
18:51
Speaker 5: really hard to square those two. At the end of
18:53
Speaker 5: the day.
18:55
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19:03
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19:06
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19:09
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19:13
Speaker 2: Alex Deel, Paul Swing you live here in our Bloomberg
19:15
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19:18
Speaker 3: So you can head over YouTube.
19:19
Speaker 2: Dot com and search Bloomber podcast and that's what you'll find.
19:21
Speaker 2: This all right, here's story getting a lot of readership
19:24
Speaker 2: today by McDonald's. McDonald's US chief says the company is
19:27
Speaker 2: ready for a fight, and in order to win, the
19:29
Speaker 2: burger chain is pulling out one of the most potent
19:32
Speaker 2: weapons in its arsenal, the value meal. So they're gonna
19:36
Speaker 2: be putting some chicken and you get fries, you get
19:39
Speaker 2: a coke, all for five bucks.
19:40
Speaker 3: That's pretty darn solid. What does it mean for the
19:43
Speaker 3: restaurant company? So let's chick in with Mike Halen.
19:45
Speaker 2: Michael Halen, he covers the restaurant industry for Bloomberg Intelligence. Mike,
19:49
Speaker 2: I guess you know the big guns here for McDonald's.
19:53
Speaker 3: Here the value meal.
19:54
Speaker 2: What's going on in the fast food business these days?
19:59
Speaker 8: Yeah, listen, they have scale.
20:01
Speaker 9: They have scale that allows them to offer prices that
20:04
Speaker 9: some of their competitors can't match, right, And so you
20:08
Speaker 9: know what we're seeing now is, you know, consistent traffic declines.
20:13
Speaker 9: Same store sales have been pretty weak now for about
20:15
Speaker 9: a year in the restaurant industry.
20:17
Speaker 8: A lot of that is due to low income consumers.
20:20
Speaker 8: Darden on their earnings call.
20:22
Speaker 9: Today said, it's you know, seventy five households with seventy
20:25
Speaker 9: five thousand or less in income, and the customers that
20:28
Speaker 9: are really struggling our fifty thousand dollars make fifty thousand
20:32
Speaker 9: dollars a year or less. So you know, we're still
20:35
Speaker 9: seeing this case shaped recovery. And so you know, about
20:38
Speaker 9: a third of McDonald's business is that low income consumer.
20:41
Speaker 9: You know, the traffic declines can be mostly attributable to
20:45
Speaker 9: those customers visiting less frequently. There's been a lot of
20:49
Speaker 9: bad press about McDonald's and some of these other fast
20:52
Speaker 9: food trains and how much they charge. You know, they
20:56
Speaker 9: went they went viral because one of their stores, we're
20:59
Speaker 9: charging eight teen dollars for a big back meal, right,
21:01
Speaker 9: and they want to kind of level set people's expectations
21:06
Speaker 9: about what they're going to pay inside the McDonald's and
21:10
Speaker 9: kind of get people focused back on the fact that,
21:14
Speaker 9: you know, you can still get a lot of value
21:18
Speaker 9: on that McDonald's menu.
21:20
Speaker 5: Do they still have a dollar man, Yeah, it's.
21:23
Speaker 8: The one two three dollar menu.
21:26
Speaker 9: There's not many items for a dollar, if any. I
21:29
Speaker 9: think everything's at least a dollar in change right now.
21:32
Speaker 8: But you know, the timing, you know, the timing makes sense.
21:37
Speaker 9: You know, last month, casual dining chains actually outperformed quick
21:43
Speaker 9: service team star sales for the first time since last January.
21:46
Speaker 9: And I think a lot of that has been this
21:48
Speaker 9: bad press about how much quick service chains are charging,
21:52
Speaker 9: and chains like you know, Chili's have been kind of
21:56
Speaker 9: playing into this. You know, they're saying, you know, look,
21:58
Speaker 9: we have a ten ninety nine three for medial. You
22:00
Speaker 9: get a lot more food, you get a better burger,
22:03
Speaker 9: and it's cheaper than a big mac meal. So McDonald's
22:06
Speaker 9: is trying to turn the tide again here.
22:09
Speaker 2: You know, I'm looking at the the FA function for McDonald's.
22:12
Speaker 2: I mean, they got gross profit margins, you know, the
22:14
Speaker 2: kind of mid to high fifties.
22:17
Speaker 3: That seems pretty darn good.
22:18
Speaker 2: That seems like, if they wanted to, they really could
22:21
Speaker 2: go into a significant kind of pricing war here. Is
22:25
Speaker 2: that something that McDonald's thinks about or they just don't
22:27
Speaker 2: even want to get into that game.
22:30
Speaker 9: Well, listen, I mean, you know, McDonald's is heavily franchised,
22:35
Speaker 9: and so they're going to have stronger gross and operating
22:38
Speaker 9: margins than some of their competitors. You know, So what
22:42
Speaker 9: we'll look at more as is the restaurant level margin.
22:44
Speaker 9: And their's is good.
22:47
Speaker 8: It's not.
22:49
Speaker 9: Like leaps and bounds better than the competition. You know,
22:51
Speaker 9: that's more like a shake Shack or a Chipotle. You know,
22:55
Speaker 9: the fast casual chains tend to have that have stronger
22:58
Speaker 9: margins and on that end, But you know McDonald's they
23:04
Speaker 9: do do almost three million store and so they have
23:07
Speaker 9: wider restaurant margins, wider margins for their franchisees than a Wendy's,
23:12
Speaker 9: a Jack in the Box and Sonic and you know,
23:15
Speaker 9: they they leaned heavily into discounting and during the Great
23:18
Speaker 9: Recession and it enabled them to take share. They massively
23:22
Speaker 9: out performed their smaller competitors. So yeah, they're they're they're
23:28
Speaker 9: this is they're they're moving towards this, right, they want
23:30
Speaker 9: to establish that that dominance uh in the industry, but they're.
23:35
Speaker 8: They have to weigh.
23:37
Speaker 9: The franchise e earnings with that, right, because if they
23:41
Speaker 9: suggest a five dollars meal deal and the franchise e say,
23:43
Speaker 9: I can't make money off this, I'm not going to
23:45
Speaker 9: run it well, and then it's not going to happen.
23:48
Speaker 5: Right, So does that put like Barking in like a
23:51
Speaker 5: better spot since they have less franchisees? Am I making
23:53
Speaker 5: that up?
23:55
Speaker 6: No?
23:56
Speaker 9: Burger King is also most of the quick service chains
23:58
Speaker 9: are very heavily franchised. It's pretty easy operations, it's easy
24:03
Speaker 9: to train new employees, and so they're they're they're typically
24:07
Speaker 9: very heavily franchised.
24:09
Speaker 8: Burger King's in a.
24:10
Speaker 9: Better position this year just because they're lapping a few
24:14
Speaker 9: years of very weak results.
24:16
Speaker 8: So that's where I think Burger Kings advantage comes in.
24:19
Speaker 9: It's just it's just weaker year over year comparisons, and
24:22
Speaker 9: and management has has injected you know, billions of dollars
24:26
Speaker 9: into that franchise system, right, and so they're renovating stores,
24:31
Speaker 9: remodeling stores, they're marketing a lot heavier and so that
24:35
Speaker 9: those are all benefits for Burger King. And it could
24:38
Speaker 9: be you know, hurting McDonald's a little bit here, but
24:44
Speaker 9: you know, McDonald's is the eight hundred pound gorilla. They
24:47
Speaker 9: have top notch marketing program right, Like I said, at
24:51
Speaker 9: the top they can offer prices that even Burger King
24:54
Speaker 9: can't match. And so so that's why we're seeing kind
24:58
Speaker 9: of what we're seeing. Right, it's a it's a week
24:59
Speaker 9: and in our environment, and McDonald's wants so much to
25:03
Speaker 9: keep and grow their share.
25:05
Speaker 2: If a consumer's not going to fast food restaurants, what
25:07
Speaker 2: is the consumer eating? Are they just staying home and
25:10
Speaker 2: cooking at home?
25:13
Speaker 8: I think on the low end, that's what we're seeing.
25:14
Speaker 9: Yeah, you know, it is a case shape recovery hiring.
25:19
Speaker 8: High income people are doing better.
25:21
Speaker 9: You know, we're seeing stock markets, US stock markets at
25:24
Speaker 9: all time highs, Bitcoin near an all time high.
25:26
Speaker 8: Home prices remain elevated.
25:28
Speaker 9: Right, and so high income consumers are still doing pretty good.
25:32
Speaker 9: But even them are showing some even that cohort is
25:34
Speaker 9: showing some some weakness. Uh, and they're kind of trading
25:38
Speaker 9: down into the QSR cheaper occasions, and we're seeing low
25:42
Speaker 9: income consumers fall out. But you know, so we're seeing
25:46
Speaker 9: guest check averages rise, but we're where traffic is definitely down.
25:50
Speaker 9: You know, like I mentioned, it's low income consumers are
25:53
Speaker 9: about a third of traffic. So chains kind of have
25:56
Speaker 9: to try to balance it, right, Like they want to
25:59
Speaker 9: have value you for their low income consumers. They want
26:02
Speaker 9: to offer higher priced items to kind of attract some
26:04
Speaker 9: higher income consumers. And what we've seen is the chains
26:07
Speaker 9: like McDonald's and Jack in the Box that have been able.
26:09
Speaker 8: To draw in the high income consumers.
26:11
Speaker 9: Chipotle's another one, have outperformed their peers since the start,
26:16
Speaker 9: since the start of the pandemic.
26:18
Speaker 5: And I should point out to just take a look
26:19
Speaker 5: at Kroger's results, right, Like com sales rose just half
26:22
Speaker 5: a percent last quarter, so yes, at topped analysts what
26:27
Speaker 5: they expected, but growth has really stalled. I mean, you
26:30
Speaker 5: had business normalizing and you got really high inflation, and
26:33
Speaker 5: it's a cloudy picture. So even the solution of just
26:35
Speaker 5: buying and cooking at home can be pretty rough. Hey, Michael,
26:39
Speaker 5: thanks a lot. Michael Hale and Bloomberg Intelligence senior restaurant
26:41
Speaker 5: and food service analysts, who I think is deep teas
26:44
Speaker 5: here everyone back with us on Monday in studio.
26:47
Speaker 2: In studio, he finally found his train ticket, which he
26:50
Speaker 2: had lost for several years.
26:51
Speaker 5: I mean, it's hard to find to be sure back
26:53
Speaker 5: to and it's going to be about the back half
26:55
Speaker 5: for restaurants and quick service guys. Who's winning and who's not.
26:59
Speaker 5: How all that's going to want wind up playing out?
27:01
Speaker 1: Ah, you're listening to the Bloomberg Intelligence Podcast. Catch us
27:06
Speaker 1: live weekdays at ten am Eastern on applecar Play and
27:09
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27:12
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27:16
Speaker 1: station Just Say Alexa playing Bloomberg eleven thirty.
27:21
Speaker 4: All right.
27:21
Speaker 5: Joining us now is a very special guest. It's Thomas Eely,
27:24
Speaker 5: founder and CEO of highly On Now. Hilyon is quite
27:28
Speaker 5: interesting because I covered this company a few years ago
27:31
Speaker 5: when it was a long haul EV trucking company. They
27:35
Speaker 5: had a power train that they were calling the hyper
27:38
Speaker 5: truck eRx and it was going to be an EV
27:40
Speaker 5: trucker and it seemed like it had a lot of legs,
27:42
Speaker 5: it had a lot of interest, and then the company
27:45
Speaker 5: pivoted instead to become basically a power generation company. And
27:49
Speaker 5: it's a really interesting pivot. Yes, there's some similarities, but
27:52
Speaker 5: a really interesting pivot nonetheless, and Thomas joins us, Now,
27:57
Speaker 5: what's happened in the last few years, tell me about
27:59
Speaker 5: your business shift.
28:01
Speaker 10: Well, Alex, you outlined it perfectly, so you know, the
28:03
Speaker 10: last handful of years, there's been so much momentum behind
28:06
Speaker 10: EV specifically in the trucking space, but the reality is,
28:09
Speaker 10: over the last twelve eighteen months, we've seen a continued
28:13
Speaker 10: decline to the point of many of the companies in
28:15
Speaker 10: the space are facing bankruptcy or have already filed for bankruptcy.
28:19
Speaker 10: They can't raise additional cash, and so we were in
28:21
Speaker 10: a unique position where we still had a strong balance sheet.
28:24
Speaker 10: We had about three hundred million of cash on our
28:26
Speaker 10: balance sheets starting at the beginning of this year, and
28:29
Speaker 10: we had a unique technology in house as well, that
28:32
Speaker 10: is a generator basically a mini power plant that can
28:36
Speaker 10: be deployed outside of commercial buildings, data centers, EV charging sites,
28:41
Speaker 10: and so we saw that it was best to pivot
28:43
Speaker 10: the company to focus on that and actually move out
28:45
Speaker 10: of that EV semi truck space.
28:49
Speaker 3: All right, so you have this Carno platform. Tell us
28:52
Speaker 3: about that.
28:54
Speaker 10: Yeah, So think of it as, you know, a power
28:56
Speaker 10: plant that's the size of like the bed of a
28:59
Speaker 10: pickup truck. Almost it can produce two hundred kilowats of
29:02
Speaker 10: power and it's designed to be able to be stacked together.
29:05
Speaker 10: So if you think of an EV charging site, you're
29:08
Speaker 10: maybe going to need a couple of megawatts of power,
29:10
Speaker 10: so maybe you know ten carnogenerators, or if you think
29:13
Speaker 10: of a data center, you maybe need forty megawats of power.
29:17
Speaker 10: But if you then go to the other end of
29:18
Speaker 10: the extreme, you think of like a commercial like store
29:23
Speaker 10: like a Walmart or place like that, you're in need
29:25
Speaker 10: about that two hundred kiloots of power size. So our
29:28
Speaker 10: thought is, as you come in and you actually make
29:31
Speaker 10: this generator your primary power source, so you remove your
29:34
Speaker 10: dependency from the grid, you can actually make electricity cheaper
29:38
Speaker 10: with this gen set than most electricity costs out there.
29:41
Speaker 10: And now you kind of have this model where you
29:44
Speaker 10: now make power outside your building and you use the
29:47
Speaker 10: grid as your backup power supply.
29:50
Speaker 5: So what the two things kind of relate together is
29:53
Speaker 5: that what was wrong with the EV trucking part. Was
29:56
Speaker 5: it that it was too expensive to build at scale
29:59
Speaker 5: or was the and not there.
30:02
Speaker 10: Yeah, so five years ago fleets were saying they're going
30:05
Speaker 10: to buy EV trucks in mass volume, and that you know,
30:09
Speaker 10: by this time, you know, all most trucks being sold,
30:11
Speaker 10: we're going to be evs. The reality is is EV
30:14
Speaker 10: adoption has gone extremely slow, and fleets are saying, you know,
30:17
Speaker 10: we're going to buy onesie tuoesie trying for a little while,
30:20
Speaker 10: maybe we'll buy more. But what's really happened is people
30:23
Speaker 10: are waiting until the government mandates that evs need to
30:26
Speaker 10: be adopted, and we're seeing those dates continue to get
30:29
Speaker 10: pushed out to the right. And in addition to what
30:32
Speaker 10: you mentioned of the costs of EV trucks have continued
30:34
Speaker 10: to go up as well. So we're really just seeing
30:37
Speaker 10: this this situation where adoption isn't happening anywhere near the
30:41
Speaker 10: rate that was initially expected, and so being in the
30:45
Speaker 10: public markets, you know, the you know, companies needing to
30:48
Speaker 10: raise more cash and stock prices continue to decline, we
30:52
Speaker 10: just thought it was best to get out of that
30:54
Speaker 10: space and focus on an area where there's actually a
30:57
Speaker 10: lot of momentum.
30:57
Speaker 1: Right.
30:58
Speaker 10: You know, we talked about AI that needs a lot
31:00
Speaker 10: of power generation, So how.
31:02
Speaker 5: Does the so what can you take from the EV
31:06
Speaker 5: trucking to the power world, Like how were some things transferable.
31:11
Speaker 10: Yeah, so this generator, the Carno was actually something we
31:15
Speaker 10: acquired out of GE and it had been a project
31:17
Speaker 10: that we're working on with General Electric for a few
31:20
Speaker 10: years where we were actually going to put it as
31:23
Speaker 10: the generator inside the truck to charge the batteries while
31:26
Speaker 10: you were driving, And so we acquired it out of
31:28
Speaker 10: GE a couple of years ago. And we always saw
31:31
Speaker 10: it as a solution initially for trucks, but we could
31:34
Speaker 10: could go into the power generation space. But as you know,
31:37
Speaker 10: we've kind of seen the market shift. We saw that
31:40
Speaker 10: just going after power generation and stationary power first made
31:44
Speaker 10: a lot of sense. And then you know, it's still
31:46
Speaker 10: a technology that we see could be viable for the
31:49
Speaker 10: EV trucking space down the road.
31:52
Speaker 2: Talk to us about again on this new energy platform
31:55
Speaker 2: that you have. Where are you in terms of in
31:57
Speaker 2: your timeline of deploying these making sales, who do you
32:01
Speaker 2: target to sell to that type of thing?
32:02
Speaker 3: Where are unit development there?
32:05
Speaker 10: Yeah, so we're at a point where later this year
32:08
Speaker 10: we'll actually be getting units out into customers hands. So
32:11
Speaker 10: you know, it's been a north of five year development
32:14
Speaker 10: program both when it was in GE and now at
32:17
Speaker 10: highly on and so we're right on the cusp of
32:20
Speaker 10: just about to start getting units out there to customers.
32:23
Speaker 10: A few key markets we're going after. One is that
32:26
Speaker 10: EV charging space. Another is actually using waste gas. So
32:30
Speaker 10: if you think about like oil and gas sites, they
32:32
Speaker 10: flare a lot of gas right now, the carnogenerator can
32:35
Speaker 10: actually be a great way to take that gas and
32:38
Speaker 10: make electricity out of it. We're going after commercial applications
32:42
Speaker 10: like data centers, commercial warehouses, you know, hotels, hospitals, those
32:47
Speaker 10: type of applications. And then another one which is kind
32:50
Speaker 10: of unique, is actually the marine space, so powering ships
32:53
Speaker 10: and vessels off of this gen set as well. One
32:56
Speaker 10: of the unique things with it that we haven't talked
32:57
Speaker 10: about is it's a fuel agnostics so it can run
33:01
Speaker 10: on futuristic fuels like hydrogen like ammonia, but can also
33:05
Speaker 10: run today on fuels like natural gas and diesel and propane.
33:09
Speaker 10: And so for customers, you're kind of getting this like
33:11
Speaker 10: future proof solution.
33:13
Speaker 5: That's interesting. So it is transferable. What is the demand like.
33:18
Speaker 10: Yeah, so our generation demand is very strong right now.
33:22
Speaker 10: I mean, just to share an example with you, Like
33:24
Speaker 10: we obviously knew the EV trucking space. Well, when people
33:28
Speaker 10: would go talk to their utilities about getting a grid interconnect,
33:31
Speaker 10: trying to get electricity for their chargers, they're being told
33:35
Speaker 10: it's like two to three years just to even get
33:38
Speaker 10: access to the power, to get connected to the grid.
33:40
Speaker 10: And then in some instances, some parts of the country,
33:43
Speaker 10: there's being told there just isn't enough power available at all.
33:46
Speaker 10: So we see a few things happening where you've got
33:50
Speaker 10: ev charging, you've got AI for data centers, You've also
33:53
Speaker 10: got industrial applications moving over to electric, so the demand
33:57
Speaker 10: on the grid continues to increase. But we're all also
34:00
Speaker 10: in a position where new power plants aren't being made
34:03
Speaker 10: and infrastructure isn't being upgraded at the rate that it
34:06
Speaker 10: needs to be. So that's where we're seeing the market
34:08
Speaker 10: really shift to these kind of distributed power generation models
34:12
Speaker 10: where you make your own electricity locally to power your
34:15
Speaker 10: facility as opposed to being reliant on the grid. And
34:18
Speaker 10: so we see a massive shift happening to that sort
34:21
Speaker 10: of market over the next few years here, and it's
34:24
Speaker 10: already started, which is great to see.
34:26
Speaker 2: So I mean, I guess I mean you called out
34:27
Speaker 2: one of the big headwinds I guess facing the EV
34:30
Speaker 2: business today, at least here in the US, and that
34:32
Speaker 2: is whether the US electrical grid can even support the
34:36
Speaker 2: transition to EVS. You're down in Texas. You guys have
34:40
Speaker 2: your own grid, but how about just a big.
34:42
Speaker 3: Picture, Can the US grid support the transition to EVS.
34:47
Speaker 10: I think it's going to be a tough one without
34:49
Speaker 10: this distributed power generation model. Just this morning in Texas,
34:52
Speaker 10: we had a power blip at this facility. I was
34:55
Speaker 10: on a call this morning with a colleague in Michigan.
34:58
Speaker 10: Her power was out. I mean, power is. The reliability
35:02
Speaker 10: of the grid is a real problem right now. And
35:05
Speaker 10: one crazy stat is if you plugged in ten semi
35:08
Speaker 10: trucks into the grid, that would consume as much electricity
35:12
Speaker 10: as the entire Super Bowl stadium during game time. So wow,
35:16
Speaker 10: it's a crazy amount of power that these trucks will draw.
35:19
Speaker 10: And I don't think the grid's able to handle it today,
35:21
Speaker 10: at least not universally across the country. And if you
35:26
Speaker 10: do want to support that type of demand, you need
35:28
Speaker 10: not only the power plants, but then you need to
35:30
Speaker 10: go build transmission lines, you need to set up the
35:32
Speaker 10: local infrastructure. So it's kind of this ripple effect versus
35:37
Speaker 10: you could just put this generator down and start making
35:40
Speaker 10: your own electricity locally.
35:42
Speaker 5: It's really interesting stuff. I wish you luck on this one.
35:44
Speaker 5: Let's check back in and see how it's going. I
35:47
Speaker 5: know that this is all a huge transition pretty much
35:49
Speaker 5: for everybody and companies included Thomas Healey joining US, founder
35:53
Speaker 5: and CEO of highly On joining us. But it is
35:56
Speaker 5: so interesting, right because it's I just think his transition
35:59
Speaker 5: is so interesting because.
36:01
Speaker 4: It's too hard.
36:03
Speaker 5: Evs are too hard if the demand's not there, how
36:05
Speaker 5: do you stay in business?
36:06
Speaker 3: I don't know how you do it as a public company.
36:08
Speaker 2: I know stock's been been down and they've been drawing
36:10
Speaker 2: down on their cash that they got from their IP.
36:12
Speaker 2: I'm not sure if there was a spacronaut back in
36:13
Speaker 2: the day, but that's kind of an interesting test case
36:17
Speaker 2: to see how a company, as a public traded company
36:19
Speaker 2: can completely pivot the business.
36:22
Speaker 5: And I remember too like Tesla, Yes, it makes cars,
36:24
Speaker 5: but it's also a storage play. It's also a battery
36:27
Speaker 5: storage company, and in which case you wonder, like where
36:29
Speaker 5: the value of EV's actually is.
36:32
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