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Under Armour Sinks as Tariffs, Sputtering Sales Hit Outlook · Bloomberg Intelligence

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  Speaker 2: Back to earnings under Armour shares. Let's take a look.
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  Speaker 2: They are down eighteen percent. They forecast worse than expected
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  Speaker 2: sales and profit for the current quarter. Here to break
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  Speaker 2: it all down for us, as Poohim Goyle, senior US
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  Speaker 2: e commerce and retail analysts at Bloomberg Intelligence poon em
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  Speaker 2: thanks for coming out this morning. So weren't they just
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  Speaker 2: I'm confused because it wasn't under Armour just starting to
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  Speaker 2: make this turnaround planned.
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  Speaker 3: Yeah, you know what, We've seen under Armour make several
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  Speaker 3: attempts at a turnaround in the last decade. So this
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  Speaker 3: is another attempt. And they do have the right pillars
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  Speaker 3: in place, you know, focusing on brand equity, forocusing on
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  Speaker 3: full price sales. The issue is that the macro's not cooperating.
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  Speaker 3: We have one hundred million dollar impact on their costs
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  Speaker 3: from tariffs that they're expecting. We're seeing that they want
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  Speaker 3: to push full price in an environment where promotions are
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  Speaker 3: picking up, so that's going to cost them sales net net. Basically,
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  Speaker 3: that means that sales are going to be down mid
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  Speaker 3: to high single digits in the next fiscal quarter, and
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  Speaker 3: North America, which is a clear key region for them,
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  Speaker 3: could be down low double digits. So the turnaround isn't
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  Speaker 3: shaping up like we expected, and I just think it
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  Speaker 3: needs a lot more time right now.
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  Speaker 4: That is actually what caught my eye to the weak
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  Speaker 4: North America outlook. I think they're forecasting a fourteen percent
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  Speaker 4: to sixteen percent drop in North America sales, which is massive.
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  Speaker 4: So what then, is your view of under Armour's strategy,
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  Speaker 4: especially compared to its peers like Nike or Adidas or
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  Speaker 4: Adidas depending on who you're speaking with.
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  Speaker 3: Yeah, so I think each of them are pursuing the
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  Speaker 3: strategy in a similar way in that they're focusing on
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  Speaker 3: the profitable channels to drive growth. So when you look
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  Speaker 3: at Adidas, you know they've been doing really well for
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  Speaker 3: the last few years, and it's in part by their
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  Speaker 3: effort to really push innovation and product to the consumer
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  Speaker 3: in the right channels, and really they've done a great
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  Speaker 3: job When it comes to Nike, they're clearly in turnaround mode.
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  Speaker 3: They are moving forward with their turnaround. We are starting
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  Speaker 3: to see signs of you know, things getting better, especially
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  Speaker 3: on their new products. That said, Nike hasn't reported yet.
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  Speaker 3: And Nike too has exposure to Vietnam when it comes
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  Speaker 3: to their production, so they will to be under pressure.
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  Speaker 3: But we don't think that promotions go away completely.
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  Speaker 2: Right.
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  Speaker 3: Nike is liquidating a lot of inventory throats direct channel
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  Speaker 3: and the promotions are very high. So when you think
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  Speaker 3: about the customer, they're going to see Nike being discounted
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  Speaker 3: aggressively because they're trying to liquidate inventory, and then you
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  Speaker 3: see under Armour going at full price what our customer
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  Speaker 3: is going to buy, right, it just means that under
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  Speaker 3: Armour isn't going to be able to delay over the
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  Speaker 3: growth that they're expecting to because of the current promotional environment.
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  Speaker 2: So with that said, I mean, the CEO was talking
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  Speaker 2: and said that they want to focus on strengthening the brand,
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  Speaker 2: positioning right premium products. They came out with this U
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  Speaker 2: a halo footwear you know line, is that the answer
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  Speaker 2: for them?
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  Speaker 3: The answer is, in part, yes, you need to have
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  Speaker 3: you know what he talked about on the call, which
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  Speaker 3: I think every brand needs to do, is they need
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  Speaker 3: to have a good, better, best positioning within their product lineup.
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  Speaker 3: So yes, you can go ahead and introduce premium product,
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  Speaker 3: but remember under Armour isn't really viewed as a premium
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  Speaker 3: brand like Nike is, right, So you're trying to change
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  Speaker 3: customer perception here, and that doesn't happen overnight, so it'll
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  Speaker 3: take time. I think the value chained that under Our
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  Speaker 3: plays and is still very very important to their brand
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  Speaker 3: and their ability to keep prices low there is going
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  Speaker 3: to be critical. It'll be nice to see what they
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  Speaker 3: do on the premium side, but I don't think they
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  Speaker 3: can hang their hat on that for a turnaround just yet.
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  Speaker 2: All right, you said it all. Under Armour share still
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  Speaker 2: down nineteen percent. That's Punam Gooyle, senior US e Commerce
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  Speaker 2: and retail analysts Over at Bloomberg Intelligence.
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  Speaker 2: And welcome back to Bloomberg Intelligence. I'm Lisa Matteo sitting
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  Speaker 2: alongside Isabelle Lee. Paul Sweeney has the day off. All right,
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  Speaker 2: we're going to get back to earnings. Wendy's cut their
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  Speaker 2: full year sales guidance. They posted a bigger than expected
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  Speaker 2: quarterly decline. So what is going on at the burger chain. Well,
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  Speaker 2: let's bring in Michael Hallin. He's Bloomberg Intelligence senior restaurant
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  Speaker 2: and food service analysts joining us live from Princeton. Mike's
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  Speaker 2: thanks for coming in. What can you tell us about Wendy's.
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  Speaker 2: What was the big sticking point for them?
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  Speaker 5: Oh, listen, the previous management team through a lot of
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  Speaker 5: promotions at the wall and none of them are really stuck.
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  Speaker 5: So you know, the danger of you know, promoting a
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  Speaker 5: lot of different products is twofold.
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  Speaker 2: You know.
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  Speaker 5: Number one, it makes the operations suffer, right, So it's
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  Speaker 5: it's harder to execute in the kitchens, it's harder to
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  Speaker 5: execute at the front of the house. Speed of service
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  Speaker 5: ends up slipping, you know, quality of the food could
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  Speaker 5: suffer because it's it's not served hot, right, and then
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  Speaker 5: marketing so consumers get confused, right, Like what we saw
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  Speaker 5: at McDonald's was run two promotions over the quarter, right,
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  Speaker 5: Wendy's ran a handful. So when you're putting what do
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  Speaker 5: you put the marketing dollars behind?
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  Speaker 6: Right?
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  Speaker 5: But if you start promoting something for a couple of
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  Speaker 5: weeks and then switch your message, people don't really know
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  Speaker 5: why they're coming to your store, don't have a good
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  Speaker 5: reason to come to your stores. And so that's why
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  Speaker 5: we saw this massive underperformance in the second quarter, about
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  Speaker 5: four hundred basis points versus the rest of quick service restaurants.
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  Speaker 4: And what is your take on when they's decision to
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  Speaker 4: cut it's twenty twenty five EPs outlook below the prior
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  Speaker 4: range and analyst expectation. Is it more structural weakness like
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  Speaker 4: consumer trends or is it really more one off pressures
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  Speaker 4: and how long do you think those issues might last?
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  Speaker 5: So this is one off pressures. I mean you saw
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  Speaker 5: McDonald's outperform the market by two hundred basis points, right,
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  Speaker 5: and so this is primarily self inflicted. You know, restaurant
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  Speaker 5: consumers are spending money. They're more discerning, however, right, and
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  Speaker 5: so the chains that are providing a good, consistent experience,
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  Speaker 5: good value for the money, that's where people are spending
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  Speaker 5: their money. They don't want to go out and spend
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  Speaker 5: a lot of money and have a bad night, a
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  Speaker 5: bad lunch, a bad dinner, whatever it is, right, And
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  Speaker 5: so that's why we're seeing this huge bifurcation and there's
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  Speaker 5: a widening gap between winners and losers. And so for Wendys,
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  Speaker 5: when you have bad operations, right, and when you have
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  Speaker 5: bad service, it takes time to regain that customer trust. So,
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  Speaker 5: you know, they got it to pretty terrible SAMSAR sales
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  Speaker 5: here in the US for the rest of the year.
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  Speaker 5: They were down five to six percent in July, which
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  Speaker 5: is a horrific number, you know, way underperforming. The street,
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  Speaker 5: which is over was just about a one and a
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  Speaker 5: half percent increase. So this is going to take time to.
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  Speaker 2: Fix now, Mike. One of the things you mentioned these promotions, right,
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  Speaker 2: but Wendy's has also done things like expanded their operating hours.
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  Speaker 4: Right.
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  Speaker 2: They're making this push for breakfast late night business. I'm
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  Speaker 2: guessing that's not working. I don't think breakfast when I
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  Speaker 2: think Wendy's.
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  Speaker 5: I don't know, Well, this breakfast has been an issue
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  Speaker 5: for years now since they debuted it right there, and
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  Speaker 5: they debuted breakfast into it, you know, at a time
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  Speaker 5: when breakfast sales have been slipping, and they're slipping even
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  Speaker 5: more this year because it's just an easy meal to skip.
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  Speaker 5: You can grab a bagel and a coffee and easily
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  Speaker 5: make it to lunch, right, And so they've been trying
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  Speaker 5: to gain steam in this daypart, and so they've been
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  Speaker 5: actually spending corporate dollars in addition to the franchise e
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  Speaker 5: dollars to try to expand that day part at a
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  Speaker 5: time when people are pulling back at breakfast and it's
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  Speaker 5: been a disaster for their lunch and their dinner business.
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  Speaker 4: And Wendy has also reduced his dividends significantly, and it's
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  Speaker 4: CEO is also stepping down. So how do you think
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  Speaker 4: these capital allocation and leadership changes might affect the strategy
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  Speaker 4: moving forward?
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  Speaker 5: Yeah, Kirk Tanner basically lit this thing on fire and
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  Speaker 5: ran for the exits. It's you know, he made a
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  Speaker 5: lot of management switches, moved a lot of people around
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  Speaker 5: the organization, fired people, brought new people in, you know,
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  Speaker 5: and then left right before things fell apart. Right, And
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  Speaker 5: now they have an interim CEO who said the right
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  Speaker 5: things on the call, right, But he comes from ups
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  Speaker 5: and he's only been in the restaurant industry since December, right,
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  Speaker 5: so there's definitely a void at the top. We would
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  Speaker 5: love to see them find a good, strong restaurant operator
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  Speaker 5: slash marketer to run this business going forward.
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  Speaker 2: So what's the winning formula for them? What do they
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  Speaker 2: have to do?
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  Speaker 6: Is it?
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  Speaker 2: Is it more promotions and more collaborations.
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  Speaker 5: No, there's too many of those, So they're going to
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  Speaker 5: cut They're going to cut back on them and get
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  Speaker 5: the operations right right. And once you get the operations right,
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  Speaker 5: meaning people go and they have a good experience, speed
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  Speaker 5: of service is on point right, the food gets to
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  Speaker 5: you hot right, you have a good, enjoyable experience. Once
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  Speaker 5: they get that stuff nailed, then they can start pushing
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  Speaker 5: on the marketing right, because you don't want people to
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  Speaker 5: come back to your restaurants and then have another bad experience.
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  Speaker 5: Then you're really going to be up the creek without
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  Speaker 5: a paddle, right, And so that that's what it's going
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  Speaker 5: to be about. It's going to be about nailing the operations.
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  Speaker 5: Then once they're confident in that, then they can start
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  Speaker 5: pressing more, do some more collaborations, whatever, institute more menu items,
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  Speaker 5: and that's what management talked about on the call, they
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  Speaker 5: said they're going to push a lot of the initiatives
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  Speaker 5: they had original only planned for the second half into
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  Speaker 5: twenty twenty six. But you know, it was a crazy call.
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  Speaker 5: I mean they were talking about how a lot of
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  Speaker 5: these initiatives they were just basically pushing out with very
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  Speaker 5: little testing, which is not how you run a restaurant business.
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  Speaker 2: It's not I remember that Taki's collapse. They just didn't
• 10:16
  Speaker 2: work out. Thank you Michael Hammon for joining us, the
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  Speaker 2: Bloomberg Intelligence senior Restaurant and food service analyst.
• 10:25
  Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
• 10:28
  Speaker 1: weekdays at ten am Eastern on Applecarplay and Android Auto
• 10:32
  Speaker 1: with the Bloomberg Business app, Listen on demand wherever you
• 10:35
  Speaker 1: get your podcasts, or watch us live on YouTube.
• 10:39
  Speaker 2: There has been a ton of stories in tech and
• 10:41
  Speaker 2: the news flow is continuing. I want to start with
• 10:43
  Speaker 2: this first one, Meta picking up Pimko blue out for
• 10:46
  Speaker 2: a twenty nine billion dollar data center deal. So here
• 10:49
  Speaker 2: to talk more about it, Man Deep Sink, Bloomberg Intelligence
• 10:51
  Speaker 2: senior Tech industry analysts, Mandy, thanks for joining us. So
• 10:54
  Speaker 2: twenty nine billion dollar data center deal. I mean that's
• 10:58
  Speaker 2: that's pretty big.
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  Speaker 6: No, it's only if you don't look at their twenty
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  Speaker 6: twenty six CAPEX number, which could be north of one
• 11:04
  Speaker 6: hundred billion. So look, the numbers are getting bigger and
• 11:09
  Speaker 6: bigger in the world of AI infrastructure. And for a
• 11:13
  Speaker 6: company like Meta, which was spending maybe thirty billion dollars
• 11:17
  Speaker 6: in capex every year and has tripled its capex probably
• 11:21
  Speaker 6: two one hundred plus next year, they need some external
• 11:26
  Speaker 6: help when it comes to you know, procuring the land,
• 11:30
  Speaker 6: getting power twenty four to seven. I mean, at the
• 11:33
  Speaker 6: end of the day, Meta is an application company that
• 11:37
  Speaker 6: you know does ads, and they're trying to get in
• 11:40
  Speaker 6: their own chips as well, but that's not their core competency.
• 11:44
  Speaker 6: So it makes sense that you know, they're partnering with
• 11:48
  Speaker 6: these large players on the infrastructure side because it will
• 11:53
  Speaker 6: turn out to be a supercycle, and you know, the
• 11:56
  Speaker 6: more partners they have in terms of these AI infrastructure buildouts,
• 12:02
  Speaker 6: I think it will help them in the long term.
• 12:05
  Speaker 4: But is this kind of public private financial structure common
• 12:08
  Speaker 4: for large tech infrastructures like Meta? Are they pushing into
• 12:11
  Speaker 4: new ground and what are the benefits of using debt
• 12:14
  Speaker 4: versus equity?
• 12:15
  Speaker 6: Well, I mean now with one hundred billion dollar CAPEX,
• 12:19
  Speaker 6: it's more than their free cash flow every year. So
• 12:23
  Speaker 6: up until now, you know, we were in that thirty
• 12:26
  Speaker 6: to sixty billion dollar range. Metas annual free cash flow
• 12:31
  Speaker 6: is around seventy billions. So from that perspective, they could
• 12:35
  Speaker 6: afford to fund it on their own, I mean, because
• 12:38
  Speaker 6: the scale keeps getting bigger and bigger every year. And look,
• 12:42
  Speaker 6: others may have the same problem. Microsoft has also talked
• 12:45
  Speaker 6: about one hundred and twenty billion dollars run rate probably
• 12:49
  Speaker 6: in twenty twenty six as well. So external financing will
• 12:53
  Speaker 6: come into play because, as I said, these companies have
• 12:57
  Speaker 6: the lllms, they have the data, the algorithm, the applications,
• 13:04
  Speaker 6: but they don't have the expertise in terms of procuring
• 13:07
  Speaker 6: power twenty four to seven, and you need a lot
• 13:10
  Speaker 6: more power when it comes to AI scale that everyone
• 13:14
  Speaker 6: is imagining, you know, twelve months from now, twenty four
• 13:17
  Speaker 6: months from now. So from that perspective, also external expertise
• 13:22
  Speaker 6: in terms of procuring land, setting up large clusters, how
• 13:26
  Speaker 6: to power them, it does make sense that they have
• 13:29
  Speaker 6: a private partnership there.
• 13:31
  Speaker 2: Now, I always hear you're talking about capex, that's so
• 13:33
  Speaker 2: much je, But when are we going to rese that
• 13:36
  Speaker 2: point where peop are going to start saying, you know what,
• 13:38
  Speaker 2: where's my return on investment? Like, I see you're spending
• 13:41
  Speaker 2: you know this much? But when are people going to
• 13:43
  Speaker 2: start to turn the question a little bit?
• 13:45
  Speaker 6: So I mean, look at how far open ai and
• 13:49
  Speaker 6: Nthropic have come. Right, So we know with open ai
• 13:53
  Speaker 6: they are at a twelve billion dollar and we'll run
• 13:56
  Speaker 6: rate now revenue run rate, and Thropic has five x.
• 13:59
  Speaker 6: It went from one billion at the start of the
• 14:01
  Speaker 6: year to five billion dollar rund rate. Look at Microsoft's
• 14:05
  Speaker 6: cloud growth number. They went to thirty nine percent growth
• 14:09
  Speaker 6: in Azure, seventeen percent left from AI. So look, you're
• 14:14
  Speaker 6: not going to see a very clear distinction between what
• 14:17
  Speaker 6: is the AI contribution. In the case of Microsoft, it's
• 14:21
  Speaker 6: very clear. But for Meta, they talked about their ads
• 14:26
  Speaker 6: getting better, and when you look at the growth rates,
• 14:30
  Speaker 6: Meta grew twenty two percent in the quarter. Compare that
• 14:32
  Speaker 6: to Snapchat four percent Pinterest and these are companies that
• 14:37
  Speaker 6: are fifty times smaller in scale than Meta. So the
• 14:41
  Speaker 6: fact that Meta is growing that fast, they're sort of
• 14:46
  Speaker 6: proving to everyone that, look, there is an advantage to
• 14:49
  Speaker 6: owning the infrastructure to investment in AI. And even though
• 14:54
  Speaker 6: the model is not similar to a Microsoft where they
• 14:57
  Speaker 6: are renting the cloud capacity and it's an old reredictable
• 15:00
  Speaker 6: revenue stream meta, I think has a higher bar to
• 15:03
  Speaker 6: prove in terms of your ROI question. But clearly, I
• 15:09
  Speaker 6: think the fact that they did so well this earnings
• 15:13
  Speaker 6: they already have an upper hand when it comes to
• 15:15
  Speaker 6: digital ads.
• 15:16
  Speaker 4: What about when it comes to soft Bank and the
• 15:18
  Speaker 4: Stargate AI push. What's significance of soft Bank buying the
• 15:21
  Speaker 4: fox Con plant in Ohio and can you talk about
• 15:24
  Speaker 4: their bigger ambitions for AI?
• 15:27
  Speaker 6: I mean soft Bank also has a big announcement from
• 15:31
  Speaker 6: earlier in the year, you know, five hundred billion up
• 15:33
  Speaker 6: to five hundred billion dollars in investment. So all these
• 15:37
  Speaker 6: companies have to figure out how is it that they're
• 15:40
  Speaker 6: going to deploy the money. So in the case of
• 15:43
  Speaker 6: soft Bank, I mean, they either partner with TSMC or
• 15:47
  Speaker 6: fox Con because they don't assemble their own chips. They
• 15:51
  Speaker 6: don't do, you know, semiconductor manufacturing, So partnering makes a
• 15:55
  Speaker 6: ton of sense here in the United States. And that's
• 15:58
  Speaker 6: where that five hundred billion dollar number you can show
• 16:01
  Speaker 6: that this is how much I deployed this year, and
• 16:05
  Speaker 6: it kind of shows your roadmap for the following years
• 16:07
  Speaker 6: as well, because now that you're investing in one facility,
• 16:11
  Speaker 6: chances are you'll probably add to that next year and
• 16:14
  Speaker 6: so on.
• 16:15
  Speaker 2: All right, man deep Sing, Always a pleasure. Glad to
• 16:17
  Speaker 2: have you here in the studio. Bloomberg Intelligence, senior tech
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  Speaker 2: industry analyst on the latest tech announcement.
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  Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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• 16:38
  Speaker 2: All eyes have been on the Central Bank and interest rates, right,
• 16:40
  Speaker 2: but there's a new book out. It's taking a look
• 16:43
  Speaker 2: into how decisions behind the fit, the ECB, etc. They're
• 16:46
  Speaker 2: constrained by the natural rate of interest. So what exactly
• 16:51
  Speaker 2: is this? What we're going to do is go to
• 16:53
  Speaker 2: the expert. Is Tom Orlick, Bloomberg Economists chief ecomomist joins
• 16:57
  Speaker 2: us from DC. Thanks for joining us, tom So. The
• 17:00
  Speaker 2: book is called The Price of Money, A Guide to
• 17:02
  Speaker 2: the past, present and future of the rate Natural rate
• 17:06
  Speaker 2: of Interest. I got to start by asking you, what
• 17:09
  Speaker 2: exactly is this, this natural rate of interest?
• 17:12
  Speaker 7: So thanks for having me on, Lisa. So the natural
• 17:16
  Speaker 7: rate of interest, it's kind of a won key concept, right,
• 17:20
  Speaker 7: but if you're an investor in the treasury market, if
• 17:24
  Speaker 7: you're an investor in the equity market, if you're an
• 17:26
  Speaker 7: investor in the real estate market, it's pretty important. The
• 17:31
  Speaker 7: natural rate of interest is the rate of interest which
• 17:34
  Speaker 7: balances the supply of saving and the demand for investment
• 17:39
  Speaker 7: in the economy. And for a long time, from the
• 17:42
  Speaker 7: nineteen eighties through the twenty tens, it was falling, right.
• 17:47
  Speaker 7: That's why Larry Summers was talking about secular stagnation. That's
• 17:52
  Speaker 7: why the US Treasury was borrowing at such low rates
• 17:55
  Speaker 7: for much of the last decade. The big argument that
• 17:59
  Speaker 7: we make in our book, a book with essays by
• 18:03
  Speaker 7: my colleagues at Bloomberg Economics, edited by Stephanie Flanders, Jamie Rush,
• 18:08
  Speaker 7: and myself, The big argument we make is that the
• 18:12
  Speaker 7: forces that were dragging interest rates down for much of
• 18:16
  Speaker 7: the last four decades have now reversed, and we now
• 18:20
  Speaker 7: have gone from a world where there's too much saving,
• 18:23
  Speaker 7: not enough investment, and so low interest rates to a
• 18:27
  Speaker 7: world where there's not enough saving, too much investment, and
• 18:32
  Speaker 7: so the US Treasury and everybody else is going to
• 18:35
  Speaker 7: be paying much more to borrow.
• 18:37
  Speaker 4: So what are the big forces among demographics, technology, and
• 18:41
  Speaker 4: geopolitics that you think will drive the natural rate higher
• 18:45
  Speaker 4: in the coming decade.
• 18:47
  Speaker 7: So it's a great question, Isabelle. So let's think about
• 18:50
  Speaker 7: what was dragging interest rates down. So first of all,
• 18:54
  Speaker 7: you had too much saving. The baby boomers were working
• 18:59
  Speaker 7: and saving money for their retirement. China, Saudi Arabia, other
• 19:04
  Speaker 7: petro states were pumping their savings into the US treasury market.
• 19:10
  Speaker 7: And then on the investment side, well, governments had their
• 19:13
  Speaker 7: debt under control, government deficits were low, and growth was weak,
• 19:19
  Speaker 7: which meant the private sector didn't have a huge incentive
• 19:22
  Speaker 7: to invest. So for a long time, from the nineteen
• 19:25
  Speaker 7: eighties to the twenty tens, the pattern was too much saving,
• 19:30
  Speaker 7: not enough investment, and falling interest rates. In the last decade,
• 19:35
  Speaker 7: all of those trends have started to reverse. The baby
• 19:38
  Speaker 7: boomers have retired, so they're not adding to their pensions,
• 19:42
  Speaker 7: they're spending their pensions down. China, Saudi Arabia, they're not
• 19:47
  Speaker 7: putting any money in the US treasury market anymore, and
• 19:51
  Speaker 7: US treasury borrowing has exploded. President Trump inherited a deficit
• 19:57
  Speaker 7: of six point four percent of GDP in twenty four
• 20:01
  Speaker 7: and with his One Big Beautiful Bill, threatens to send
• 20:06
  Speaker 7: that deficit higher. So the pattern is shifted from too
• 20:10
  Speaker 7: much saving, not enough investment, and falling interest rates to
• 20:16
  Speaker 7: not enough saving, too much investment and rising interest rates.
• 20:21
  Speaker 7: Donald Trump wants a new FED chair to cut the
• 20:24
  Speaker 7: short term policy rate. Even if he does that, we
• 20:28
  Speaker 7: think these big structural forces are going to keep longer
• 20:31
  Speaker 7: term borrowing costs elevated in the years ahead.
• 20:35
  Speaker 2: Yeah, and you mentioned that, So your book suggests that
• 20:37
  Speaker 2: it's not going to be that simple to just, you know,
• 20:39
  Speaker 2: get a new FED chair.
• 20:40
  Speaker 7: Correct, Yeah, that's right. So there's there's so much excitement
• 20:45
  Speaker 7: around the question of who the next FED chair is
• 20:47
  Speaker 7: going to be. Yesterday we had Stephen Myron, the head
• 20:52
  Speaker 7: of the Counsel of Economic Advisors, nominated to the FED Board.
• 20:57
  Speaker 7: There's talk that perhaps Kevin Hassett, the head of the NEEC,
• 21:01
  Speaker 7: perhaps Kevin Walsh, former member of the FMC, could be
• 21:05
  Speaker 7: the new FED chair. And the market is betting that
• 21:09
  Speaker 7: whoever it is is going to move the dial and
• 21:12
  Speaker 7: start delivering a lower FED policy rate. But guess what,
• 21:17
  Speaker 7: it's not the FED which has the determining force on
• 21:21
  Speaker 7: the cost of borrowing across the US economy. It's actually
• 21:25
  Speaker 7: those bigger dynamics, the balance between saving and investment. And
• 21:30
  Speaker 7: the big argument we make in our book is that
• 21:32
  Speaker 7: that balance has shifted, and so it doesn't matter who
• 21:35
  Speaker 7: the FED chair is, borrowing costs are going to be
• 21:37
  Speaker 7: structurally higher.
• 21:39
  Speaker 4: And you mentioned this earlier that if the cost of
• 21:41
  Speaker 4: money keep rising, what then should governments, businesses, and individuals
• 21:45
  Speaker 4: do differently to maybe adapt.
• 21:50
  Speaker 7: So let's think about what impact very low borrowing costs
• 21:54
  Speaker 7: have had in past decades. So first for governments, when
• 21:59
  Speaker 7: borrowing is cheap, then governments can keep on piling on
• 22:03
  Speaker 7: debt and it's still sustainable. Think about equity market investors
• 22:10
  Speaker 7: or property market investors. If you've put money to work
• 22:13
  Speaker 7: in the US stock market or in US real estate
• 22:16
  Speaker 7: pretty much anytime over the last four decades, you've made
• 22:19
  Speaker 7: quite a lot of money. And part of the reason
• 22:22
  Speaker 7: for that is that interest rates have been low, So
• 22:25
  Speaker 7: your cost of borrowing to make stock or property investments
• 22:29
  Speaker 7: has been low. Now, with interest rates rising, all of
• 22:33
  Speaker 7: those dynamics swing into reverse for the US, the US
• 22:38
  Speaker 7: Treasury could be facing a world in the years ahead
• 22:40
  Speaker 7: where the cost of interest payments on their debt is
• 22:44
  Speaker 7: more than total US spending on the military, on defense,
• 22:47
  Speaker 7: on the Pentagon. For investors in the stock market or
• 22:51
  Speaker 7: the equity market, that upward pressure on asset prices from
• 22:56
  Speaker 7: low interest rates, well, at a minimum, I think we
• 23:00
  Speaker 7: can say that's not going to be guaranteed going forwards,
• 23:03
  Speaker 7: and we could well be moving into a world where
• 23:06
  Speaker 7: structurally higher borrowing costs actually mean downward pressure on stocks,
• 23:11
  Speaker 7: downward pressure on real estate.
• 23:13
  Speaker 2: So, Tom, what can you tell us about You know,
• 23:15
  Speaker 2: where is the natural rate of injuries? Where is it headed?
• 23:20
  Speaker 7: So the focus of our book is on the natural
• 23:25
  Speaker 7: rate of the ten year horizon. Now we think it's
• 23:31
  Speaker 7: headed up from a low of below two percent in
• 23:37
  Speaker 7: the mid twenty tens to around two and a half
• 23:40
  Speaker 7: percent today, and it's going to continue edging higher in
• 23:45
  Speaker 7: the months and years ahead. Now, what does that mean
• 23:49
  Speaker 7: for the ten year treasury the rate, which is probably
• 23:53
  Speaker 7: the most important one in the whole global financial system. Well,
• 23:57
  Speaker 7: we think something in the four to five percent range,
• 24:00
  Speaker 7: something around four point five percent is going to be
• 24:03
  Speaker 7: the new normal in the years ahead, doesn't mean there
• 24:07
  Speaker 7: isn't going to be huge variation around that. If the
• 24:10
  Speaker 7: Fed cuts policy rates, if that becomes the narrative for
• 24:13
  Speaker 7: the next few months, it's going to impact long term
• 24:16
  Speaker 7: borrowing costs. But we think the new normal around which
• 24:20
  Speaker 7: we're going to be fluctuating in the months and years
• 24:23
  Speaker 7: ahead for the ten year treasury is around four point five.
• 24:27
  Speaker 4: Percent and we have less than one minute left. But
• 24:29
  Speaker 4: you mentioned risks like AI war and climate. Give us
• 24:32
  Speaker 4: a sense on how exactly those might drive up the
• 24:35
  Speaker 4: natural rate.
• 24:37
  Speaker 7: So maybe we'll just talk about the AI piece of it. So, AI,
• 24:42
  Speaker 7: if it delivers on its promise, is going to be
• 24:45
  Speaker 7: a game changer for growth. And if the economy starts
• 24:49
  Speaker 7: growing faster, well that's going to create all kinds of
• 24:52
  Speaker 7: investment opportunities. Investment in the data centers to power AI,
• 24:58
  Speaker 7: investment in re configuration of factories and offices to take
• 25:03
  Speaker 7: advantage of the new technology. And if investment demand goes up,
• 25:09
  Speaker 7: well that changes the saving investment balance and that will
• 25:13
  Speaker 7: be another force which adds pressure for interest rates to
• 25:17
  Speaker 7: rise higher.
• 25:17
  Speaker 2: All right, tom Orlick, thank you so much. Good look
• 25:20
  Speaker 2: at the book Boomberg Economics, Chief economist here at Bloomberg.
• 25:24
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