Latest / Bloomberg Intelligence / Solar Cost Declines To Persist Despite Tariff Disruption: Evans

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Solar Cost Declines To Persist Despite Tariff Disruption: Evans · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Bramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:15
  Speaker 1: you and your money, whether you're at the grocery store
• 0:17
  Speaker 1: or the trading floor. Find the Bloomberg p m L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Earlier today,
• 0:33
  Speaker 1: the dollar was just starting to get a bid in
• 0:35
  Speaker 1: strengthening against rival currencies, but now it's back down in
• 0:39
  Speaker 1: weakening against uh the rival currencies. Here to talk about
• 0:44
  Speaker 1: whether we can expect to see the ongoing weakness continue
• 0:49
  Speaker 1: for the dollar is Doug Borthwick, Managing director and head
• 0:51
  Speaker 1: of FX at Chapter Lane and Co H. Doug, thank
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  Speaker 1: you so much for being with us. You know, this
• 0:57
  Speaker 1: is a really important question, and I just want to
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  Speaker 1: frame this issue first because I was reading a story
• 1:02
  Speaker 1: about how the pace of dollar denominated emerging market bond
• 1:07
  Speaker 1: sales are hitting a record so far this year, and
• 1:13
  Speaker 1: this is basically a leveraged bet that the dollar will
• 1:16
  Speaker 1: continue to depreciate and then emerging market currencies will continue
• 1:19
  Speaker 1: to appreciate. Is there any risk that all these investors
• 1:24
  Speaker 1: are wrong? Well, there's certainly a risk of the investors
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  Speaker 1: are wrong. That there always is, there's no one way bet.
• 1:30
  Speaker 1: But I think the one thing that they're putting their
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  Speaker 1: their money on is the fact that there will be
• 1:34
  Speaker 1: a continuation of the dollar weakening. Now, dollar weakness is
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  Speaker 1: something that this administration has been pushing from day one,
• 1:40
  Speaker 1: when President Trump has talked about making the US more competitive,
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  Speaker 1: and that's certainly the case, and we're seeing weakness in
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  Speaker 1: the US all However, it's it's expounded somewhat by what's
• 1:52
  Speaker 1: happening with reserve managers and how they're managing the reserves
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  Speaker 1: given uh, you know, how they're moving money into China
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  Speaker 1: and moving it out of the US or not allocating
• 2:00
  Speaker 1: towards US treasuries as much as they used to. And
• 2:03
  Speaker 1: what's really interesting is that once the SDR the I
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  Speaker 1: M S currency came into being, and then they decided
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  Speaker 1: that China should be part of that, they made China
• 2:10
  Speaker 1: ten percent or eleven percent allocation, and that man to
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  Speaker 1: bother the US is and it means that if the
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  Speaker 1: folks and reserve managers start building up Chinese reserves as
• 2:20
  Speaker 1: you'd expect to, because China is now a rather large
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  Speaker 1: trade um trade partner with them, then they need to
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  Speaker 1: really start moving money into Chinese currency and out of
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  Speaker 1: US currency. We re estimate right now that if they
• 2:34
  Speaker 1: allocate ten percent of the reserves to China, that's about
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  Speaker 1: one point three trillion dollars that they would no longer
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  Speaker 1: be buying in US treasuries but instead be putting into China.
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  Speaker 1: And that ends up as being of all of the
• 2:45
  Speaker 1: holdings of US traasors that are held by foreigners right now.
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  Speaker 1: And so this constant drip we're seeing from reserve managers
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  Speaker 1: and the Bundesbank has already said that they're buying China,
• 2:55
  Speaker 1: and they said the Central Bank and Francis said they're
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  Speaker 1: buying China. They're not the only ones, as more of
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  Speaker 1: folks by Chinese and that means there's less dollar demand
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  Speaker 1: that obviously the US dollar is going to start weakening,
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  Speaker 1: and we've been seeing that continually over the past year.
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  Speaker 1: Doug Borthwick more prosaic question, did you uh forecast the
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  Speaker 1: strength and sterling against the dollar? I haven't forecasted the
• 3:19
  Speaker 1: strength and sterling against the dollar. I've sort of stepped
• 3:21
  Speaker 1: away from sterling given Brexit, but certainly we did say
• 3:24
  Speaker 1: when it was euro was at one oh four at
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  Speaker 1: the start of last year, that it was going to
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  Speaker 1: weaken considerably through one tent and we see the euro
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  Speaker 1: continuing to weaken and we see no reason why we
• 3:34
  Speaker 1: won't see one thirty in the next coming months. Okay,
• 3:36
  Speaker 1: but the reason I'm bringing up the pounds sterling is,
• 3:38
  Speaker 1: you know, when we speak to four X experts, and
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  Speaker 1: it's always about how the market, you know, trades off
• 3:47
  Speaker 1: of you know, little pieces of news. I didn't hear
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  Speaker 1: anybody over the last you know, two weeks say, boy,
• 3:54
  Speaker 1: you know you've really got to go short the dollar
• 3:56
  Speaker 1: along the pound, and you know you would have a
• 4:00
  Speaker 1: four and a quarter percent just on a spot basis.
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  Speaker 1: That seemed like a really good trade, and I haven't
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  Speaker 1: heard anyone mention it. Yeah, I think that coin flippers
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  Speaker 1: would be very good in telling you where sterling is going,
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  Speaker 1: but not necessarily four EX experts. The interesting thing that
• 4:16
  Speaker 1: the pound is because of the uncertainty and Brexit. Is
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  Speaker 1: it going to be a hard Brexit a soft Brexit,
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  Speaker 1: folks are mostly staying away from discussing it. And what
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  Speaker 1: you do find though, is that you know, as the
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  Speaker 1: dollars weakly cross the board against every single currency. Sterling
• 4:29
  Speaker 1: is picking up on that, yeah, is really based on
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  Speaker 1: the euro strength or the weakness and dollar against the end,
• 4:35
  Speaker 1: it's it's just getting picked up in the whole front
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  Speaker 1: of it. Yeah, But I mean, all you gotta do
• 4:39
  Speaker 1: is look at a chart. You've got higher highs and
• 4:41
  Speaker 1: higher lows. That's certainly the case. But then you know
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  Speaker 1: they could turn around in the UK and so they're
• 4:47
  Speaker 1: doing a hard, hard Brexit and we're looking at one
• 4:49
  Speaker 1: thirty in the Sterlings. So it's sterling is Sterling is
• 4:52
  Speaker 1: less simple to to really identifying the divine all right,
• 4:56
  Speaker 1: So what's the best call you've got right now to
• 4:58
  Speaker 1: make some money over the last Over the next let's
• 5:01
  Speaker 1: say two to three months, I continue to believe that
• 5:04
  Speaker 1: sterling is going to move much much higher, and it's
• 5:06
  Speaker 1: just really the beginning of the cycle. I think we're
• 5:08
  Speaker 1: going to see these ten moves annually for the next
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  Speaker 1: couple of years of dollar weakness. Euro is gonna be
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  Speaker 1: a big beneficiary of this. I think folks thinks that
• 5:17
  Speaker 1: dollyn is going to continue in this one ten, maybe
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  Speaker 1: moved back to one fift. I think that's wrong. I
• 5:21
  Speaker 1: think we'll see one O five and dollar in dollar Canada.
• 5:24
  Speaker 1: Canada has the trade surpace with the US. I think
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  Speaker 1: we're going to see that move lower the dollar against
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  Speaker 1: the Canada, and I think the dollar Mexican continue to
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  Speaker 1: move lower as well. So you're a dollar bear dollar
• 5:34
  Speaker 1: bear across the board. Absolutely. So one thing that I'm
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  Speaker 1: trying to square is let's say, uh, the US economic
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  Speaker 1: picture is as good as people think it is, and
• 5:46
  Speaker 1: perhaps even better, let's say that there's an upside surprise.
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  Speaker 1: We have seen the City Surprise Index showing that there
• 5:52
  Speaker 1: have been more upside surprises of late um. At what point,
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  Speaker 1: especially given the fact that the Federal Reserve is going
• 5:59
  Speaker 1: to be hiking interest rates, at what point is that
• 6:02
  Speaker 1: enough to encourage people back to the dollar or is
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  Speaker 1: this something that's structural that that is going to continue regardless, Certainly,
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  Speaker 1: I think that if the sudden is very structural. Remember
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  Speaker 1: before the European bailout of Greece, you know, the euro
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  Speaker 1: was trading around this one thirty level, and then you
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  Speaker 1: saw a huge move into the dollar and out of
• 6:24
  Speaker 1: the European currency. And now, if anything, we have we've
• 6:27
  Speaker 1: heard nothing about Greece, nothing about Italy, leaving the euro Zone.
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  Speaker 1: And so what we're seeing now is folks not necessarily
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  Speaker 1: deciding they don't like the US, but they're certainly deciding
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  Speaker 1: that maybe it's time to get back into the Euro
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  Speaker 1: and unwind some of their safety play that they moved
• 6:41
  Speaker 1: into the United States. And so, you know, moving up
• 6:43
  Speaker 1: to one thirty doesn't mean that we don't like the
• 6:46
  Speaker 1: dollar anymore. It just means that, you know what, we
• 6:48
  Speaker 1: feel more comfortable with the Euro. And so where the
• 6:51
  Speaker 1: Fed is, I think the Feds very much behind the curve,
• 6:54
  Speaker 1: you know. I think that the fact that probably raised
• 6:55
  Speaker 1: another hundred and fifty basis points before folks start thinking, oh,
• 6:59
  Speaker 1: you know what, now the US dollar is more interesting
• 7:02
  Speaker 1: to us. Remember, interest rates over in China are much
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  Speaker 1: harder than they are in the US right now. And
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  Speaker 1: as long as reserve managers need to get into China,
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  Speaker 1: and that means taking reserves maybe out of the United States,
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  Speaker 1: then that's that's that's going to be a move that's
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  Speaker 1: going to see dollar weakening. It's going to see us
• 7:16
  Speaker 1: and streets naturally start to rise. One thing that certainly
• 7:19
  Speaker 1: will allow the Fed to raise rates will be if
• 7:21
  Speaker 1: the dollar we can considerably does that mean that we're
• 7:24
  Speaker 1: going to see about of accelerated inflation. I think that inflation,
• 7:29
  Speaker 1: you know, I think one of the best indicators of
• 7:31
  Speaker 1: inflation was when Walmart moved into Mexico and suddenly pricing
• 7:35
  Speaker 1: inflation almost disappeared overnight. And I think that the Internet
• 7:38
  Speaker 1: has done something very similar to that with the prices,
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  Speaker 1: and that we don't there's now we have so much
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  Speaker 1: clarity in what pricing should be that it's hard to
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  Speaker 1: raise prices because we can always find somewhere else that's cheaper.
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  Speaker 1: So I think that when you look at prices rising
• 7:50
  Speaker 1: above two percent in the US, I think that sometimes
• 7:53
  Speaker 1: it's a fool's dream and that we can always seem
• 7:56
  Speaker 1: to find pricing less ultras. I think high inflation something
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  Speaker 1: that's really going to be the back burner for a
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  Speaker 1: number of years. All Right, we're gonna leave it there,
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  Speaker 1: but thanks very much for being with us. Douglas Borthwick
• 8:05
  Speaker 1: is managing director and the head of f X at
• 8:07
  Speaker 1: at Chapolin, Dane and Company. President Donald Trump slapping tariffs
• 8:26
  Speaker 1: on solar panels and also on washing machines imported into
• 8:30
  Speaker 1: the United States. Here to tell us more about the
• 8:32
  Speaker 1: tariffs and the effect on the solar industry is James Evans.
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  Speaker 1: He is our global clean Energy analyst for Bloomberg Intelligence. James,
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  Speaker 1: thanks for being with us. You know, last time I
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  Speaker 1: believe that we went through this whole tariff issue regarding
• 8:46
  Speaker 1: the solar industry, Chinese companies decided to just relocate their
• 8:51
  Speaker 1: firms to Taiwan. Isn't that correct? Yes, that's correct. So
• 8:56
  Speaker 1: there was unecdotal evidence that a little of the Chinese
• 8:58
  Speaker 1: manufacturers trying to get the previous tariffs at the US
• 9:01
  Speaker 1: put on the imports of solar modules and cells by
• 9:04
  Speaker 1: setting up operations in other countries in Southeast Asia like Vietnam,
• 9:08
  Speaker 1: Malaysia and Thailand. So hopefully with the new section to
• 9:12
  Speaker 1: a one tariffs that have been imposed, that won't happen
• 9:15
  Speaker 1: because these tariffs are effectively impacted on every single country,
• 9:20
  Speaker 1: no matter where you are. So that's not something that
• 9:21
  Speaker 1: can be so easily skirted by a lot of the
• 9:24
  Speaker 1: Chinese solar producers. Okay now, and I just want you
• 9:27
  Speaker 1: to hold that thought and then tell me the manufacturers
• 9:30
  Speaker 1: that are in the United States that have been asking
• 9:32
  Speaker 1: for there's terror for leave their bankrupt, right, I mean,
• 9:36
  Speaker 1: there's a SNIVA and Solar World. So a lot of
• 9:40
  Speaker 1: the manufacturers that used just mentioned have gone bankrupt over
• 9:43
  Speaker 1: the recent years. Part of that is because of a
• 9:46
  Speaker 1: massive build up in production capacity of the solar modules
• 9:50
  Speaker 1: in the in China and in Southeast Asia, and so
• 9:53
  Speaker 1: a lot of those panels are being able to be
• 9:54
  Speaker 1: produced at a very very low cost. And you know,
• 9:57
  Speaker 1: we're operating in a very global market. So those pan
• 10:00
  Speaker 1: are ending up in the US market, and it's been
• 10:02
  Speaker 1: hard for a lot of the US manufacturers to compete
• 10:04
  Speaker 1: with the scale of production that a lot of the
• 10:07
  Speaker 1: Chinese manufacturers have been able to produce, so James, So,
• 10:11
  Speaker 1: if this is going to potentially allow producer producers in
• 10:16
  Speaker 1: the US to charge higher rates for their solar panels,
• 10:20
  Speaker 1: that means that some consumers may not choose solar panels
• 10:24
  Speaker 1: because it's more expensive. How much does this damp in
• 10:27
  Speaker 1: the expansion of solar energy in the US. That's right, Lisa.
• 10:31
  Speaker 1: So the big fear amount about these tariffs is that
• 10:34
  Speaker 1: actually most of the jobs in the US market aren't
• 10:37
  Speaker 1: related to manufacturing of solar panels or solar cells. They're
• 10:40
  Speaker 1: actually in installing the panels, in developing the projects, and
• 10:43
  Speaker 1: in making equipment that goes around the panels, so kind
• 10:46
  Speaker 1: of the trackers, the racks, and a lot of the
• 10:48
  Speaker 1: electrical equipment. So there's concerns about some of those job implications.
• 10:53
  Speaker 1: But but also you're right. If the panel costs that
• 10:56
  Speaker 1: are imported into the US will increase, then we're going
• 10:58
  Speaker 1: to see the impact of that on love of the
• 11:00
  Speaker 1: project economics are going to worsen. Um. It's going to
• 11:03
  Speaker 1: have the most impact on the larger utility scale projects
• 11:06
  Speaker 1: where kind of module costs are a higher share of
• 11:09
  Speaker 1: the total system um the kind of residential and commercial scales.
• 11:14
  Speaker 1: So the smaller kind of solar developments may be less
• 11:16
  Speaker 1: impacted by this because there's a little bit more margin
• 11:19
  Speaker 1: in there. There's a little bit more room for a
• 11:21
  Speaker 1: lot of the panel producers to to get a higher price,
• 11:24
  Speaker 1: whereas you may see some delays in development of utility
• 11:27
  Speaker 1: scale the large solar developments over the next year or
• 11:31
  Speaker 1: two until this kind of module tariff digresses over the
• 11:35
  Speaker 1: next four years. James, did the US producers are poly
• 11:40
  Speaker 1: silicon Did they end up connecting or hooking up with
• 11:44
  Speaker 1: Chinese companies after the first round of UH sort of
• 11:49
  Speaker 1: imports of of low cost solar panels, so poly silicon,
• 11:54
  Speaker 1: you're you're referring to the raw material of solar panels
• 11:57
  Speaker 1: and um. Effectively, what happened was when the US Imports
• 12:02
  Speaker 1: imposed tariffs on imports of US modules UM sorry in
• 12:06
  Speaker 1: Chinese modules into the US market, China responded by imposing
• 12:10
  Speaker 1: tariffs on polysilicon, which is the raw material for solar panels,
• 12:14
  Speaker 1: into China from the US, and that's still not been resolved.
• 12:18
  Speaker 1: That's still an issue that's ongoing, and there are a
• 12:20
  Speaker 1: number of US polysilicon manufacturers of producers that have found
• 12:24
  Speaker 1: it really really hard to compete now that China has
• 12:27
  Speaker 1: such a stranglehold on global module production and they can't
• 12:31
  Speaker 1: effectively get their product into the main consuming market of China.
• 12:35
  Speaker 1: So as part of the I t C investigation and
• 12:40
  Speaker 1: this kind of announcement, they've also said that they want
• 12:43
  Speaker 1: to have a separate investigation into whether there's any kind
• 12:46
  Speaker 1: of deal that can be done to remove the previous
• 12:49
  Speaker 1: tariffs and the Chinese tariffs on polysilicon. But given the
• 12:53
  Speaker 1: fact that the Section two or one tariffs haven't really
• 12:56
  Speaker 1: gone down very well, not only in China but in
• 12:58
  Speaker 1: in the rest of the world, especially in Southeast Asian markets.
• 13:02
  Speaker 1: UM that is going to be a bit of a
• 13:04
  Speaker 1: long long shot. If you ask me, how much of
• 13:07
  Speaker 1: a price increase our consumer is going to see in
• 13:10
  Speaker 1: solar panels as a result of this. So from a
• 13:14
  Speaker 1: typical basis, you're you're talking about a kind of ten
• 13:16
  Speaker 1: percent um increase, So it's on the larger scale utility
• 13:21
  Speaker 1: salt kind of side. From a consumer perspective, it's going
• 13:25
  Speaker 1: to be in in the lower single digits. So there's
• 13:28
  Speaker 1: going to be some small increase incremental increase in this um,
• 13:31
  Speaker 1: but that's going to fade with time. It's going to
• 13:34
  Speaker 1: fade as the tariffs go down over the next four years.
• 13:37
  Speaker 1: They start at thirty and they decreased by five percent
• 13:40
  Speaker 1: every year. But they're also going to go down because
• 13:42
  Speaker 1: panel costs are going to continue to fall. You know,
• 13:45
  Speaker 1: we've seen dramatic declines in the cost of a solar panel.
• 13:48
  Speaker 1: Last in you saw a decline of about a third
• 13:51
  Speaker 1: in the cost of a solar panel. Last year is
• 13:53
  Speaker 1: about twelve percent, and we're anticipating that those panel cross
• 13:56
  Speaker 1: de planes are going to continue going forwards. So you
• 13:57
  Speaker 1: don't think necessarily that this move is going to undermine
• 14:01
  Speaker 1: the expansion of solar or the industry more broadly. I
• 14:04
  Speaker 1: think it's gonna it's going to be slightly disruptive in
• 14:07
  Speaker 1: the near term, especially for some of the larger projects
• 14:09
  Speaker 1: as I mentioned, but I think that the fundamentals are
• 14:12
  Speaker 1: there and that solar is a technology the costs are
• 14:15
  Speaker 1: coming down. It's not like you have a fixed fossil
• 14:17
  Speaker 1: fuel base that you have to try and support all
• 14:19
  Speaker 1: the fossil fuel prices. So this is a bit like
• 14:22
  Speaker 1: on the semi conductor side. The costs are coming down
• 14:24
  Speaker 1: over time and that's going to continue. That trend is
• 14:26
  Speaker 1: going to continue. So there is I think a secular
• 14:29
  Speaker 1: shift towards not only solar but also other technologies like
• 14:32
  Speaker 1: wind energy UM that is going to see these costs
• 14:35
  Speaker 1: declined further and further UM and you're going to see
• 14:38
  Speaker 1: more and more of this into the market. There might
• 14:40
  Speaker 1: be some near term disruption at least in the US
• 14:42
  Speaker 1: over the next year or two as a result of these,
• 14:45
  Speaker 1: but it's it's definitely going to be a trend that
• 14:47
  Speaker 1: we're going to see continue going forwards. James Evans, thank
• 14:49
  Speaker 1: you so much for being with us. James Evans is
• 14:51
  Speaker 1: global clean energy analyst with Bloomberg Intelligence coming to us
• 14:56
  Speaker 1: up from London talking about the tariffs that are being
• 15:00
  Speaker 1: placed on solar panels and what that means for the industry. Well,
• 15:17
  Speaker 1: we got some sense today of what JP Morgan plans
• 15:21
  Speaker 1: to do with the money that it is saving from
• 15:24
  Speaker 1: the tax overhaul. It's saying that it's playing the earmark
• 15:27
  Speaker 1: twenty billion dollars over five years to boost lending, expand
• 15:31
  Speaker 1: its branch network, and increase gifts to charity. Here to
• 15:35
  Speaker 1: tell us what this means for shareholders is Charles Peabody,
• 15:38
  Speaker 1: who we always love having on Managing director and research
• 15:42
  Speaker 1: analyst at Compass Point. Charles, thank you so much for
• 15:45
  Speaker 1: joining us. So what's your first dake on this? Well,
• 15:49
  Speaker 1: you know, I think it's clearly a net positive for
• 15:53
  Speaker 1: Morgan in the industry in the sense that it's clear
• 15:57
  Speaker 1: that those institutions that have invested in their franchise and
• 16:01
  Speaker 1: their employees over long period of time and consistently have
• 16:04
  Speaker 1: done better than those that have not. Um Just in
• 16:06
  Speaker 1: the last decade we saw JP Morgan do much better
• 16:10
  Speaker 1: than City Group, and that's because Morgan was investing in
• 16:13
  Speaker 1: its products and businesses where a City Group was capital
• 16:16
  Speaker 1: constrained well, could just I want to break in there,
• 16:19
  Speaker 1: because do we really have a sense of what these
• 16:21
  Speaker 1: investments really mean? I mean, we do have a sense that,
• 16:26
  Speaker 1: you know, the sort of minimum wage that they'll pay
• 16:28
  Speaker 1: for workers will go from fifteen to eighteen dollars an hour.
• 16:32
  Speaker 1: But beyond that, what does this really mean? Well, you know,
• 16:38
  Speaker 1: I break it down into four pieces. I mean, there's
• 16:40
  Speaker 1: ten billion being airmarked for affordable housing finance, and I
• 16:45
  Speaker 1: think as an aside, you're gonna see JP Morgan invest
• 16:48
  Speaker 1: much more aggressively going forward in and building out their
• 16:51
  Speaker 1: mortgage banking operation, which had really shrunk over the last
• 16:53
  Speaker 1: ten years. UM and I suspect acquisitions may be part
• 16:57
  Speaker 1: of that. Um You're gonna see four billion invest in
• 17:00
  Speaker 1: in supporting small business growth and that's been the fastest
• 17:03
  Speaker 1: growing portfolio. They've got about a twenty billion dollar portfolio there.
• 17:07
  Speaker 1: And you're gonna see another half a billion incremental investment
• 17:10
  Speaker 1: in philanthropic investments. UM. So the balance of that twenty billion,
• 17:15
  Speaker 1: which is about five and a half billion, is going
• 17:16
  Speaker 1: to be invested in things like employees, branch expansion, innovation,
• 17:21
  Speaker 1: et cetera. UM So, I think those investments, you know,
• 17:25
  Speaker 1: JP Morgan has done invested wisely. I think they will
• 17:27
  Speaker 1: enhance the value the franchise over a long period of time.
• 17:30
  Speaker 1: So I'm just curious, Charles, why do you think the
• 17:33
  Speaker 1: stock is not reacting today? Well, you know, short term, Um,
• 17:39
  Speaker 1: one of the things that you have to acknowledge is
• 17:41
  Speaker 1: this is going to add about a billion to a a
• 17:43
  Speaker 1: billion and a half to UM JP Morgan's expense operating
• 17:48
  Speaker 1: expense structure, and so you're in a sense increasing the
• 17:51
  Speaker 1: fixed costs of that expense structure, hoping that growth will
• 17:56
  Speaker 1: offset that that fixed cost uh. Um, But that remains
• 18:00
  Speaker 1: to be seen. So one thing that I was noticing,
• 18:05
  Speaker 1: Charles is that you actually or not that bullish though
• 18:08
  Speaker 1: on JP Morgan's shares. Well, I think the shares are
• 18:13
  Speaker 1: pretty fully priced. Um is where I'm coming from. Um,
• 18:17
  Speaker 1: you know these actions aside, I mean, the stock is
• 18:22
  Speaker 1: um trading you know almost at two times book, you know,
• 18:26
  Speaker 1: and Jamie Diamond even said that, you know, at two
• 18:29
  Speaker 1: times book his own investment in his own stock was
• 18:32
  Speaker 1: not necessarily the best investment where he rationalized that he
• 18:36
  Speaker 1: could buy the stock between one and a half two
• 18:38
  Speaker 1: times book. But he's sort of captain at two times book.
• 18:41
  Speaker 1: All right, So if you believe that the stock is
• 18:43
  Speaker 1: a little too expensive for investors, what stock do you
• 18:46
  Speaker 1: recommend people buy? What company do you think is not
• 18:49
  Speaker 1: been overpriced? Well, you know, I will tell you him.
• 18:56
  Speaker 1: The b k X index, which reflects the large cap banks,
• 19:01
  Speaker 1: is around one fifteen today um the pre crisis top,
• 19:05
  Speaker 1: and that b k X index was about one. So
• 19:09
  Speaker 1: we're worthin five of that all time high UM. And
• 19:13
  Speaker 1: as a as a relative to the SMP five hundred,
• 19:16
  Speaker 1: the b k X index hit a high in March
• 19:19
  Speaker 1: up two thousand seventeen, and despite all the hooplab around
• 19:23
  Speaker 1: deregulation and tax reform, that b k X index has
• 19:26
  Speaker 1: not been able to make a new high relative to
• 19:28
  Speaker 1: the SMP five hundred. So I'm I'm thinking we're topping
• 19:31
  Speaker 1: out here, and I'm not anxious other than very very
• 19:35
  Speaker 1: very short term training. I'm not anxious to add to
• 19:37
  Speaker 1: my long positions here to be peeling off. I wanted
• 19:42
  Speaker 1: to just follow up in one aspect that you said.
• 19:44
  Speaker 1: You said that you think that JP Morgan could potentially
• 19:47
  Speaker 1: make an acquisition of a mortgage lender. Is did I
• 19:52
  Speaker 1: hear you correctly? Yeah? I mean they there, they want
• 19:56
  Speaker 1: to reinvest in the mortgage space. UM. What has held
• 20:01
  Speaker 1: them back has been the litigious environment UM. And if
• 20:04
  Speaker 1: if we can get some cleanup of that litigation risk, UM,
• 20:09
  Speaker 1: I think you'll see them go out and start to
• 20:12
  Speaker 1: invest in both organically and inorganically UM, in that space
• 20:16
  Speaker 1: and rebuild that that mortgage banking franchise that used to
• 20:19
  Speaker 1: be quite substantial ten years ago. And would they start
• 20:22
  Speaker 1: to issue UH non agency mortgage backed securities again. You know,
• 20:29
  Speaker 1: if you can, as I said, you can clean up
• 20:31
  Speaker 1: the little litigation risk, I think they would do f
• 20:33
  Speaker 1: h A lending again. I think you know Jamie Diamond
• 20:35
  Speaker 1: talked about that in his annual letter UM two shareholders. Well,
• 20:40
  Speaker 1: Charles said, if JP Morgan is too expensive, and you
• 20:44
  Speaker 1: mentioned the possibility of adding to their mortgage business, is
• 20:47
  Speaker 1: there a particular stock or even a non bank financial
• 20:52
  Speaker 1: company that you believe is undervalue well on a relative basis.
• 21:00
  Speaker 1: You know, Goldman Sachs has been treated very poorly by
• 21:04
  Speaker 1: the marketplace UM year to date, largely because of their
• 21:07
  Speaker 1: week thick trading businesses UM. Yet the other three businesses
• 21:12
  Speaker 1: UM plus they're equity trading, are doing very well. UM.
• 21:15
  Speaker 1: I think if we get some added volatility, and there
• 21:18
  Speaker 1: are indications that we're starting to see that we could
• 21:21
  Speaker 1: see better activity. So in many respects, I would say
• 21:24
  Speaker 1: the thick trading business bottomed in the second quarter of
• 21:26
  Speaker 1: seventeen and there's some leverage from that going back this year.
• 21:30
  Speaker 1: I want to thank you very much for being with us.
• 21:32
  Speaker 1: Charles Peabody, he is managing director Research Channelists at Compass
• 21:36
  Speaker 1: Point in giving us his thoughts about the banking industry,
• 21:54
  Speaker 1: House of Cards and other Netflix originals, Orange is the
• 21:58
  Speaker 1: New Black, Stranger Things. Here to tell us about the
• 22:01
  Speaker 1: success of Netflix is Paul Sweeney, US director of Research
• 22:05
  Speaker 1: and senior Media and Internet analyst for Bloomberg Intelligence. Alright,
• 22:10
  Speaker 1: Paul Sweeney, is this all about subscriber growth or is
• 22:13
  Speaker 1: it about something else? Yeah, it really is about subscriber growth. Um.
• 22:17
  Speaker 1: You know, this is a company where investors really focus
• 22:19
  Speaker 1: on the growth of the subscribers, not you know, and
• 22:22
  Speaker 1: really internationally. That's really really the bulk of the growth
• 22:24
  Speaker 1: is coming from for this company. Um, you know, it's
• 22:27
  Speaker 1: not really an earning story yet, it's not even a
• 22:29
  Speaker 1: revenue growth story at the moment. It's really investors are
• 22:31
  Speaker 1: focusing on subscribers because eventually, you know, you get the
• 22:35
  Speaker 1: more subscribers, you get paying more every month in the
• 22:38
  Speaker 1: company just put through another price increase in October of
• 22:41
  Speaker 1: last year that drives revenue and ultimately profits in cash flow. UM.
• 22:45
  Speaker 1: So this is clearly a momentum. Stock has been. It's
• 22:47
  Speaker 1: been a phenomenal stock, up another sixty percent last year. Uh.
• 22:51
  Speaker 1: And what's driving the momentum is the subscriber story. I
• 22:54
  Speaker 1: guess if people like the shows, it perhaps doesn't surprise
• 22:58
  Speaker 1: them that it dominates their life more than Goldman Sacks does.
• 23:02
  Speaker 1: Because their market cap is now beyond where Goldman Sacks is.
• 23:06
  Speaker 1: And I'm just struggling what needs to happen with Netflix
• 23:10
  Speaker 1: to legitimize this market cap and even translate into upside
• 23:15
  Speaker 1: for share investors. That's what you know the company when
• 23:18
  Speaker 1: they kind of came well, not when they came public,
• 23:20
  Speaker 1: but when they really started talking about their uh you know,
• 23:23
  Speaker 1: they're over the top of viewing as opposed to the CDs.
• 23:26
  Speaker 1: They said, listen, this is gonna be an expensive gambit
• 23:29
  Speaker 1: for us. We're gonna have to buy a lot of programming.
• 23:31
  Speaker 1: We're gonna have to invest in a lot of programming. Um,
• 23:33
  Speaker 1: But we believe in what they called the virtuous psycho,
• 23:36
  Speaker 1: which is the more we spend on programming, the more
• 23:39
  Speaker 1: subscribers will sign up, and the more subscribers that sign
• 23:42
  Speaker 1: up and pay more, that will drive revenue, that will
• 23:44
  Speaker 1: drive cash flow, and that will drive profitability, which will
• 23:47
  Speaker 1: give us even more money to invest in more product,
• 23:50
  Speaker 1: which again will attract more subscribers. So, um, where they
• 23:53
  Speaker 1: are in the life cycle there is it's they're absolutely
• 23:56
  Speaker 1: in this toward growth uh stage. Uh there in every
• 24:00
  Speaker 1: entry around the world, with a notable exception of China.
• 24:03
  Speaker 1: And so their strategy now is to invest in programming
• 24:05
  Speaker 1: to drive subscribers. And the US market has become and
• 24:08
  Speaker 1: continues to be very profitable, and the profitability margins in
• 24:13
  Speaker 1: the US continue to grow. Many of their international markets
• 24:16
  Speaker 1: have also turned profitable and expect to be fully profitable
• 24:20
  Speaker 1: by the end of this year. And then that's really
• 24:21
  Speaker 1: when the street looks for earnings and free cash low growth,
• 24:25
  Speaker 1: because when you take a look at the company now,
• 24:26
  Speaker 1: they are significantly free cash flow negative. Let's let's put
• 24:31
  Speaker 1: that in plain English. You're expecting to burn through four
• 24:34
  Speaker 1: billion dollars of cash this year exactly. It's just extraordinary
• 24:37
  Speaker 1: and where's that cash going. It's going to fund about
• 24:40
  Speaker 1: eight billion dollars of programming, which is the biggest programming
• 24:43
  Speaker 1: budget in Hollywood by far. Just by point of comparison,
• 24:46
  Speaker 1: HBOS will spend about two and a half billion dollars
• 24:48
  Speaker 1: on programming. Uh So how are they financing that programming? Uh?
• 24:52
  Speaker 1: In the debt market. They they have been issuing dead
• 24:55
  Speaker 1: over the past couple of years. UM. And the debt
• 24:58
  Speaker 1: market loves this company, and so that is kind of
• 25:01
  Speaker 1: their source of capital. And really, if you take a
• 25:03
  Speaker 1: look at street consensus numbers, UM, you know they don't
• 25:06
  Speaker 1: have this company turning three casual positive to one or
• 25:09
  Speaker 1: maybe two keeps getting pushed back UM as a continue
• 25:13
  Speaker 1: to invest. Paul Sweeney, Alright, they've got about six and
• 25:16
  Speaker 1: a half billion dollars of debt and they've got all
• 25:20
  Speaker 1: these great deals to create original programming, I believe is
• 25:25
  Speaker 1: the target for Netflix. They want to have at least
• 25:27
  Speaker 1: fifty of it the original content. I wonder if you
• 25:30
  Speaker 1: could contrast that with what's going on at Twitter and
• 25:33
  Speaker 1: their content, which is a user generated And just a
• 25:37
  Speaker 1: note that Bloomberg LP has a venture with a Twitter
• 25:41
  Speaker 1: for at TikTok. That's a twenty four seven streaming news service.
• 25:46
  Speaker 1: So what is Twitter need in order to grab those eyeballs?
• 25:51
  Speaker 1: Twitter has about five million monthly users, which you know,
• 25:55
  Speaker 1: sounds like a lot. It is a big number, but
• 25:57
  Speaker 1: relative to the facebooks and the Instagrams of the world,
• 26:00
  Speaker 1: which have you know, one to two billion subscribe subscribers
• 26:03
  Speaker 1: every every month, it's not. And uh so when you're
• 26:06
  Speaker 1: out there competing for advertising dollars, which Netflix doesn't have
• 26:09
  Speaker 1: to do, Twitter really realized on advertising dollars. What they're
• 26:13
  Speaker 1: finding is that three million user base is not enough
• 26:16
  Speaker 1: to really attract digital advertising dollars. So and it's unlikely
• 26:19
  Speaker 1: that they can materially grow that much more um although
• 26:23
  Speaker 1: we are seeing some growth. So what they have to
• 26:24
  Speaker 1: do is they have to make sure that those people
• 26:26
  Speaker 1: that are on Twitter stay longer, are more engaged. And
• 26:29
  Speaker 1: how do you do that. Like a lot of companies,
• 26:31
  Speaker 1: Twitters investing in video because that actually is engaging and
• 26:34
  Speaker 1: that's where advertisers want to place their money. So we
• 26:37
  Speaker 1: did just get the news this morning that Anthony not
• 26:40
  Speaker 1: to the former now chief operating officer of Twitter, was
• 26:43
  Speaker 1: departing to join a lending start up. So far or
• 26:47
  Speaker 1: not really start up but a lending arm so far.
• 26:50
  Speaker 1: How big of a of a problem is this for Twitter?
• 26:52
  Speaker 1: You know? I I do think it's an issue for Twitter,
• 26:55
  Speaker 1: both the media term and longer term. Anthony Noo is
• 26:58
  Speaker 1: very well regarded by investors in Wall Street in general.
• 27:02
  Speaker 1: H He has that rare combination of operational experience which
• 27:05
  Speaker 1: he's gleaned over the last several years at at Twitter,
• 27:08
  Speaker 1: as as well as a very deep financial background having
• 27:10
  Speaker 1: been a banker in the CFO. Uh. So, he really
• 27:13
  Speaker 1: brought some stability to Twitter. And it's really it's it's
• 27:16
  Speaker 1: doubly important at Twitter his role because the CEO, Jack Dorsey,
• 27:20
  Speaker 1: the founder and CEO, always spends half of his time
• 27:23
  Speaker 1: at Twitter, spends the other half at his other public
• 27:25
  Speaker 1: company Square. So you kind of have a part time CEO.
• 27:28
  Speaker 1: You need a strong CEO. That's what Anthony Noto is.
• 27:31
  Speaker 1: Now what do you do? Yeah? Paul Sweeney, thank you
• 27:33
  Speaker 1: so much. We will find out what they do as
• 27:35
  Speaker 1: we follow this and other stories in the media with you.
• 27:38
  Speaker 1: Paul Sweeney, US director of Research and senior media Internet
• 27:42
  Speaker 1: analyst for Bloomberg Intelligence. Uh definitely a tale of two
• 27:46
  Speaker 1: stories this morning. Thanks for listening to the Bloomberg P
• 27:54
  Speaker 1: and L podcast. You can subscribe and listen to interviews
• 27:57
  Speaker 1: at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
• 28:01
  Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
• 28:05
  Speaker 1: on Twitter at Lisa Abramo. It's one before the podcast.
• 28:08
  Speaker 1: You can always catch us worldwide on Bloomberg Radio