This is Bloomberg Business Wait inside from the reporters and editors who bring you America's most trusted business magazine, plus global business finance and tech news. The Bloomberg Business Week Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
Man, take a look at what was once a pandemic, Darling. We're talking about Peloton right now, down almost twenty four percent at its lows today, almost down twenty eight percent, the mostion in about two years, and it's on track Tim for a record low closed Sava se Bernstein, saying this was after a messy fourth quarter, Yeah, where they gave a week revenue forecast for the current quarter and all said costs for a product recall, we're significantly more
expensive than it anticipated. It just can't seem to do anything right.
Like, if you haven't been living in under a rock, you'll know that Peloton has been mired in a two year tail spin. It was an pandemic, Darling. The company's bikes and more were a hot commodity during COVID nineteen lockdowns.
Carol, I have one, you got one, bought it before the pandemic, early on.
The Peloton train. Yeah, demand those slumped after people began heading back to offices, going back to gyms. And also you got to remember when it comes to working out, there there are cycles. There are fads like totally remember jazzer size, the thigh master, Nordic track like these are all things from my childhood that like.
Oh, come on, you have a thigh master at home?
Yeah, definitely did at one point, we absolutely did in my house.
Oh my god. Well, the stock we're talking about, Peloton now down around ninety seven percent from its all time high back in January of twenty twenty one. That was the peak. So where does Peloton go from here? We have great voice on this. David Trainer is a CEO at New Constructs, an independent investment research firm. He's been advising investors to sell. He joins us on Zoom from Nashville. David, So nice to have you back with us. Where does Peloton go from here?
I think it goes to zero. You know, Peloton was one of our original zoneombie stocks, and the key divining feature of a zombie stock is burning cash but not having a lot of cash to support that burn. So at some point it just runs out of money. And when we first first put Peloton on the Zombie stock list. The CEO announced that they were going to have to engage in major cost cuttings in order to extend their
cash burn runway beyond just six months. And what happens, you know, in that situation, is you just stand up in a death spiral to all the points you guys were just making. It was never really a good business. And so you know, now you've got a good business slashing costs, and it's never going to really going to be able to get out of its own way and become a successful business. It was a bad concept to the from the beginning of my opinion.
Why why do you believe that? I mean, think about it, because I don't think there's a but hold on it before I before I let you answer, I'm just gonna, you know, remind people that this is a company that wanted to be sort of the the Netflix or like Amazon kindle of working out. You buy one expensive piece of hardware and then you pay a monthly fee which is high margin to the company, and you just keep paying it every month and you don't need to buy a new hardware.
If the problem is that anybody can do that, right I'm not saying people don't want to do, you know, or have what they're selling, but to make a profit at it, you're gonna have to do that in a way that no other business can. And that's what I think a lot of investors often miss. There's a difference between a good product and a good stock. There's a
difference between a good company and a good stock. And look, for Peloton to ever be successful, they would have needed to have provided an exercise bike and set of entertainment that goes with it that was meaningfully differentiated and better than what anyone else could do. They couldn't do it, you know. I think being born into this sort of super hype IPO environment meant that they had a lot of money and really weak corporate governance, which meant that
spending was terrible and crazy. But yeah, look, the bottom line is I'm not going to tell you people don't want to ride their bikes and be able to watch videos, right, but they can do that in a lot of other ways. And the number of copycat products that had been out there ever since, you know, soon after Peloton launched immediately proved our point, which we wrote, by the way before the IPO. We warned people to stay away from this IPO from the beginning because again, there's no moat around
this business. There's no competitive differentiation to create profit margins.
Who's your favorite instructor, Carol, I.
Can't even remember. It used to be Robin. Robin was really cool, but this was another one.
This was what I thought was the mode. I thought this was the mode. Were these instructors that they were paying half a million dollars a year Carol? Yeah, and you know you couldn't find anywhere else. They had exclusive contracts with the company, and that's what drew people, right.
Yeah, And I will say it did create a community, and I like the you could be a live aspect, or you could pop into the library. I liked it. My daughter, who's much younger than me, obviously she liked it. But I do wonder, David. I mean, it's interesting, as you say, you know, you've got to be either a good company, good business, or good stock. I hope I didn't miss anything. Are you saying that Peloton is none of those?
Not necessarily?
I mean, look, people like the product, but you know, I don't know that it's been a good company and that it's just been losing lots of lots of cash, been a big cash burner forever. And I'm not saying that like you know, you might not like an instructor here or there, but look, the bottom line is that it has been a great product for consumers because they've been able to buy it at below cost. Right, Peloton
has never made any money. Everything they're selling is selling it a loss, which means they're selling it to you effectively below a proper cost. So that's the distinction. And when I say like a good company and a good stock, one of one of the classic examples has been Walmart for years. Right, makes a lot of money, super cash flow generator, but the valuation is too expensive. Right, the valuation implies, and this is today and more in the past.
Nvidia another great example, good company, bad stock, right doing a lot of great things, but when the valuation improved implies you're going to be over two point two trion and revenue and have a thousand percent return on invested capital while growing revenue at twenty five percent compounded annually for twenty years. The valuation is too much. So the key to investing is to buy good businesses at good prices.
And so you can be a good business and a good company but not be selling at a good price.
So where do we go from here with Peloton?
I recommend if you haven't already sold it, I would take it out of the portfolio because I think it can go to zero. And part of the trap here is that it's only been able to survive this long on the good graces of unsuspecting investors believing that there was more there than there is.
Because it's interesting what you said about sell you know, a loss on the bikes, and I get it, but you pay I'm still paying a monthly fee even if I don't use it like that is commitments you make, set it and forget it you can. But that's not enough, correct.
It hasn't been. I mean they're still burning cash and there's just not a lot of people that are going to do that either, I mean, let's let's face it, or they can do it, you know, at their gym where they can with a group of people. But I think you know what you guys led with on the beginning about how this being a being a COVID darling because everyone was trapped in their house and now they had a way to com you know, connect with other people.
That was good for a while, you know, And I think there was a small maybe a quarter or two where Peloton maybe had a positive profit margin.
But never since does it make sense for a big company to come in and buy Peloton. In the past, a couple of years ago, in the last couple of years, we've talked about, oh, would this be a good fit for Apple, would this be a good fit for Amazon?
Yeah.
I mean, look, that's what we call stupid money risk for these business like these these danger zone stocks or zombie stocks that you know you never know, Like for example, Mattress Firm was one of the most heavily shorted stocks in the market. It was a terrible business, it was about to go bankrupt, and then some South American company came and paid a thirty forty percent premium to the
stock price. Crazy stuff happens in the stock market. So I'm never here to give any kind of advice in general, but not to ever say, hey, shorting is a good idea, because it's dangerous nvidio.
Oh wait, go ahead, go ahead.
Final thought, don't I don't see any white Night coming out and saving Peloton again. There's too many like Amazon's got its own knockoffs. Yeah, right, got Nautilus and a lot of other exercise companies. They have knockoffs on a peloton. There's nothing innately special, so special about a pet about a peloton that I think somebody wants to buy it.
Thirty seconds? Can you give me thirty seconds on an end Vidia? As we wait for those earnings?
Yeah, good company, bad stock, but extremely expensive valuation. I mean they've got to improve margins by like a thousand basis points and grow revenue at twenty percent compound and annually for twenty five years to justify the current stock price. I think around four hundred and fifty five hundred and sixty bucks.
Yeah, I'm sixty nine right now.
I want you to repeat that, David, you said good company, bad stock.
Yeah, good company, bad stock. Right, they make a lot of money, but the stock price is implying they're going to make a huge, huge amount more. And keep in mind, in order for you to expect to outperform as an investor, you've got to believe the company is going to do even better than the twenty percent compound and annual profit growth for twenty five years.
Got you know what I mean, yeah, hey, listen forgive thank you though so much. You did what we wanted to do, especially on Peloton, and appreciate the Nvidia thoughts. David trainor CEO at New Constructs on zoom from Nashville, Tennessee.
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The race is on to adopt generative AI. That is in the press release from the founder and CEO of Nvidia, Jensen Wang. He also is saying a new computing era has begun. Companies worldwide are transitioning from general purpose to
accelerateed computing and generative AI. That's stock, as Charlie just mentioned, Can continuing to build momentum to the upside in the after hours, up seven point six percent that buyback news and third quarter revenue outlook beating the forecast, I mean, growing into that valuation.
Perhaps, Yeah, this is a blowout quarter for the company. Shares up seven point eight percent after third quarter revenue outlook beat, the company approving an additional twenty five billion dollars in share repurchases with a look at the quarter in the outlook, we got back with us. Dan Morgan, senior portfolio manager at Sonovus Trust, joins us on the phone from Atlanta this afternoon. Dan, You've had three minutes to look at this initial reaction, Carol, I.
Mean, again, this is just a huge quarter total blowout number. What gets me is that third quarter guidance, the sixteen billion in the street was about twelve and a half billion, and then there was a whisper number out on Data Center that said that they got to do better than ten billion, even though the street was around eight billion,
and they did ten point three billion. So again, Tim and Carroll, this just gives further evidence that, you know, AI gener of AI chip demand continues to be extremely strong. And again and Vidia has been the poster child right for substantiating AI.
You know, it's so funny. I'm going through the press release and I'm like, oh yeah, they do chips for gaming, Oh yeah, they.
Do automotive for years.
But our focus is so much AI. Help us break down the business of what it is and where the growth is. Is it all the AI growth?
Yeah? I mean Tim and Carroll. If you look at their data center group, it's projected at about sixty five percent of the overall demand come from generative AI. So that's what's really pushing that number. And you know, Carol, you even mentioned earlier. I mean, we used to talk about Nvidia as a gaming company, right their GPUs and all the great gaming chips they had, and then they just started working into the same sandbox with AMD and Intel
in the data center area for for cloud. And now they've just gone and done a fabulous job in terms of the chip portfolio that they're offering in that space, and obviously the demand is extremely high because they blew these numbers away.
Again, Hey, I want to be smart here though, because we all get heady when it's like, oh my god, look at what they're doing and how much they're big beat. Should we be heady here? You know? One of the things that we keep questioning is we had on a guest earlier who said great company, badstock, meaning it's overvalued. What is it in this release an outlook that says, well, maybe it's not overvalued.
I think Carol, everyone that talks about the stock being overvalued is basically looking at trailing pe multiples, right, or they're looking at price the sales, which is about forty times. But you look at the forward estimates for let's say Physical Year twenty twenty five, which are going to go up after this release, they were around ten and a half. You're straining at thirty eight times earnings. I mean, that's
not excessive. You got to remember already halfway through Physical year twenty four for them, right, we're going into the third quarter, so we've got to always look ahead. So I think if you look at the stock as on a forward multiple basis, and you factor in the tremendous year over year growth that they're getting right now and the momentum that they're getting on this quarter to quarter basis, the stock to me doesn't seem that excessive when you compare the growth rates to the multiples.
Why the heck are they doing a buy back twenty five billion dollars in share repurchases because they can? Because it makes sense?
Yeah, I saw that, Carol. It's kind of funny because you know, usually when you've got enough free cash flow for a buyback, you might go out and buy somebody, right, you know, And why do you need to buy shares back if you're not a value stock, right, a company trying to generate higher earnings per share by lowing the denominator in the number of shares. So they're basically saying, hey, we're bullish on our own stock. We're going out and
buy it. So we're going to do a buyback, So we don't care about what you say about the trailing multiples.
I mean, I'm just I can't get over this quarter. Expectations were high, and then they come out and they say, seeing third quarter revenue sixteen billion dollars plus or minus two percent. Estimates were for twelve point five percent. Data revenue in the second quarter coming in at a record ten point three two billion carrol versus estimates of eight billion.
It makes me wonder, like, all right, help me out here.
What didn analyst get wrong? Exactly my question.
They have a hard time figuring out this one. Why is it?
I just think the fact that they are one of the sole companies at this point that have really shown a tremendous amount of growth related to AI, and I think that everybody wants to doubt the company. I'll be honest with you, Tim mc carroll. This you and I Carol, we've been doing interviews on video for years. Yeah, and it's almost like this earning to report to me kind of felt like a carnival atmosphere. It's like everybody knows about it, you know. So it's just kind of interesting
the spotlight coming on them. But as Tim was saying, they blew out on all the matrix everybody was looking for. So I try to find someone who can, you know, throw a dart at this one.
I think I still think about our conversation to him with Iri Jersey. Was it yesterday or the day before?
Yeah, day before.
We were talking about he's our interest rates strategist here at our Bloomberg Intelligence team, and we're talking about fed and Jackson holl and blah blah blah, moves and yields and so on and so forth, and he's like he had a conversation was it on one of our blogs or one of the blogs that was about interest rates?
Right?
Right?
And what came up?
Well, I'm also talking about the idea that you know, it's a macro story, and Ben Emmon's coming out and saying that in Vidia is you know, this is like a macro company. This is more important than Jackson Hall.
But here I'm saying, right, our interest rate guy saying that in the conversation about interest rates comes up in video.
Like everybody's talking about it.
So that's why I want to be smart here, Dan, So what is the smart question to ask the CEO and team on the call to make sure we're not missing something or getting too irrationally exuberant?
I think, Carol, the biggest question coming in this quarter that everyone was worried about, and we've talked about this before, in terms of constraints related to their supplier, right TSMC. There were worries that they wouldn't be able to make enough chips fast enough to meet consumer demand from Nvidia.
So again that's probably going to come up on the conference call, that is there any doubt in your mind, mister CEO that you will not achieve the sixteen billion target in the third quarter because of potential constraints related to tsm MC. I think that's probably what's going to come up as being a worry point if we can find one here, Carol, is.
There any are there any worry points about supply?
Well, I mean there were concerns I've heard people talking about packaging issues that might hurt.
Them, and so far the packaging issue what you mean.
Yeah, I mean that sounds very strange right after what we went through the last two years about you know, supply constraints in the chip industry. You just hear different things, but that's been the vocal point Tim has been on TSMC. Can they build the chips fast enough? Can they fill the demand and meet that target? And I think that'll probably come up.
So this also shows that maybe people who initially did went through a buying cycle and maybe they've gotten them, but we're still continuing to see people one up and continue to buy correct based on these results in this outlook.
Yeah, it looks like that's the fact, Carol. I mean, it's the demand was better than what they had projected a quarter ago, right, because we're they came out and gave that lofty number at eleven billion in terms of sales. The on this quarter, of course, they crushed that and then they upped it again, so obviously they're feeling extremely strong about their business.
One quick last question, do you buy here because people are buying in the aftermarket? Would you be buying because you think it's going to go even higher or no.
Well, Carol, as you know, we've been in a Vidia for a very long period of time. It's kind of like Apple, and it is on our buy list. It is a stock that we would buy for clients that had the proper you know, risk tolerance and objective. So it's obviously based on individuals, but pretty much most of our clients already owning, so you know, it's kind of you know future.
We're there, all right, Dan Morgan, you are, Jem. We know it's a busy afternoon for you, so thanks for always finding time for us. Dan Morgan, he is senior portfolio manager at so Nova's Trust, really a go to for us on names like Nvidia and others. Joining us on the phone from Atlanta. We really appreciate his input.
Yeah, let's recap the numbers here, Carol, certainly worth repeating and Vidia forecasting third quarter revenue of sixteen billion dollars plus reminus two percent. The average on of this estimate was for twelve point five billion. She just us adjusted gross margin seventy two percent to seventy three percent, again beating estimates those were at seventy point five percent. She's adjusted operating expenses at about two billion dollars. Estimates were
for two point oh five billion dollars. In the second quarter, revenue came in at thirteen point five to one billion dollars. The estimate was for eleven point oh four And that's up, Carol, from a year ago of six point seven billion. Yeah, I mean it's do ch top line growth.
Stocks up seven point seven percent in the after hours. This is the number one performer in the S and P five hundred this year by a mile. And as Tim just broke down the numbers, you know, Netnet giving an upbeat revenue forecast for the current quarter, and it's fueled by surging demand for its AI processors in data centers. And then there's that twenty five billion dollar share repurchase, and they're going to continue to do share repurchases this fiscal year.
You're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from three to six Eastern on Bloomberg Radio, the Bloomberg Business App, and YouTube. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa, play Bloomberg eleven thirty.
Well, it may feel like we still haven't recovered from the election of twenty twenty. Carol, After all, Rudy Giuliani just this afternoon surrendered in Georgia and was released on a one hundred and fifty thousand dollars bond. That's where he faces a deadline to surrender on charges that he conspired to keep former President Donald Trump in office after he lost the twenty twenty election.
Yeah, exactly, he did. But he did call the case a travesty in some broadcast remarks. All right, this the election of twenty twenty four is already in full swaying with the first Republican debate tonight Milwaukee, Wisconsin. It'll be another crowded stage. Eight candidates will be there, but on very notable figure will not. And we're talking about the
former president of the United States, Donald Trump. He also, by the way, has until Friday to turn himself in on charges of illegally conspiring to reverse Joe Biden's twenty twenty victory in Georgia. There's a lot going on politically, and we've got a great voice, Tim on all things politics and elections.
Yeah, Mark penn Is, chairman and CEO of STAG. Well, it's a publicly held one point three billion dollar market cap marketing, strategy and communications firm. It also owns the Harris Poll, which Marks chairman of. In politics, Mark was an advisor both to Bill and Hillary Clinton, as well as Tony Blair, and also met with President Trump while he was in the White House. Mark joins us on Zoom from Washington, d C. Mark, how are you. It's good to have you back with us. Well, I want
to start with what's happening in Georgia. What's happening tonight? How do the Republicans, the eight Republicans facing each other today tonight, how do they set themselves apart from the man who's not there, the man who they're all trying to be, former President Donald Trump.
Well, look, I think the most important for them is just to act like adults. I think that people are looking for a different kind of leadership. I think the winning candidate is going to show strength, composure, understanding the issues, and understanding of the problems that people are going through.
Wait, wait, wait, hold on, you're saying the winning candidate of tonight or the winning candidate of the Republican primary is going to show them, Well.
The winning candidate of tonight.
Okay, because I don't know if President Trump. I don't know if President Trump and bodies the qualities that you just described.
No, no, No, there's two. There's a primary going on to be the opponent of Donald Trump, right and so right now there are eight candidates who are kind of buying to oppose Trump. And whether or not they're going to be able to beat Trump, I think they more likely if they consolidate around one, more likely than not they will. But that's certainly a toss up race. But I think this first primary is who is really going to be the Trump challenger and how are they going
to pick up steam tonight. I don't think it's going to be by attacking their opponents. Don't even think it's going to be by attacking either Joe. You know, they'll do some perfunctory attacks on Joe Biden, and I don't think it's going to be necessarily attacking Trump. It will be showing that they are real adults who have strengthen leadership capabilities and can understand people's problems.
Hey, Mark, you know, as a businessman, as an investor, I do wonder what kind of candidate do we need from the Republican Party? Really, what kind of candidate. What kind of individual do we need in the White House right now? That would be yes, good for businesses, which are important to a strong economy, but really more broadly good for Americans because you know, healthier society, healthier individuals, healthier business environment. I mean that leads to good economic
growth and is just good for everyone overall. So what kind of individual do we actually need in the White House today?
Well, look, people want and they have wanted for almost two decades now, since I worked with President Clinton. They have wanted someone who would bring the country together and not really I think, cater to the partisan divides of the country. I think that is the number one thing that people have been looking for for a very long time, and which they've gotten. A number of candidates who said they were going to do that and then ultimately in
the end didn't. Since when I work with President Clinton, we sure did. I think from a business environment, people are looking for growth without inflation. They are looking for a return to middle class values, meaning lower energy prices, lower interest rates on their mortgage, you know, healthcare costs that they can manage, better education for their kids. You know, people are really looking for the fundamentals and the basics here.
Of course there's immigration and crime that are additional issues, but it's these costs of middle class like food, housing, gasoline, that really are weighing on the voters that are really the number one issue before the voters in this electorate.
Do you see the voters coalescing the republic Republican voters and the Republican primary coalescing around anybody apart from former President Trump. I think they're going to.
I don't know which candidate it's going to be. But even if you look in Iowa, Trump is polling at forty two in the poll that was done. That means there's fifty eight percent of the Republican electorate in Iowa that wants somebody else. They just don't know who they want. They know who they don't want.
That's interesting.
Yeah, it is interesting, you know, and I do want under you know, when you look out at the outlook, it is an interesting time. We're debating whether or not we need to just get kind of get woke with inflation, if you will, in terms of maybe it needs to be a higher rate. Maybe that's the realistic going you know, the realistic level going forward. Maybe we need some resets because we're coming off the pandemic and things are different,
geopolitical alliances are different. I mean, how do you see the outlook, the outlook for just kind of our business environment, or economic environment or market environment.
Look, the the environment has always been shaped by two incredibly powerful forces, technology and globalization. I think you're on the eve of another wave of technology that is going to significantly lower business costs. That is the adaptation of AI. We see it in our business, we see it in how we're adopting it, we're seeing it, how we're bringing
it to clients. In terms of globalization, there has been something of a pullback from globalization, you know, I think an increasing of barriers, a growing kind of sense of global tensions, no question about that, particularly with China and Russia. And so it's unclear whether globalization will continue to drive prices, you know, down. But when you look at the at the outlook, those are first and foremost above our politicians,
the two critical drivers. And then you have regulation, taxes, you know, and kind of what government industrial policy is. And I think all those are up for grabs in what is a fifty to fifty country, And so there's a lot of potential directions here which the country could go in which frankly it's too early to call.
Yeah, first steps, So maybe beginning this evening. Hey, Mark, nice to get some time with you, Chairman and CEO of Stagwell, as we said, publicly held marketing Strategy Can Communications Firm. Mark joining us on Zoom from the Nation's Capital, Carol Master, Jim Stenovic This is Bloomberg Radio.
You're listening to Bloomberg Business Week with Carol Messer and Tim Stenovik on Bloomberg Radio.
Carol's happy with so great, What a great setup.
Carol, you've heard of the dear John letter, right, may be given a few Oh wow, Okay, what about the dear j letter and the Jay in this case being none other than Jerome Hayden J. Powell of the Federal Reserve. Neither did I founded in the Bloomberg terminal.
See this is the way you listen to us. Get those lice, nice little tidbits.
Okay, you're gonna read the letter? Well, no, okay, should.
We get to it.
Let's get to it.
Let's get to it. Barrett Rodholts is the host of Masters in Business, and of course that's on Bloomberg Radio the podcast as well his chairman a chief investment officer of Ridtholt's Wealth Management. He writes that dear Jay letter in the remarks section of the current issue of Bloomberg BusinessWeek magazine, which is available as we speak, and it's also on the Bloomberg and at Bloomberg dot com slash BusinessWeek. Berry Jinks.
Yeah, all right.
Barry joins us on zoom in New York City along with the editor of Bloomberg business Week, Joel Webbert. He's here in our Bloomberg Interactive broker's studio, Joel. I want to start with you and just ask you, know how how the format of this comes together because it's it's i would say, untraditional to say the least to read something.
Like it's Barry, So it's got to be right. It started literally like twenty feet that way, and Barry was waiting to begin one of his Masters in Business interviews and I bumped into him and he wouldn't let me walk out of the way.
Just be honest, and you just started pitching me. You roam the newsroom, don't you, and you find people.
And as an evangelist for returning he had a in my ongoing propaganda to talk to you about how greed return to office is. I managed to get the story from from Barry, and uh, we started talking about August is a productive month for Barry.
He's written a.
Couple of stories for the magazine always in August, and this one was informed by the fact that, you know, August is for the central banker crowd. You go to jackson Hole, which you know, somebody's figured out how to do August right for the record, right, let's ask it's a good reason to go to Jacksonville. The central bankers are there, and we were talking about how J. Powell has has performed. So it's also you know, mid year
performance review season. Like so, so Jay, you know, or Barry, if you were going to write this Dear J letter, which you've done, what would you want to lead with?
If if I was his supervisor reviewing him, I would start with the fact that the federal Open market can he led by Chairman Powell, always seems to be late to the party. That that's the theme that seems to run throughout my Dear J letter, which which was sincerely congratulatory, Hey Jay, you won you beat inflation? Can we not as always overstay or welcome and snatch defeat from the jaws of victory. So I would start with you were
late to get off emergency footing. You were late to recognize inflation had spiked through your two percent upside target. You were late to recognize it peaked, and now you're late to recognize that that inflation rolled over. And hey, three percent inflation pretty good. It's not two percent though, So that's another bullet point in the Dear j letter.
When you delve into the history of the two percent inflation target, you know, you assume that there's some substantial academic research and quantitative monetary models that say two percent is the ideal inflation target.
I think it's I thought it was in the Bible, right.
I did not know give it turns out, and I'm quoting. Roger Ferguson, the former Vice Chairman of the Federal Reserve, did a recent article in I Think it was a Council on Farm Relations where he basically points out, this is a wholly made up number. It's completely fabricated. It literally came from an offhand comment from a television interview in New Zealand in the nineteen eighties. There's just zero,
anything of any significance to two percent. Some people are trying to kind of backfill and say, well, their credibility is on the line. It'll look like they're moving the goalposts. And you know, to quote Caines, when the data changes, I have to change. In the twenty tens, monetary policy couldn't get inflation up to two percent, and then you had six trillion in fiscal stimulus. Hey, that's a regime change. You got to rethink your entire numbers.
Do you know how many conversations that we have had in the last I feel like decade about that two percent number, or just even in the last week or month about two percent. And it's amazing to hear that it's really not based on anything.
Nothing, absolutely nothing. I will take a little bit of credit for finding Ferguson's Peace, which I thought was so insightful and brilliant in June, and nobody had referenced it, and I sent it out to a number of people and people have been discussing it. By the way, there have been other researchers who have had some pretty substantial.
Arguments. Lawrence Ball, who's a.
Member of the National Bureau of Economic researcher and an economics professor at john Hopkins made the case all the way back in twenty thirteen that four percent would be a much more appropriate target. Lots and lots of other folks have come out said three four percent. It's just you have to accept the fact that two percent is a meaningless number. We shouldn't be wed to it.
Okay, So what else should Jay and his team be talking about while they're in Jackson Hole and not fishing.
So there's there's a couple of things, and two or three different bullet points all relate to the fact that the FED is a very large, somewhat sclerotic institution. You could you could say that about any large bank, any large government agency, any large institution, and they're very much tied to their history. Lots of the folks in the FED went to college in the in the seventies. The models that were dominant back then, as I write, in
the era of disco and polyester. It was a very different time wearing you know not and you know Dua Lipa is doing a modern version of this. But that doesn't mean the FED has to go back to the seventies. The economy today is so different the fact that a lot of the decision making, a lot of the thinking, a lot of the actual models date back to the
nineteen seventies. And you could see this in the group of economists who since zero interest rate policy and quantitative easing since Serpent q E in the early twenty tens, have been warning about hyperinflation. You know, people like Larry Summers, well respected economists, almost became fit chief himself has been talking about, hey, we need to get the unemployment rate. We need to throw a few million people out of
work in order to get inflation down. And over the past year it's pretty clear inflation has dramatically rolled over. The FED has to break with respect history, but update your models. We really have to get into you know, it's no longer an era of super powerful unions, heavy metal when it comes to you know, manufacturing and steel and huge labor costs, huge finance costs. The modern economy is digital and productive and quick. They just don't seem to be part of the modern world.
It's a good thing we can rely on the CPI. Then, right, Barry, No, I know that was a setup, buddy.
So here's the fascinating thing. And you know, my phrase that I've been using, I don't know for decades is we're in an era of deflation punctuated by spasms of inflation. Go back over the past thirty forty years. You have globalization, you have massive automation, you have huge productivity gains from technology, and the dominant backdrop, certainly since the nineteen eighties has.
Been deflation area.
Yeah, there have been a few spasms of inflation five to eight and then again twenty one to twenty three, but each time they've been TRANSI. The FMC turned out to be right. It just took much longer than anyone expected and very specific, a very specific cause. And when you look at what was taking place since you mentioned CPI in the mid two thousands, because CPI's biggest input is the way the BLS measures housing costs. It's called
owner's equivalent rent. What would it cause? What would you generate if you could rent your house, where your condo or wherever you lived if you own it, And so it's this model that sort of tries it does a half decent attempt to approximate housing costs. The problem is there are a lot of moving parts to housing. In the mid two thousands, when the bank said, sure, we'll give you mortgage, we don't. It doesn't matter if you're not working, if you don't have a job, if you
don't have any taxes. Here's a million dollars, go buy a house. That sent a lot of people into the home ownership market, and naturally, apartment rentals took a hit, and so as if you remember that inflation spike in the mid two thousands, when oil ran all the way up to one hundred and fifty dollars, owners equivalent rent looked like home expenses were going down because of the
way it's calculated. Fast forward to the twenty twenties, following the financial crisis, you had a decade of underbuilding single family homes because the homebuilders panicked from like seven to twenty nineteen, they wildly underbuilt single family homes, focused on apartments and multifamilies. And so you have everybody moving out of looking for a second place to work remotely, not in a city, lots of second and third home buyers, and lots of first time home buyers who basically just
can't find any supply out there. Lack of supply means home prices are going higher, and so perversely the right Now sixty one percent of mortgages people with houses with mortgages are four percent a row under, and it's close to ninety percent for five percent or under. So people have these golden handcuffs that's stuck where they are. The FED is actually making inflation worse.
Yeah, Uh, Tim, do you think anybody's listening?
Uh?
When you know he's reading this for Jay? Is Jay listening?
You know?
Joel? That was going to be my final question to to Barry. Hey Barry, have you have you heard back yet from JB?
We have a drinks planned around Thanksgiving?
But no, no, I haven't.
Heard listen to give to give Jay Powell credit, He's got a million people yelling at him, telling him what to do, what not to do. They seem to have been pretty clear, I give this FED credit versus let's say the Greenspan FED and to some degree the Bernanki Fed for saying this is what we're going to do and here's how we're going to do it, and then they they go out and do what they say. I'm kind of astonished how the market continuing used not to
believe them. Whether you agree with what the Fed's doing or not. You can't say they're not transparent and they're not doing exactly what they said they're gonna do.
Okay, so we're gonna talk about Jackson Hole a lot. What are you looking out for, Barry?
You know, this is one of these sort of academic gatherings where there's a lot of chatter and probably more than a little wine drinking. I'm not really looking for anyone to come out and say, hey, we've seriously rethought our entire modus operanda and mistakes were made. Changes are gonna be upcoming that that's not gonna happen. This is a little bit of a you know, an annual getaway in the dead of summer. I think it's gonna be a whole lot of nothing other than the FED continuing
to say we're not done beating inflation. Even though I disagree with them. I'm not the FED chair. They're gonna do what they're gonna do.
So if you could sit down J Powell or the Nvidia CEO and founder, who would you sit down with right now thirty seconds?
Well, there's nothing to say. I'm not going to get anything from the Nvidia CEO. They just released Learning, so there's no insight to be getting there. At least with Jay, I could say, you're so close to winning, why do you The risk is to now to doing too much. Previously the risk was doing too little. Put that flag in the ground, declare mission accomplished, and take the rest of the year off.
Which is what you wrote in your letter.
Yeah, well, Jackson Hol's a pretty good place to start that journey.
Little gap year in Jackson Hole. Yeah, I think it sounds nice. Maybe ski bum in the winter, fly fish in the summer, why fish in the summer, rock climbing.
Maybe hedge funds do it. When you're up big for the year, you cash out and you go away.
Why wouldn't you write? Barry Ridholts thank you so much, really appreciate it. He's the host of Master's in Business on Bloomberg Radio, chairman and chief investment officer of rid Holts Wealth Management. And this is the remark section of the current issue of Bloomberg BusinessWeek magazine.
You know, I'm gonna tell everyone to sign up for BW Daily, but I'm gonna do it a little early today because it's a really special edition. There's Jackson Hole bingo from the Abots. Actually walked up to my desk yesterday and someone had printed it out and put it on my desk. Joel, was that you?
No comment?
Oh okay, I think you're Jael, Thanks very much. All right, you are listening to watching Bloomberg Business Week on Bloomberg Radio, Umbromarco.
Journal.
How about you let me drive?
Oh no, no, no, no, who's going to drive?
Alright?
Please?
I'll do gravel?
Wait, I want to drive.
It's a good question.
Good this is the drive to the clothes.
Don me think well?
Brunel on Bloomberg Radio.
All right, just got about seventeen and a half minutes left in today's trading session. Carol Master Longer Team's Stenemic live in our Boomberg Interactive Broker Studio on YouTube. I'm Blue Burger Riginal. Yeah we are, and it seems like bulls are everywhere today, at least if you look at
the trade. Most of your major industry groups I think ten out of eleven in the S and P five hundred are higher for the day, and tech once again outperforming, as we heard from Charlie up one point eight percent.
Yeah yeah, y S five hundred up one point two percent. The Dow Jones Industrial Aba it is for now, what a difference than you know, look what happened last week.
Carol, Yeah, I know, I know, and August has had a very different tone. So let's see what Jimmy Lee has to say. He's foundered and CEO at the Las Vegas based registered investment advisor Wealth Consulting Group. Today though we find them on zoom from Sea Island, Georgia. Everything awesome there in Georgia.
Jimmy Lee don just came out. Maybe it's because of you, guys, I don't know. It's very nice here, very nice.
What do you care more about this weekend? Video? Or Jackson Hole?
Both are important, but I think I think in Nvidia is probably more important when it comes to related companies that might participate. But you know, I think Jackson Hole, I think Powell is going to be normally hawkish like he always is, and I think he needs more evidence of lower inflation before he can he can sound sound a little bit more dubbish and so so I think
they're both important. But obviously just in a few minutes here we'll we'll have what Nvidia has to say, and I think they'll probably end up, you know, posting some good numbers, but maybe having some issues with UH, with supply and things like that and meeting demand.
Who knows.
We'll see, all right, we'll see we've just got it, like under an hour to go, and then we'll find out it is the most important earnings report of our lifetimes, Carol. So that's that's what That's what everybody's saying.
Well, I am curious though on Nvidia. I mean, are you thinking, I don't know, have you been recommending to investors to buy it ahead of earnings. We've done some stories I think about the options trade, and it looks like we're anticipating maybe a ten percent potentially on the earnings report, at least based on some of what we're
seeing ahead of it. I don't know how we just had We just talked with David Traynor, thank you, uh, and he's saying, you know what good company, bad stock because it's just a video.
So yeah, you know.
I was actually actually having a conversation with two people on our investment committee this morning about the about the stock, and our CEO is talking about how the obsence market is pricing the potential volatility with Nvidia in this earnings report.
So definitely if you.
I've not been recommending people by prior to earnings myself, but if you're gonna be doing it, you should know that it could be very violatile.
One way or the other.
Right, So I think I think it's really for traders to try to invest ahead of earnings and things like that.
And you know, we'll see.
I think the company overall though and will benefit from this massive trend. And AI, well, we'll see in the long run if companies that are chasing AI will get the bit turned on the capital that they're investing.
So that's set to be seen too.
I'm going to go back to something that you said, Jimmy about Howell needing more evidence of more inflation or more evidence of lower inflation. I should say, are we starting to see that evidence? And look, I understand that that services is more important than goods and to our economy, but we are getting some startling stuff from some retailers foot Locker today, for example, the warnings that we heard
from Targets executives, Walmart executives, Dix executives. Is that does that tell you that inflation is easy?
Well, I certainly believe that those are very important factors for the strength of the consumer and where we're at right now with that issue. But I think Powell, unless he gets you know, more of the headline numbers that they focus on.
Consistently lower, I think he.
Is going to continue to feel the political pressure from his other committee members and just in general for talking
hawkish until we start to see the lower numbers. Now, my personal opinion has been, as you know, as I've been on your show, you know throughout the year that I think inflation will finally start to look even better than what may be predicted because of this housing shelter costs number that is a big part of the core CPI that will start to look better in the next few months and throughout the rest.
Of the year.
As you know that that number the owner is the colder, rent portion of the shelter cost is the biggest portion, and those numbers should definitely start looking better and have a lower impact and a positive impact on lower inflation
going forward. So maybe Powell will get what he really needs, which is better inflation numbers, so that he can you know, pause, And I think the future's markets still predicting that the I think seventy eighty percent or so that the FEDS are going to pause in September, but I think after that, I think it's almost a coin flip.
And as far as investors are thinking, you know.
It's interesting talking in the newsroom and someone saying to me, kind of tired of all the FED speak, And I wonder, for you, who has to make investment decisions, what is really the constructive conversations or narratives that really make you pull a trigger on either buying or selling something. Is it the FED conversation or is it something like an nvideo report.
I would say it's it's really neither, Carol. As you know, we work with long term investors. Most people that are listening aren't traders, and certainly not institutional traders, and so people that are invested for the long run. We've never
promoted market timing and getting in out of stocks. We believe that you know, under overweight sectors or different asset classes depending on the part of the business cycle that we're in an economic cycle might make sense, but getting in and out of stocks trying to market time has never.
Really worked consistently.
Historically, stocks are up seventy five percent of the time, you know, and so it's very difficult for short sellers to make to earn money doing it that way, and so it's a very difficult game to play. So really it's more about asset allocation and maybe to invest new capital like these things I think matter, you know, trying to get money to work. A lot of investors, even professionals, have missed out on the huge gains this year. I don't know if they're going to get their chance to
get back in. So I don't really see how we're going to retest the lows from last year.
Very quickly fifteen seconds. I mean, are you still holding lots of are your clients holding lots of cash on the sidelines high cash positions or no? Much more fully invested very quickly please.
I would say that the firms more fully invested.
But people do have a lot of cash, and it's evident the five plus million dollars that people having money markets all right.
So the sign us some cautiousness. Jimmy Lee, thank you so much. Be well, Founder and CEO at Wealth Consulting Group on zoom from Sea Island, Georgia. We're just about ten minutes away from the Clothes Carol Master, Tim Stanvick week our Bloomberg Radio.
This is the Bloomberg Business Week podcast, available on Apple, Spotify, and anywhere else you get your podcast. Listen live weekday afternoons from three to six Eastern on Bloomberg dot com, the iHeartRadio app, tune In, and the Bloomberg Business App. You can also watch us live every weekday on YouTube and always on the Bloomberg terminalone