This is Bloomberg business Week 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 Masser and Tim Stinebec from Bloomberg Radio as we mentioned yesterday, and the new double issue of Bloomberg Business Week, several stories on the destruction in Eastern Europe, including one on the new arms race that has to do with supplies and Russia and Ukraine having enough ammunition. Who knew there were ammo shortages? And so crazy to think that it's been a year since that Russian invasion
of Ukraine. Absolutely, and as you said, who knew that there were AMMO shortages? Our business team, business Week team definitely knew. The new issue, by the way, online at Bloomberg dot com slash business Week, also on the Bloomberg terminal, of course on newsstands. Let's get to it with Natalia Drosdac. She's Bloomberg News reporter covering EU government. She's on the phone from Brussels, along with the Bloomberg Business Week editor Jill Weber, of course, editor of the magazine. He's here
in our Bloomberg Interactive Broker Studio. I have to say, Joe, Uh, the to all the coverage really important and as Maddie said, hard to believe that we're already one year in or almost one year in on this. Yes, so to mark that we wanted to create a package of stories and um In in the ongoing effort to show how important
return to office is. Natalia, who happened to be in New York from Brussels, floated as I bumped into every one day, Uh, this idea that you know, the world happens to actually be running short on on AMMO, And I said, well that has some serious implications when um, you know Putin has decided to wage war in Europe, right, and and that is a coverage area that I just think is going to become even more interesting as the conflict reaches on. But Natalia, bring us up to speed
on on your reporting and which you found. Yeah, I think one of the features of this war in Ukraine that we've seen is um the incredibly high attrition rates of ammunition that is taking place every day. Both sides are burning through as much as thirty thousand, one five five millimeter ammunition UM, which is artillery ammunition basically, and I think that has really um that has really taken the West by surprise. I mean so much so that their stockpiles have also been depleted as a result of
supporting Ukraine in its fight against Russia. And we know that Russia is also facing that pressure. I mean that just in terms of the staggering amount of ammunition that they're they're going to going through. That means that there's been, um basically this urgent need to to boost production on on all fronts, on all sides, um in Ukraine and
Russia in the West. And so there's this expense from the officials in recent weeks that the war is really becoming a battle of factories and production as much as it is a battle of troops and weapons. And so there's this real race to to to produce as much ammunition in particular to get that to the front, especially right now with both Russia and Ukraine launching new offenses in the coming weeks and months. So this is an
urgent issue. Okay, so you might have been tired of hearing about supply chains, but it turns out wars have supply chains to Let's actually just focus on on the europe side, and and what's going into Ukraine to support the Ukrainian side. Where where is that stuff coming from and what sort of what do the numbers look like? As that machine has rapped back up, well, so Europe UM. So both Europe and the US have had to boost production. I think it's fair to say that the US has
and quicker to do it. UM. They were producing around fourteen thousand UM shells per month before the war, and now they're planning to get up to as much as nineties thousands per months as soon as the next year. UM. But but Europe does seem to be lagging behind UM. And you know, we have we have some examples of of companies in Germany and Slovakia who are who are
really trying to dose production. But the problem is that Europe comes from this context of years of really limited defense spending, which I'm sure you will remember from the Trump days because that was something that he was really UM pushing the Europeans to do more of, to spend
more in defense UM. And as it happens, because Europe was spending UM in a limited amount of defense on the basis of the assumption that there wouldn't be a major war this content that meant that production and industry has also kind of uh scaled back in a big way as a result. Hey, to tell you, I'm so sorry to jump in. I just wonder. I know you're talking about the europe impact, but we've been talking all week about how the US has also been limiting investment
in defense. I wonder to what extent some of the sources that you spoke with in your fantastic reporting on this would be concerned about that as well, the US
potentially pulling back on investment in production of something like AMMO. Well, I think I mean the context right now, that would be really hard to justify, um, because I think this there's just such an urgent need not just to support Ukraine, but also to to replenish the Allies stockpiles, and NATO Allies just just in the recent weeks UM and months has agreed to to raise stockpiling guidelines as a result
of that. So this is like a clear, uh concrete um takeaway that they're they're they're yet that they're making from from the war and learning lessons from what they're seeing in Kraid to tell you, I feel like there's a reality of and you make a great reference to World War One, um when it comes to ammunition. But the reality is, you know, ultimately who is able to kind of bring in and build up their stockpiles could have a large um impact on ultimately who maybe wins
this war. So is there a net net who has the advantage right now? Russia or Ukraine? I think it's it's a really tight race. Um. You know, when you talk to NATO officials, they're really confident about their position. Um. They know that Okay, Ukraine's using less, but they're more efficient about the ammunition that they're using because they've gotten very um modern weapons from from NATO allies, and those modern weapons are more precise at targeting UM targeting, making
those hits UM. And Russia's under sanctions, it's a Ukraine also has the backing of the entire West Western production capacity potential capacity. But on the Russian side, they've really they've really um, I mean they've they've switched into wartime economy. So that means that the sense has become a number
one priority. So there it's us the forefront, and we we don't have concrete numbers about their current production of ammunition, but we know that before the war they were producing one point seven million, one five two, which is the Soviet UH standard for ammunition. I'm gonna jump in here. I highly recommend everybody check out the series of stories, the photo essay, your story there with all the numbers.
Um just talking about here. We are almost one year in u Natalia Josiac Bluemberg News and of course the editor of Blueberg business Week. Check out this is the cover a special jeep dive into the war in Bloomberg business Week. You're listening to the Bloomberg Business Week podcast. Catch us live weekdays from two to five pm Easter on Bloomberg Radio, the Bloomberg Business app band you too. You can also listen live to our flagship New York station,
Just Say Alexa play Bloomberg e Love and Dirty. Ain't calls on trucks, but if it runs, dear matter, thanks much. Tract sex all right, we're gonna talk about tractors. Yeah, I guess they could be sexy. I don't know. Down on the farm. Everybody, alright, cheers of deer. They are roommate and I and the team we were just talking about this deer jumping today. Certainly one of I think it's the number one gainer in the SNP five reported
first quarter results be the expectations. They raised their forecast. Let's get into what is going on at the company, maybe what it says more broadly about the farm economy and the world at large. With us is Bloomberg News ag reporter Elizabeth Elkin. She's joining us via zoom in New York City, and we've got Bloomberg Opinion, Deals and Industrials columnist Brook Sutherland right here in our Bloomberg Interactive Broker studio. Hey, Elizabeth, I want to start with you
break down the quarter for us. Yeah. Absolutely. Um, So, like you said, we had a really really really strong day for deer today. Um, you can kind of see how well farmers are doing based on how well deer is doing. Right, So, farmers are making a lot of money, which means that they're buying a lot of tractors, and so then you get deer making a lot of money off that. Right. There are a lot of farmers who
are going in and they're upgrading their fleets. You know, they need they need new equipment just like anyone else does. And uh yeah, they're they're upgrading and they're spending a lot of money and and Deer is making money off that. Of course, So Brooke, bringing you into the conversation here, tell me a little bit about what this is looking like on the deal side. What are people most excited about when it comes to Deer? Uh, sure, I mean
on the deal side. I think in the industrial world, it's just interesting to see, um, you know, how these companies might behave if we see some valuation reset. We've heard a lot of companies complaining about prices being very expensive. Certainly, Deer has been making some inroads on the technology front, which you know, we've seen that across the industrial sector of companies wanting to invest in these higher tech options
for their equipment. But you know, I think what's interesting in today's numbers and just really echoes what we've heard across the manufacturing sector this quarter that they're not really seeing that dramatic drop off in demand that people have been worried about for so many quarters. Certainly there's pockets of weakness um for Deer, particularly that's on the more
consumer facing side. Some of those sort of hobby tractors that were very big during the pandemic when we were all sitting at home, and I'm trying to figure out really, I mean, people who think tractors are sexy and we're excited to get out and do that during the pandemic, and so we're seeing weakness there. But in terms of they're really in more industrial facing businesses, it's just not happening there and and nor is it for a lot
of the other industrial companies that I look at. But go through some of the headlines and numbers that we got from Dear though that was so strong about you know, they addressed demand, they talked about supply chains, walk us through it a little bit, sure, like Elizabeth was saying, you know, um, farmers are are doing well right now.
Crop prices are up, and you know, there's some expectation that net income for farmers will be down next year relative to this year, but Deer still expects it to be at a very healthy level to support that replacement demand for this aging farm equipment that we've been talking about for years and years now, and they are looking
to invest. And you know, Deer has also come out with higher tech offerings UM that can help improve farmers productivity, which of course is very appealing at a time when crop prices are high, and you want to get as much bang for your buck as you possibly can. UM. You know, it's part of this. And let me first start with you and then I'll bring you back in Elizabeth. It's part of this the inflation story that because farmers have been have they been able to charge higher prices?
Is that part of it. Deer seen incredible pricing power and they're not alone in this UM, you know, But I think it is just notable how much Deer has raised prices. And it's somewhat similar to what we've seen at Caterpillar in terms of pricing power. But these are very big companies with very deep networks of dealers UM and service providers, and they have a lot of power when it comes to pricing UM and they certainly have
not hesitated to flex that in this environment. But is it because farmers are making more money off the crops? I mean, I think farmers be able to absorb the higher costs UM. And you know, at the end of the day, if you need the equipment, UM, you're you're going to You're gonna want to buy it. UM. Of course, you know there are competitors that you can look to in this field. But you know, like I said, Deer is a big company in the agriculture equipment space and
they have a lot of power. Elizabeth, come on in on this and what we've been talking about. Yeah, absolutely, So, Um, commodity crop prices are really really high and farmers are, as we've said, making a lot of money off of that. Um, you know, we do as as we've been looking at this year or this past sort of year period, UM, we've been worried somewhat about like farmers being able to outpace inflation, right because everything that goes into growing crops
goes into like the farm you know, like processes. We've seen like massive inflation on that. But but so far crop prices have kept up pace more than so and so um yeah there. I mean, farmers are kind of rolling in cat right now. And that's where we see this come in, right, So farmers are rolling in cash. I wonder how much of this is the fundamentals versus the technicals for dear, Like, what what is the exact data point that people are most excited about when looking
at Deer and Brooke? I wonder if you can touch on that sure, I mean, I think it's a variety of things. I think there was a lot of angst heading into this quarter. Um you know that we might start to see signs of a slow down. Deer uh It's stock is up significantly over the last couple of years, and you know, I think people are wondering if you know, there's an opportunity for some profit taking at some point here, but the company just keeps out performing, blowing past. It's
kind of markable. I just went back to I guess that was a little bit of a Yeah, I think was a little bit of a down year, but they have just been shooting up year after year they have. And I mean it's not just the agricultural equipment either. I mean one of the things that stood out to me just you know, looking at the industrial sector more broadly, like I do, is their optimism around construction equipment that you know, whatever weakness we're seeing and housing, they still
are seeing very strong demand for construction and forest equipment. Um. You know, as some of that institutional commercial spending comes in, um, you know, benefits from infrastructure spending, that sort of thing. So you know, that's a focus for a lot of investors in the industrial side. And I know Elizabeth that you cover this in a much more high brow way. But I do wonder to what extent kind of the memification of Deer and Caterpillar has any impact on the companies.
Like when we see everyday consumers just wanting to buy anything branded Dear to kind of express their own love of the company. Um, does that stay sticky? Does that remain a good sign for the company when you look, you know, a year from now, five years from now.
I mean, look, Dear is like one of these top names, right, I mean I don't think that I can think about driving through I went to school in Alabama, Like, I can't think of that driving through Alabama without seeing a bunch of big green deer tractors, right, Um, and the hats, you know, and the children. Really they have so much that you can buy to just be like, I love this brand, and they've done so much marketing around that,
and I just wonder. I know that's a low expense, but I wonder if that has an impact on the health of the company. I think it's a great thought. I mean, the branding is obviously really really important to a company like this, and you know, like you said, even like the hats and things like those are things
that I who like don't. I don't drive tractors, right, but I could still buy a bunch of like deer you know, hats and uh shirts and things and like be like, yeah, I love big grain tractors, you know, all of those country songs like I can still do that. So I would imagine that that is helpful for these companies, right. I would also think that the brand power helps and plays a role in the pricing factor to um. You know, it's a well known brand that people think of and
that that gives them a lot of power. You know, I'm looking at your een go back to the end of it's up at almost I mean, it's really just been on a tear. So guys, let me just we just have about a minute and a half left here. Brook. Let me start with you. So when you look at the industrial space more broadly, we've had reports you've got, dear, what does it tell you about what's going on more broadly in the economy. I mean, as you say, these
are not inexpensive machines, No they're not. But I mean I think one of my biggest takeaways this earning season has been CEO's willingness to not only hold steady capital
expenditures but step them up. I mean, I think you have to feel like they're they're taking a pretty confident view of the economy here to be making these spinning decisions that you know, there might be some sort of soft dip, a soft landing, short term dip, but they're looking past that and thinking about the long term future of their companies and seeing a very robust demand back drop, whether that's from reshoring or infrastructure or other stimulus programs
in the US and in Europe or China, and they feel good. Elizabeth, come on in for a final thought here, just got about thirty forty seconds here, because I always think about people think about farmers always needing subsidies, and it's such a tough industry. What does it say more broadly to you about what's going on in agg and again got about thirty seconds here. Absolutely, yeah, I mean, it is a tough industry. But at the same time,
like you see huge commodity farmers like really making money. Um. That being said, you also see some of the smaller farmers really struggling. Um. And I think that you can see that in some of these equipment sales numbers. UM, small egg in the US was looking down for the year, and UM, I think that that's sort of telling of some of the smaller scale farmers rather than these big commodity farmers that we talked about a lot. Well, the deer numbers stock still up about seven point three percent.
We saw a co going up, and we saw other names in the space definitely trending higher. Um. Thank you both really appreciated. Bloomberg News Agriculture reporter Elizabeth Elkin joining us via zoom in New York City, and of course Bloomberg Opinion, Deals and Industrious columnist Brooks Sutherland. You're listening to the Bloomberg Business Week podcast. Catch us live week days from two to five pm Easter on Bloomberg Radio, the Bloomberg Business Band. You too. You can also listen
live to our flagship New York station. Just say Alexa, play Bloomberg even dirty. I'm room journal. Yeah, but you let me drive, no, no, no, hon please, I'll go Bombardi Revels. Right, I want to drive. Good question D. This is the Drive to the Globe down on bloom Bird Radio. All Right, we just heard from Charlie of course breaking down the trade here. Keep in mind we are on track for the S and P to see its first back to back weekly declines, the first time
that we've seen that here. In standout though, is those small caps up about one and a half percent for the week overall, and a little bit higher certainly in today's trade. So let's talk about the markets. Let's talk about it with someone who knows it very well. We've got Alan Zaffran, founding partner and co CEO at I e Q Capital. He is joining Carol and myself on zoom from northern California. Allen, great to speak with you here. I'm gonna start with the million dollar question on all
of our minds. What's the outlook for recession in three Can you read the tea leaves for us? Mawson and Carol, thanks for having me. Of tea leaves are not terribly encouraging other than this day. If we're going to have a recession, the appearances are that will be relatively shallow but extended. And I think the challenges being seen in the way the market is playing out right now. It is a strange time, Madison. And the reason is the
bulls are arguing that we've avoid were avoiding recession. But if you're avoiding recession, the economy is going to be strong. And if the economy is going to be strong, that means the Fed's going to keep rates up higher and longer, which in turn is going to push down economic activity, and it's gonna push down valuations and earnings estimates. And so the market wants to hear that we've already pivoted with the Fed, We've had a soft landing, and it's
all steam ahead. The problem is the market isn't yet priced in fully higher rates for a longer period of time, and the fact that has on reducing earnings estimates. That is the struggle worth witnessing right now. Al I gotta say, it feels like chicken and the egg, like I'm not quite sure you know it's and this is the predicament that FED finds it's self in. And we know FED policy not exact or you know, it takes a while for these moves to really feel their impact, and so
none of this is an exact science. Having said that, we do know are a lot of conversations have been about inflation. Bringing it down. It's harder, right, The first bunch is easier but as as as the time drags on, it's a little bit stickier and trickier. Um. Having said that, the investors that you talked to, are they more optimistic or pessimistic at this point because the earnings and the kind of held up out here in the Silicon Valley,
people are guarded and concerned. Not from the standpoint that it's armageddon. There's just this feeling that we're in the middle of an elongated, slow grinding cycle that hasn't played out, and it's just gonna take more time, and it's aggravating, particularly for those in Silicon Valley that have startup in early stage businesses with short runways of cash before they burn up and need more money. That's the scary part.
Other much more well positioned, solid businesses, predominantly in the SMP five or an index, don't have those near term cash problems, but they recognize the economy is slowing as the FED raises rates, and we all know academically in theory, when the FED raises the rate fed rate, it takes about twelve months from the full impact of each rate
hike to fully filter through in the economy. So if you believe that to be the case, the slowdown economically is still going to show up six to twelve months
from now, not today. This goes back to I have to say, you know, Maddie's something that I've been talking about a lot Ken Rogoff on surveillance this week, and just this whole idea of we don't really know what's going to happen and how this plays plays out, and this is what makes it so tricky and so interestingly he was the one who was saying we're going to have soft without the landing, like another thing to add to our little reel of options for for where we're
heading with this. UM, I want to ask you Alan about tech companies because you are in Silicon Valley and you're talking about the importance of cash. As the era of free money starts to wrap up, how are you thinking about tech companies, UM, Tech companies still have a fabulous quality in which they're incredibly capital like high margin businesses with recurring revenue streams, and you get entrenched customers who just can't let go of their software based systems
once they grab them. So if you have a really strong franchise and a durable product until a better competitive technology shows up, it's a winner. The challenges. These companies are valued on the basis of long term cash flows, so those businesses are the most susceptible to rising FED fund rates because I'm going to use higher discount rate when I value the present value of those distant cash flows.
I do think they're increasingly attractive, but in an era where the Fed is going to keep rates higher for longer in the short run, there's still sub it to some whims of continued valuation pressure. Despite how far they've come down. They're compelling long term opportunities, but you have to be selective and ensure you're in a business that has a long enough cash runway to endure whatever slowdown might show up in the next six to twelve months.
I mean, Ellen, this is the important conversation, right, and you write about it in your latest research about you know, this fifteen year period of easy money being over UH interest rates, you know, structurally elevated amainst the return of inflation. I mean, if we are going to forgive me a new norm when it comes to where inflation settles and were rates settle and the Fed funds, I know they're sticking to two percent, but I think a lot can
be debated about that. That means it's a whole valuation reset for asset classes. And that's the predicament we find ourselves in. And just got about a minute here. Don't put all your eggs in one basket. Don't forget there's a reason to own reads, there's a reason to own value based businesses, consumer staples. Financials will do it, which will do okay when we get back to more upward sloping you old curve, which is look what forward looking
healthcare stocks. So, despite being here in Silicon Valley, um our clients are well diversified across all sectors because we recognize that area is change and with it, different valuations are applied in different business models can be durable despite in your term economic conditions. All right, we're gonna leave it on that note, Allen, have a great weekend. Appreciate checking in with you once again. Alan Zaffron he's founding
partner and co CEO at I e Q Capital. This is the Bloomberg Business Week podcastle Apple, Spotify and anywhere else you get your podcast. Listen live each weekday starting a two pm Eastern on Bloomberg dot Com, The I Heart Radio app tune In, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Termit level.