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This is Bloomberg Business Week Insight from the reporters and editors that 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 Stenoveek on Bloomberg Radio.
It is the first full day of Donald Trump in the White House. We are expecting an announcement later on coming from mister Trump, specifically to announce open Ai SoftBank, Oracle and an Ai investment. This was initially reported by CBS News. We have seen Oracle shares jump on it. But again this is why we are watching very much the first few days, the first few weeks, the first one hundred days in terms of things that may come down that will impact the trade and also impact businesses.
And that includes the tariff Watch.
Yeah, things that may or may not come down. What's expected, what's not expected. The President's signal plans to impost previously threatened tariffs of as much as twenty five percent on Mexico and Canada by February first, reiterating his contention that America's closest neighbors and largest trading partners, Carol are letting undocumented migrants in drugs flood into the US.
All right, So what might all of this mean for US companies? Bloomberg Intelligence Director of Equity Strategy and chief equity strategist Gina Martin Adams writes about that she.
Joins US from New Jersey.
All Right, Gina, So should investors be more concerned perhaps with this round of tariffs than first than compared to what we saw in the first Trump White House in terms of how it impacts specifically US stocks.
Yeah, I think that's a really great question and something that we're going to have to grapple with probably most of this year. Unfortunately, as the tariffs unfolds. Right now, it's still relatively speculative. But the one thing we can hang our hat on is the fact that the dollar has been rallying since late September, in fits and starts, of course, but at its peak just a week or so ago, the dollar was up ten percent from its low in late September.
The dollar is a.
Signal for portions of the US market, especially the S and P five hundred's most multinational stocks, which tend to experience ripple effects of currency in their earnings outlook. Now, these happened to be also the stocks that were largely leading the S and P five hundred earnings recovery in twenty twenty three and twenty twenty four. They now face the most difficult comparisons and the highest earnings expectations going
into twenty twenty five. So I would anticipate that at the very least, you have some currency concerns start to eat away a little bit at multinational stocks earnings outlook, which could create another bout of volatility or indigestion in stocks as those emerge.
Gin We have sort of a playbook here in recent history. We saw what happened in the first Trump administration, We saw certain tariffs continue in the Biden administration. How were the stocks that were affected, the sectors that were affected, how were they hit, and how does that play into your analysis over at Bloomberg Intelligence.
Yeah, I think it's a great point. There is a precedent, but pass is not necessarily a perfect precedent for what to expect in that. In twenty eighteen, the tariffs were pretty targeted at China. This time around, it looks like the tariffs could be considerably more widespread wrapped up with as you mentioned, at the onset and immigration issues targeted at least in the short run at Mexico and Canada predominantly, China seems to be kind of put on the back burner,
or at least temporarily on the back burner. Let's see where that goes over time. Nonetheless, there's one indicator that I think is really the most important for investors to follow regarding the potential market implications, and that is the operating margin forecast from analysts. This is one of the single best indicators of coming performance in the equity market. Operating margins obviously have been expanding for the better part
of the last two years. In twenty eighteen, we saw operating margin forecasts turnover very quickly, not only because of ten tariffs, but also because the FED was tightening interest rates and we had some operating issues at the largest tech companies emerge. And so I think you want to watch this operating margin forecast pretty carefully. If analysts start to lose face the faith that companies can pass through prices onto their ultimate consumers, that they can maintain pricing power,
that is usually pretty problematic for stocks going forward. We saw that in twenty eighteen. We may say that again now now on the products and areas that could experience the greatest operating margin pressure, it could be quite different. But the important thing to know for the markets at large is that operating margins are the key.
Also fair to say, and I was thinking about a conversation Tim and I and David Gora had yesterday following the inauguration, and this was with Stefan Seelig. He was Under Secretary of Commerce for International Trade at Commerce during the Obama administration. He was also head of the International Trade Administration. And he said, when we talked about tiras, he said, they're complicated. They are not all one thing.
And as you made that distinction between twenty eighteen and the teriffs were very targeted at China versus maybe something here that's more like a blanket tariff, it does become a different issue. So we have to be smart about kind of the devil and the details we do.
And I think the other thing to consider is that tariffs target at economies often impact markets through companies, and economies and markets are not the same thing. Economies companies are really a microcosm of economies are certainly related to the economies, but the companies are the ones that oftentimes pay the tariffs. A good example is, you know, these
tariffs targeted at Canada. How much of that is actually going to impact US auto manufacturers, who are some of the biggest exporters of products from Canada into the US is a huge question, and I think we have to consider that companies are very multinational in nature. Many of the US companies that are multinational will ultimately be the payers of these tariffs. So we want to be really careful and conscientious in not suggesting that tariffs that are
targeted at economy are paid by those economies exclusively. They're generally paid by companies, and companies are often multinational in nature and can sit on various exchanges across the world, don't necessarily represent those economies.
Gina, in your analysis, does any of the transformation that the president is hoping actually happen? The idea that maybe because of tariffs, companies based here in the US will manufacture goods closer to home in the US, employ more Americans, and make it work as the whole idea behind these being implemented is well.
I think there have to be a lot of other changes that happen to get US companies to relocate into the United States beyond simply an acceleration and cost. Companies tend to find lowest cost labor around the world. They will not necessarily relocate to the US. They may relocate to other nations. They may find other ways to path
through costs. There are a lot of different ads by which companies can flexibly approach a sanctions or a tariff's environment, such as the one that we're likely to go into. I think you can see some relocations to the degree that's in the best interest of profitability of the company.
But that profitability is most important for public companies to keep an eye on, obviously, and if it's not in the best interest of their shareholders, if it's not in the best interest of seeking profits, then why would they relocate to the United States. There has to be a pretty compelling reason beyond tariffs. One of the biggest reasons companies locate outside of the United States is it's just more efficient, more effective, and better for their cost structure.
Will tariffs ultimately overwhelm that decision. It seems unlikely, given that labor is such a huge portion ultimately of company costs, but we'll see you can also see efficiencies gained in other ways, another by relocating into other regions of the world, particularly when we're selling into other regions of the world as a corporation. So I think think it is very complicated.
I think that a blund instrument of tariffs can be effective in certain instances, particularly at protecting domestic industries, but it's not one big broad brush that we can paint and I think that each company decision will be made on a profitability perspective of that independent company.
Hey, you know one thing I want to ask you, and one of the things that we've talked about over the last couple of years is some of the spending plant programs that Congress passed a Biden initiated that Congress ultimately passed and put investment dollars certainly into the US economy, spending on infrastructure, green initiatives, and so on.
Chips.
Donald Trump is expected to announce an open AI SoftBank Oracle AI investment. We've been talking about this news out of CBS reports, and I just wonder how you were thinking about or watching the Trump administration for other things that you think could potentially increase kind of the liquidity and cashets out there to put to work that would impact the markets, the equity market as well.
Yeah, I think federal spending programs have become a really big bogie to watch for companies. Over the course of the last several years. The Chips Act was very consequential. The Inflation Reduction Act was also pretty consequential to certain industries profitability trends. So any sort of fiscal spending package or public private partnership dedicated to elevating investment into certain sectors can be very meaningful. I think we have to
watch rather than speculate as to what may happen. I think we want to watch for the details of each of these packages to assess the viability and certainly the market impact. But nonetheless, we are in an era where federal spending and targeted federal spending is having real economic and market consequences.
Hey, speaking of market consequences, just thirty seconds, real quickly, we've got Netflix after the earnings.
We are an earning season. This is a big one to watch.
It's been on a tear the last couple of years, but it's down about seven percent since early December. How might a name light Netflix kind of help or hurt sentiment in the markets just quickly.
Yeah, it's a great question because Netflix is sort of one of those representative examples of the media segment within a tech telecom and media. It's pretty important for driving sentiment with respect to content producers. I think that it's less important than say the Mag seven. Yeah, but we do want to watch for persistence of profitability. I think Netflix could give us some pretty good indications as to sustainability of spending, but also what's happening with margins. Margins
are really key right now for that entire space. To the degree that this company is navigating the margin outlook relatively with a relative strength, I think that could be fairly supportive for the broad sector. But ultimately we want to watch for the Mag seven, which are obviously have potentially profound impacts.
I feel like I'm going to make up t shirts watch operating margins because I feel like that's my big message from you right now.
Overall, it is the big message this year.
You're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from two to five pm Eastern. Listen on Applecarplay and the Android Auto with the Bloomberg Business ap or watch us live on YouTube.
The thiny twa billion.
Dollar cannabis industry in the United States is watching perhaps what a Trump administration in Republican Congress may mean for their world. Bloomberg Intelligence Nathan Dean writing last month that quote, while legislation to let US banks service cannabis based businesses will face similar policy hurdles in twenty twenty five as in the past, Donald Trump's election victory raised the odds at a long awaited goal of the cannabis sector can make it to the President's desk this year. Let's see
what Erwin Simon has to say. He's chairman, president and CEO of the one point one billion dollar market cap cannabis company Tillray Brands.
He joins us from New York City.
Tillery, by the way, is one of the world's largest licensed cannabis companies.
Erwin, nice to have you back here on Bloomberg.
We are curious about your thoughts regarding the Trump administration and their stance his stance toward federal legalization of marijuana.
What do you think the outlook is.
So Number one, thank you very much for having me listen It was great to see President Trump, you know, inauguration yesterday and ultimately see him come back to office. You know, Trump is about business. You hear him talk about terrorts. You hear him talk about you know, free trade.
And if you come back and look at cannabis and the opportunities there to legalize that and the excise tax that can be brought into the US coppers, I think he looks at as a business and I think, as I said before, I think medical cannabis in the US legalizes, and that enacts safe bank ultimately from a decriminalization, and that takes the illicted market off the street.
And I think absolutely Trump will absolutely look at that.
And I think you know, he has already looked at that. When it came to the election in November, he was in favor of cannabis, you know, legalizing from a recreational standpoint. In Florida. It didn't pass that has needed sixty percent, and I think it was around fifty three fifty four percent.
Why are you optimistic that he'll do this stuff during this term when during his first term there was a lot of optimism and a lot of hope from folks in the cannabis industry. I know you weren't at Tilray at that time, but there was a lot of optimism coming from the industry and that ultimately did not come to pass.
So listen again, I think from a business standpoint, and he looks at it from two things. He looks at it from the tax dollars and the excise tax that come into place. And he looks at an illicted market that he takes off the street, and he gets real regulation in here, and he ultimately brings safe baking in here, which allows money that's going through going through the banks.
From a regulatory standpoint, Listen, you come back and look at Canada today, and Canada is a tenth of the size of the US, and there's over a billion and a half dollars in excise tax that comes into Canada each year. If you multiply that by ten, you look at the fifteen billion dollars opportunity here in the US.
So I come back and absolutely if you look at Europe today, there's twenty different countries that allow medical cannabis in Europe today, And come back and look at recreational cannabis. Recreational cannabis day is legal in twenty seven states in the US and medical cannabis is in thirty five states, so a big part of the US population wants cannabis legalized. But I'll tell you this here, till Ray is in a good spot. You know, we can't sell cannabis in
the US because we're a NaSTA eclistic company. We're the largest cannabis company in Canada today. We have a good sized beverage business in the US today with our craft beers, our spirits with Breckinridge, and our hemp business of Manitoba Harvest. We also have a good sized business in Europe today with our medical cannabis business, where there we only can sell cannabis through prescriptions from doctors. So we're a well
diversified company. And I got to tell you it would be very helpful to tell Ray if cannabis did legalize in the US from a medical standpoint, and I think, hey, it's a two three hundred million dollar business for US right away at a three percent size of the market. As you just said, you know, it's a ten billion dollar market here in the US. I'm a medical standpoint.
What about what about tariffs and the comments that the President has made about Canada the possibility that there could be twenty five percent on good twenty five percent tariffs on goods coming from Canada by February first, and also the jokes that he made over the last month about essentially Canada becoming the fifty first state. How do you look at all that.
Well, I don't think that's going to happen, number one, But number two, I think you got Canada's attention.
You know.
The good news is, you know, the only thing we bring in from Canada today is we bring some hented for our hemp business. You know, none of our beer, and of course none of our cannabis does sell within you know, the US. None of the cannabis we make today and growing Canada is sold in the US. Listen, the Canadian dollar, you know, has quite a bit of value. So if there was a tariff, I think ultimately it gets passed on to the consumer. I don't think it's
going to be twenty five percent. I think there could be tariffs. We have five million square feet to grow in Canada today, and if we could produce there, which would be about sixty metric tons, and be able to sell them in the US, it would be very, very beneficial.
To till errate.
Where's the growth in your business? Right, there's cannabis, there's the beverage business. You guys are also moving increasingly into vape and infused pre role categories. So tell us a little bit about where the biggest opportunities are for you.
So the growth in Canada today is in pre rolls. The growth in Canada today is cannabis and tu streets and the fake business. And that's where the growth is in Canada today. And as the market continues to mature and more and more consumers are buying, you know, from the legalized market, not buying the illicit market. And being one of the largest growers today in Canada, that's a
big opportunity for the Canadian market. But you know, Canada's forty million people in size, and ultimately the market is going to continue to mature. In the US, we're the fifth largest craft brewer in the US today and we became a beverage company. So big opportunities that we come out with a treat called Liquid Love are not out drinks or energy drinks. So the beverage business for us,
big opportunity for us. And listen, as people walk around, they always have something in their hand, whether it's a coffee, whether it's a drink, whether it's a water. And listen, beer business is not going away. And ultimately the beverage business is one of the biggest categories out there, and today we have ten breweries out there, We have seven hundred distributors, We have an infrastructure of sales.
And marketing people in Europe.
Medical cannabis big opportunity for US, as doctors are prescribing cannabis today as medicines for paying for anxiety, for sleep, etc. So we're really in some good businesses. We're a five year old company. As I put this together, we're investing in these business We're investing in these brands. We have over forty brands today with three diversified business So I like the cannabis business. I love the beverage business, and the wellness business is another big opportunity for US.
Erinde. Your beverage portfolio.
You guys have done some streamlining, and you know, the recently announced portfolio rationalization of beer brands in the US is really kind of consistent across the overall slowdown that we've seen with other alcoholic producers. Tim and I talk about it all the time with folks in the alcohol industry. Is cannabis use among young adults at the expense of alcohol.
The reason why.
So, Number one is, you know, we've done multiple acquisitions within the beer business in the US. We bought eight businesses from Anheuser Busch. We just bought four from Mulson's. We bought Montak Brewer. We we got Sweetwater. With that, we're doing a couple of things. We're doing a skew rationalization as we had way too many skews out there. We're coming up with a lot of new innovation. We have over one hundred and forty new products.
And the other thing what we're.
Doing is they're skeewing our brands to such regional brands and we're before we are selling them in multi states.
Now we're only going to sell it in two or three different states.
But shot Talk will become, you know, a national brand for US, and Sweetwater will be expelled and with half the US. So that's one of the big reasons. And the other thing is is we bring all these businesses together taken out costs. Is taking ours all these SKUs So.
Yes or no, it's not because young adults are doing more cannabis versus drinking.
So I think the young adults absolutely are doing more cannabis and absolutely that is you know, a rationalization, and that is affecting the drinking business.
Absolutely great to get some time with you, Ern Simon, He's CEO of Tillry Brands.
This is Business Week.
This is the Bloomberg Business Week Podcast. Listen live each weekday starting at two pm Eastern on Applecarcklay, and Android Auto with the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa Play Bloomberg eleven thirty.
I said we were going to start with Apple, but that was before I learned about this bloom A News story from our next guest, Mark German, Bloomberg News Chief Technology correspondent, joining us from our San Francisco bureau. That's exactly where I want to start off.
Mark.
We'll get to Apple in just a minute. But you've got this story out about Meta working on upgrades too. It's smart glasses exploring new wearable devices. We're talking watches, camera equipped earbuds, looking to embed AI into more of its products. What did you learn?
Yeah, so Meta that's the hot story this morning. Obviously, they've got their hardware division, Reality Labs, and they're cooking up a lot of stuff. They're cooking up some ideas that Apple has tried and Apple has been working on, and they're also cooking up some new ideas to take their smart glasses business to new heights. So let me start with this year. So right now, you have ray
Ban Meta glasses. Right, those don't have AR displays, but they have cameras, microphones, you can take calls, control music, do all sort of sorts of stuff with them using Meta AI. Those are getting a big upgrade this year. Right, they're going to launch a new version that uses Oakley glasses. Right, this is meant for bikers, meant for athletes and such, so a little bit of a higher end pair. Then they're going to launch a super top end pair that's
probably gonna cost around one thousand dollars. This is going to have a display in the right lens. It's not an AR display, but just a display so you can run some light applications, see photos that you took, get notifications. It's going to be pretty nifty. They're testing using risk based control. That's the same control mechanism that they've used for their AR glasses prototype Orion looking Ahead Orion, that's the big AR glasses splash they made last fall. That's
actually never going to launch as a consumer product. Instead, they're going to start trying to sell it to developers next year in twenty twenty six, as a testing ground to develop applications for it. A year later they'll launch a follow up. The first one aim to consumers with
AR functionality. That's called Artemis. That's a more modernized version some display trade offs, better hardware, better software, more modern the other things they're looking at, and this comes back to the Apple portion is again launching a smart watch. They've considered it for about half a decade, maybe even longer than that. They're working on it again, talking about launching it sometime this year or next year. And then lastly,
they're exploring earbuds. These would be AirPods competitors in house headphones from Meta, and they would include cameras and you'd basically be able to look around and use AI to understand the surrounding environment. So the functionality would be very similar to what you're getting from the ray bands right now or the other Meta smart glasses, but they would
be in a more familiar form factor. Right, There's some people who don't want to wear glasses, and so the alternative to get those same AI features would be tucking in those technologies and cameras and other elements into the earbuds. It's interesting because this is a type of product that both Apple and Samsung are exploring as well. So it seems like all the tech companies are looking how they can really beef up the earbuds businesses.
Mark It feels like a really big step by Meta even further into hardware.
Why are they doing it?
Yeah?
For for Meta all in on AI right now, and the best expression of AI is how it's integrated into hardware products. Obviously, if you're not the device maker, you're not going to be able to integrate AI. You see that Apple has its own AI tucked into its devices. Google has its own AI and its device is Samsung
has its own AI and its devices. So for Meta really to be able to be a leader in artificial intelligence, they're going to need to push it not only to their applications on various platforms, but build their own platforms to run it on. And obviously glasses and different wearables like earbuds and smart watches. Those are the ultimate expressions
of AI in making that technology actually useful. So I would say at this point, based on what we've seen publicly, it's fair to say that Meta is the leader in AI wearables, in AI devices right in terms of next generation types of platforms things be on the smartphone, We'll have to see if Google and Apple and Samsung others will catch up in the coming years. I do expect them to, at least on the hardware side in Apple's case, maybe not on the II side, but for now they have a first mover advantage.
Mark.
You try all this stuff out when it does come out, not when it's being worked on. What have you tried from META platforms And how has it been Because I haven't actually tried these smart glasses yet.
Yeah, I've been wearing the Meta smart glasses actually recently. I love the form factor. The phone call quality is great. It's basically, you know, air pods and a glasses form factor, and you really get no benefit for that, right unless you have lenses that take advantage, lenses that take advantage of the surrounding environment by using augmented reality there's really
no advantage to having that form factor. I guess the only thing you could say is usability, right getting that full temple area to do gestures, But Apple's done a pretty good job in the small space allocated on the miniature size of the air pods. The other thing is battery life, but those things will be overcome. So until you get these AR displays into these smart glasses, they're really no more useful from a technology standpoint in comparison
to earbuds with cameras. But of course we're still waiting for that evolution to happen. So I think at some point you'll see smart glasses without displays morph into these earbudds with cameras, and the smart glasses market is going to become this AR device's market.
But that's going to take a while, Okay, part perfect segue to move on to another big tech name. Shares of meta platforms, by the way, hired by about seven tens of one percent. Apple shares down three point eight percent. They were down as much as four point six percent, weighing on the S and P five hundred and the Nasdaq. iPhone sales fell eighteen point two percent in China, according
to Counterpoint Research. That was during the December quarter. The company also getting this pair of analyst downgrades market It makes me think of what happened a year ago. We'd be talking to you throughout the month of January, Apple getting two down grades. In the first week of twenty twenty four, there was news of a discount on the iPhone fifteen in China. Everybody was freaking out about iPhones. Then Apple closes out the year hire by thirty five percent. What's going on here?
Yeah, every year, I think for the last five six years. I think since around late twenty eighteen early twenty nineteen, there have been concerns about iPhone performance in China, particularly in the holiday quarter.
You know China.
The China iPhone sixteen launch misses out completely. On Apple intelligence and artificial intelligence, I don't think Apple intelligence is I don't think it's even fair to talk about it in the same breath as what you're seeing from METAAI and Google AI and some of the features you're gonna see from Samsung Leader this week on THEIRS twenty five line.
But still it's a marketing point. It's important for consumers to know that AI for apples there too, and they've completely missed the boat on China, and I think that's dragged down iPhone sales there a little bit, combined with the fact that there's no new design or major new features in the iPhone sixteen hardware. Later this year, they're gonna come out with an air version of the iPhone seventeen, and from everything I've heard, that's probably not going to
have a physical simcard slot. That's something that you need to use most carriers and most plans in China, So the sales of that device probably won't be as strong as they would have liked in China. But once they come out with a new design phone, I think some things will start to slightly turn around. But certainly the tide is continuing to shift for Apple and China in the wrong direction.
Yeah, that's what I was going to ask you, Like, if they miss you know, if they have a quarter or there's you know, a product cycle a quarter or two, you know, does that just kind of build on itself to the downside. I'm just curious, you know, or do if consumers in China get excited, do they come back to Apple?
Yeah?
I don't think Apple's ever going to disappear the Chinese market loves these luxury items, these luxury goods, and you know Apple's going to keep coming out with more expensive
devices and higher end devices. I certainly think once Apple is able to bring a foldable to market, I think that's going to do extraordinarily well in China if they can get the SIM card and the e SIM situation worked out there, because China is very prominently using physical SIM cards and when you move to these foldable devices, it's more of a digital SIM system because of the smaller space. But I'm sure they have plans to figure
that out. But once Apple gets into foldables, I think that'll be slightly helpful there.
Okay, Mark, we've said the last minute and a half to talk about Sonos because your Power On column over the weekend talked about the question would Apple buy Sonos?
So they won't.
Yeah, he wrote a whole column about it, and the answer is just.
No, Yeah, I don't.
Well, the column said that Apple's not gonna buy them, right, I don't see any benefit certainly on the software side. Apple's not gonna buy them. The software is the whole reason the CEO was just fired. Right on the hardware side, much of it is commoditized, and Apple has the chops internally to do speakers if they wanted to. So you're not really buying anything but a relatively small user base. So this is a better fit for a company like Spotify or Amazon.
I'm Mark, I'm part of that small user base, and our Sono system at home is basically bricked. It's kind of unbelievable. We had this great system. It just doesn't work anymore. Is Tom Conrad gonna fix this or am I just out of luck?
He's going to fix it enough, in my opinion, to make Sono's an interesting acquisition target. And I think at its sub two billion dollar market cap, which is in one one four thousandth of what Apple's probably going to be worth, and you know about before the end of
the year, right uh, I think they're extremely attractive. We'll have to see what the new Justice Department is going to allow in terms of acquisitions, but it would fit quite nicely into Amazon, and it would also fit quite nicely into a company like Spotify that's tried and failed to develop its own hardware in the past.
I just want speakers that work, Carol, He just wants it to work. I'm using my phone.
About it a lot.
I'm just going to tell you, yeah, I'm not the only one.
All right, Mark Urman, thank you so much. Bloomberg News Chief Technology correspondent. Be sure to check out his weekly column and his Power on newsletter.
Mac.
I bet you let me drive.
Oh no, no, no no, this is not a twin.
Please, I.
Want to drive.
It's a good question.
This is the drive to the clothes.
Now, plum for me.
Well then on Bloomberg Radio, all right.
Everybody, just about eighteen minutes left in today's trading session.
You heard from Charlie and Bill Maloney.
We've got stocks pretty much hovering near their best levels of the session, so up about eight tens of a percent on the S and P five hundred again, of about two thirds of one percent on the Nasdaq one hundred, and the Dowie, if you're interested, is up more than one percent, So we're talking about a five hundred point gain. And we've seen pretty much some broad based buying into the trade.
Hey, it's everybody's favorite parlor game, Carol Masser. How many times is the Fed going to cut rates this year?
It's going to do what it's going to do.
Well, traders, right now, pricing in about one and a half rate cuts by the end of the year. Yet our next guest says he's expecting four rate cuts. We're going to drive the clothes now with Chris McMahon, CEO of Aquinas Wealth Advisors and MFA Wealth. Chris joins us here in the Bloomberg Interactive Brokers Studio. He's also the author of a new book, Faithful Finances, Six Steps to Establishing a Catholic Financial Life. Chris, good to see you again. Look at that one and a half rate cuts by
the end of the year. That's what sure the folks the options market is looking at right here, you're saying four though, why.
A couple of reasons. I think it's funny, Tim, isn't it? What just last week?
Was it?
Vava said no rate cuts? They said, look, we're in trouble. The inflation's not rained in. We're gonna have no cuts next year. Then we saw what happened. PPI was cool. CPI was cool last week.
Right.
Then. Of course, Goldman came out just the other day and said, look, we're I think what did they called. I think they called it the sweet spot of the economy where inflation's under control yet and also at the same time, the economy is growing, and I think they called for two if them research so they called for two, and we're swinging for the fences. We think there's gonna
be four. And one of the big reasons for this, which I don't think we're talking about enough, is kind of all this commercial real estate that's out there cooking the refinanceays. There's still a trillion dollars of commercial real estate leases are gonna have to be refinanced in twenty twenty five. That means that those interest rates have an enormous impact on this are you know, I certainly the FED might be you know, smidge political from time to time.
Right, you're saying the Fed is going to do four rate cuts to tell about the commercial real estate?
I do.
I think that's going to have to We're I think we have a I think, Carol, I think at the end of the day, it will be a catastrophe. It'll slow down so much of this mojo we have going now, we'll push up against new highs in the Dow if we see, if we see some of this really problematic real estate not being refinanced at reasonable rates, I think it's gonna be a problem. And I think that's all.
Why should sorry, why should the Fed do that? What are the implicator I mean.
Lots of implications.
That's a great question, But I mean, why once again should there be kind of a bailout.
Well, that's a great question or a very helpful move.
I think they would do it absolutely as a bail They wouldn't call it a ballot, but I think it's a move to a the commercial real list to industry. I think the consequences of not doing it or could be potentially could derail this entire market. We could see markets push down twenty you know, twenty percent easily. And some of these games we've made, and we've made them today.
So take a step back, Chris, So you're saying, I mean, we've been talking about concerns about office property commercial, right, it's the office property, and it's not the top tier. We're talking about the lower tiers.
And is this just because of pandemic people not going back to the office. It's just as simple as that is.
It's vacant office properties that you really can't repurpose, and so something's got to happen.
Absolutely. Carol from Pittsburgh. We've a tower there be and y has a huge tower in Pittsburgh. They're saying it's gonna be thirty percent occupied by the end of the year. Thirty percent, right, And that's just one little city. Cleveland. You saw what happened the skyscrapers that were sold. That's a huge issue. We see it. And then factor the fact that europe Central Bank said they were going to
do four cuts. We don't mimic what Europe does, but I think we're going to be in an environment of reduce, of decreasing interest rates, and I think inflation has at least taken a pause. It gives them an opportunity to at least do too, you know, in the first in the beginning of the year, in the first quarter for sure.
Okay, let's take a step back from rapcuts and talk about the incoming administration. I guess it's not well.
It's kind of like linked it totally is.
I mean, but they only have so much power. You said, the FED sometimes gets political.
Every now and then they do get a little.
What are some examples of that?
Well, I mean, I think I think we've seen the interest rates go be cut probably at times last year when we had a big seventy five bit basis cut, people say, what's going on right now? We're still in an inflationary period. Clearly that was a sign to get in front of him, to sorry, set aside inflation and make consumers confident.
Right.
We see that all the time, and I think we're going to see it more. Consumer debt is still at all time highs. It's really a problem, right, But I don't worry about the consumer debt nearly as much they do the commercial real estate. I think that debt could be catastrophic to the economy, and I think, wait.
Is that because the bank exposure.
Yes, I think particularly regions.
So then we.
Shouldn't bring down the capital reserve ratio, should we?
No, we should not.
We should maybe even increase them.
We're worried about regional banks. We think the big banks are going to be okay, the regional banks and whole commercial real estate, we're very worried about what that would do to them. And that's why we see the interest rates coming down. It'll save, it'll save, in our opinion of the regional banks, a great deal of pain, a lot of stress.
Right.
Well, well, so it's kind of interesting.
So I'm thinking about people who are listening.
I mean, we've what I wanted to go back to is that we've been thinking about talking about concer, about office properties, and you're saying, because today this year is when they've got to start making the payments and they've got to either restructure. Huh Okay. If we don't get that, then what happens? Is it a financial crisis akin to the GFC the Great Financial Crisis?
I don't think so. I think it's going to be nothing like, it's not going to be compared, but it's going to be one. Maybe it'll be it'll be you know, forty percent of it could be dramatic. I think we can have twenty I even potentially twenty five percent rundown on all the all the capital markets, which would be catastrophic and all that wealth that was created would be wiped out. I think.
But your real concern is the regional bank exposure. They're the ones that are going to feel it.
Go ahead, I want to talk a little bit about like step back, big picture and hear more about what you do at aquinas Wealth Advisors in MFA Wealth, because you're a CEO of both of these organizations. I want to focus on aquinas a little bit because you write that you believe that good returns and good values are not mutually exclusive. You also have this new book coming out about faith and investing. Talk to us a little bit about how you make investments based on your face.
It's interesting to him. For years, we never did it, They said, separate it, don't ever discuss politics and religion. But what happened was it became so polarized in the boardrooms. Boards became so socially active, much like college boardrooms did previously. And what we found as many of our investors were saying that had more traditional values. They're said, my goodness, the companies I'm investing in are radically out of alignment with the things I'm concerned about. Our main goal be
to pull these companies back to neutral. That would be our main goal, right, get back to the old days. Companies make profits, They give the shareholders of the former dividends instead of having chairmans of companies. They've become really overvalued. They think their opinions are so important to us, which they're not.
But did that hurt returns?
Oh?
Absolutely I think it did. Certainly.
What are some examples of companies that went all in on these policies that then didn't have returns as good as you think they could have.
That's a good question. I think there's an issue around investors bailing out on securities that hurt those companies ultimately. And I think when I think about that, there's some companies have done poorly. And also there's been a little bit of impunity if you're a call correctly some of the corporations where they saying, look, we don't care, this is who we are. For example, you know that corporate Equity Index scoring and you familiar with that scoring system,
which really think about that for a second. Just two years ago, they were saying, unless you adopt our mandates around you know, DEI and these other types of concerns, even if your company is profitable, we're gonna if your corporate Equity Index score is not high enough, we're going to displace you as the chairman of the company. We're
going to change the makeup of your board. That these companies are being held hostage by these mandates, and I think that really is changing dramatically and very very quickly as we see it.
I think there's two sides too, because we also have a story about how a group of about thirty shareholders representing about two hundred and sixty six billion in funds as asked Walmart to explain its decision to retreat on diversity, equity and inclusion initiatives, especially after years of having consultants McKenzie and others saying, listen, diversity improves performance.
Yeah, it's a great quick thing. You go right to the point, Carroll, here's the problem you're going. No one's ever going to be satisfied. We shouldn't get out of this business altogether. And reverse discrimination is discrimination, always discrimination.
Chris, we got to run. Happy New Year.
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