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All right, so we know a big, big day out in the Bay Area today with Apple and their new iPhone and new product launches. Mark German he covers all the technology stuff out there for Bloomberg News. Mark, I've already informed Tim Cook that I am, in fact going to be upgrading my phone here in the not too distant future to the iPhone sixteen. I guess I am who cares and they're very excited. Are people excited for this event here today?
And if so, why, Yes, it's all about the iPhone this year. This is actually going to be more of a muted release, right, So this is not a big year over year overhaul. Remember last year they added the
Titanium show. Well, this year is more about refinements, increased processing performance to better support artificial intelligence, improve displays on the Pro model, so slightly bigger screens is about a five percent display increase, but because the bezels around the display are smaller, that increase is actually going to be more noticeable than a five percent increase would normally suggest if you heard that. The other big enhancement is going
to be a camera button. This is going to be on all four new models, both the low end and the high end models, and it basically works the same as a DSLR button, right, So you soft touch it to autofocus on a subject, you press it in in order to actually take that photo or a video. You're also going to be able to swipe on it up and down or left to right in order to zoom
in and out of the subject. So it's essentially the same camera controls that you've had on the display now relegated to a harbor button on the side of the phone.
And the bet there is that will help people take more pictures and maybe better pictures, which of course is going to translate to people needing to buy iPhone with more storage base, which obviously costs more, and bigger iCloud storage plans, which obviously will generate more revenue for Apple on both of those things, right, So it's I guess a win for consumers and a double win for Apple.
Does that imply then a supercycle definitely taking hold in twenty four to twenty five.
There's no iPhone supercycle.
There have been some analyst claims over the last several weeks about a supercycle coming with these new iPhones. I would have to say that they're either making things up, or getting bad information, or just trying to pump the stock price for their own self interests.
Right.
The reality is that the numbers that we're seeing in terms of iPhone orders from the supply chain probably indicate an annual decline.
On iPhone unit shipments.
Now, an annual decline doesn't necessarily mean a revenue decline, right, Because they're adding new features through these higher end models, particularly making the lower end Pro model even better at one thousand dollars price point. You may be seeing people who normally would buy the seven ninety nine version go to the nine nine version, which could raise overall asps. In terms of an iPhone supercycle, that normally means big
hardware changes, We're not getting that this time around. It also would mean that Apple intelligence would be ready to go, but I would say it's half baked.
If even that.
A lot of the new features aren't coming until December, and many more aren't coming until the middle of next year.
So if you're anticipating an.
iPhone supercycle, if you believe there will ever be an iPhone supercycle again, a I would say, adjust your expectations for twenty twenty four, maybe focused on September twenty twenty five, when the iPhone seventeen launches with more significant enhancements.
What is Apple Intelligence?
Apple Intelligence is artificial intelligence for Apple customers, right, So that's the Apple branded version of their AI platform coming as part of iOS eighteen point one sometime in October. That's including summaries of notifications. That's including phone call recording and automated transcriptions. That's including transcriptions and voice memos is including voice recording, and the nosapp. It's including gen Mojis, which uses artificial intelligence to create your own emoji characters.
My daughter loves that, by the way, like they're making emojis, Like she takes my phone and does the things and she makes chiffs and all this stuff. Like the young kids, they love it.
I think the gen moojis are going to be incredibly popular. I think it's going to be at the center of many of Apple's advertisements for these features, but that's not coming until December.
So I'm not sure.
How that can sell new iPhones in September if it's not going to be available until December.
So I have some big.
Questions about where analysts get their information from, why they say the things they do, and why some.
Of them are considered reputable.
So I think that people need to be able to separate the signal from the noise. And that's why I'm so happy to come on here and explain and provide a dose of reality.
So but the dumb question, So Paul gets his new phone in October, can he just update the stuff when the cool things like the emoji stuff comes out?
Yes, he can'tolutely and it's not a dumb question, right, So what we're going to see our Apple Intelligence features rolling out probably over the course the next six to nine months, with constant software updates. Now this is new for Apple. This is not something they've done in the past. Usually you get one big software update every September and you're pretty.
Much set safe for buck mixes and.
Maybe a couple of enhancements here or there until the following September. This time around is going to be a gradual release. Now, why are they doing that, because Apple Intelligence simply is not ready. There's a lot of testing that needs to go into this. And the reason Apple Intelligence has been behind is because they're responding late to this AI praise. They really didn't start getting to work on these AI enhancements until the second half of twenty
twenty two after they saw chat GPT launch. Right, this was really something that was developed over the course of twenty twenty three and into the first half of twenty twenty four.
And their development.
Cycles for major new initiatives like this, these normally can take three to four years, right, but they did it basically in half the time.
So, yeah, you raised a good point earlier, mark that there's a reasonable scenario, just given the size of the market, that there really are no supercycles unlikely to be a super cycle again for the Apple iPhone. Is that a belief that's widely held out there.
It's widely held by me, and I think it's widely held by people who really understand this stuff.
You know, the last time we.
Got a true, true iPhone supercycle was back in twenty fourteen, ten years ago, with the release of the iPhone six and six plus two reasons.
That was the first time.
That they made substantial screen size increases to the iPhone. That was your first Apple fablet, right, moving to the four point seven to five point five in screen sizes.
Massive.
Also, that was the same year where they struck the carrier agreement with China Mobile in China, the biggest wireless carrier in the world, adding an addressable market, an additional addressable market of one billion people, right, So that is what really elicited that supercycle, and that was a two three year thing, So that was great for Apple. We saw another big bounce in twenty seventeen with the iPhone ten.
Obviously that was major in terms of asps or great the starting price right by three hundred dollars from seven hundred and two one thousand. That was a big upgrade with face idea. Then we saw that again with the iPhone twelve, five G all four models at the tail end of twenty twenty, at the top of COVID when people were splurging on money, right, So that was a big one.
But since the iPhone twelve and twenty twenty and the advent of five G for Apple.
We haven't seen major, major, major significant changes.
Maybe they're coming at the end of next year. Maybe that will.
Create a supercycle, but I want people to know, don't expect one this year.
All Right, We're on't up more Apple in just a moment. Also, Hey, Mark Ourman, Thanks lot really appreciated. Bloomer Technology senior reporter joining us from California.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Apple Car Play 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.
Speaking of sectors, good to look at. Looking at Apple, it's about one point three percent today. It is their glow time event, as we've been talking about. But Bloomberg Big Take had a fantastic piece today and we wanted to dive into Austin car technology reporter for Bloomberg News. It's titled Apple's Rise from Rebel to three point four trillion dollar world power. It's great to get you on this, Austin. It was a wonderful piece. Distracted me from my whole car ride.
Into the office.
Can you just connect all the dots from like the eighties until now.
You want me to summarize forty years and a minute, I can you bet you've got okay? Well, well, really, what this story does is chart why and how Apple found in its position today, facing a big anti trust lawsuit in the US, a lot of regulatory pressure in Europe, as well as a lot of really just skepticism and criticism for a lot of the partners and developers that
have depended on Apple over the years. And it charts how basically Apple has changed from thatnineteen eighty four era when it released the Mac it was seen as this sort of disruptive force in the technology industry to twenty twenty four when a lot of people think that this is a sort of domineering force that needs to be disrupted.
So we go through from the Mac to the iPod and iPhone up through present day with the release of the iPhone, the new iPhone sixteen later today, and it's just really just putting all the pieces together about how Apple finds itself.
In that position now.
And Austin along with Max Chafkin, you guys reported this story.
Just fantastic work.
But for me, Cameron Galley who does all the illustrations just made it really cool and really interactive, some awesome stuff as always.
So Austin, where do you think Apple goes from here? What's is it just new products?
Is it maybe getting more ingrained in our daily lives?
If that's even possible.
What do you think kind of a longer term vision is for the folks in Kupertino?
Look, I mean, I think a really good question for listeners right now or even you guys, is just, you know, going to release this new iPhone. If you guys are Apple users, have you ever seriously considered switching to a different device or is it just the default? Now that I'm going to upgrade to the iPhone sixteen? Maybe at default? And so I think the question is how long can that last where it is just sort of the default?
I mean, even their new features that are going to release today are all about you know, AI and how that ties into some of its hardware. But in all honesty, they're two years late to AI. A lot of the features. Mark German or Apple colleague, is reporting that won't really release until twenty twenty five, at which point maybe you should just wait for the iPhone seventeen and I just think there's a big question about you know, Apple's products
are still good. They still make you know, the best laptop, the best you know, watch and earbuds. I'm talking through my AirPods right now. But at the same time, when they don't face that type of pressure, does their products just become too incremental and too boring? And I think that is when you're going to see a lot more disruptives trying to change the way computing works and work outside of the Apple ecosystem. But the problem for consumers
like us is we're kind of stuck in it. I'm not going to switch anytime soon for sure.
Well then to that point, but I found also interesting, and I didn't know in the piece that you wrote, was sort of Tim Cook's role in managing Apple supply chain, and you dug deep into Apple would have a supply chain partner and then in essence look to manufacture that in house, and then booed that company, which is really messed up tons of companies around the world. Can you give us some detail on that. Sure.
The most infamous example actually goes back about a decade ago. Apple was developing these new sapphire screams that were going to be altered durable instead of the glass that they currently use, and they sort of outsourced it to a partner and then left that partner on the hook with all the liability when Apple decided not to go that route because the sapphire wasn't quite going as fast as
they could develop it for the iPhone. And I think that we sort of positioned that as symbolic of what Apple has seen with a few of the partners they've worked with over the years, not just in the supply chain, but also on the software ecosystem side. It's really fascinating all this sort of trend that we see of a partner really excited to work with Apple in the beginning, like Goldman Sachs on the Apple Card or even General Motors.
We side as another example of working them on CarPlay, and then years go by and suddenly they're not so happy with the relationship with the Apple anymore. And I think that really has become our trend in recent years as the company has grown to this massive, multi trillion dollar force that essentially it's Apple's where or the highway. And I'm just curious how long that will last with partners before they say you know what enough is enough, and.
You know, Austin, I think for a lot of investors, one of the longer term issues that's still always out there and is probably increasing in concern. It's just the regulatory risk for not just Apple but kind of big tech in general, but certainly for Apple given their marketing position. How do you think the companies kind of how do they react to that? And just in terms of a long term thread or headwind.
Well, actually, I mean the DOJ case in the US. You know, they just released their complaint in March. Apple is pushed to dismiss it just earlier in August. That's going to play out over the course of years. I think that, you know, the preceding cases with the DOJ
and IBM, or DJ and Microsoft. I mean this last many, many years, but we're already seeing sort of a precursor to that, and what's happening in Europe with the Digital Markets Act, which has already pushed Apple to change a ton In fact right now in Europe, because of those regulatory changes, you can get an alternative marketplace, meaning you
don't just have to rely on Apple's app store. You're you're actually able to delete a lot of native Apple apps that you can't delete the US, you can delete Safari. You'll eventually be able to delete your phone app, your camera app, the app store and just use alternative products from the third party ecosystem. And so what you're seeing in Europe is this almost two track system where they have a lot more flexible sort of computing platform than
anywhere else if you're an Apple user. So I think what they've sort of done is take this almost whack a mole approach to regulation and the EU, and even in some of the pressure they've seen in the US, they've had to open up that walled garden that, as we refer to it, sort of their closed ecosystem a little bit more in a way that Apple doesn't like
because they lose control. But for consumers in a lot of ways, it's a little bit interesting to watch this company have to change and not just have it the Apple approach. They're going to have to, at least in Europe so far, open up their walled garden a little bit, allows some more players within their ecosystem to run some of those fundamental parts.
Yeah, which is why it's so interesting to read the piece because it really reminds us that Apple wasn't the leader forty years ago, that it was a very different world when it came to PCs. You can definitely read this Big Take and more on the Bloomberg and at Bloomberg dot com slash Big Take. Definitely check it out, really wonderful stuff. Plus, if you're joining us from Boston, Massachusetts, like Austin is, if you're listening to us in Boston,
does now ninety two nine FM in Boston. I could have done a little bit better, but I did it all right, Austin, Thanks a lot, Austin Car Technology Reporter.
You're listening to the Bloomberg Intelligence podcast. Catch us live weekdays at ten am Eastern on Applecar playing Android OUTO with the Bloomberg Business That listener on demand wherever you get your podcasts, or watch us live on YouTube.
Okay, let's get to another chap story here that we're looking on. That's HSBC is looking at potentially merging it's commercial and investment bank to cut some cost. We wanted to get more on that with too much netsl senior US Banks analyst. He joins us from Bloomberg Intelligence from London. Can you just walk me through why and sort of what this would look like.
Yes, hey, hey guys, thank you very much for having me. So cost cutting, yes, so that's definitely something on top of our gendle of the new new HSBCCO who has just started started his position a couple of days ago. So why cost cutting? First of all, we are seeing a revenue weekending outdocouse weekending because of interest rates are
going down the next two years and the hedges. We need to do something to keep the profitability and they would love to stay at around the meeting's rot and in order to achieve that, they need to cost codes because there's little options to do with revenues.
So what is the competitive position for hs SPC. Just break it down for it because I think a lot of our listeners and viewers some don't have a great handle on it.
Yeah, So first of all, we need to understand that HSBC is very much heavily emerging market focused bank. If you are emerging market focused bank, of course you have much better opportunity to grow your revenues, your growth your lending. But if you look into the outlook, it's not had to rose the story anymore because now we have much higher interest rates, red are going to go down. GDP is not so growing south fast as it does in the past, so revenue is going to flat in the
next two three years. But if you look, if you are emerging market focused bank as well, you are facing higher inflation costs and because of the higher wage inflation those markets, etc. Your costs, but it is growing. On top of that, you have to invest in digitalization, transformation, et cetera. So everybody is doing this globally, so there
is massive cost pressure. And looking at HSBC, which is spread across more than fifty markets, mainly in Asia right now after recent recent restructuring, you know there's a massive and they have to do something about this to streamline the operations. They have started this already a couple of years ago under no Queen and they've done quite good
job cutting costs by more than five billions. However, there are still lots of things to be done, and one of those aspects we definitely head counts and then maybe looking into cost base and look at headcounts and try to have some synergies in those two businesses, which will combined have around forty billions in revenues, will be the biggest, biggest revenue driver for HSBC Marke bigger than wealth and every which is the key focus of the bank at the moment.
It's something damn question. But if it's such a it makes so much sense. Why haven't they done it already?
Well, that's a good question for.
The four CEO who just left no queen and the new guy is coming and he has to deliver something and he has to why he hadn't done before Because we were living in different interest rate environments right here linking in the interest rates environment that we're supporting revenues, but the condition has changed. Environments has changed now that the expectations for US rates, global rates are going up
and down. The volatility is quite high, but I think we now expect, we know more or less that the rest is going to come down and the sensit and EDGESBC is one of the most sensitive bank to cut in indust right, so they have to do something quickly and definitely the new CEO needs to deliver something, needs to convince market that he can get the handle of on cost causes. Definitely the big issue. Have been writing
about this quite a lot. You want to deliver. If you are Amergic focused bank, you want to deliver revenue revenue Manda's cost which recall operating joes. You want to have a round one to three percent. And at the moment they're running negative jobs into the future, so it's
not the compelling story for HSBC. Hence cost focus right now is very important, and they would replicate possibly what Standard Charge did at the beginning of the year where they also plan to merge to you and its just to cost cut costs and they are able to keep cost flatish in the next two years, and possibly HBC is going to follow the same path.
Tomash.
I'm just looking at the p GEO function to see where they get their revenue from a geographic perspective, and again about you know there at half the revenues comes out of Asia, about almost forty percent comes out of Europe, only about ten percent out of North America. So have they can they be a significantly profitable and generate the types of returns they need to without having a bigger presence in North America.
Well, if you look at they have been very much dealer reading themselves or they were the risking themselves when they were you know, they existed France, Canada, they have some US as well. They cut on operations over there now heavily focusing on Asia at the moment, and Asia growth is what they want to level and embark on. They definitely look into wealth management and if you look at new stories over the bloom work, there's a lots
of stories. They're hiring people more people in Hong Kong or in Singapore because they want to really compete with wealth management and this is the area of their growth. And whenever they talk about interest rate cutting just or lending growth is very difficult and the moment, so wealth management is definitely something they want to they want to explore further and that's the area of growth for them.
It's in Asia, but also in Middle East where where we have the largest non millionaires billionaires come to the market, and they want to definitely couple supports meeting this in this AREO.
All right, Tamash, thanks a lot. Tamash Netzel joining us senior EU Banks analyst for Bloomberg Intelligence.
You're listening to the Bloomberg Intelligence podcast. Catch us live weekdays at ten am Eastern on applecar Play 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.
Alex Steel here alongside Paul Sweeney. This is Bloomberg Intelligence Radio. We cover all the tap news in business, economics and finance or lens of our Bloomberg Intelligence folks. They cover two thousand companies in one hundred and thirty industries all around the world. We also like to take a broader view and kind of step back and look at what the pros are doing. And for that we go to Chuck Lieberman, co founder and chief investment officer and Advisor's
Capital Management. They have just under eight billion dollars in assets under management.
Great great person.
To talk to, Chuck. Do you care if the FED twenty five or fifty at the next meeting, if they cut seventy five or fifty for the rest of the year.
I do care because of the message that it sends in terms of the economic impact that's likely to be small twenty five or fifty. I don't think the market is on board with what they're likely to do. I think they're going to do less rather than more. The market's price for one hundred and twenty five basis points between now and the end of the year. I just don't see that as feasible without a recession.
So we had a wholesal of economic data last week. Comment leading with the jobs number on Friday, it appears economy slowing. Is it slung at a rate that a Do you agree with that? And are you concerned that maybe it's slowing too much?
It is definitely slowing. But as I joked, good luck trying to avoid getting a traffic ticket. If you tell the cop you slowed from one hundred and you slowed down to one hundred miles an hour in a seventy zone, that's not going to fly very well. The economy has slow. We're growing at a more moderate rate, but we're still growing north of two percent, and fundamentally that's a very solid growth rate. Productivity is adding one one and a half percent a year, labor force is adding, domestic labor
force is adding a half a percent a year. Maybe all of the rest is coming from immigration, and so we have the capacity to grow at two percent a year. We're doing that. So that's very solid growth.
So if we have that solid growth, is it that the FED will cut less in the short term? But the amount of cuts over all in the cycle is the same. Or do you think that we need to start and we I mean investors, you can start pairing back what they think neutral is.
Well, I think that the market has a bad sense of what neutral is. And one way to see that is people say that monetary policy is very tight. They look at the funds rate and they look at inflation and they say interest rates are high. True, if you look at the tenure however, relative to inflation, the real rate on the ten year is is not very high. And yet that's the rate that matters much more for corporations, it matters more for mortgage rates. It's a much more
critical interest rate. And on that basis, monetary policy is not tight. It might even be considered loose.
So given that backdrop, with the economy, with the federal reserve, where are the best opportunities these days for you?
Do you find them in the equity markets? In fixed gum? Are there certain sectors that screen well for you?
Fixed income is not that attractive, especially because the market is anticipating a lot more cuts than I think are likely to come. But the equity market I think offers good value, especially the disliked, unloved SMP four ninety three, the MAGS seven obviously are through the roof, and I think a reasonable case can be made that justifies that they all have high growth rates. They have enormous growth potential.
Companies are typically doing very, very well. I think you can look at you have to look at them actually one at a time and judge their prospects. The four ninety three are relatively ignored, and there's great value across the board and whole sectors. So it's not hard to find stocks with good, solid prospects, good dividends and trading it ten times earnings or even less. So that's real value.
Okay, So where I guess what spaces like? Are you going to go like deep cyclical there? Do you just look for value? Is it dividend players? Is it going to be just safety trades in those four ninety.
Three Well, I manage a portfolio that is income oriented. We call it growth excuse me, income with growth, So it's an equity based, income oriented portfolio. I've got lots of exposure to the energy sector through Master Limited Partnership, Soil and Guests partnerships. I've got lots of exposure to business development companies, very high yielding companies because they're required to pay out their profits. I've got exposure to parts of the market where I think there's real value. And
then the banking sector of the financials. The financials are typically still cheap, still offer very good dividends, and they're very well capitalized, and the companies will do well.
So you mentioned banks financials, Do you have exposure to regional banks as well, Yeah, a couple. And how concerned are you about commercial real estate and the exposure there, because I mean, alex linees is something we probably try to get as many guests on as we kind of talk about commercial real estate in general.
Well, there's no question that the office space market is problematical, but that's only a small fraction of the overall real estate market. I've seen numbers like six or seven percent of the total commercial real estate market is office. The rest of it is fine. The part of the market that I really like are nursing homes. They got crushed during the pandemic for obvious reasons. The stocks are still cheap. Businesses recovering, not surprisingly, occupancy is rising, rates are rising.
Their biggest problem is getting labor labor costs arising, but profitability is improving. They pay high dividends, perfect for my strategy of income with growth. We're producing over six percent yields on that strategy and we've still got some growth embedded in there as well. So it's a great way to generate income in a cheap part of the market.
So staying on that for a second. With commercial real estate, aside from office, we generally hear like student housing, senior housing, and also wear housing. Is there like another leg or something to that that's also interesting to you in that space?
Well, it's all one offs. So for example, there's a APR Properties which does experiential type of things. They own top golf outlets, say they own movie theaters. The movie theater business is struggling obviously, but it is coming back and top golf and other parts are doing well. So that's an interesting play.
We own it.
So there are lots of opportunities.
You just have to dig.
So when you talk about your dividends strategy, I guess almost biygn ific definition, you don't have a big exposure to technology because I look at a company today. The story today is Apple and the new phone launch and we're covering it like crazy here at Bloomberg. But you look at this company that got one hundred and fifty billion in cash. You're going to throw off one hundred million dollars a year in free cash flow no dividend.
You you should know that this is a point of He gets very upset by this.
I argue with Tim Cook about this all the time. I do, usually over a cocktail.
But what do you say, how do you think about the technology companies and dividend given all the cash flow they have.
Okay, so as a fiduciary, we've got to diversified portfolio, so we have to have some exposure to technology. Okay, there are companies that pay dividends and they're still doing fine. Seagate Technology is one of the ones that we own. Broadcom is another. We've owned that one for a while. These are among our lowest yielding holdings in the portfolio strategy. Nonetheless, it gives us some exposure to technology, and Broadcomm is going to benefit from AI. So we're playing that game too.
And it's been one of the most undervalued players versus like an Nvidia. It's really underperformed from that perspective.
Well, it's undervaluant in that it hasn't performed as well as in video, but then few things have. But it's great value and we'll do fine. And that's where long term players, we're not trying to make the buck in the next twenty minutes.
Tax policy, it's an election year. Tax policies can be front and center here for both candidates. What's it mean for again, an income investor like.
You, it matters a lot. So one of the things that we look at is how is the tax treatment of the dividends that we produce. We prefer ones where there's some shelter, which MLPs do. It's great reads do as well. Interest is taxed at full income tax rates, so that's not as great and we don't have a
large exposure there. And actually our exposure to fixed income is a little bit below average, which rather be eighty equity twenty percent fixed, we're more like fifteen closer to fifteen fixed right now because we don't see the bond market is particularly attractive.
So if to say are raised, does that change then the dividend payout situation that you're talking about, it.
Will hurt, but it will hurt everything. All stocks will be worth less because of a higher dividend a higher tax rate. So you have to pick your poison, and the question is which ones will be hurt the least. Again, if it's a matter of full tax applicability for interest, that gets hurt even more than stocks. In the case of stock, some pay return of capital, they will be hurt the least. So, yeah, it will affect some of our allocations.
When you sit down with the management teams of the companies you own and you talked about use of cash and cash repatriation, buybacks versus dividends, what's your what's the discussion?
Like?
What points do you?
Maan?
I love it when they do buybacks, but often they feel like they've got to do some dividends to play care shareholders. I look how whoever they return capital is good. If they're producing enough free cash flow that they can afford to buy back or pay out higher dividends. Either one works for me. Theoretically, I shouldn't care. That's what the mathematics say. As long as they return capital, are profitable and they're growing their earnings and they return on capital is high, I'm.
Happy if we see increase in capital gains tax does that.
How do you think about that again, that hurts.
It hurts the valuation of these companies and so, but it's in across the board type of damage. It will hurt the valuation of the entire stock market.
So what's the big issue that you're focusing on right now with your team?
Well, I think the issue that everyone's struggling with or talking about is whether or not the economy is likely to lapse in recession anytime soon. I think the answer is no. When I look at the economy, I have a tough time constructing a recession scenario. The easiest way to make that case is to say that interest rates have gone up a lot and that will cause a recession. Well, we've been sitting in that boat for a long time and it hasn't happened. And is a reason it hasn't happened.
The consumer is in very good shape. Job growth is still solid. Income growth is even more solid. So consumers have the capacity to spend, and that's seventy percent of the economy. Capital investment. We're trying to promote green initiatives. We're trying to bring business back to the US, manufacturing back to the US. That's a tailwind for the economy.
We happen to have a severe housing shortage, so even though mortgage rates are high, it hasn't crushed the housing market as much as it would have if we didn't have that housing shortage. And if interest rates dip, you're going to see housing takeoffs like a bansheet.
All right, great stuff, Really appreciate It'm s so good talking to you. Chuck Lieberman, co founder and chief investment officer Advisor's Capital Management, Joining us there.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar Play 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 playing Bloomberg eleven thirty.
So one soccer're watching today that is doing absolutely nothing is Starbucks waiting at ninety one dollars sixteen cents. It's literally flat on the day, But it's a big day because incoming chief executive officer Brian Nicol has to live up to the hype that really propelled Cheryl's higher. It's his first day a CEO of Starbucks. Michael Hale and
Bloomberg intelligence senior restaurant and food service analyst is joining us. Now, what First of all, how long do you think the market gives him before they judge him.
Yeah, it's tough to say, right, you know, I think really it's going to take some time. You know, you don't turn around an aircraft carrier on a dime. You know, Starbucks is a behemoth of a company, So I think
the market gives him some time. He's got phenomenal track record, right what he's done at Taco Bell and then Chipotle, obviously we're very impressive, you know, and he's really you know, the first thing he's going to do, I think is just try to change that culture, right, bringing in a culture of transparency, accountability, talking about he's going to talk about hard work and compensating his employees for doing a good job, because you know, those are some of the
things he talked about changing at Chipotle on his first earnings call there. So you know, all that stuff's going to take a little bit of time, and because of his track record, he'll get he'll get a pretty long leash.
I think, what what are the challenges facing this company?
Because just as a consumer, I mean the Starbucks and Route thirty five and.
Wall Township, New Jersey.
They do a great job.
People are great.
It just works like a charm. Stores in great shape. The one in Summit's good, It's always packed.
What do they need to do here? I don't think anything's broken.
Well, it depends on the store.
You know.
It sounds like that location is doing pretty well. But they have of thousands and thousands of locations across the globe. I mean, you know, in the US, operations is a big issue. You know, drink orders have become more complicated.
Digital orders have kind of changed the experience for the in cafe customer, right Like it was it became popular because the briests knew your name, right, and the level of service was phenomenal for a chain of that size, right, And through digital ordering and these very complicated orders, you know, they've lost some of that, right And so so operations, you know, they're losing a lot of orders because people are trying to place them on the app and the
wait times are kind of obnoxious at times, right, And so I think operations is going to be his primary focus. Running the best cafes possible is really going to be job number one. But there's a bunch of different issues, you know, operations is just one of them. Politics has been an issue, right. Starbucks has always been a brand that that kind of puts their politics in your face, and I think I think Brian Nichol is gonna want to step back from that, right because of.
All of the the.
You know, all the issues they've had with their customer base. Right, people haven't been happy with you know, there's been some boycott talks online about their stance on the Israel Hamas War, about their stance and how they've handled the union negotiations, you know, so that's a big thing. And then you know, we think eventually, once they have the stores running really really well, they're going to start spending some more money
on marketing. Maybe not a ton of money, but we would expect them to start spending on marketing.
You know.
It's not something that that Starbucks has traditionally done. But it also wasn't something that Chipotle had traditionally done, and it's been paying them dividends now for a handful of years.
So I think with Chipotle, though, we just maybe Paul can attest. Is it like there's a menu and it's basic, Like they're add ons, right, but like it's a basic menu. Starbucks menu is like explosive, Like they can't even have all the options up on the ordering board because they're just too many. So it does working with operations and getting that better, I mean, they have to pair back their menu and get back to their base.
Yeah.
Probably.
You know, we had been critical of the previous management team because they kept rolling out new menu platforms and then in the next breath talking about improving throughput. But you can't have both. So we fully expect them to pair back this menu, make it easier to execute in the cafes, right, make lives easier for their employees, and get the orders out faster. So yeah, I think that's going to be a major part of what they do going forward.
I mean, Bloomberg had a story from last in twenty twenty three where I mean the variations if you add all the potential options, there's like billions of different types of drinks that could be oh yeah, you know, so it's just at.
It and there's like the cold drink, there's the tea, there's the refreshers, then there's the frozen refreshers and the blended refreshers, And I know this because my daughter likes those things. By sometimes you get them frozen and sometimes they're not. It's very cold.
I know, I don't know how they do it, and my power, you know, my hats off to them. All right, let's step back and look at the restaurants space in general here. You've got some research out recently restaurant promotions marketing heat up. That's not what.
Shareholders want to hear, do they.
No, But restaurants are kind of desperate right now to get some traffic into their stores. Low income consumers. Spending has been very weak. This seems to be spreading to the middle income consumers, right, based on the industry data that we've seen, which showed an improvement you know, last month in August, but it was still negative at casual dining restaurants, at family dining restaurants and a quick service, right, and so they bounced from that horrific July numbers that
we saw, but still or negative. And so yeah, restaurants are trying to do whatever they can to bring you know, those low income consumers and middle income consumers back into their restaurants. You know, just for example, it was you know, I think it's thirty five out of the last thirty seven quarters quick service chains have had negative traffic, right, And so that's that's not a sustainable type of situation when you have same source sales rising because your prices
are going up, but traffic can continues to decline. Eventually, there's a tipping point, and that's what we've seen this year.
So to that point, then which ones are do you have faith that can maintain some kind of margin and also grow their top line.
You know, it's some of these chains that have a big gap on pricing, you know, in terms of you know, they've been pricing less than their competitors, right, So if you're providing a lot of value, and value can be two ways. It can be a better price, but it also can be a lot more food for what you pay. But some of these companies that that you know, people see value at, you know, Rank, Wingstop, Chipotle, Texas Roadhouse. These are all of the chains that have been outperforming.
These all of the chains that have been able to drive traffic, and a big part of it is being priced below competitors. You know, wink Stops raised prices about half as much as their competitors, and on their last earnings call. They credited that as a big reason for their for their phenomenal quorder.
All right, Michael Halen, thank you so much for joining us. Michaelin he's a senior restaurant and food service anamals Bloomberg Intelligence, joining us from Princeton. Tuck a little Starbucks first day for the new CEO there. I'm happy with my Starbucks.
Uh interesting Starbucks. I went, I go like once a week.
Oh okay, I used to go more of it. But yeah, double short mocha very easy.
What's your go to?
Oh yeah, he's gonna okay, it is an Americano sometimes I sometimes not half calf alma milk to Stevia.
Wow, that's which.
Actually for a Starbucks order, isn't really that bad? Like there's no syrup, there's no Whippi things. It's not it's you know, okay.
I think the younger you are, the more CREATI if you are with your coffee orders, I thank you.
I'm just so sweet.
I mean, and the kids, some of the kids come out with these things. I'm like, you know, how many druiders of a basic cup of coffee can you have? There?
But apparently there's a lot. But again, Strawbucks. Who knew.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar Play 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.
Alex Steel here alongside Paul Sweeney. This is Bloomberg Intelligence Radio. We bring you all the news and business, economic and finance through our lens of our Bloomberg Intelligence analysts. They cover two thousand companies and one hundred and thirty industries all around the world every Monday at this time. And we like to bring you another arm of Bloomberg, and that's Bloomberg n e F originally or previously known as
New Energy Finance. So the team in Bloomberg that tracks and analyzes the energy transition from commodities to power, to transport, industry, buildings and agg sectors. And here with us for more is Brenna Casey, Bloomberg b n e F Carbon Capture Analyst. Brenna. We take a look at, say, how carbon capture has grown, the amount of money that's been put in Oh oh, so Sorry, Paul's a question.
Pre question, Can you define what carbon capture is probably the better question.
Yes, Yeah, So basically simply CCUS carbon capture, utilization, and storage. It's kind of just a way to abate emissions from heavy industry, so things like petrochemical refineries, integrated steel mills, hydrogen blue hydrogen.
Okay.
Natural gas processing is a huge historical and use sector.
So basically there's some sectors that you cannot decarbonize and you and they have to exist, like you need cement for example, So this is a way to kind of get them out of the air. And then the question is kind of.
What do you do with it?
Do you reuse it somewhere? Do you put it somewhere? Do you store it in a rock or somewhere else? And it's been a huge focus for a lot of companies, energy companies and a like in oil companies for example, what has been the investment cycle like and where are we now in that cycle?
Yeah, So if we're looking particularly to the US following the Inflation Reduction Act, we saw this catalysis of not only project announcements but kind of you know Series A, you know, lots of equity financing into that into the market right now. As you know, the IRS is still yet to address forty five Q. So that's the inflation reduction Yeah, yeah, so the Inflation Reduction Act, which was
signed into law, you know, two years ago. Forty five q's in investment tax credit that the government is proposing to you know, heavy emitters. They can if they meet X, y Z requirements, then then they can take this credit and apply it to their tax burden. And you know, kind of how to mitigate the cost of ccs because it's extremely capexx intensive.
So if you store your carbon er get it out of the air, you get a text crdit.
Okay, yeah, it's like eighty five dollars per ton if you store it, and then sixty if you reutilize it.
Yeah, exactly.
However, the IRS has yet to finalize the criteria, so developers don't know what actually constitutes as a project that can qualify for these sorts of credits, and so what we've actually seen is not only investment taper off, but just announcements of you know, future projects into the sector.
Which what's kind of ironic is that if you look at investment numbers for last year for ccs in total, it was globally eleven point three billion higher than it's ever been before, the US to come around two point eight billion of that. However, that is all bolstered by just d OEE grants. So the DOE has, you know, these direct air capture hubs. They're trying to throw money at growing out midstream infrastructure, so trans like pipelines, the
storage like storage basins you mentioned earlier. But there's really no FID is being taken in the sector at all. Besides, I think it was the hydrogen Bomont complex last year.
So FID is Foreign Investment Decision Final best finstation. Sorry, And it basically means like, Okay, I have enough and I understand enough of the economics where I can actually like put money in the ground and like put a shovel on the ground and do some stuff. And that's where we're really lacking. Which rates of the question is it a is it building this stuff is still too complicated?
Or is it the demand side? So I'm a company and I'm like, I can capture your carbon and I can store it for you, but how much are you willing to pay for that? Is that part of the issue now?
Yeah, it's definitely kind of a sector by sector issue. So if you look to power, we're seeing the most cancelations in the power sector just because CCS is tremendously expensive, and so for seeing a project announced around, you know, thirty percent of those projects in the power sector are like they're probably going to get canceled. And that's because retrofitting with CCS adds around fifty six percent to the total l COE. So it's eight hundred million plus capex investments.
If you look to something which.
How did they recoup that? Because that's about power, it's either the company is paying for it or like, I'm paying for it in my bills, right, and that's the definite way of how they recoup that cash.
Especially if you know the forty five Q credit if you are in a bit or two qualify, it only lasts twelve years. A lot of these lifetimes are twenty twenty five years, and so yeah, how do you kind of make that investment back carp.
And capture losing some momentum because maybe just the transition to green in the US has become a little politicized and maybe it's losing a little bit of impetus.
Are we falling behind other countries.
For example, I.
Mean, the US is definitely the market leader. So globally there's around four hundred and twenty four million metric tons of CU two capture capacity do to come online by twenty thirty five. Now, out of that, around one hundred and sixty I think it's one sixty three million tons is based in the US and following you know, the
forty five q Invice Reduction Act. Even though there's you know, hiccups here, hiccups with transparence or permitting, we do see the United States as the best place in the world is to kind of build one of these projects.
So what companies do you feel like have the real deal? It's I talk to a lot of companies and they're all going to try and sell me their carbon capture products and like why they're the best and how their economics work and all that stuff. Who actually can make this work?
Yeah, I mean, if we're looking at power and hydrogen, which are the two leaders right now, kind of the biggest players here, we're seeing occidental energy. So not only are they looking to retrofit there, you know, natural gas assets with carbon capture, but they're also kind of taking this first mover run into the direct air capture space. So that's a really interesting company to watch in that kind of little corner. There's also you know, like air
products for hydrogen excellon Mo. It's primarily these oil and gas majors that are moving around in the market because they have you know, just previous expertise, but they also understand the geology, how to store these things, how to build you know, these big expensive projects. So yeah, air products Oxy so oxy.
Is one of the peer players for eanps for oil and gas. We talked to the CEO and she wants to eventually basically be a rent for higher direct air capture, So meaning like, hey, I need you to capture some stuff, and you build a plant near a factory or somewhere else and you just suck carbon out of the air and then therefore you're able to separate it and then store it somewhere or reuse it, and that's like what they want that business model to be. Amazon signed an
off take with them. They wouldn't tell me the price. They're like it was really hard, Like you can get the off takes and like the buyers like an Amazon, but it is really expensive. Yet like it hasn't become easy on that sense, all right, Brenda, thanks a lot, really appreciated. Branda Casey, Bloomberg B and if carbon capture analyst.
I obviously find this really interesting, I know. And the idea is, like you can do green all you want, but like we're not starting over from scratch, so you actually need carbon capture to get the existing emissions out because how else do you filter that. You can get trees, and that's awesome, and like we want trees, right, maybe the ocean, but we need all the things. Let's make all work.
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