Apple's Low-Cost iPhone Rollout At Risk From Virus

at Bloomberg dot com. Well, the economists and strategists are trying to really calculate the impact the economic impact that the coronavirus will have on global GDP going forward, but certainly one of the industries that is most at risk is the global technology space. We heard Doug, Greg, Jared, you're talking about Apple and Fox Console. Let's start there. John Butler, Senior Telecom Service and Equipment Animals for Bloomberg Intelligence.

He joins us here on our Bloomberg Interactive Broker Studio. So John, let's start with Apple, because that's kind of always the poster child I think if you will for dependence upon China and supply chain and you know kind of it sells into China, sources out of China. Give us a sense of what's going on with Apple with fox Con and kind of how you think this is going to play out. So I think the I think Apple is in a little bit of trouble for the

current quarter. So fox Com, which is the main manufacturer the iPhone um, has had its factories closed up until now. Apparently this morning ten of the workforce is back at one of two factories. But we've had a delay in the opening after the Lunar New Year, and I think those delays are going to continue as Beijing continues to really try to try and lock down this virus by limiting people's travel and in instituting quarantines before people can

get back to work and so forth. There's a difference between a short term disruption where the demand for the iPhone picks up right away as soon as people can go back to the stores and as soon as production ramps up, and a longer term disruption that actually has a more material effect on the business overall. What's that tipping point here for Apple? Well, I think Apple and fox Con have both been sort of talking about moving beyond China. There are lower cost regions in terms of

cost of production. China is getting relatively more expensive, and I think Apple's lack of diversification in terms of where it makes the iPhone. UH is really biting them here, and it's a reminder that they need to diversify geographically perhaps in terms of where they make the iPhone. So what has Apple said, What have they said publicly about the financial impact here? Again they get I don't know

their sales are in China. They make make most of their stuff in China that they sell around the world. This seems to me like it could be more than a one quarter thing because it's gonna take a off of these factors to get ramped up again and build inventory and distributed and all that kind of stuff. Yeah, I mean that's my concern, Paul, as I think this illness now is going global. So in terms of the impact in China, I think it's sort of confined to

let's say, the next next month or so. But more broadly speaking, you know, for Apple, you know, there's a concern that people aren't going out to the retail stores as much, so I think they'll be. My opinion is we'll see an impact in the second quarter, but if it continues to spread globally, I think it potentially could spill out over into third quarter. And I need to

say one thing. The company continues to say that they factored this impact into their latest guidance, So coronavirus risk was already an issue when they set the guidance for the current quarter, but it has since gotten worse. One thing that this uh The situation has really highlighted for me is just how much of an engine China is in terms of production of electronic parts. I mean, it's just such a massive source of all of these products.

Can you give us any kind of size as his scopes, any any kind of understanding of just how crucial not only China, but in particular Wuhan, which is the hardest hit area is for these types of products. It's hard to say. Les. You know, the global supply chain is so huge, and it's so diverse, and it's been diversifying geographically, but I think you hit the nail on the head. China is still the world's factory floor. So for Apple, even beyond han Hai, there are other manufacturers for them

in China that are being impacted by coronavirus. In terms of pegging an actual number onto what what percent of total global electronic manufacturing is in China, it's anyone's gas, I'll throw out seventy as a guest in it. But I I actually have no idea. I've never really run the numbers. So so John, one of the things for Apple, the bookcases five G. Is there any risk to this manufacturing supply chain issue impacting what could be a this

five G story building for Apple? Not yet, Paul. You know, they typically need a couple of months of lead time in terms of building the new devices. That would put us in July in terms of the start of production, maybe even mid June conservatively, And I think at least in China we're going to be clear of this crisis

by then. The real issue is Apple is reportedly going to launch the iPhone nine, a low cost sequel to the iPhone se if you remember that one priced at three and that was going to have a March launched date, according to Bloomberg. And so we'll see what happens there. I have a feeling that's almost certainly going to get

pushed out by this, by this epidemic. You know, I could just keep speaking with you, and one thing that you said that when you walked in that really was compelling to me, John, was about the factory floor, the fox con to floor, and how they have to increase the ventilation and make it safer for people to come back, and what that will take in order to get the sign off, And there are all these questions there. There are a lot of little things you don't think about.

So when you're manufacturing the iPhone, you need really superior ventilation to limit dust the risk of dust getting into the devices. But that also that kind of system promotes the spread of a virus, and so somehow they're going to have to work out a solution to that, and that I think is one of many small items that we don't always think about. John Butler, thank you so much. Always illuminating. John Butler, Senior Telecom Services and Equipment Analyst

for Bloomberg Intelligence, joining us here in our interactive broker studios. Well, it's great, Jared said, you just can't keep a good market down. We have the it's up a hundred and twelve points, and it's you know, it's kind of shrugging off the coronavirus. It appears, uh to help us get a sense of what is going on at their Scott Clemen's Chief Investment Strategies for Brown Brothers Harriman uh based in Pittsburgh and actually in here in Bloomberg Inactor Broker Studio.

You're based in New York though York. Yeah, that's right, Yeah, absolutely so, Scott, thanks for being on our studio again. You know, at least night, earlier in the morning, we were looking at commodities, and commodities are all down, the medals are down and kind of reflecting presumably uncertain global GDP growth exacerbated by the concerns of the coronavirus. No such issue really with the equity markets. What do you make of that? At the risk of dating myself, I'm

I've referred to this as the time x market. Remember those old commercials that takes a licking and keeps on ticking. Think about what this market has been confronted by just in the past couple of months, between escalation of tensions in the Middle East around your end, of course, the presidential impeachment and trial, and now the coronavirus. I think that investors are looking through all of this noise to the underlying fundamental driver that is personal consumption. Sixty eight

of GDP is personal spending. As long as the labor market is healthy, as long as the housing market is healthy, that engine of economic activity and therefore earnings and therefore the market is okay. I thought you were gonna say, they're all looking at the under underlying driver, which is the Federal Reserve helps, doesn't it? Well? I mean, but how much is that? That sort of what's driving that? Well, it's meaningful. I think of that as an insurance policy

of sorts. Not only the feds willingness to lower interest rates last year and send the signal that they intend to keep them so this year, but the balance sheet operations as well. So you've got a fundamental backdrop of a decent economic environment, not great, but durable, stable economic environment with the insurance policy of easy monetary policy. That's a pretty powerful combination. Alright. So again, we've, you know, had such a great twenty nineteen, uh, even with some headwinds,

twenties a pretty solid start as well. What sectors should we be looking at here, given that we're eleven years or so into this economic cycle? Is it defensive? Do I go back out on the risk curve? What am I do? On the equity side? We like those equity sectors in plays that depend on this underlying fundamental strength in in the consumer, so consumer discretionary consumer staples. They're sort of old fashioned what we used to call the

blue chips. They pay dividends. They're not terribly exciting or sexy. They're not Tesla going up and down ten or fiftent a day. But for investors who are interested in preservation of wealth and long term accumulation of wealth, potentially with some income needs on the side that healthy dividend yields can meet, that's the sectors of the market where we find the best value in the best long term place.

What about the Russell tooth Hausand I'm gonna throw this at you because I harp on this every same day I'm looking at it. It's the small cap small MidCap shares that have underperformed down on the year, even as you see new records on the sp and as yet, and that's not a new thing. If you look at the performance of large cap versus small cap domestic stocks going about three years, five years, seven years, end years, even the large caps have outpaced the small and medium

caps and and it surprises me. But what's the message you Well, you would think in an environment in which there are concerns about global trade well predating the coronavirus outbreak. I mean, think of just the ongoing China U S trade dispute. Domestic companies ought to be doing better than than than companies with a big multinational exposure. So we we have in our portfolios actually dialed up that smaller

MidCap exposure. We've also dialed up the non dollar exposure as well, because non dollar assets, both emerging and international, have vastly lagged the good old fashioned SNP five. So we think increasingly that's where the value plays are. That's not a barish call on the markets. It's just an

observation of where the bigger opportunities live. I'm glad you mentioned emerging markets because we've been talking about that as well this morning, and I'm looking to bring up the five year chart of the MSCI Emerging Markets Index versus the SMP five and clear underperformance and then underperformance even widened out a little bit in what's the catalyst for Can an emerging markets call work in a world where we have trade tensions phase one, deal or notwithstanding, and

you know, maybe some kind of threat the global growth from this exogenous factor I called the coronavirus it's it's hard, Paul, because those are substantial obstacles to sentiment at least. But if you look back even and and I don't have it in front of me, but in a mind's eye, over a ten year trailing period, the SP five large cap us is outpaced emerging markets in dollars like for like comparison by a thousand basis points annualized. That's an

extraordinary rate of performance differential. It doesn't necessarily mean their valuation opportunities in the emerging world, but it's strongly hints at it. The problem, of course, with a value based investing approaches. As good as it is, and it's what we do, it's our bread and butter, it's a horrible timing tool because cheap things can get cheaper, and that's

been the story and emerging markets. But the valuation gap between the developed world and the emerging world is wider than it's been since the summer of and you have to cast your memory back. But that was the sort of getting close to the peak of the dot com bubble here in the States, but rolling crises throughout the rest of the world. Venezuelan debt crisis. Tai Bak crisis, Russian debt pretty hard, horrible time for emerging echoties. We're back to that level of gap between valuations of the

two markets. When does the coronavirus and more importantly, the ripple effects from it economically becomes something more than noise and potentially even change your thesis. It's a good question, and the difficulty with that is as unpredictable as the virus itself is. People's reaction to it is even more unpredictable.

Institutional reaction to it is more unpredictable. So not to diminish the human tragedy of it, the decisions by various governments to quarantine whole cities, to shut down air roots, to shut down trade kind of the right thing to do. You want to limit the susceptible part of the population to the virus spread. But it will certainly punch a hole in first quarter GDP. I think we'll get an

early indication of that from some Bell Weather companies. Mean listen to not only earnings report, but interim reports from fed X or UPS or inn Boeing on airport airplane orders, certainly airlines themselves. We won't get the GDP numbers to late April distant distant future from now. So we're listening

to the anecdotal information coming out of companies. So far, we think it's sort of a tenth of a percent two tenths of a percent hit to GDP domestic GDP in the first quarter, but there's no question that if the response to it exacerbates as exacerbated, the hit could be bigger. It's an election year. Do we care historically as equity investors? Historically no, But there's nothing about this

election that's historically normal. Um and and and part of the challenge, Paul, is that the Democratic field in particular is still so wide that we haven't really honed in on what genuine policy proposals might be. So I could certainly spend some time analyzing the most recent tax proposal or trade proposal from any number of Democratic camps, but at this point candidates are still lying for lanes. They're still throwing more ideas out than there are actual policies,

so it's hard to tell. I think once we get past probably not until Super Tuesday, will that field begin to narrow to a point where we can actually analyze what the likely implications are of a smaller handful of potential democratic outcomes. There's no question in my mind, though, that political developments this year could be the cause, or at least the blame for a market correction the likes of which we haven't seen since August of last year. We'll sort of overdo one the blame for it. I

like the way you catch that. Scott Clemens, Uh, well well crafted. Scott Clement's chief investment strategist at Brown Brothers Harriman, overseeing about forty billion dollars, and he joins us here in our interactive progress studios. One of the fallouts are from the Senate acquittal of President Trump. As President Trump has kind of, you know, seeking retribution on on those that he feels were against him during the impeachment process.

We saw, uh on Friday, um, you know, two days after being acquitted, Gordon Sunlin and announced that he had been at outside as the US ambassador of the European Union. Army Lieutenant Colonel Vidmann from the National Security Council also let go. So lots of issues going on here as it relates to kind of the fallout from the impeachment process.

To get some color, we welcome Clint Watts Clints, Distinguished Research fell for the Farm Policy Research Institute, is also a Senior Fellow at the Center for Cyber and Homeland Security George Washington University. Clint, so lots going on here. We also had some New York being part of a global entry program being revoked by the president. So the question is how much does all of this impact kind of our national security, our security apparatus. What are some

of the fallouts do you think if any? I think the big thing is that people will become reflexive and withhold, Meaning if I were in government right now, I think you'd always try and engauge, Uh, do you deliver the president something he doesn't want to hear? And what are the consequences of that? And I think it's pretty consistent over the president's term here that you see him being retaliatory if he doesn't necessarily get what he wants or

here already wants. And he also sees the US government officials longtime public servants as loyalists or not loyalists, which means you have to pick a side, and so that can be troubling both in terms of executing national security and formed policy. For sure, I thought Gordon silence testimony was quite remarkable when when he went to UH Congress, because he basically said everybody was in on this and I was in on it. I thought it was fine,

and this is what actually happened. And so when you look at kind of how this is played out now, UH over the last couple of months, now he suddenly on the on the stick end instead of the carrot. So I think it can be troublesome over time. It's very hard to run a government that way. There's a

question about the morale among national security professionals. Then there's a question about national security itself with some of the measures, and when we talk about the Global Entry issues, basically President Trump proposing to bar New Yorkers from enrolling in it or or applying for it newly, there's a question of how much of a national security threat our programs like Global Reentry and things where people have expedited access through through security lines. I mean, is there some true

threat that has emerged as a result of them. Yeah, I don't think there's been a true threat. I think you know, by and large, what you find is that if you give more data the data and information the government, you give up more privacy of your information. Then you can get accelerated through these processes. I think what's interesting about it is is a really place of the access to the wealthy, meaning that if you have money, you

can buy these things. It's not a cheap service. I think it's a couple hundred dollars that you have to do. You have to spend additional time to go after the airport and gets screen and so if you're someone of lower means, you're obviously not going to be able to do that. Um, So it's kind of an access program. It does beg the question though, of like who uh can get that access and you know, what are the

requirements for it? Or does it give people extra value like if your foreign adversary, can you work your way into those systems. It's unlikely, it's probably a low probability event, but it just shows that there's not a universal acceptance of what security is, that there are different standards for

different kinds of people. So Clint, as it relates to some of these whistleblowers and the retribution, I'm thinking about the again the Army Lieutenant Colonel Alexander Vinman being pushed out of his position, is that is that in the prerogative. To what extent is that in the prerogative of President Trump? How common is that type of thing or is this kind of out of the bounds it is in the prerogative of the president to do that. It's just quite uncommon.

You know. I just saw a report I think a couple of hours ago that Ben Man was already asking or you know, sort of requesting to be moved from his position when his natural time was to come through. Usually these are one, two or three year assignments, you know, for the military folks to go over to the White House on these details. And but why not let that just naturally come to pass? Why do you have to force the issue? Um, I don't see anything Vinman did as being out of line. He was asked to go

testify the Congress, which has oversight function. He did when he had concerns inside the government. He went through an approved and uh not a wide open public process. So that sort of begs the question, what do we expect these people in the government to do when called to Congress? And it really also shows just how weak, uh, the legislative branch and oversight of Congress has become in comparison

to the executive branch. President Trump has pushed the limits on all of these things, and it so just begs the question, why do this if he might have cycled out in the next few weeks or months, why go this extra step and really pushing him out of the

White House, other than to make a public spectacle of it. Yeah, clean, I do want to just h if I were Tom Keane, rip up the script um just a little bit, because I know your most recent book, Messing with the Enemy, Surviving in a social media world of hackers, terrorists, Russians and fake news that while all of this uh political

drama is going on. We got the announcement from Attorney General Bill bar today about the Equifax Equifax hack back in two thousand and seventeen, basically charging China's People's Liberation Army for hacking into Equifax and stealing the information of millions and millions of customers. I'm wondering, do you feel, on the balance, like we've gotten safer or less safe when it comes to our ability to counter and detect some of these potential hacks. I think we've gotten a

lot better. What I would point out, I was thrilled at the Justice Department did that today. What I point out though, is that actually occurred in two thousand and seventeen. So there's some some things to think about. One, what China was doing and has done and continues to do, is build up big data from around the world, and big data powers artificial intelligence. It is the fuel for that machine. The more data you have, the more you can learn, The more you can learn, the more you

can power your economy. And this comes out of time. We're here in the United States, we're talking about data privacy and beating kind of beating up on big tech in our own country. China is running wild in the space, and so they have fuel from their own country and from the West now. And so when we look at how we retaliate on this, we're talking about four hackers.

I think that they came out in the indictment. They probably hacked thousands more times in the last two years to and half years since that happened, And it really shows how long it takes to do one of these investigations and how weak are retaliatory measures really are. We're going to indicte those four hackers and nothing will happen

to them. Ultimately, but the good news is we're finally coming around to building a system and doing something about something we've not been able to do really for the last decade. Clint Watts, thank you so much for being with us. Clint Watts, Distinguished Research Fellow for a Foreign policy research institute. Also the author of Messing with the Enemy, Surviving in a social media world of hackers, terrorists, Russians

and fake news. Yeah, essentially, the commentary about the hacking, it's just a question even you think about that, and it's just, you know, as good as the defenses can be, as much money as companies invest in protecting their data, the other side is also making strides as well. So it seems like what we've heard from the experts as it relates to hacking, cybersecurity a never ending, you know, kind of battle between the hackers and the folks being hacked.

So we'll obviously pay attention to that. I think it's fitting, Paul, at a time when gold is absolutely in vogue for us to focus on another precious stone of sorts or metal, non precious metal stone, diamonds. Let's talk diamonds, and luckily we have with us the expert w as our president and co founder of Gemological Science International, based in New York, joining us here in our interactive broker studios focusing on evaluating,

studying precious gems and in particular diamonds for years. And Debbie, I just want to get started because we've had people on this program talking about lab grown diamonds and if that's going to absolutely revolutionize the entire industry because you can't tell the difference. Have you seen real in roads made by the lab grown diamond producers? And do you think that it does materially affect the value of the

naturally found diamond? Yeah? Well, um, right now, overall it's an eighty seven billion dollar industry and only two percent of that right now is lab grown diamonds. Um that you can definitely as a laboratory, we see both on a daily basis, So we certify natural diamonds and we also certify lab grown diamonds. They are not the same thing, and it's important for consumers to really understand what the

key differences are. Um, either option is fine as long as you really understand what you're purchasing and also the reason for your purchase. But from let's say a gemological standpoint, they have the same chemical, optical, and physical properties, but they're not the same in the sense of their origin, where they came from, and also the time that they took to grow. So natural diamonds are billions of years old, they're formed hundreds of miles beneath the Earth's surface. They're rare,

they're precious. No two are ever the same, and the supply of the supply will eventually exhaust itself. UM. Lab grown diamonds are really technology at its finest. You can they're grown in factories over weeks or months, and because we can always grow more, the supply is infinite, and that does leave a lot of possibilities for where it can be used. So are people still buying diamonds as much as they used to? What's the trend in kind

of diamond demand? Yeah? Absolutely so people are still buying diamonds, and I think consumers are just doing this a lot differently than they used to. UM. I think retailers have done a really great job of enhancing the consumers overall buying experience and shopping experience, So whether it's online or in store, and today for consumers it's become a real

integrated journey. Many will start online to do a lot of research or homework about what they're buying, and then they'll walk into a store to really look, see, feel, and experience the product. And it's all about really creating an informative, educational, and really memorable experience. It's all about when the consumer wants to buy, how they want to buy, and where they want to buy. And they're still buying

diamonds today. I'm startling to understand the correlation between the haven us at sort of store value and precious gems. We certainly see it with gold to a large degree, although there are a lot of factors. Is there a sort of commensurate increase in value during times of uncertainty for diamonds, For diamonds, yes, definitely. UM diamonds historically have always maintained their value. UM diamonds have inherent value, and

over time they do appreciate. You know, I think many consumers the reason that they like natural diamonds as they can always upgrade, they can trade it in, there's a secondhand market for them. With lab grown diamonds. Right now, it's still something that's very new, so we're uncertain about the long term value of it and of course, since it's something we can continue to grow more and more um with time, that could mean that the value will

go down a little bit. So on this show we talk a lot about investing in stocks and bonds, and one of the things we hear about from investors has increased interests in e s g. Environmental social governance, and I know in the diamond industry that's a big issue as well. You hear I'm sure you're getting more and more questions from consumers about that. What's what's kind of this status of the other industries that related to that, where the diamonds come from and how they're sourced and

all that. Yeah. Absolutely, I mean consumers are all about transparency and they want to know all about their diamonds, where they came from. It's interesting at g s I, we were one of the first laboratories to offer a Minds to Market report, which tells you all about your diamonds journey from the mind all the way to the market.

And I think it's really important for people to understand also the millions of jobs that the industry provides around the world, the social benefits that we provide, and how

we sustain local economies around the world. We provide jobs in some of the most remote regions in the world in Africa, India and Northwest Canada, Western Australia, deep in Siberia, and by providing these high quality and safe jobs and also through the local sourcing of products and services, were able to really provide significant, long lasting, positive um impacts on these economies. And if we can bring in even Botswana. Botswana is probably a great example of this because it's

one of the world's greatest development success stories. And before diamonds were discovered there there were only four miles of paved roads. Today there's over four thousand. Poverty has been cut in half. Every child receives a free education. There's now over three hundred schools. And this is really all because of the economic stability our industry is able to provide to help create basic infrastructure, healthcare, education and clean water.

W as a thanks so much for joining us. We appreciate you coming in your de w as our president co founder Gemological Science uh International based here in New York, joining us here in our Bloomberg inactive broker's studio. I didn't know there was such a thing as lab grown diamonds. Idea yeah, so it's actually a growing, a growing industry that basically they've come out with a way to actually replicate the billions of years that it took to generate diamonds.

But then it sort of raises a question of their store of value. But I of course start looking at store of value, and you know, if you want to raise questions about anything, if bitcoins considered a store of value, you know, I mean, but you know, what what what is value? Exactly right? Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Paul Sweeney. I'm on Twitter at pt Sweeney. I'm

Lisa abram Wits. I'm on Twitter at Lisa abram Woits one. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio