Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside my co host Matt Miller.
Every business day we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market moving news.
Find the Bloomberg Markets Podcast on Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. Let's bringing Alison Williams. She's the pro on this. She's our senior analyst Bloomberg Intelligence covering the bank. She's also the co director of America's Research for Bloomberg Intelligence. So she's got a bunch of people that report to her rely on her for the management of that biz.
So she's a busy person.
We appreciate getting some time here in the Bloomberg in our active broker studio. Allison, let's start with Goldman Sachs here. You know, from my perspective, I haven't competing against these guys forever. Look at you know, really admiring the franchise. There a little bit of a miss here this quarter on the fix training, the fixed income, commodities and credit and all that kind of stuff.
From your perspective, what happened so.
I think, you know, obviously not benefiting from some of the areas of the other banks, And just to put that in context, so they missed on fixed they sort of made it up with equities and fees, but net the other banks posted big positive surprises. They have more momentum going on. Yes, Goldman probably benefited last year. Well, we're pretty sure they benefited last year from commodities, which is a business that they have a lot more relative strength than the other peers. But the bottom line is
there's just less momentum in that business going forward. They earn more from the other banks reporting today from that business that's a negative. Bank of America is really the interesting one. They've been gaining share in equities and a fixed income and you know, part of that is some investments that they've made, but I think they're also benefiting
from some of the troubles at Credit Sue. If you think about where Bank of America has some of their strengths, the securitization business, those spread type products, those were businesses that Credit Sweez is relative strong and and much of that business has sort of gone away from them, and perhaps going to Bank America.
Is there a best fixed income trading business on the street. Is there a bank that's known for its fixed income trading? Like, if I have a multi billion dollar fund and I want to do work with one big firm, is there one I would obviously choose?
JP Morgan.
Yeah, okay, I was just oh, I would said Goldman opinion.
Yeah, so you're thinking, so I guess that the reason why you're probably thinking more of Goldman. Goldman has you know, really strength with the hedge fund customers, the asset management customers, you know that that that research frequently deals with. I think JP Morgan has an additional leg up with the corporate UH type customers, and so I think, you know,
they are the biggest in that business. Goldman has made, i mean some pretty remarkable market share gains in the years, which again might be why you're why are I just going to them? But JP Morgan is still the biggest of that business.
So be ay, give me a sense of where they stack up against the JP Morgans. I guess, against the Goldmans, against the Morgan, Stanley's and some of those capital markets businesses, because again the guts of Bank of America on that side is Merrill Lynch. Where where are they now, you know, ten years on from this this merger, so.
I think they've they've definitely had some fits and starts, and I think if you look at their business over the long term, it's it's not been it. You know, it doesn't have sort of the same volatility as some of the other bigger names that we're talking about, JP, Morgan and Goldman. You know, they've sort of kept that business relatively steady. You know, Bank of America and UBS as well, just you know, tend to be sort of quarter and quarter out generating sort of the same amounts
of revenue. But in the you know, in the last couple of years, and I think you know, this has also been helped by some people exiting prime brokerage, right, they sort of stepped up one of their capital requirements and they figured, you know, we we're going to add some more balance sheet to this trading business. So they invested in prime brokerage. They invested in macro, which is
rates and currencies. So, as I said, they're good at those credit spread securitization type businesses that Credit Sweep was good at, but they've made investments in the interest rate business, the currency's business, like that's sort of the business that we're relatively more bullish on, you know, this year and the years ahead, just because we think you have all these trillions of dollars still sitting on central bank balance sheets.
There's going to be uncertainty. There's going to be you know, this is an unprecedented situation, and we think that the interest rate uncertainty extends.
We're in for a world of volatility for well, we're in it already and it's got to continue with with all of those variables. In terms of the investment banking business, investment banking revenue, how do they do.
So, you know, Goldman did a little bit better, All the banks did a little bit better. But you know, we're looking at twenty to twenty five percent declines and calling that a win because last year we're down fifty percent. But things are still weak there and you're starting to see these headlines about you know, cuts in the investment banking business. You know, the CEOs have the CEOs of the investment banks have talked about their clients, you know,
still not really adjusting to the newer valuation. So you know, as we know, tech has had a few good months, but we're just not back to where we were, and some of those companies waiting to go public may not have adjusted their expectations. The other thing that the investment banks CEOs have said is, look, when the FED stops raising rates, we think that that could really put a flood of issuance. You know, that remains to be seen
when that happens. Again, We're we're sort of in a pretty remarkable period where Jamie Diamond's interesting right, Like they talked about FED cuts are being baked into their interesting income guidance. But then he said everybody should prepare for higher rates for longer, and so you see that you're getting those contradicting messages.
So, Allison, you've been following these companies for a long time. You've seen management teams come and go.
How was the street?
How were investors viewing David Solomon, the chairman and cy of Goldman Sex.
I mean, I think for Solomon it's still a little bit weight. And see I know that there's you know a lot of the negative press and criticism have come around the consumer business. I would keep in mind that even though that's that's sort of being done away with under Solomon, it was really started underwind Fly. That was a huge deviation for Goldman. You know, parts of that business remain. You know, we're hearing a lot about this new Apple product on the deposit side of things, but
the Marcus loans. You know, frankly, I don't think any investors really ever believed in that business. I always thought the strategy was sort of like a me too from like the nineties.
I'm going to say I like that strategy. I know you, I know you have hated it forever, and Paul also has never understood the consumer. To me, it's just high end super luxury if you're doing your banking with Golden.
But it's not going but it's it's the it's the strategy with which they went after these loans, which was competing on price. Well they failed, so I was the loan book, right, So they're still trying to go after those deposits. Yeah, they're trying to go after it with using the Apple premium brand.
You know.
They they're going after CDs with premium pricing in their market.
And they always had this, not not the loans, and they always had and they still have. But one of their real selling points for decades has been you sell your company a will advise you take the fee there and then when you have that the proceeds in your pocket. Oh, let me introduce you to my private wealth manager in Dallas, Texas or in San Francisco, and he'll he or she will help you manage this money.
We'll make fees there too. So they've always had that. But Marcus was more.
Marcus was more, you know, let's broaden out. Let's broaden out the net, right, like, are we leaving all this white space behind? And you know, let's try to do a few different things there. You know, as we as we just discussed the deposits, I think is interesting and getting getting those customers in the door. But the credit card lending strategy was really like a price a pricing strategy, and that's you know, I don't know any bank where it's one over the long term.
Eventually that all right, Morgan Stanley, before the open tomorrow is up what we have?
So Morgan Stanley, Uh, people I think are going to be listening. I'm going to be listening to find out. You know, Andy c left Merrill. He's going over to City to be the head of their global wealth management. Is there going to be more competition in the us keeping mind, Morgan Stanley bought that's you know, Smith Barty business. They're a wealth powerhouse. Part of that came from city a long time ago. Equities trading, you know, has been generally been disappoint So that's not great for a city.
I mean, that's not great for Morgan Stanley. Excuse me. We'll see how their fixed income holds up, all right, and.
We'll see if anyone else says, you know, AI can reduce headcamps.
Yes exactly. We like that because that was a good line from mois the morning Hand.
Yeah, morning Hand on Top Live. So that was you know, if you're you know, working on wall streets, I think, oh great, now I got another. I gotta worry about these stupid machines taking over my job. All right, Allison Williams, as always, thank you so much for finding a few minutes in your busy scheduled to come in and get us up to date on some of these numbers coming out of Bank of America and Goldman Sachs. A little
bit of a miss for Goldman Sacks. It doesn't happen very often, but so the stock's off just a little bit here. But we'll continue with these big banks, big investment banks reporting. We've got Morgan Stanley tomorrow before the open and Alison will be all over that and her team.
You're listening to the team.
Can's are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot Com, the iHeartRadio app and the Bloomberg Business App, or listen on demand wherever you get your podcast.
If you're Fox, Fox Communications, Fox Corporation, Rupert Murdock all the Fox Network, You're in a little bit of a legal suit here with dominion voting systems and the potential risks there are pretty material, so believe it or not, Bloomberg Intelligence has a bunch of litigation analysts for just this type of analysis. Matt Sheltenham joins as Caesar, senior Litigation analyst at Bloomberg Intelligence, and I happen to know that he is in Vegas as we speak at the
National Association of Broadcasters conference. It's my first question, Matt, most important, and this is important, so get it right.
Where are you staying?
I am at the Aria Hotel Nice.
All right, that's new school, that's new school, very good.
I'm a Bellagio guy, so you know, go to the high rollers crafts table.
Where do they have the the fake Paris and the Venice Yeah, and all that stuff that's.
Right there on the strip. Oh I thought it was Paris the hotel. No, Paris is the hotel? Oh I see?
Yeah?
And the Venetian is that and they are both awesome properties. All right, Matt, talk to us about Fox and Dominion voting Systems. What is the lawsuit and where are we now?
Yeah, so we're at the very beginning of this, this lawsuit heading to trial. Now, this is a suit about Fox's election coverage over about a month from November into December after the election, when Dominion's name kept coming up in interviews that that Fox held and Dominions this voting software company. Its software was used in about thirty states during the election, and a number of allegations were made suggesting that Dominion had had kind of rigged the election.
And so now this is a defamation claim brought against Fox News claiming that you basically have wiped out our business by these false statements that you made. And it seeks initially they saw one point six billion dollars in their complaint. I think that's come down a little bit but it's a big, big deal, a serious financial threat to the box.
Why one point said, you know, when I sue somebody, typically it's for a million or so. Oh yeah, how do they get to one point six billion dollars?
Yeah? So I think that's that's one of the most important things to watch going forward, is how credible is that number? Is that damage's number? And so they put one point six billion in their complaint, and as I said, I think it's come down a little bit. What they're looking at is one, what is our lost profits because of this? And two what is our lost value as an enterprise? And I think it's that second category that's
going to be the focus here. They have an expert who comes in that says, when we look at our value as an enterprise over the next ten years, and we're basically so damaged as a business that you've wiped us out, we value that is at about nine hundred and twenty million dollars. Now Fox comes back and says, that's crazy. You you independently were valued as a company in twenty two for about three hundred million dollars and
your business is actually doing better after the election. So I think I think dominion has a strong case about defamation. I don't know that it has a real strong case to get to that billion dollar figure. But one other footnote on that, though punitive damages are also in play here, the judge refused to take them off the table, and so it's not just that direct harm to the business. The jury has the ability to come in and effectively punish Fox. And sometimes punitive damages can go as much
as five times the economic damages. So that's where you really get to big deal numbers.
It gets you there.
Yes, hey, Matt, if I'm Fox, why can I just claim First Amendment protection?
Yeah, So that's what they've been doing. And they brought in Paul Clement, you know, the noted First Amendment Supreme Court lawyer, to defend them here, and and they tried that defense, but the court has mostly shot it down. That Fox, you know, Fox makes the First Amendment argument. This was the most important story of the day. The President of the United States is saying that the election was rigged. How can we not report on that? And
and and so. But but the problem is there is real, no, there really is no defense in in in in the First Amendment that lets you air allegations that you know to be false or that you strongly believe to be false, and and so the so that the judge so far is pretty much said, now, we're not going.
To go there.
I already have decided these are false statements that you made. And so the only question in this trial now isn't the First Amendment. It's it's it's whether you knew they were false or whether you had a high probability to believe they were false.
If television news can't make stuff up anymore than where are we as a country?
Well, the first Amendment was for like mistakes.
You know that.
The The issue for me is do we get to see Rupert Murdoch, Do we get to see Alan John Hannity, Do we get to see Sean Hannity and Tucker Carlson testify. We've already seen some of their you know, SMS text messages and it didn't look good, right.
Absolutely, And I think that right now, you know, I still think a settlement is a pretty good bet over the next couple of months before a jury actually announces its decision. But I wouldn't be at all surprised to see this trial advance pretty far. So I think it's more likely than not you are going to see those witnesses called to the stand. And I think Rupert Rupert Murdoch is pretty early on the list, potentially in the next couple of days.
All Right, Matt, thank you so much for joining us.
Matt Sheltenham, he's a senior litigation analysts Bloomberg Intelligence.
He's in Vegas.
Matt, make sure you go over to the high end crafts table Blajo use my name.
They'll take care of you over there.
So Matt Sheltenham, he covers all that in litigation stuff for Bloomberg Intelligence, so it's great to get his informed legal opinion when you get some of these big legal cases surrounding certain companies.
You're listening to the tape Cat's are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune it app, Bloomberg dot Com, and.
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Let's turn to real estate, commercial real estate, and when you want to do that, because you know people aren't coming back to the office. That's how it is, particularly here in Midtown Manhattan, but maybe it's different in other parts of the world. But Jeff Langbound joins us. He's
a senior reat analyst with Bloomberg Intelligence. Jeff, talk to us about I'd love to get your view on commercial real estate, office real estate in particular, how do you think office real estate is going to evolve in this country, you know, over the next several years, because boy, it's changed since pre pandemic levels.
Yeah.
Right, Well, first I want to say that nobody may be buying equities broadly, but definitely nobody's buying reads right now. So that's that's something we're definitely keeping an eye on. So the office is definitely a very different environment than it was pre pandemic, and right now we are in
a very long kind of figure it out period. I think where we're going to figure we're going to have to see how much how much space tenants need, if any, We're going to have to figure out what properties are actually worth, and then we're gonna have to figure out what can be refinanced once mortgages start coming due. So it's going to be a long period of time where we have to figure out what the office environment is going to look like.
What does the I mean I'm assuming everybody refinanced at near zero when they could. So when does that wall of debt? When's the first wall come due for maturities?
It's starting, it's it's this year. You know, there's there's a big chunk, big chunk coming of debt that was issued in the twenty eighteen timeframe. And like you said, not only are interest rates at lows, but asset values were at highs and cash flow. You know, everyone was projecting continuous rise and cash flows. So you have loan to values that you know are going to be elevated if you start marking values down. You have interest rates that you know, if it was floating debt has already
risen and it's starting to present a problem. If it's not floating debt, then the refi is going to present a problem. So you know, but like I said, it's going to be a long term process to figure out how this is going to work because lenders don't want to take over office buildings that are you know, difficult to operate in this environment, and so landlords or borrowers are you know, kind of trying to figure out what they can can negotiate in order to get properties refinanced.
So I'm just looking at the Bloomberg Property Reate Office Property Index. It peaked in October of twenty twenty, and it's now down sixty percent sixty zero percent from that peak in February of twenty twenty. And Jeff, I don't even feel like I can go in and buy the bottom here because, like you mentioned, A, I don't know don't know what my cash flows are going to because I don't know how much space my tenants are really going to need longer term, and too, I don't think I can finance it.
At these rates.
So, I mean, I don't see is this is this just the new normal and everybody's got to adjust.
No, I don't think so. I think it's a little bit more nuanced than that.
You know.
So, the first wave of declining prices was you know, speculation, declining prices in the office rate Index and in the shares themselves was you know, speculation over how much property values were actually falling. You've gotten some pressure recently as the banks have started to struggle, where you know, there's real concern over the over the financing, But I don't think that it's a catch all for every property and every owner of properties. There's going to be a differentiation
between quality. The owners of better quality assets are going to be able to attract tenants, uh, and the lower quality assets are going to need to find some alter use as a polite way of saying, they are obsolete as office buildings. And it's going to take some time for that to get worked out. And so you know, you may not want to buy the entire index, but there may be some names that have over corrected to figure out where the values actually are.
Right, amazing stuff.
We're gonna next time you're in New York, Jeff, let us know we're gonna get you in the studio here Jeff Langbaum Senior read analys for Bloomberg Intelligence, given the latest on this property index property market out there.
You're listening to the team Can't Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot Com, the iHeartRadio app, and the Bloomberg Business App, or listen.
On demand wherever you get your podcasts.
Tesla's got some earnings coming up, and that's always something to pay attention to.
A if you're Tesla shareholder or creditor. But this is if you're interested in this whole ev issue. Transition from that.
I know Matt all Over, but Joe Levington Joints us he's a direct or Credit Research of Bloomberg Intelligency Joints. Here in our Bloomberg Interactive Broker Studio, Joe, you cover the debt of Tesla. What's the what's your view of kind of how the company's evolving here from you know, you've been following this company since the beginning. How do you view kind of where they are right now and kind of what their growth plans are?
Sure Apoulo, Yeah, they really moved from the hunter to the hunt ad at this point. And really for them, they have a couple of strategic weapons that others don't. One is a dominant cost position. You know, if you think about their profitability, they're going to have about fourteen percent margins this year. If you look at their peer group, it's about eight percent. And so they can use that in terms of pricing, and you're seeing them cut prices aggressively.
Some say it's because there's no demand, That's.
What I say.
But you're saying, but the other the bull case is it's from Hey, it's a position of strength. They've got the margin and they can drive market share and that's good.
Yeah.
I mean at the end of the day, whether you know it might be the looking at the at the same picture just slightly differently, the fact is that the grow thirty eight percent, right, and your peers are growing three or four percent.
So whether you're say in.
Terms of what top line sales, yeah.
So you know, like one can say, hey, there there's not enough demand to hit their fifty percent, but relative to peers, they're blowing them away, and they have the ability to use that and scale on their margins and
still gain share at the same time. So whether you look at it as hey, they're missing their fifty percent or hey, they're you know, doing much better than their peers, it's going in the right direction for them, certainly from a credit perspective, and because it has been that way, their balance sheet has a huge amount of cash and very little debt at this point, so they can continue to do that.
I saw I saw a funny headline this morning Mercedes Benz aims to double EV sales this year, and at first I.
Was like, wow, that's a big deal. But if you only sold like twenty five evs last year, it's not that difficult.
Now Tesla were to double ev sales, that would be a major feat because what they're selling like, well, well, over a million cars a year.
Now, that's totally right.
And you know, you could go back and forth on whether fifty percent growth a year is doable or not.
To me, that sounds like a very very aggressive scale. But what it's really telling you.
Except for when you tell me that they have thirty eight percent growth and fourteen percent margins, I instantly think, well they could have margins and boost that to over fifty no problama for sure more.
And I will tell you, Matt, like the real thing for them is kind of becoming the Toyota evs, meaning as you move your price point down, the amount of consumers that can afford your vehicles grows very, very significantly. And that's really where they're going is to become the affordable car, which was really you know, like master planned part one from Tesla.
So the balance sheet, how does the credit market view Tesla? I mean, if they wanted to go raise more capital, could they do that at a reasonable rate?
Spread oh, one.
Hundred percent, when you know, it's amazing that in twenty eighteen Elon Musk is talking about being in manufacturing hell and just trying to survive. Today, they have over twenty two billion dollars of cash on hand, They've been upgraded seven times in the last two and a half years. I've never seen that happen for another automobial company.
And look at the north of twenty percent ebitdam margins. I mean, that's I could lend against that exactly.
So you know, like right now, you could probably do a green bond for ten years at under four and a half percent, so really a very.
Cost efficient way.
If they wanted to, say, build out a captive finance unit, which a lot of auto companies do as another revenue stream.
Does it matter that they've had I mean, you're a credit guy, but Paul and I are too dumb and we just focus on the stock. So they had a drop in market cap from like one point two trillion down to six hundred billion, which sounds like, well, that's that's a horrible wipeout, But to be fair, you know, they're just back where they were two years ago. So they had an incredible climb during the pandem and then a drop back to normal levels.
There's still a behemoth, oh for sure.
And keep in mind how rates have extended during that period two and for companies that are long Greasian cash flow companies like them, when you have a big growth, you're going to have that in a up cycle in terms of breeds. But in that period Matt their CDs is outperformed. So what it's telling you is that from a risk perspective, people think that it actually has less risk than it did two years ago, even though the market cap is half the size.
That's interesting, all right, So how about the other auto companies for GM, I mean all the other big public ones that on that have public debt outsetting that you cover. This industry is making this transition like we've never seen before. If I'm a creditor, how nervous am I'm about going from the traditional internal combustion engine, which I can model, I know what the profits are and I know what the growth is to this EV thing.
And the other car makers make a ton of margin on the big ice cars, right, nothing on electrics.
That's right.
In fact, Ford, its model E business or its TV business is expected to lose three billion dollars this year, just to put that in perspective. But really for Tesla, lart a very unique place because they have these other companies, you know, in a very type grip. Obviously, any sort of pricing pressure that they put on them just means more opportunity for them and a tougher capability for Ford
and GM. But what I would say Paul to your specific question is that if you're a creditor, you're probably not that scared of the situation, despite the fact that this evolution is very unique. And that's really because at the end of the day, the average bond in the sector is about three and a half years, and there'll still be plenty of ice engines sold over the next three and a half years to delay the bills.
So the big car companies don't go out with ten year twenty year paper.
No.
Most of the debt, I would say about seventy five percent of the debt is attached to the captain finance companies, So if you think about the leaser alone, that's really where the debt is finance. There's very little at the manufacturing units because they're so cyclical. You really can't put much leverage on them.
You wrote about Ferrari's tiny financial services unit. I always find this part of the business interesting because it's a little bit opaque to people focused on the manufacturers and especially the stock side. Who's in the best position in terms of a finance unit, Because as rates ries, you want to have a very strong finance unit, you do.
And really it's the ones that have the best credit quality that are in the best position. So a company like a Toyota or Mercedes really or a BMW, they really stand out above the others. A company like Ford and I would say that they have as an operator are a very good operator.
Their interest costs will go.
Up about eight hundred million dollars this year just because of rates, and that is hard to pass through when your average car has increased about twenty five or thirty percent of the last couple of years.
Affordability really is the word of the year for autos.
I think of GS and Folkswagen, we probably talk about them the most. Is the biggest competitors to Tesla, right because Folkswagen has invested so much money in building out its evs general motors as well, seems like they're in a position to just explode in terms of EV sales. How do they look from credit quality perspective?
Well, I'm a fan of Volkswagen, have ben it for a long time. I do think with both of those companies. One of the key differences between Volkswagen and in general motors versus the Tesla is the.
Amount of products that they have.
There's a reason why Tesla only has a handful of products and they scale the heck out of them as much as they can. Versus having a very wide broad range, you can't get the same scale and obviously you have to have more marketing on top of it. So again, from your cost position, you're much better off being in the Tesla spot than one of the other peers. Despite both of them being you know, like very very strong.
Their size hurts them. As what you're saying it does.
It does.
Hey, if I'm buying a Ferrari or Lamborghini, I'm not finits in it. I'm just throwing down the AMEX.
Right pretty much.
Yeah, I don't think you even bring in the Amex just you know, like.
I mean, I just walk in and you know, why do they have a financial services unit?
What does Ferrari do with the financial services unit.
Yeah, they have a very small one, just for for a few folks in the US. It's very different than let's say Porsche, which has a much, much bigger and more meaningful finance company. So there is a difference in customer between a Porsche owner and a Ferrari owner. If you're a Ferrari, you're like mister Sweeney or yourself, You're you're living large.
I wish that were the case.
Yeah, I can't imagine if I'm again, if I'm in the if I'm a Lamborghini Ferrari kind of buyer.
Costs.
I mean, you're looking at a base price of over four hundred thousand dollars, well over four hundred thousand dollars, and when you add options.
You know, I was just aut in Carmel and there are invented doors parked on the street. That's I mean, it's just incredible. I would never take it out of the garage, but but that's that's the level of wealth out.
There, all right.
Joel, thanks so much for joining us. Joe Lovington, he's a director of credit research for Bloomberg Intelligence, joining us live here in the Bloomberg Interactive Broker studio. He doesn't mail it in, slash phone it in like other directors of research at BIS, so we appreciate.
Him coming into the office. It's good stuff. Don't get him in trouble exactly. He gets in trouble all on his own.
You're listening to the tape Catcher live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and 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.
Matt, here's the story.
I have no idea what to do with. Here's the headline. Chat GPT, can dcode fed speak predict stock moves from headlines? Where are we going in the world?
I thought it was a great story, but it does we do say in that story? Or Justina Lisa, as she wrote the story for us at Bloomberg News that, of course, there already are fairly intelligent algorithms out there that decode this kind of stuff every day, right, I mean, Bloomberg publishes stories that are intended for machines to consume, to read and then parse. So this is just I think from what I'm reading here a little bit of progress in terms of the ability of these AI programs.
All right, Justina Lee, Bloomberg News, the reporter on this story, joins us now from our London studio. Justina, fascinating story you have here. Tell us kind of what's going on.
Yeah, I mean, like every other field, finance has seen an avalanche of research about what chat GPT means for everyone, and we're starting to see some preliminary results here And this time my story is based on two academic papers. I mean, one argues that you could use chat GPT to classify if a sentence and a Federal Reserve statement is dubvish and or hawkish, and in this case they
compare it to what a human analyst might classify. And in the other case, they asked chat GPT if a certain corporate news headline is good or bad for a stock, and then they found that that answer correlated with how the stock actually subsequently performed.
So yeah, I thought the FED paper was interesting. They compare chat GPT's translation to that of Bryson. I guess like an intern at the FED. He's like a twenty four year old kid known for his intelligence and curiosity. Did did chat GPT beat Bryson or did Bryson do better?
Well?
In this case, they used Bryson as a benchmark. So the idea isn't necessarily that chat GPT is better than humans, but that chat GPT was better than prior technologies and coming close to human thought. And one amazing thing about chat GPT is not only can it classify if the sentence is devish or hawkish, it can even like explain
why it classified the sentence that way. And in this particular case, they actually found that a lot of the time chat GPT's explanations were very similar to Bryson, who Google tells me is an actual research analyst at the Richmond FED. So the two explanations were actually pretty similar.
So where does this technology go from here? Justina?
I mean, is this something that is just over time every day it's the iterations are going to make it better and better.
Yeah, I mean it does feel that way. I mean currently it's very commonplace in hedge funds to use machines to read earnings transcripts and tweets and headlines and to kind of incorporate those into trading models. But I think what all this research is telling us is that chat GPT is a lot better than the early generation of the technology in parsing nuance and context, and it can kind of understand a lot of financial news even if
it hasn't been specifically trained for that purpose. So I think what this tells is this there's probably going to be even broader use of chat GPT for financial purposes, and also that it's going to get a lot better and a lot more accurate.
What's the difference between chat GPT and the technology that you know, traders already use on a daily basis. You talk to any humans in this market and they'll tell you that the algorithms are taken over and it's just computers that are doing all the trading at very high frequencies often as well. So is chat GPT going to be able to replace those or are those computer models you know, made more specific to their jobs.
Yeah.
I think when it comes to you know, the first generation of this technology, it was very much based on understanding particular words and so sometimes it couldn't really understand
the context very well. Whereas chat GPT uses this technology that kind of manages to understand and where the focus of a piece of textas But I think if you ask people who have been following this technology for years, they would say it's not necessarily a huge breakthrough if you're ready familiar with you know, for instance, Google's prior
model called bert. But I think what kind of chat GPT has done is it's kind of opened up access to this tech that makes it potentially possible for a lot more financial firms to start doing this tech as well.
Is there the expectation that there will be some commercialization of this type of technology so that if a hedge fund wants to do it, I can go to you know, chat Gptfinance dot com or something and you know, get it from Amazon or something.
Yeah.
I mean obviously currently any one of us can go on chat GPT and ask them to interpret a sentence for us. But if you really kind of want to use it on an industrial scale for a hedge fund, I think you do need to reach out to the
firm for a license and something like that. And I think that is kind of something that a lot of Hetchman's are now considering, because then you know, chat GPD is not open source and so in a way you kind of need to give over your data to that software, and a lot of firms will be pondering whether they should do that or whether they should, you know, rely on their own internally developed models.
What's the competition like right now, you mentioned Google's uh chat or whatever we call it, Google's GPT.
What does GPT even stand for?
It stands for I'm forgetting GP but T is transformer.
I just nobody. I mean, it's funny.
You know.
Elon Musk was on Fox News and he said he wants to start his own called truth GPT, and I think he's trolling obviously.
But why do we have to put GPT?
I always wonder at the end of all these at least Bert doesn't do that. What are the other competitors to to open AI?
I just googled it. By the way, it's general to pre trained transformer.
No wonder, no wonder.
Yes, yeah, I mean the last this major breakthrough is Bert from Google. I kind of mentioned this at the end of story more as a disclaimer. But Bloomberg now has NP you know, a GPT as well. And the significant thing about you know, Bloomberg's large language model is that is specifically trained for finance.
But do we use. Have we licensed this from open ai? Is this our own chat GPT? That seems to be what everyone's doing, and I know they offer that with GPT for.
Yeah, I think it's Bloomberg's own thing and it's very new. They release the academic paper on it, I think, just at the end of March.
Interesting stuff.
So I guess the word, you know, I think we're going to see more and more of academic support for this and maybe driving it forward because it just seems like it's.
Well in Microsoft, which obviously is heavily invested in open ai, has been using it for being and now I all of a sudden find being being a lot more useful than Google.
Yeah, I mean, that's that's Google's taking a hit on that.
So Justina, what should we look for next from chat GPT in finance?
Yeah, I mean there's been so many papers on this subject, you know. I've read one where the researchers started using chat GPT to even design an investing strategy, and they said that it was better than random, which is sort of a low bar, but at least there's that. But I think generally, you know, people have talked about how it could really jump start a lot of financial research is a very good at summarizing thing. So, if anything, it will speed up a lot of process good stuff.
If it's better than a monkey throwing darts, that's actually a stretty high bar.
That is Justina Lee. She's a market's quant reporter for Bloomberg News. She's based in London and she's got this great story out on the Bloomberg terminal. To check it out talking about chart GPT can de code fed speak.
How about that?
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Apple Computer make it a big splash or continuing to increase their investments in India.
They actually open their first door in India.
I'm surprised.
I would have thought they would have had a store there, but they opened their first door. And Tim Cook I saw some video of him in India greeting folks anaa Grana senior techanas Bloomberg Intelligence.
He's been following Apple for a long time. So, Honurra, what's the.
Strategy here for for Apple and India broadly defined?
So, Paul, it's so when it comes to Apple in India, India, Apple doesn't have such high market share in India, and the reason for that is these phones are fairly expensive and flankbet you know, even ninety percent of don't even qualify for you know, Apples to be competing in that market because they are all sub three hundred dollars phones.
But as you know, you and I've discussed in previous discussions that as this middle class becomes more rich, they are more inclined to buy a luxury product like Apple compared to a lower and smartphone.
So I can't believe that this is their first store in India. I mean I feel like people, yeah, more well over a billion people, right, Honor rag and talk to us about the size of the rising middle class.
What are we talking about in terms of numbers?
Yeah, So, first and foremost, I mean, you can buy a you know, Apple phone in India through partners and through online channels. So it's not as if that an Indian consumer cannot buy it it was the first Apple
loan store right there. So so making that distinction in terms of the market size, you know, this is a contribute over three hundred and fifty million people or somewhere in that range of mid middle class and extremely you know grow that that particular portion is growing at a much faster pace in terms of the purchasing power parity, largely thanks to a very large you know, technology boom and the software ecosystem with most of the you know,
technology companies in the West have very large development centers in India. And it's those young people who are driving you know, the spending of luxury products, and I think that is the real big opportunity in our view.
So it's I think it's over one point four billion people in total, right, three hundred fifty million in the middle class.
That's more people than in all of America.
And yes, and they care this, this giant middle class. They care about high tech products, right, they want this stuff.
No, I agree, But you know, I would also say that they have been a lot more cost conscious about the products because if they can find a you know, Android product from Samsung or another firm or another company that is equally or better you know, they are not just bound by the brand itself. But you know, Apple is a luxury brand. It is somebody something that people
aspire for. And I think, you know, Apple will build products in India, and I think that way, you know, it is possible down the road the products may be slightly cheaper if they are made in India.
And they'll be building them there.
Though I think, what's the output of iPhones out of India was like seven times more this year than they made two years ago.
So Apple doesn't disclose that information, and you know you'll have to rely from a lot of media, you know, channels, but you know, we think it's still less than five percent, a lot less than that at this point because ninety eight percent of the phones as of last year were assembled in China. Now that is going to change over
the next decade. But you know, one of the things I would say is if if a phone is built in India, I think in the long run, that would be more palatable for the Indian audience because it will not have export duties and other things that go with it.
An maybe two or three iPhone upgrade cycles ago, Apple introduced, you know, a lower price model, specifically to appeal towards you know, some of these emerging markets that never really took off, do they do they still have that that they still want to attack them a market that way? Are they waiting for people.
To just what's that cominie or the SE something the ion are which one is that?
Yeah, it is the s C.
But you know, Paul, if I look at the smartphone install based in India, it's let's say about six hundred million units out there. Ninety percent of them fall below the three hundred you know, dollars price band. So even the SE doesn't qualify for you know what you're saying, because even that falls into that you know, thirty five percent bucket or so, thirty five million unit bucket or so. And I think that really is going to change over time as this middle class becomes a little more affluent.
You know. We think, for example, the current you know, revenue run rate in India is is is roughly around six billion just on the on the iPhone itself. We think, you know, that could grow at somewhere around sixteen seventeen percent over the next decade, you know, reaching about thirty billion by twenty thirty two.
Some good numbers there, buddy, that's some you can make some money on that.
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I was just showing Matt the Richmond Spider kind of little hand signal.
And then you explain it to me. But I obviously get it, and you've got it. Okay, thank you. Some people don't, but you're on top of that stuff. All right, let's talk markets here.
We're gonna welcome Karen pie In pie Pay parent Pay, thank you, I am pay, I am pay. Got you designed the Guggenheim thing and the pyramid in front of the oh the loose right, that's right, all right here, just so wordly, Karen Pay, head of portfolio management and Equities at Fiduciary Trust International. Karen, we're kind of getting into the thick of earning season. I'm gonna for like fifteen seconds. I'm gonna get away from the Fed. What
are you looking for in earnings? How concerned are you about earnings risk in this market?
It's a great question. So we've been saying that the markets should be shifting their attention to fundamentals as opposed to the FED, which continues too. Yes, but it continues to be a driving force and continues to be a theme in the market. But in terms of earnings, we are concerned that profit margins are going to get squeeze. You know, companies have been able to raise prices over the past year. They've done really a good job, especially
the companies that have pricing power. But we are seeing that companies are going to struggle a little bit in terms of maintaining their their margins. And we are hearing about companies talking about cost cutting. And you know, even when we look at the banks earning, so far, margins have been held up, but they're doing so with the combination of better revenues, better better income interest income from the banks, but also there's a lot of discussions about
cost reduction and cost containment. I think that will continue to be a theme this year.
We heard someone today suggest lowering headcount by using AI on Wall Street. That's at one of the biggest banks in Charlotte.
Right.
So, in terms of the fed's impact, everyone seems to be pricing in, you know, one hike and then a pause. Okay, if you look at futures and options, you could see that they're pricing in cuts, but I don't think a lot of investors really buy that.
What's your outlook?
Sure, So, markets I think are backing in about eighty five percent probability of another increase in May. So, but I think, you know, there has been some expectation of rate cuts for this year that I think helped drive markets up during this first quarter. Our outlook is that we probably won't see that occur until maybe next year. And you know, my view is that inflation probably will
be a bigger challenge for the FED. I think, you know, the label markets have been very strong so far, it's going to be a gradual grind lower and that means that inflation isn't going to come down as quickly as maybe the markets expect. And so as far as rate cuts go, I don't see that happening anytime soon.
Karen.
You know, I think what a lot of investors, you know, really for the last twelve thirteen years, they've been used to this technology that big tech companies leading the way, and that.
Didn't work in twenty twenty two. It's kind of come back.
Here in twenty three, here the big tech names are leading the way. How important is it for you and just as you look at the broader market for tech to be a leader, or can this market move higher if it's something else industrials or small cap or something like that, how do you think about leadership.
Sure. Yeah, So I think that market's in the very short time period can sort of disconnect from fundamentals. So last year technology stocks didn't do well because they were fighting the tape, the FEDS tape in terms of rising interest rates. You know, it's the long duration trade that didn't work last year, given that technology companies have a lot of future growth that had to be discounted back
at higher rates. Valuation is a big part of it, and I think that in this market we have to pay attention to valuation in the very short term, like what happened in the first quarter because of the shift and rate expectations. That helped some of the valuation recovery in the tech stocks. But from a fundamental standpoint, we are seeing, for example, companies talking about reducing CAPAC spending. Taiwan Semi actually just this week talked about reducing CAPAX.
So we're sort of on the other side of a lot of the spend that happened during the pandemic when it comes to companies you know, going all digital, right so there was a lot of accelerated spending in technology. I think we're on the other side of that right now.
So it's going to be difficult as a longer term trend to see sustainable rallies in technology until either the FED pivots where we start to see rate cuts, or until we start to see bottoming in terms of fundamentals and we start to see maybe some increases in growth expectations or capac spending.
How do you feel about the consumer because a lot of tension has been paid to bank balances. You know, previously we were all concerned with how much money was in savings accounts and checking accounts just to gauge the health of the consumer his cup overfloweth right, But now we were all just looking at you know, deposit outflows to gauge the health of the banks. I think we've
gotten back. We've put that banking issue in the rear view mirror, and now we're concerned about the consumer credit use and the possibility of a credit crunch.
All great questions. So I think a lot of about cash flow, and you know, I think we just talked about CAPEX and companies are in a position where they probably have less cash flow. We saw that impact some of the you know, private equity world and some of the venture companies, which caused the problems that you know
we saw at Silicon Valley Bank. In terms of the consumer, I think that consumers are also at a point where as you pointed out low savings rate right we also have a cliff that is happening in terms of the support that consumers see from the government, So there's not going to be those tailwinds for the consumer. I think the one positive for the consumer right now is that the labor market is still very strong, and so we're not expecting the consumer to createor here, but we do
expect consumer spending to slow. I think it also takes a long time for behavior to change. So everyone's still kind of on a high from the reopening of the economy right now, and there's still a lot of spend on travel and restaurants, and we see all of that, but the lower income consumer is spending on credit card debt right now. The higher end consumer still has a
wherewithal to spend. But we expect that the pressures will be coming forth in the next several quarters that there would be more pressure on the consumer.
Karen, I see kind of it in your notes here. You have an ESG investing license now, Matt and I kind of share I think what is a growing skepticism of ESG investing. We're not like the state of Florida or anything, but you know, it's it's it's there, under the under the under the surface here. How do you guys at Fiduciary Trust think about ESG.
Sure, it certainly is a topic of interest. I would say that a lot, a lot more of our clients were interested in ESG investing and impact investing. I think some of that maybe definitely last year took a little bit of a turn in terms of you know, ESG investing has been somewhat correlated to growth investing and correlated
with technology. The way that we think about ESG investing is we actually do believe that when you look at the ESG factors like environmental factors, social factors and incorporate that into your thinking, incorporate that into your analysis, it
actually should help yield longer term better results. And the reason for that, and you know, sort of kind of fold into our investment philosophy, is that we believe companies that are forward thinking and think about their business risks and to understand the trends that are occurring in the marketplace will be in a better position to handle those risks and to capture the opportunities when it comes to changing consumer behavior, changing consumer trends, and even some of
the you know, risks that might be coming forth from a regulatory standpoint or just from what's happening from a business standpoint. So when you do it right, it can be very beneficial. I think the issue is that you do you know. I think what raises your question is are people labeling ESG investing accurately?
You know?
And I think it's important for investors to really understand what's underneath the ESG labels.
Yeah.
Well, I mean some people will put big integrated oil producers in their ESG basket, which I can understand. You can kind of do some mental gymnastics and justify it, but at the end of the day, I mean they're mining for hydrocarbons, right.
Yeah, So it's important to really understand again, you know, to your point, what is in the portfolio, what is in the investment strategy? And ESG investing doesn't necessarily mean that you exclude fossil fuels or exclude energy stocks, but it's about finding the highest quality companies and to understand the level of admissions and work with clients and for those investors to understand what level of tolerance that they're willing to take and what the opportunities are.
Karen, thank you so much for joining us. Really appreciate it.
Karen Peg, head of Portfolio Management Equities for Fiduciary Trust International, joining us in the Bloomberg.
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