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 moven news.
Find the Bloomberg Markets podcast called Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast.
We are joined now by Brian moynihan. He's chair and CEO of Bank of America. Brian, thanks for being here. We're here for the Aspen Economic Strategy Group meetings, of which you are apart. It is about the economy, and last time we talked, you were projecting at Bank of America a recession, mild recession, maybe Q four in the Q one next year. You've changed your mind.
Why?
Well, first of all, it's a great setting. It's a beautiful setting, and there's a lot of great people here to talk about the economy. But our team basically has moved from a slight recession to no recession. And so in the early next year first quarter, second quarter they had a slight negative quarters they now having positive one percent and a half of percent positive, but more importantly
behind that is what's really going on. In terms of the unemployment rate projections, they're now four point three peak unemployment in the latter part of twenty four early twenty five.
You're saying that's sort of an unemployment was slow down, which is really what's going on, and we can talk more about it, but that's what's really going on is people employed, they have money, they're spending money, and the FED is trying to slow down the economy, and it looks like we're reaching a pretty good equo.
Aby you've said, it's hard to have a recession when you've got unemployment in the foes, that's all.
They hard to do.
But what are you seeing in terms of jobs? Is there any softening in the market at all? Are that you're seeing at Bank America or more broadly, well, if you look.
At if you talked to our clients, you sort of see very specialized roles. Welders are still in high demand, even because construction is going on in the IRA and all the different building That's one thing, but in general, if you take our companies example, last year this time it was a great resignation. Turnover was back up to fifteen percent, which was higher than pre pandemic. It's now down to seventy eight percent. Last year we heard thirty seven hundred people in the month of June. This year
hard nine hundred, I mean. And yet headcount keeps drifting down, and so I think a lot of employers are doing that same thing, which is managing headcount carefully.
And that's why you've.
Seen job openings drop by twenty percent in the last twelve months or so. It doesn't mean people laying a lot of people off. That's happening here and there, really specialized industries, but people are being much more of conservative their employment. Last year, it was your post to every job known de mand because you didn't know what was going to happen. Now, with the lower turnover, the labor market is a lot looser this year that was last year, although the unemployment rate is still low.
One of the things you have a lot of vantage into is consumer spending. At back of America, what are you seeing in consumer spending? The commersumer seems to still be spending, maybe softening a little bit, But how much dry powder do they have? Because we had thought that a lot of excess savings they can still express. We're now hearing for example, credit card bounces are really going up.
Yeah.
So if you think about a consumer, it's their wages and wage growth, it's the money they have in their accounts from the stimulus and other things that went into their accounts during the pandemic. It's their ability to borrow, and then it's a rate at which they have to pay to borrow. And so if you think about all that, what we see is consumer spending. If we were talking last year's time, it was ten percent year every year, and that was inconsistent with a low inflation economy. That
now is down to five percent. So you've seen to drop by half and so year to date it's five percent. Month of July it's four and a half percent, so you're seeing it slow down. And what is spending at in the month of July is consistent.
With a lower inflation.
It's very much like it was in seventeen, eighteen and nineteen as a FED raised rates in economy sort of settled in. And so I think there's always been this battle between the consumer and the FED, and the consumer has pushed the won the battle back a bit, but they got to be careful of overwinning it now and now the risk really goes to overtightening and slowing down the consumer too much, and then we would have a recession.
Well, let me take the flip side of that a second. I want to talk about soft landing. Also, some people are saying maybe they won't won't have a landing now is what's the risk actually of inflation reaccelerating here because they haven't gone far enough.
Well, I think I think our economy is sincs A. Chances that are low, and I think I agree that personally and our team under Cannas Browning Platt is one of the best teams in business and they're good at But what there's see what the drag of higher rates comes through very quickly in housing instantaneously transmitted car purchases, things which happen faster. But with a line share, the mortgage is half for more undred three percent, And you really think about only half of the who people who
live in America have a mortgage. It tied up in our housing they rent and other things it's rent and its new home purchases. Those both are UNDERTA those have now mitigated. So you're seeing inflation come under control. Even these places are rate sensive. What you haven't seen is the impact in corporate Yet that's still ahead of us.
Because corporations, barring costs went up, they're starting to their activity is that they're using the lines less, which means they are finding less opportunities which overcome that borrowing cost. They're being more conservative on their debt. They've got to refinance some stuff. Good news is a lot of finance at lower rates and that has turned to it.
But commercial real.
Estate, the debate is so a lot of the fiscal drag, the drag from raising rates is still ahead of us. And that's why I think people forgetting that. They're still a pretty constraining lending conditions are tighter. Just at the Senior Loan Officers survey.
Just said it.
So the impact is more in front of us for some of the rate increases and behind us. Yet you're seeing it already tip inflation flattening out, not down yet with flattening out, and we still say it takes till twenty five to get back to the target rates.
What does all that mean for Bank of America the way you run your business. You had a very strong quarter, particularly in trading and sales last quarter. Are you doubling down on that or are you being a little more conservative.
Well, the trading and sales team, Jimmy Tomorrow, the team have done a great job and they had the best first half they've had and we've earned fifteen billion dollars plus in the first half of this year. The team's performing strong, the credits in great shape. Stress test just went on and our losses were lower than they were last year. And we're been the lowest of our peers for almost every year except for one. Have the last
twelve or thirteen stress tests. So you put that all together, we're well prepared for whatever comes at us, and that's what we do. Jimmy and the team had done a great job in training, but about three or four years ago, first under Tom Montaggon and Jimmy took over all the trading. We increased the size of balance, the scope, the capitol, committed to business, the talent, and they've been able to get a good payback on that. You know, the way they do it is, you know, we made money every
trading day. If you look back across the last several years, it's very rare. Maybe a couple of times a quarter will lose money. We just basically the team runs a great business and they're doing a great job.
The markets woke up yesterday to announcement of the Fitch downgrade in the US sovereign debt and there's a debate debate about whether that was the right timing, was the right thing, and the bomb marker now is actually responding a little bit to that. What's your take on that D rating?
Well, I think it's a bit of a non event in the sense that, you know, the US has the ability to pay its debts and has shown that ability. It's sometimes interesting how we get there with a debt ceiling increase and things like that, but they get there. It's the strongest economy world by a lot. It's the biggest economy, strongest economy. It's worth capital comes to them
from around the world. Great incentives in the US for companies around the world to invest and grow here at the IRA, the Infrastructure Act, A, Chips Act, et cetera, et cetera. The tax rates are lower, which makes it more competitive. So I don't worry about the fundamental ability
of PAARA debts. But if you separate the downgrade into two PAGs, is one is you know, sort of the debts that continue to accumulate, and will they start to outstrip the growth in the economy because right now, with inflation, they've been kept at a lower level. That's a question. And then secondly, is their willingness to deal with that, and that's that's an honest debate. But the two sides have to have that debate, and that's a political process and
they have to have it. But the reality is the action downgrades a person holds three hundred million dollars more treasuries, it doesn't change our opinion of the US's credit winess.
Well what about that holding the US treasure Because as you suggest, there is an issue at some point down the road, it's not clear what it would be. I mean, you talk about the process, the political process, it doesn't give a lot of comfort. That's one of the things that Fitch said, Actually, you know, we got a problem, but also we got a process that doesn't seem to be able to deal with it.
Yeah, And I think that goes back to the structural changes in America. You know, the demographics, the demands on social security and the t you know so called and title what's over time as a percentage demands, Those are serious issues. That you know, the political process and the citizenry has to be involved in not solvable in ten minutes. And so that's all good, and that's what we're talking
about here at the Aspen Economic Strategy Group. You know, what are the thought processes between balancing those outcomes better? But you know, those are long term questions. In the near term, there's much bigger risk of some of the things that go on outside the United States to the economies of the world than there is inside the United States.
We're growing, people are employed, people are spending, and that's good news, and that will get mean that the fiscal receipts of the US will stay a little stronger on a relative basis.
How much is it supported simply by the strength of the US dollar. That is to say, people tend to turn to dollars when in doubt.
They should because it's you know, it's a safe haven. It's what commerce is conducted in because in the day, the consumption power of the United States drives economies around the world. Therefore there's you know, US consumers spend dollars. So if you're selling stuff in dollars, you got to be exposed a dollar. And so I think the idea of some of this debate about reserve currency status. It's been tightening in the flight to quality, and the US tends to come. Now ten year bonds moved up and
everybody gets built up. We're talking about the difference between you know, three eighty three ninety and four ten, four twenty. These are not very big moves in a grand scheme of things. It is tapping quickly, and people get excited about who trade bond is living from the grander impact in economy. Those moves are needed to get the Ultimately, they old curve has to get back and sink or else we aren't taming the inflation or we're going to drive into a recession.
When you talk about the strengthening the US dollar, is it stronger today as a reserve currency globally than it was ten twenty years ago?
And if so, why because I think the opportunities in
the US are the strongest. And that's why, you know, with a great financial system we have, with a great set of companies and innovation, we have the research universities, we have the things like if we keep investing in all that and let capitalism and you know, United States style capitalism drive the US will always be a favorite place because other places are struggling with different systems that proved not to be as beneficial, with less innovation, less
ability tackle problems, and so yes, it's interesting from time to time all what goes on. But if you think about, you know, think about the late sixties to now, we've doubled them around. People work United States. We were supposed to be taken over by japan ankeeers. The computers are going to get rid of all the people. The people are still working. You know, we had to more in Vietnam. We had the political constitutional crist This and Nixon presidency.
You had an oil and bar. All that stuff happened in the early seventies and still a dec you know, fifty years later, we have twice as many people work in this country.
Since we talked last, Brian, and we now have the proposed regulations on capital requirements from the federal bank regulators. We talked before and you said one hundred basis points, as I recall, a difference in the capital requirements would amount one hundred fifty billion dollars lest year loan. Now we have the proposals. What would it mean for Bank of America and for our banking system.
Well, what it does is it's not to get too technical in the grand skiving things, but it changes the calculation of risk WEDED asets RWA. And so the idea is that the estimates by the FED is it's fifteen to twenty percent of our WA increase. When you do that, then ten percent of our WA at X and ten percent of our WA at one point one times X means you have to have more capital, and so the amount of capital goes up. That then constraints leny because
you can't do anything with that capital. If you did, then you'd have more rw and you have to have more capital. So so but I think if you step back, this industry is well capitalized. It just proved it again in another crisis. It's well managed, it's well rked related. You've had successive FED regime chairs and people working in a chair supervision vice chair over the years say the capital's adequate. Industry, it's well it's well managed as well.
Capities they'll be. Banks will fail, they fail, they failed throughout history.
That happens.
But since the financial crisis, more people under the tent because the issue of the financial crisis a lot of stuff wasn't a tent. The problem is if you get the capital regulations of banking system too tight, you push stuff back outsides of tent. And that's a concern. So as I look at it, one, give a set of.
Rules, we'll live with it.
Two, it won't you know, bank Americal adjustice business model to make it work. But what's been interesting about this is it's competitive position United States versus Europe and others. This is making the bank industry, all banks less competitive to mid sized US companies than foreign banks are to mid sized US companies participating in a sing globe of supply chains in those countries. That's that's more of a trade question and a balance of power question.
That's one.
And then second, I'm surprised by the amount of descent that the governors of Federal Reserve. I've been working on Federal Reserve stuff for my whole or forty years now, and I was just surprised the amount of debate, which shows you that you know, whether it's mortgage loans one side, whether it's a tax benefits for and treatment for energy clean energy investments, or whether it's the basic trading and things like that there's been a lot of water that's got to go over the dam here to get these
rules right, because there's a debate even among the governors themselves about what the right answer is.
Over the years. Brian, you said there's a role for regulation, and you'll live with the regulation as you say you will with capital parts. But what is the problem it's being addressed. That's what I don't quite understand. You talked about the crisis we had back in March with the banks. I'm not sure this addresses that well.
And that's been the debate, and that's go read the descents and the debate in the things. So strong regulation is important. Rapid growth in banks tends to come from things that turn out to be not so interesting after the fact, and so I think, you know that's the thing they need to sort of come to a common agreement on Basil three. Across the world. We're just applying
it with much more rigidity and requirements. And so if you look at the largest bank in France, UK and Germany, they have about half the capital requirements in the largest banks in US do. So that could send a competitive question and so I think people just have to look at it seriously look at it relative to what we're trying to do here. We want the strongest banking industry. Our banking stry has better returns, has better things. But on the other hand, our multiples are half or less
than the SMP multiples. There's a reason for that, which as investors or say, wait a second, if the capital demands don't stop, we aren't sure that we can continue to invest. So there's a little bit of a counter veil here that people have to pay attention to it. And then back to your point, every hundred base of points of capitals, one hundred fifteen hundred billion less loans we at Bank America could do, and this applies across
what they can't be done other places. Those companies aren't that size.
Man, Brian, thank you so much for spending times. Really appreciate it.
That's Brian moynan.
He is the share in CEO of Bank of America.
You're listening to the team Ken's our live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot Com, the iHeartRadio app and the Bloomberg Business app, or listening on demand wherever you get your podcasts.
We did have another Central Bank decision today. Earlier the Bank of England did raise interest rates to a fresh fifteen year high and raising its key rate to five and a quarter percent. Here and really, as far as the central bankers, they're signaling how the UK still faces a longer period of higher rates. So we want to get straight to our next guest, A Vanias stav Rukiva, who's an economics professor at London Business School, joining us on zoom to break down this latest decision from the BOE.
What's your takeaway from this.
Hi, it's a pleasure to be here. I think we expected them to hike, given that the core APN numbers is still very high at six point nine percent.
Also, it's a bit.
Embarrassing for Bank of England to be essentially the central bank of an advanced economy with the highest CPI numbers at this point. I don't think they had a choice but to hike.
Professor, here in US, we're seeing inflation come down pretty significantly, although some people call there some areas of stickiness. If you will give us a sense of what's driving the inflation in the UK and why is it perhaps a little bit more stubborn to bring down than in other parts of the world.
I think the difference between the UK and the US is around the wage inflation. So the UK is particularly problematic because it got hit by Brexit at the same time, which of course limited the inflow of workers from the Urozone. But also they have other structural problems. So we know that the number of people that long term ill and they cannot return to the labor force is significantly higher in the UK than in other countries. Actually some of
the numbers are as high as half a million. Moreover, we are seeing a lot most strikes, of course in the UK. We don't really see that in the US, and they're justified because there were decades of austerity and public sector wages are very y low. I don't think these trends are going to go away. So for example, the fact that they approved public sector wage increase of six percent, given the even you know, course CPR inflation is seven percent, I don't think public sector workers are
going to be side with these wages. So I do think that actually strikes are going to continue and this is going to feed into higher wage inflation. Also, wage inflation in the private sector is above seven percent, so wage inflation is the biggest problem in the UK in my opinion.
How has also the inflation picture impacted other economies in Europe.
So the Eurozone is quite interesting because there is massive hetroogeneta across different countries in the Eurozone. So this is the usual problem when you have a single central bank and many different business cycles. So we know the southern European countries, for example, the inflation rates is significantly lower than Germany, and then you have Eastern EU operator inflation
is still very very high. So historically CB has tended to put a higher weight on Germany, oversized weight on Germany, and that has been a problem as well, a political economy problem. And now they're going to have the same problem, right which which economy are going to target when you're
fighting inflation. Of course, we're seeing the Eurozone is not really growing at the moment, I mean, at best, their flood the forecast forizationion and you know, the probability of soft lending is much lower in the Eurozone and in the UK relative to the US, So the picture is much gloomier for the eurozones and people even think that
maybe they've overdone it at this point. It's unclear how it's going to develop, but it's going to be a biggest struggle given the heatorginating business cycles that we see in the Eurozone.
One of the challenges I guess for the Eurozone that's perhaps a little bit more pronounced, is it ties with China. It's reliance on China, but primarily as a trading partner. What's the feeling there, how that will develop because obviously here in the US the tensions continue to be escalated.
Yeah, and demand essentially hasn't really recovered in China, right, So the forecast for China and not particularly optimistic. So definitely this is putting a drug on exporting countries such as Germany in particular, and we're seeing that effectively. The growth in Germany is definitely lower, So it will play a factor. I'll be surprised if you don't see at least a mild recession in the Eurozone for sure.
How do you think when you're looking at more global central bank policy, when the FED potentially is close to being done, but then you have these other central banks that still have to be aggressive. Can the US economy still be resilient and shielded from these other economies also the.
US is a fairly close to economy. So the main way through which the US is connected to essentially our economies is through financial intermediation. Right, so essentially financial markets at global so to the extent that their disruption outside of the US, they're going to affect it, But trade is more second order for the US. Now, I'm a little bit less of the opinion that the US is
necessarily completely out of the woods. So this soft lending narrative about the US is a bit surprising because they still have core CPI of four point eight percent, so it's not two percent. I am of the opinion that is going to be significantly harder for them to get it down to two percent. And the problem is the following so markets effectively uprising in the soft lending they are expecting, you know, the economy is doing better than
expected as a result. Actually we're seeing that the credit spread, so the difference between the high yield corporate debt and let's say the treasure is this thing is actually narrowing despite the fact that we're increasing interest rates. So that's very surprising, and it's showing that actually risk appetite is growing, particularly for US assets, and that is making the job
of the FED harder. Right, So if your credit spreads getting more narrow, even if you're increasing base rates, you're not that contractionary if you wish, unless at some point we start seeing more defaults. So the component, of course, you can decompose credit spreads into a component which is kind of risk premium risk, aversion component, and component due
to default risk. If default risk increases and as a result credit the increase, then we're going to you know, find that essentially growth is going to slow down.
In the US, but that's not self lending.
That is going to be profitty recessionary. So I don't see how we're going to go down to two percent without a recession in the US. But there is a second option, which is that the FED actually doesn't really care to rush to go down to two percent, and they're just going to wait to the next for the next shock. Right, So we get another shock which is just going to slow down negative demandsion that is going to slow down the economy, which is not monetary policy,
and inflation is going to come down. For example, we have elections around the corner, which market's not talking about, but elections come with high uncertainty. High uncertainty slows down investment, which naturally is going to slow down demand as well. So yes, I'm less clear on the soft lending scenario in the US than some other market participants.
All right, doctor, thank you so much for joining us. Always appreciate getting your perspective.
You're listening to the tape cancer on line program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, Tune it up, 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.
Jess Met and Paul Sweeney here in our Bloomberg Interactive Broker Studio, streaming live on YouTube. Go over to YouTube and check it out. You can search Bloomberg Global News and that's where you'll find this markets. I think they're going to turn positive by the end of the day. This market just feels like it wants to go hired. It's coming off the laws. But what do I know. Let's check in with a professional who does this stuff
for living. Phil Phillip Colemark, Managing Partner and Global strategist for MRB Partners Canadian Canadian.
We've picked that up pretty quick.
Phil.
Thanks for joining us here in our Bloomberg Interactive Broker studio. You know twenty twenty two is ugly. There was nowhere to go stocks, bonds, a sixty to forty portfolio. You got crushed only Lisa Bromwits, who owns a big barrel of oil.
In her apartment.
They made money l last year, but this year a lot better.
What do you guys?
What's your market call at MRB Partners right here?
Yeah, we've been we've been away from the recession call, so we've been favorable on equities.
We continue to be.
I mean I think people are capitulating away from that call. They've gone to the soft landing call. Now I caveate that with bond yields here, keep an eye on them because they're they're rushing in against their October highs. And as long as they remain capped, you've got a window or that sweet spot for for equities where you've got you know, economic upgrade and yet you capped yields. We start to blow through that, which I think we will
later probably this year. Then it starts to get a bit rocky for equities again, particularly for some of those high flyers that are longer duration assets.
And besides this Fitch downgrade, a lot of this movement, especially with tech and growth corners of the market this week, were really driven after the US Treasury did boost its quarterly sales when it comes to those bond sales to help really finance that surge in the budget deficits, which, obviously, to your point, since bond yields hire and really pressure
those stocks. What's kind of your view here as far as where you think EU markets could go in the shorter term, because I'm kind of wondering if this was an opportunity for some people who may have bought some of these high fly names, whether it's in Nvidia and some of these other chip stocks this year that have really taken off, to maybe sell those and potentially buy the dip later on.
Yeah, I think very much. We've had a big rally in some of those higher flying names. They were really leading the market the whole year, so there's a bit of profit taking going on. I think the key will be really is keeping the eye on that ten year treasury here, because they are very much linked to it.
We had a situation where we had lower cap bondields after the twenty twenty two issue really from October, and that capping has allowed some of these higher flying, longer duration assets sort of to take off.
Now we're seeing that come back up.
We saw a lot of the bond yield back up in May, then we saw a digestion phase, and now we're seeing a brush with the highs. So we've seen people go from the recession call in deep raightcuts to pushing out that recession call was never our view, but pushing it out to next year and looking for the rate cuts there. There is an inconsistency there though that costa capital. The economic data is telling you the cost of capital is not biting. The household sector, employment or
even housing starting to re accelerate here. So if the cost of capital is not biting, then that means interest rates or more likely bond yields will eventually go higher. At that point, some of those long duration assets will come at a selling pressure.
What is the pain point specifically safe We're looking at the tenure because it is trading around right below four point two percent, highest level since November of twenty twenty two.
Yeah, I think a decisive breakout.
We've flirted with this a little bit and pulled back in in terms of the bond yield. I think a decisive breakout we start to blow through those levels. I think that takes us into uncharted territory again. So I think the equity investors were comfortable as long as they could sort of get it go from the recession camp to the soft landing camp, if you will, And so the idea being as the growth would improve and cost of capital wasn't going to be biting. That was sort
of your goldilocks or sweet spat scenario. If we go from the soft landing cap a camp into either bondield's breakup or the no landing camp, so to speak, which would push those yields up and bring out some of those rate cuts in twenty twenty four, and then yields break higher. A decisive breakout I think gets us back into that uncharted territory. It puts a lot of volatility
back in across financial asset markets. And in that case, given that we're flirting here, you know, our advice to our clients is to stick where you've got a bigger valuation. Discount and sectors that are less exposed to that higher interest rate environment. So it kind of pulls you back out at tech right now and puts you back into financials and things like that.
So, you know, I'm looking at the world interest rate probability function on the Bloomberg terminal warp. It's been wrong forever, so who knows. But I mean, you know, kind of saying starting next year, starting the cut rates, it doesn't sound like you're in that camp.
No, I mean, we haven't been in that camp.
And the problem with that campus is always seems to be one year out you cut rates, that we're going to head into recession. It's easy for forecasts and people to say, well, we've we're normalizing interest rates, and it's not. We're not in a recession today clearly from the data, but a year out we will be, and so they keep pushing that out. We've seen two years of that
pushing out. At the beginning of this year, we're in rate cuts now, right, and and so we've pushed that out to the beginning of next year, and now we pushed it into mostly backloaded to the second half of next year. The real issue, though, is has the cost of capital started to jeopardize the economy. So, in other words, for the rate cut cycle to occur, you have to have something that's really going to damage the economy, and right now that data is telling you that interest rates
aren't that catalyst. So unless you're calling for a different black swan event, then then there's not a case for the FED to cut.
And it may be a case where inflation comes down for the FED to go.
On hold, but unless you're getting weakness in the economy based on previous rate cuts, then there's no case for the cuts. And I know there's a lot of people saying that there's this hope for soft landing, which brings down inflation enough to allow the FED to take the pressure off.
But reality is is that a.
Big chunk of that PC inflation a basket is core services x housing and that's linked to wages. So unless you're getting a recession, there's really no hope that we're coming back down to the near the two percent target.
Do you expect to see because you were talking about value earlier, particularly some of these more cyclical quarters of the market that have picked up pace since the beginning of June, whether you're looking at small caps or even just within the S and P five hundred, say industrials trading around records also materials. Do you think they can basically take the baton from tech and growth that had really obviously outperformed in the first half of the year.
Yeah.
I think that's largely been our bet, is that you would end up as long as bond yields remain seemingly calm and didn't just swike higher here, then you ended up with a situation where growth expectations have been revised up, and really the sweet spot for your longer duration I guess your growth stocks is when you're in sluggish or
weakish recessionary growth and lower interest rates. If you're coming away from that and you're getting into a broader, better growth back drop, it rotates back to value in general. The caveat is is that you'd like to have that happen in a constructive manner, where it takes that baton as you just characterize, and leads the market higher. I think that can happen as long as the bond market
doesn't become disruptive. If we start to see a material spike up, say we blow through the highs and yields and we start to see that get run as people start to dump their treasury holdings, then I think we're going to be into a rocky period for that rotation might occur, but just not in such a structive manner.
What do you think is the.
Specific level for the ten year for instance, like around four and a half percent above that to really recalibrate tech and growth stocks.
Yeah, I think that's probably a good target.
I mean, I think we're going to ultimately have to go higher before we actually get into really a growth in pinging or impediment sort of area. But I think if we start to push through that, I think it was like four twenty four to twenty five was the high we start to break decisively above. So you get to four fifty, I think you're going to start to see that rotation occur like we saw in twenty twenty two. You're also going to see a lot of volatility come
into the index. I wouldn't want to call it at twenty twenty two, but we make it an echo effect or a taste of that. As people get into that uncharted territory, then they start to work worry about growth again or the outlook again, but I think that rotation starts to facilitate itself as we start to punch higher.
So what are you guys doing with emerging markets?
Yeah, we like emerging Asia particular. I mean, most of our US is a very expensive market, so we've been rotating away from the United States, especially in a context of a broadening growth better growth BACKDOB.
A lot of our bets has been in the Euro area.
We have we also have an exposure and that's where the earnings power is on.
And it is a euro call evaluation call.
Yeah, it's a valuation call.
But you've also got relative out performance in earnings right now, so your earnings are out performing the global aggregate. So you've got some tailwinds from a value and a fundamental story. We do like emerging markets, specifically Emerging Asia. We think that you know, the China reopening element should eventually help in terms of growth and earnings within the area. We also think the semiconductor cycle is getting towards a low and we'll start to see the.
EBB the other way.
So there's some support, which is a lot of beta to non Chinese Asian markets. So so we have a mild overweight in Emerging Asia.
All right, good stuff. Philip Colemore, thanks for joining us live here in our Bloomberg Interactive Brokeerst Studio. Philip is a managing partner and a global strategist with m RB Partners.
You're listening to the team.
Ken's a live program Bloomberg Markets weekdays at ten am Eastern.
On Bloomberg dot Com, the iHeartRadio.
App and the Bloomberg Business App or listening demand wherever you get your podcast.
Let's bring on our next guest, Jenniferree. She's a senior litigation analyst focused on antitrust at Bloomberg Intelligence. She joins us via zoom and she's got some work out because our good friends at Amazon, who again report earnings after the clothes, they've got a little bit of an issue with the Federal Trade Commission here, Jen, thanks so much for joining us here. Can you just summarize what the FTC is doing with Amazon right now?
Sure?
Thanks so much for having me. I mean, you know, this has been so anticipated.
I feel like I've been writing about this coming lawsuit against Amazon by the FDC for about two years. And you know the reason, Paul, why we all knew this is because the current chair of the FDC, Lenacon, has been a vocal Amazon foe. I mean, in fact, she published a big paper where she basically described all the ways that she thinks Amazon is a monopolist and behaves in an anti competitive manner and it damages competition and
it's bad for consumers. And so I think there was expectation that once she came into the FTC, she could launch an investigation. In fact, it was launched before she even started, I should say, but that investigation will culminate in a lawsuit. And now we're seeing some news that this lawsuit's coming, possibly in August. It'll be for monopolization most likely, which is, you know, one half of sort of the antitrust world.
The other half is price fixing.
But this is going to be about Amazon's conduct, and I do think it's going to be aggressive and wide ranging and probably seek ask a judge to try to break up parts of the company's business.
Really, do we have any sort of scope of the timetable and how long this could take?
You know what, It's going to take a long time.
And it's funny because there will be a lot of news and honestly, then we're going to hear nothing because
these take so long. I mean, the complaint will come out, it'll get started, and then what happens is the companies go through what's called the motion to dismissed process, which could take up to a year, where they try to at least get some of the complaints, some of the claims and the complaint thrown out, and then they get into the discover base, which can go a year or more before they really get into sort of the nuts
and bolts of the litigation, summary, judgment, and trial. So honestly, we're looking at two years probably more could be three years before there's even a first decision, which could then be appealed.
So jen are they looking at the retail side of Amazon as opposed to the web services side, or are they looking at it in its entirety. Where's really the focus here and what are some of the concerns that the FTC has.
I think the main focus is going to be about the platform and the way they treat third party sellers.
In the platform.
They could get into cloud too, but I think this is mostly about the platform, right and about first whether they have provisions and contracts with third party sellers that prevent those third party sellers from offering their product outside of Amazon at a lower price that Amazon has to get the best price. You know, this is a pretty common It's called the most favored nations clause, and it's
actually pretty commonly used in business. But in this case, because it is more expensive seller to sell on Amazon then let's say its own website or maybe on Etsy. What the consumers and some state attorney generals that have already sued about this have said is that it causes prices to go up on Amazon and on websites outside Amazon.
I think that's probably going to be in their paul. And then I also.
Think some allegation that the third party sellers on the site are either punished or rewarded for using other Amazon services, like their fulfillment services or like advertising on Amazon, so that they're sort of bundling or tying these products together, and that to really get good sales on the website, you're sort of forced to buy other services. I think that'll be in there too. Cloud might be as well,
but it might be a little premature. I think the FTC has an open cloud industry investigation and they're looking at Amazon as part of that that could be a new complaint that comes down the road, or that could be part of this.
What presidents has been said, if any, for other companies in a particular situation like this, really.
Good question, because there are very few precedents.
Honestly, there have been very few over the years lawsuits brought by an enforcer, the Department of Justice or the Federal Trade Commission against a company from anopolization. And the really big one, the one we kind of think of as the Bible, was a case the Department of Justice brought against Microsoft back in the nineteen nineties and it ultimately resolved. I think it's something like two thousand or
two thousand and one now. Having said that, the FTC did suit Qualcom monopolization just a few years ago and they lost over the way Qualcom was licensing its chips. It wasn't as big a case as Microsoft, it didn't get quite as much press, and they weren't seeking to have Qualcom broken up, which is kind of a big deal.
So there's very little.
There are private suits, but there really is very little precedent, and mostly there's not a lot of precedent with plaintiffs winning these kinds of cases.
They can win. They can win. It's hard.
So what's the consensus here among legal experts like yourself, one is antitrusting. What's reasonable out look for the ft C here at this point?
You know, Paul, I, this is how I think about this suit. I think there's a lot of risk because it won't settle. The FDC is not going to settle. That's the first thing. And secondly, they're trying to get a breakup, and you know what, you go into court asking for that.
If everything falls into place, you get the right judge, maybe you get something like that.
I think it would be overturned on appeal. I think some of these allegations actually might have merit, for instance, perhaps the use of the most Favored Nation clauses, or perhaps even you know, if it's true that they sort of forced sellers in order to really get sales in the platform, to also buy their fulfillment services or advertise on the site. You know that one might have some
merit to in terms of any inter trust violation. But at the end of the day, when you ask what are the remedies, what are the remedies for these violations? A judge is really told from the Microsoft suit from that big precedent that you use the remedy that's the least drastic.
That's going to fix the problem. And in my mind, there are a lot of remedies out.
There that are behavioral in nature, that are much less drastic than structural that would fix the problem, for instance, a firewall, or for instance just saying you can't discriminate against sellers anymore based on which of their products they use or buy. And in fact, those kinds of remedies are already being used in the UK and in Europe.
UK and Europe have the same complaints about Amazon, and Amazon is settling those cases and offering up exactly those kinds of remedies, and those regulators who are absolutely as aggressive as the USFTC are accepting those remedies. So when I think about this, I think about way down the road, even if the FDC wins pieces of it, they won't win all of it. The remedy is likely not to be particularly substantial or impactful to the company.
That's kind of how I view the long.
Term outlook pole and that's kind of I think the market music is again the stocks of fifty percent year to date.
But we'll right I'm actually curious, what's the likelihood that the FTC would settle.
I think it's very very low. This is not a settling FTC. They have expressed that overtly they're not interested in settling, particularly mergers, and this is a big deal. This is their case. This is the one Leona Cohn wants to make her name on. She is absolutely gunning for Amazon. I think in the same way that the Departner of Justice is kind of gunning for Google. And when you're really going all out and you really want to try to get that breakup, I don't think you're going to sell.
Hey, Jen, thanks so much for bringing this to our attention. Amazon big story here. It's going to be a long term story. As they tend to be on the legal side, general stay on top of it as we will. Jenry, Senior at Litigation Analysts covering antitrust for Bloomberg Intelligence.
You're listening to the tape Ken's Are 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.
Keetha Raganathan, who's one of our great strategists here at Bloomberg Intelligence, US media analysts at the firm, joining us on Zoom to discuss that. But also first I wanted to start off with what's happening with Lionsgate buying E one and the news there so, hasbro actually sold Inner TV one film and its TV unit to lions Gate for three hundred and seventy five million dollars in cash plus the assumption of its loans. Geita walk us through this details when it comes to this deal.
Yeah, absolutely so. Lionsgate, as you just pointed out, bought that. It's basically some film and TV production capabilities that they have brought from Entertainment One. And of course Entertainment One is really well known for you know, all of its preschool brands, right, whether it was Pepa Big or PJ Masks, you know, my Little Pony. But you know, none of
those brands have been have been sold to Lionsgates. So this is really more you know, film and TV production especially gives them a lot of capacity to make unscripted content. And if you kind of think about lions Gate. I mean, this is one of the few independent studios that is still available kind of in Hollywood if you look at all of the other studios they're part of, you know, these bigger conglomerates, whether it's Warner or Disney or Paramount.
So this is this is a company that has you know, obviously they have a great library, over seventeen thousand titles. They come up with some you know, they have some pretty good franchises, you know, whether it's The Hunger Games or The Twilight or even John Wick. So they do have some good franchises, and they could be a great add on for you know, a huge tech company, you know, maybe an Apple or an Amazon or a Google. And what they're trying to do is to really kind of
find more value in their assets. So they currently have a film studio and they also have a cable network division called Stars, but they're in the process of separating those two businesses so that they can kind of unlock value. And I think what they're trying to do here is kind of really beef up their studio assets so that it could fetch them premium valuation when they decide to.
Sell all right, getha, We're about to kick off some big earnings for the media companies. And actually today we had Warner Brothers Discovery. They took their guidance down a little bit, but talk to us about Warner Brothers Discovery because that's one of the leading media companies now with David Zasov as CEO, it's right up there trying to buy for some leadership position in their global media space. What do we learn today from Warner Brothers Discovery.
Yeah, I'm actually a little bit surprised, Paul at the reaction. I think it's almost a little bit of an overreaction because the results that they reported were stellar. So the one metric I think that everybody is focused on these days in the media world is free cash flow and they absolutely blew it out of the water. So we were expecting about nine hundred million to about a billion and free cash flow for the second quarter. They came in at one point seven billion.
Wow.
Of course, they got a little bit of a boost from the writer's strike. They did say that about one hundred million boost, and they do expect to see a similar level of free cash flow again in three Q. So as far as you know, profitability metrics are concerned, you know, free cash flows concerned. I think it was absolutely stellar. Now, what they did do is they kind of walked back expectations a little bit just because of
the strike. So, you know, they said that they're not completely sure whether they're going to be able to release the rest of the slate as they had planned, so there's a little bit of uncertainty. And then, of course, the tv AD market continues to be very, very choppy, so they had a thirteen percent decline in linear tv AD revenue, and it doesn't seem to be getting much better over the second half. So I think all of
those factors kind of weighed a little bit. But as far as two Q results go, it was it was spectacular.
Looking ahead to Disney's earnings results next Wednesday after the closing bell, if you look at its prior quarter, it's direct to consumer segment, which obviously includes that flagship Disney Plus streaming service, actually suffered a loss of more than six hundred and fifty million dollars. What are you looking ahead to for the outlook when it comes to Disney's report.
Yes, and Disney, I don't think it's going to be so much about you know, the quarterly metrics as more about strategic direct You know, I don't think this this quarter is really going to do anything in terms of, you know, the numbers itself. I think it's really going to be more about what Bob Eigers says about what he's planning for ESPN, and there's been so much of speculation about what he's planning to get to streaming craftability. You brought that six hundred and fifty million loss number.
Actually their streaming.
Losses are expected to go up a little bit for this quarter, but that's not really the point. The point is, you know, what are they going to do with the linear TV assets? What are their plans you know for Hulu? So it's really more strategic direction that we're kind of going to be looking for when Disney reports next week.
So how does the whole Bourbenheimer situation also affect their strategy?
Have to ask?
Yeah.
So I think what it tells us is that Disney's content engine is clearly broken, right because we can talk about you know, maybe you know, box office demand kind of flagging a little bit, but it doesn't really look that way. I mean, if you look at the movies the top movies this year, whether it was a super Mario that came out from Universal, you look at you know obviously Barbie Oppenheimer, all of them doing really really well.
So it really looks like the Disney franchises have gotten tired, right, whether it's Marvel, whether it's you know, Star Wars, and their animation studio has really had a string of misfires. The leading animation studio today is you know, surprisingly it is Universal. They've had they've had a string of his
they're doing really really well. So definitely there has to be a huge reset in the film division, and it's going to be interesting to see what, you know, mister Traiger has to say when they report.
I mean, I never thought i'd hear those words of Githa because I thought their movie strategy which is set forever just mining all the films out of Marvel and Pixar and all those types of things. But boy, that's if that's in fact the case, that's that's really big for this stock, and it really puts the pressure on Bob Iger. It's interesting has a company kind of admitted that or is that just kind of a you know, kind of a conservative take.
I think they have somewhat admitted to it, which is why we're kind of you know, they kind of had a pause on some of their Star Wars properties, they're delaying some of their you know, other releases. I think definitely, you know, Barbieger is taking a hard look. But again, Paul Is you very well know you know, content production takes a while. I mean, if you want to make a good film, it's going to take three to four
to five years. So this, you know, he has to be in this for the long haul, and that kind of explains why, you know, he extended his contract as well. I think it totally makes sense. But definitely, clearly something has to happen on the content front to kind of reinvigorate, re energize all of these franchises.
What are the companies saying. You kind of just brought it up earlier, But these strikes, the writer strike and the actor strike, I mean, they got to get resolved like now. But I don't hear any sense of compromise from either side here.
Yeah.
I mean again, you know, as you had mentioned earlier, So the first thing David Zaslav said on the All today was, you know, we need to get these strikes sorted out. That's what Netflix said as well, So you know, obviously it is of paramount importance. They need to get it done. But again haven't really heard anything. Just as you said, as of right now, the only good thing that it's doing for all of these companies is it's
really bomboosting. We're free cash flow numbers. But come twenty twenty four, it's going to be a blood bath, especially when you have a complete, you know pause. In terms of the content pipeline, do you think.
That Barbenheimer can crush box office for a third week in a row.
I absolutely think so. I mean there's going to be a few new films obviously this weekend, you know, Teenage Mutant, Ninja, Turtles, Meg Too again don't stand a chance at all by the end of this week, and Zaslav actually mentioned this on the call. They expect Barbie to cross a billion dollars at the global box office. So it's just been spectacular.
What are the theater operators saying about the movie business in the future that.
So they are actually so obviously this has really played well for you know, the operators. We've seen kind of box office estimates go up a little bit of course there are clouds on the horizon, Paul with those strikes, so again it's a little bit iffy still, but I think in general the sentiment seems to be good. I think what this The one thing that comes out of, you know, the Barbie success, is that people really want
to go see original movies. They want to see something new, they want to see something fresh, and if you make good content, people will definitely.
Go all right, Keitha, thanks so much once again for joining us. Bring us up to date on all things going on in the global media space. Githa Raganathan. She is the senior media analysty covers a lot more of the media at Bloomberg Intelligence base down there holding down the Ford in our Princeton studio.
Down there, you're listening to the tape cancer 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.
Who better to talk with us about this latest earnings report than Will Lansing CEO of Fico, who's here to discuss the earnings results as well as what's happening with the outlook with the industry. Will thanks so much for joining Paul and myself walk us through with this latest earnings report.
Well, it's it's been a really good quarter, it's been a good year, and frankly, it's been.
A good decade for Fico.
What's happened in the most recent quarter is that our software business has really taken it off, and we can talk a little bit about how the software business has evolved from the scores business that you're probably familiar with, and then our scores business is as strong as it's ever been. In the combination of these two businesses, which
is really what Fyco's made of. Scores and software is driving the growth, big revenue growth, and we have new offering, the Fyco Decision Platform, and that's growing over fifty percent a year.
So it's just been just a great story.
So Will, I'm a stock jockey myself and I'm you know, Fico is a name we've used forever. It's been thrown around. Anytime we're going to get a loan, we think about where's our fight Gosco. What's our fight? Go Score and looking at your company went public in nineteen eighty seven, So it's just amazing hit all time high today on
your stock price. But when public at nineteen eighty seven, lead manager Hambroock and Quist, who I remember quite well, they were leading investment bank on the West Coast, doing a lot of smart deals, including this one. In hindsight, so we'll talk to us. I think we're all kind of familiar with the Scores business. Talk to us about the software business. What is that business for you guys, and what are the key drivers? Well, maybe just a little bit of history to be able to frame appslware
business because it evolved from our Scores business. So the company was found in nineteen fifty six by a mathematician and an engineer and their idea was pretty simple one.
It was, let's use.
Data to make more informed, fact based decisions. And if we can do that, you know, we can you know, we can lower the cost of making these decisions. We can make better, more precise decisions. And at the time we were really an analytics consulting firm and we would take any kind of work that came along, any kind of optimization work. Anything that required data to drive a decision,
we were interested. We rapidly evolved through the fifties and sixties to doing custom projects for banks, for financial institutions who actually had big dollar value decisions to make, and so it made sense for them to invest in trying to make a better decision. And so for the first thirty forty years of fiko's existence, we were doing custom projects for different banks and also other industries, but a
lot of banks. In nineteen eighty seven, we partnered with Equifax and launched the first kind of industry wide score, and the idea was, you know, we're doing these credit scores individually bank by bank, why don't we produce a score that the entire industry can use and it'll lower the costs of a evaluating credit, it will make credit more accessible to more people. And that was what kind of drove us to this idea in eighty seven and
of launching an industry wide score. We rapidly followed that score with scores with Experience and TransUnion, and so suddenly we had multiple scores available to evaluate credit with and they were all built on the same kinds of data sets that the data comes from the credit bureaus, and most importantly they were fungible. It was the same oddset score ratio for a score where it was produced by Equifax or Experience or TransUnion, and so you can imagine that was.
Quite popular with the lenders.
They loved the idea of a low cost way to evaluate credit and to leverage any of the three credit bureaus credit files.
So that was kind of the first half of.
Fiko's life was with building these kinds of custom projects and then eventually building an industry wide score. Along the way, we came to a view that we should try to reduce this analytic ip that we have to software, because
it's not just a credit file. You can look at a lot of different kinds of data to make a credit decision, and so we built software to do that, and the idea was we'd get returns to scale software returns as opposed to just being kind of an analytics body shot, right, And that was successful also, and we wound up becoming the pre eminent player in credit card fraud detection and a very strong player and originations and collections, recovery and customer communication virtually all the kind of key
functions around undwriting and risk and a bank.
This is.
I'm sorry, go ahead, Jeff.
I was curious because, obviously, since this is Bloomberg and we like to see what's ahead for the economy, I was curious as far as the analytics and what you're seeing when it comes to Americans and their credit and their credit scores, how that translates into either what you're viewing as far as the amount of people trying to take out loans and what that could mean for approval, as far as how that into the economy and consumer credit at this point.
Well, you know, people are as interested in credit as they've ever been. Obviously, interest rates are higher and mortgage buyes are down a bit because of that, but there are very few people who are not interested in what their credit score means, and because it drives the price of credit, and it drives access to credit, and so we have a new found, i'd say, over the last ten years, sensitivity and awareness of the impact of a
credit score on of your life. What we're seeing is as much appetite for credit scores as we've ever had. We're selling more scores than we ever have, and the industry relies on them very heavily.
So we'll thirty seconds left here. What's the key issue that you're getting across to your shareholders these days?
The number one issue, well, you know, our shareholders are well familiar with our Scores business and how strong it is, what powerful franchise it is. It's the industry standard and the cornerstone for US credit economy. Our software business, which is built on this decisioning platform, is very powerful, and that's also driving on our stock price. We've had this phenomenal run over the last decade over thirty percent cumulative return CAUFIN annual growth rate and twenty four x over
the last decade in our stock price appreciation. So that's driven by recognition of the software or the software as well as listeners.
All right, hey, well thanks for coming on. Really appreciate getting a few minutes of your time. Will Lansing, thanks.
For listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three.
And I'm fall Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch US worldwide at Bloomberg Radio,