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 called Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. I want to talk some cars, Matt, some German cars.
I would love to, you know, not just German cars. You're referring to the full shory story. They're made everywhere, right, and China is I think the real problem here.
All right, let's go to Monica raymut Auto's industry disruption report. I didn't know we had a disruption reporter from Bloomberg News joins us here. So Monica, let's start with Volkswagen. What's the news coming out of our good friends from Germany?
Thanks for having me, guys. I mean, the biggest news of the week, I would have to say is the
deal with XPANG. Basically, Volkswagen came out yesterday and said that they're investing around seven hundred million dollars in this EV producer in China, and it's really at first for Volkswagen, it's basically sort of them admitting, you know, we can't we can't really keep up on the Chinese market, so we need to partner with with somebody who really has their finger on the pulse of what Chinese consumers want.
It's amazing because I mean Volkswagen is usually the biggest or the second biggest car maker in the world. Right, how key is the Chinese market Monica to Volkswagen and is it that important to other manufacturers?
Oh?
Yeah, I mean, I mean China is absolutely huge. I mean it's it's basically like thirty percent of their revenues and has and has it has been. It has played a key role for them over the past several decades. And I mean Volkswagen was really a star there, the market leader for the past decades because they were banking on that German reputation of engineering ability and you know
that Cachet as a as a foreign autumn. But now as the tide has turned and everyone's pivoting towards electric vehicles, you know, the local automakers, the local startups in China are able to leverage what they're able to do when it comes to software and technology and the consumers are are pivoting that way, and Volkswagen has been really slow to sort of pivot in that direction. And they've they've really struggled on software, you know, trying to.
Now, Herbert Deese was chased out as CEO, but he was I kept seeing headlines like spending fifty billion dollars to build evs and he had I think ralvald wrote a story back in the day that Deese wanted to start a huge software company within Folkswagen and he was spending almost thirty billion dollars on that.
What happened to all those efforts?
Oh yeah, Oh, I mean those efforts are still underway. The software unit carried is still alive and kicking a bit barely, not barely, I shouldn't say that, But all of those efforts, they haven't all been for nought.
You know.
Carriod, the software unit is still creating two of the big coming platforms for Volkswagen, the two big EV platforms, one for the premium brands Portion and Audi, and then one sort of like a catch all platform that can be tailored across all of the ten brands. The problem was Carriod, the software unit just took on too many tasks at the same time, and they were overloaded and they weren't able to deliver non glitchy software, especially when
it came to the ID series for Volkswagen. So basically, Luma came in and he said, okay, hold up, we need to clean house a bit, we need to refocus our energies. And he's he's put in a new CEO at Carriod. He's you know, created this five point plan of trying to get things in order. And he's also taken a play a page from the playbook of Portia and sort of saying, you know, listen, compared to my predecessor, I'm not afraid to go into third party partnerships to
get the best technology here. And he's really saying, yes, we will stick with our software strategy with carry It. Yes we will continue to deliver the platforms, the EV platforms for Audi, for the for their q Q six, for the Pasha Emacon, but also moving forward, we're not going to be afraid to partner with other people who who have been doing this a little bit longer or have more expertise that we currently don't have.
So Monica, just give us the kind of a sense, your sense of how the European automakers in general are are pursuing this this transition to EV. Is there a sense that they're on the cutting edge or they're lagging kind of where are they?
Oh man, that's a that's a really tough question. I mean Volkswagen was sort of the first European car maker to you know, jump in feet first, uh, into the into the EV uh you know push. I mean that all came as a result of the diesel scandal and they were sort of, you know, nudged a bit in that direction, right, but they've really been you know, they sort of started out, you know, they were the first ones to move forward, and the you had Mercedes and
BMW sort of moving forward on that. The difference I think there is you have Mercedes and BMW that are more in the premium and luxury market, right, and so they're able to It's the same thing with Portia. They're still able to leverage their their IC sales, their combustion engine sales as and use that to fund partially pushed into evs.
Apparently, yess.
Indeed, Monica are the other car makers as active in China. I remember seeing some stories about some of the Stilantis brands, you know, pulling out. Now, maybe it just wasn't a big enough market for those individual brands, but surely Tavares has to be worried if it's this important to BLOOMA.
Yes, I mean some, I mean some car makers are more active in China than other Stalantis. I think has has your right, has moved away from China and is focusing his efforts elsewhere. I think the concern for Tavares more is what do the Chinese car makers mean for
Europe when they come over here? Because the Chinese makers are focusing more on you know, sort of these small, smaller, smaller vehicles that are maybe more affordable, and if the European car makers can't focus on that segment, there's a real fear among some analysts and automakers that the Chinese makers could capture a segment of of the of the
market that the European makers are not focusing on. And so that's why, you know, there's this drum beat, at least from Tavares that we need to make these vehicles more affordable. We need to get regulations, we need to get you know, government policies on board in Europe to make the you know, these cars more affordable in Europe. But in terms of how other carmakers are doing in China, I mean it's really Folks was at the top of
the list for for a long time. But you have Uid that's, you know, really at the top now when it comes to EV sales, and then you have Tesla who can't certainly can't forgotten. And you know, those are the two big players, at least to my mind.
All right, Monica, great stuff, great catching up with you, Monica Raymuland, Auto's industry disruption reporter for Bloomberg News.
Joining us how to Berlin, joining us out of Berlin, right in my old office, you're old.
Beat right, yeah, exactly right. Where where's your car these days?
Are your challenger?
Do we know where it is?
Well, supposedly it's scheduled for production in uh in Canada, Okay, But they haven't sent me the actual production confirmation yet, so I'm still waiting. And in the meantime, I'm looking across like Auto Trader and maybe I'm thinking maybe I should go for bright orange instead of dark green.
I'm not sure.
Yeah, so you haven't selected that even that yet?
All right?
It's just supply chain still an issue in the auto industry. Matt's been waiting for this challenger with this scat pack all year logic for like a year. I don't know what's going on there.
You're listening to the team. Can'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 on demand where however you get your podcast.
Matt Miller, Paul Sweeney here in our Bloomberg Interactive Brokers studio, and I forgot to mention we are simulcasting on YouTube so people see me, so people can see the MAT's actually here. He's back after a little hiatus in the afternoon. So you can check us out on YouTube, just search
Bloomberg Global News. All right, this has been in addition to just a week of I think one hundred and sixty five of the S and P five hundred companies reporting earnings next week, and I think one hundred and seventy two next week, So super busy in the earning season. But we've had a lot of central bank movement over the past couple of days, including the Fed yesterday and the European Central Bank today. So let's kind of break it all down and see where we are. Anika Gupta
joins us. She is the director of Macroeconomic Research, Equities and Commodities for Wisdom treat She joins us via zoom. So, Anika, boy, what do you make of kind of what we've seen coming out of these central banks over the past twenty four hours.
Yeah, it's been really interesting, Paul. You know, at one hund we have both of these central banks, the FED as well as the ECB. Uh, you know, keeping their optionality open. I think they they they've they've tried to, you know, indicate that they have they have covered quite
a bit of ground on the inflation front. The only difference between the FED and the ECB is the FED is facing an economy which is a lot more resilient and stronger based on the consumer strength, whereas in the Eurozone the ECB is faced with the situation where they have made a lot of progress on inflation. Yet uh, you know, the recent indicators are pointing to growth slowing down, so we are headed for a period of stagnation before we actually get that rebound back into a growth phase.
So I think the ECB gave out a lot today at the at the at the meeting where you know, some of the some of the statements that were made when when President la guard was asked, is there still more ground to cover? And you know, she clearly said at this point she wouldn't say so. And I think that that indicates this looks likely to be the last hike.
But clearly they've kept that optionality open where you know, there's so much additional data to come out until the September meeting that they you know, anything could influence their decision. But as of now, I would say for both central banks, it looks like this is the last one in their tightening cycle.
Well, you know, Chair and Powell referenced the data points that he was looking forward to between now and September meeting.
There are many.
We got some this morning though, that were pretty darn impressive. GDP came out at two point four percent for the second quarter. We were looking for one point eight percent in our survey of economists. Personal consumption consumer spending also higher than anticipated one point six percent, And you got the core PCE, which is the Fed's preferred gauge of inflation and not nearly as bad as we expected at three point eight percent rather than four percent. So this
looks pretty darn goldilocks to me. How do you think it looks to Chair Powell?
Well, you're absolutely right, Matt. You know, I think we've even seen the IMF echo similar a similar viewpoint where the US has been and is proving to be a lot more resilient than investors expected at the at the
start of the year. And I think, you know, given given the fact that the US economy has been that brasilient, it does open a goldilocks environment because we have seen progress made on inflation, and given the fact that the growth has been quite resilient, it should put this fit in a situation where they could hold rates at current levels, and then that expectation of them, you know, beginning to cut just gets postponed further down the line.
So Anka, you're based in life. And then I believe right around one King William Street, which is just right around the corner from Bloomberg's European headquarters at Queen Victoria Street, talk to us about inflation, inflation in the UK, inflation in across Europe. Christine Leguard called that out as still higher than she would like to say. Why is inflation across Europe maybe a little bit stickier than maybe what we're seeing here in the US.
So I think what seems to.
Be quite different in the UK is largely due to more structural factors. I think Brexit in a big way has contributed to inflation being a lot stickier. That being said, the most recent inflation report has shown you know, a small sliver of cooling. But I think Gregsity has a very important role to play as to why the UK seems to be the laggard in actually bringing down that inflation side. But for the EU Zone, you know, what seems to be holding inflation up quite strong has been
the strength in the labor of MAK. Wages have been rising, and I think that that has essentially, from an income standpoint, helped your your your zone consumer you know, actually have a better and a higher purchasing power. So you've got wages rising, You've got inflation beginning to come down, be it headline inflation feeding into lower core inflation, and that is just you know, from an income standpoint, making the uarsone consumer a lot, putting them in a much better position.
So I think those two factors really stand out, and that's that's one of the reasons why our fight inflation has been a bit of a laggart compared to the US.
So you were talking about how rate hikes are going to get pushed back, but I noticed on the dot plot that we're expecting, at least the FED itself is forecasting a full percentage point of rate cuts over the next year. Why do you think that the Fed's forecast differ so much from what Jerome Powell, you know, we'll say at any given press conference.
Well, I think it's it's, you know, purely based on the fact that the economy has been fairly resilient. There are also risks lurking around. You know, we've seen commodity prices over the past few weeks actually rebound. We've seen uh, you know, the escalation between Russia and Ukraine actually increase, uh, you know, with Russia pulling out of the Black Sea grain deal, and so as a consequence, we've seen agricultural
prices within the commodity spectrum also rise. U and I think central bankers have taken note of that that these these risks are there at the horizon and for the US, it's quite important because you know, the we're seeing growth quite resilient. For the Eurozone, we are seeing growth being quite tepid. You know, forward looking indicators are saying there's weakness ahead. So I think the ECB is right to say that they you know, they they they've covered quite
a bit of ground. There isn't all that more left to do so at this point in time. But for the US, you know, as as growth seems to be a lot stronger and the consumers appears to be a lot more resilient, and you're also seeing a few inflationary concerns rising on the horizon, there's always the risk that you know, they've go on me just does better than expected, and that gives less need for power to actually have to invene intervene.
With k What does that mean for the FX picture? I mean, we had seen the dollar hold strong for so long this year against all you know, predictions, and then it came kind of the Bloomberg Dollar Index came tumbling down a couple of weeks ago. Now it's on a steady climb higher. You know, in the euros trading it less than a dollar ten right. The pound is trading it less than a dollar thirty. What do you think the growth differential means for the currencies?
It has, It has a very big impact. So what we've seen is the dollar response to two important factors, one being the growth of differential and the second being relative interest Now. Clearly, until now, the dollar was weakening because interest rates and the rest of the developed market world was actually rising and interest rates expectations for the FED were actually declining, so there were expectations for them
to pause or cut. But the way things are evolving with the strength of the US economy, you know, we're now seeing relative interest rates move in favor of can continue to remove in favor of developed developed market economies as opposed to the US. And at the same time, we're also seeing growth prospects in UK and Eurozone actually deteriorate compared to the US, and hence that seems to be the dominant factor in play right now, which is why the dollar has been strengthening.
All right, Anitka, thank you so much for joining us. Really appreciate getting your perspective. Anika Gutta. She is the director of me Acroeconomic Research for the Equities and Commodities Business at Wisdom Treaty is based in London. Again, we
had the ECB this morning, fed yesterday. Rate increases. Yes, the market's kind of reading into it that they may be perhaps the last of the rate increases, at least for now, when we're seeing some reaction in the market's s and P five hundred up a half one percent.
You're listening to the tape cans our 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.
I'd like to begin with your newest rules that you just unveiled yesterday, putting restrictions on brokerages and money managers and their use of AI to interact with clients. What is your primary concern with the adoption of this technology that you're trying to address?
First, Kaylee, it's good to be with you, But talking about this, I think that predict data analytics, including artificial intelligence, is the transformative technology of our times, and every bit is transformatives to the Internet or mass production of the automobile one hundred years ago.
Now, what are we trying to address?
When an investment advisor or a broker works with you as an investor, they're not supposed to put their interest, the advisor's interest ahead of yours, Kayley, as an investor. And so what we're trying to do is make sure that the technology aligns with that standard, that the technology that can predict about each and every one of us so much about how we might react to a little behavioral prompt or a little knowledge how we might react.
That they're putting our interest as an investor in the right place and not putting themselves ahead of it.
And of course the AI move wasn't the only one you made yesterday. You also just approved a plan to require companies to disclose cyber breaches within a four business day timeline.
Why is that the appropriate time break?
Well, if I could just give a little bit more, it's about material.
Incidents.
So if a company lost a factory and that factory is wiped out, and that factory is material to its operations, let's say because it's lost to a hurricane. Investors need to know when they're buying and selling the stock. In a similar way, if you had a cyber incident that management determines as material you know, hundreds of millions of files lost or something or compromised.
Investors benefit from that disclosure.
But giving business is just four days to disclose that.
That's what we have in our rules today currently four business days if you have, like if that factory you know, was wiped out by a hurricane, to put out the material information.
And so that's consistent with rules on the books.
And by the way, many companies have been making such disclosures, some haven't. It's been fragmented and we thought it was important to bring some consistency to it around these material events.
Mister chaired, Danny Berger here in London, really wonderful to speak with you today now on some of your proposals when it comes to equity market structural reforms. You joined Bloomberg TV back in March. You said, of market participants, give us your best advice, tell us what you think.
What did you get.
What was the best advice you got?
Well, we got in terms of equity market structure, thousands of comments. So I would say that what we're about at the SEC is trying to drive greater efficiency and competition in those markets, so when you send an order into a broker, that you feel that you're getting best execution in that order, and also that the markets themselves
are competitive. So one of our rules was about sort of leveling the playing field between the lit markets, the so called New York Stock Exchange and NASDAK and so forth, and the wholesalers are dark market, which at times the dark part of the markets are between a third and a half of the market. So it's trying to bring some level the playing field and ensure that investors are getting best execution in these markets.
What about in terms of the feedback you got, are you taking any of that on board? Would you change anything considering what you've heard so far?
Well, we do that as a regular basis.
When we make a proposal, we put it out to public comment and get feedback. And we put out four separate proposals for different aspects in the markets, and I think we've gotten four to six thousand comments on each of them. So and we naturally consider it and the staff makes recommendations about adjustments.
Okay, I'd like to discuss another proposed rulemaking that has received a certain degree of feedback your climate risk disclosures, specifically as it relates to Scope three emissions. What conversations are you having around Scope three in particular.
Well, we've heard a lot from the public on this, but to set the stage, companies today are making disclosures around climate risk. In fact, well over half of the top thousand or so companies currently make climate risk disclosures, including greenhouse gas emission disclosure. So we're trying to bring consistency to that and yes for investors that they can
compare comparability for that. You asked about one part of greenhouse gas missions, so called Scope three, which is about the supply chain and where a lot of the concern lines, and so we've heard from a lot of commenters about that, both from issuers and investors.
We understood when we made a proposal.
That this was not as well developed so called disclosures around supply chain emissions, and so we're taking that into consideration. And as I just chatted with your colleague, the staff considers what to recommend upon adoption and whether to make adjustments.
So we could see you change there potentially.
Well, just as in the equity markets that I talked about, we do take these comments seriously, Kayley. It's a really rigorous exercise in climate. We got sixteen thousand comments.
So it's a lot to sort of sort through. But the Scope three issue is one that we've heard significant comments.
Interestingly, we've heard from I think forty eight or forty nine of the state farm.
Bureaus literally about well, what is this effect? And we only oversee.
The public companies, the six or seven thousand public companies.
That's it.
We are a disclosure based agency. I often say we're merit neutral.
We are not. You know, we're not.
This disclosure is about something already happening between investors and issuers, and it's an important thing to bring consistency. It's not about those, you know, those farmers and ranchers who thoughtfully wrote us.
So we've heard.
Okay, I'd like to move to a different topic which has gotten a lot of attention lately, Crypto, specifically a ruling that was made in the Ripple case that XRP is only a security when sold to institutional investors, not so with retail investors. I know you've previously said you were disappointed by that ruling. The SEC has also said that it intends to seek further review. So does that mean you are going to appeal it? Can you elaborate on your thoughts around that ruling.
Kayleie, great question, But the Commission, I'm one of five commissioners.
The Commission has not acted on that, and.
If the staff makes a recommendation, we'll have a discussion of it and we'll take it up then.
But I don't really have anything more on.
You for a you for that.
In the meantime, as we wait for this, what does it mean for your efforts around crypto, for your efforts to try to protect the consumer in these areas?
Does it complicate it?
Look this field of crypto investing, a lot of investors should be aware it's not only a highly speculative asset class, it's also one that they currently should not assume that they're getting the protections of the securities laws, even though the securities laws apply to many of those tokens without prejudging anyone, but you as investors are not getting the.
Full, fair and truthful disclosure.
And the platforms the intermediaries are doing things that we would never in a day allow or think the New York Stock Exchange or NASDAQ would do. The platforms often are co mingling and trading against you and have market makers that are on the other side of your trades, and we don't allow that in the rest of our securities markets and the securities laws are there to protect you.
And that's right now.
This is a field rife with fraud, rife with huckster and they're good faith actors as well, but there are far too many that aren't.
And of course you've brought cases against crypto exchanges on this point, But do you need to change tactic? Does it change anything for those cases? Again this XRP ruling.
Again, I'm not going to go into any one ruling, but I think that the securities laws are clear and if you're if the public is investing in your project because they're anticipating profits based upon the efforts of that project, or there's entrepreneurs congress painted with a broad brush, and I would ask you this, It's like, when you look at a token, you can find a website, you can find a CEO, you can find a Twitter or x feed, whatever it's called these days. And there are entrepreneurs behind
many of these projects. Without again prejudging any one of them Elsewhere in.
The crypto space. I'd like to discuss the spot ETF because we have seen a wave of filings recently recently from Blackrock and others trying to finally achieve this one has never been approved in the US, just a futures ETF. It seems like everyone thinks there has been a tone shift, that something is different this time around. What do you make of that wave of recent filings. Has anything actually changed for the sec.
Kayleye, Probably won't surprise you.
Those filings do ultimately come up to a five member commission, so I can't prejudge any filing. But back to your colleague, as I said, this is a field that there's a lot of non compliance in this field, and that the platforms themselves where trading is occurring of various crypto tokens. Though some of it comes under the securities laws, currently they're not necessarily compliant with those time test of protections against fraud and manipulation.
Okay, on the subject of securities laws, which obviously is your purview at the SEC. Just yesterday House Financial Services Committee passed through committee legislation on crypto market structure that would actually give more authority in regulating this space. To the CFTC still has a long way to go if it were to become law.
But what is your thought on that legislation.
I sort of share my thoughts directly with members on the way I told them.
I understand your question, Kayley, but I think that those members on the hill would appreciate if I continue to share my thoughts directly with them.
Not too dissimilar, mister Tara, I wonder if there's some degree that you would want a wider scope when it comes handing down fines to batter actors. Do you think it would be helpful to have higher finds again in order to discourage certain behaviors.
I would say this, we have good tools at the SEC around not just penalties, but also what's called discoragement, to give back ill gotten gains and so forth. But if you're asking whether we could use more authorities, I would say, we need more cops on the beat, We need more resources. Our agency is just the size we were in twenty sixteen. We actually shrank, We've kind of come back, and yet the markets have grown so significantly in those seven years.
And finally, as you say you need more resources, I wonder how you feel about the ability of you to get those things from this Congress, in particular, when you have certain members of Congress who have said things like introducing legislation to remove you as chair, referring to tyrannical chairmen, including the current one, Does it mean it more difficult to do your job when there's that kind of political rhetoric out there in your efforts to protect investors.
We work closely with Congress and individual members, and I look forward to those public debates. I think that we're really an important agency. The capital markets really wouldn't work without cops on the beat and rules of the road. Just you know, think if you're watching soccer matches, if there were no refs on the field, what would that
soccer match look like? It would look first more like rugby, and then after a while it would really look worse and fans wouldn't come to the field anymore or well most so, I really do think that it's important to have this agency, and we're part of these well regulated markets.
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 listen on demand wherever you get your podcasts.
We're talking about A in the context of financial services, businesses and markets. It's also a big deal basically for every other industry out there. And what does it mean for a lot of these industries and people that work in the industries, think Hollywood writers. That's come up in their discussion. Ronie A. Settholm joins us. She is a managing partner of set Home Law Group. She joins US life here in our Bloomberg Interactive Broker studio. Thank you
so much for joining us. So what are some of the early thoughts within the legal community about AI. I don't know where this thing goes.
Thank you for having me well.
AI is definitely a hotbed topic and there are so many issues to discuss.
We don't have time.
We can speak for days. But you know, one thing that I'm concerned about as an attorney is the use of AI. While I don't think there's going to be a nefarious use in this labor dispute, as the technology becomes more prevalent and accessible, who knows what anyone will actually be saying. Because once I've captured you know your image and your tone using AI, I can manipulate it to say anything, and so this is going to raise a lot of eyebrows.
And it's going to raise I guess a lot of.
Lawsuits, right, I mean yes, for the legal industry, this is going to be a big money maker.
It very well can be.
You know, another legal issue that we're talking about is what kind of intellectual property rights exist when you use AI?
Right now, the answer is.
None, because it only protects original works created by a human being. And so there's a huge discussion now as to what is the purpose beyond making money? Of course, right you create a television show or something else using AI quickly and you make money when people watch it.
Okay, fine, but do you actually own it?
Yep?
Likely not.
So what are the like for example, just in this writer's strike. Forget the actors for the moment, but just the writer's strike. I mean, that's intellectual property that they have created.
I guess the question is.
There are two issues there.
Right on the one hand, they don't want anyone using the IP that they've created, Right on the other hand, they're worried that AI is going to come in and write new material instead of thanks it.
Yes, exactly, and depending on what their current CBA collective Bargaining agreement says, they may have already relinquished all rights to use of those materials you.
Know, they've already written.
I mean, for example, Sarah Silberman wrote a book and it's been I guess accessed by open ai.
In training. I would guess, yes, that's exactly right. And so and now she's suing what open ai.
She's suing open ai and meta and it's for copyright infringement because one of the ways you can infringe upon copyright is to utilize someone else's work to create a derivative work or maybe a sequel, you know, in more common vernacular.
So, but Ronnia, this isn't a breaking new ground. This isn't you know.
We don't have to create any kind of new framework to address these issues.
The law is already there and it's clear, Yes, that is true.
I think some of what is happening now is consumers are talking about it. Are we as consumers going to accept these AI generated copies or movies or television shows or not? Are we as consumer is going to accept AI generated anything? I mean, this is really a kind of an existential threat. Almost any job if you think about it.
But again, those are two issues right on the issues, We're not going to accept theft if a company uses copyrighted material and doesn't you know, follow proper procedures there, i e. Paying some kind of royalties to Sarah Silverman in this case, that's not okay. On the other hand, if open ai writes a new comedy special with without infringing on anyone's copyright, which I don't know how that would happen because they have to train the model.
But exactly I don't know how that would happen either, because AI is only as smart as the information you provide.
I so I'm not just talk to myself into understanding what you were saying.
Glad to feel of help.
So is there sense Runnie that the legal industry. I mean, hopefully they're going to do better than our regulars in Washington, But is there any sense that there's Is there any academic work being done in the legal industry about how to look at this stuff from a legal perspective?
I think it's extremely exploratory.
So, just like any technology, some use of AI will be beneficial to all and some of it won't. And in fact, you're likely using AI now without even knowing right, because it's part of a lot of systems that you're currently utilizing. And so I think there has to be some regulation around how to use it and when not to use it, and there should be also some contractual
provisions that attorney's right. So I represent some celebrities and some influencer and when we are working with production companies or others, they'll ask us to release the likeness, the tone, the image of the.
Celebrity in perpetuity, in perpetuity and in any medium known or unknown or soon to be known.
That's a wide scope.
It's a very wide scope. So I think the attorneys they have a power of a pen. And when the other side says this is a deal breaker, you should just take a step back and ask yourself.
Is it really a deal breaker?
Or can we carve out something to keep the integrity of the image of the person.
Any idea how this act that the writer's strike will play out, because I'm not sure the Well, if I were a media company, I'd be saying, hey, guys, I'd love to give you a cut of the streaming revenues or whatever. But I don't know what they're going to be.
You know, I don't know how the economic side is unclear. I heard your interview yesterday with I think she was the head of a guilt Yeah, yeah, a writer's guild, and she I mean, her insistence is that these streams companies are just cashing in hand over fist and making billions and billions and billions in profits. But as we know from watching the market move every day, investors aren't sure about that.
No exactly, so any sense of how this might play out? It seems like it could go on for a long time.
It can go on for a long time, but I think as more people feel the pain, they'll have to be some compromises. Right now, it seems like everyone has their dukes up yea, and nobody cares about the you know, fringes. But this strike is not only affecting writers and actors. It's affecting so many other people in the professional Tangentially.
It reminds me tangentially of the lawsuits we saw flare up over NFTs. Yes, and I wonder did we ever sort that out? For example, Quentin Tarantino wanted to make an NFT.
I think of his script for.
Paul Fiction, right, but the Studio said no, no, no, no, Hang on a second, we own that script, you know, even though you have the physical paper copy in his hand. So there were similar copyright issues coming up around Crypto.
Yes, well, the.
Copyright laws are the same, they're applied across the board. But again a lot of this can be taken care of contractually, hence this strike. But here neither side seems to be communicating very well, and that always ends badly.
All right, Ronnie, thank you so much for joining us. Lots of issues out there for you guys to figure out. Ronnie is set Home Managing Partner, set Home Lawgroup.
You're listening to the tape Cat'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.
Cam Harvey, he's professor finance down there at the Duke University. All right, let me explain to how this works at FUCA when I was there. Here's the grading system pass, high pass, Superior pass, anything below pass you don't want to talk about now. On Cam Harvey's class Futures Options. I think I don't know what it was. It was something very hard. I didn't say with great comments. I probably did not get a superior pass. There's chance I got a high pass. But if I had to put
money on it, I put it pass. Yeah, but that's okay.
Well, and you're not an economist, and what we said, we still have questions to ask.
You still have questions. What we said back in the day is twenty p's twenty passes equals sixty g's, which was the going right on Wall Street for You're in the NBA, so all you had to do is pass.
That's a really materialistic way to look at in your generation.
That's why expiration because I played golf every day. Hey, camp professor, thanks so much for joining us here. What did you take away from boy? We had a lot of central bank speak over the past couple of days, with the ECB this morning and the FED yesterday. What are you taking away from some of these central bankers.
That they fundamentally are misjudging the inflation threat? It is It is shocking to me that you just need to look at the data. Look at the most recent inflation release, which was three percent, and actually the more precise number was two point nine seven percent. And if you look at the drivers of inflation, the main driver is shelter. So shelter is a little over one third of the CPI, and shelter is running at seven point eight percent. So
let's do some really simple math. The contribution of shelter to that three percent print is about one third of seven point eight percent, and that comes to about two point six percent. So almost ninety percent of the inflation print was shelter, and shelter is not running at seven point eight percent. So you look at the data, you look at rents year over year, you look at housing prices, it's close to flat or one percent or two percent,
and it's because shelter lags. So that's seven point eight percent is reflecting stuff from six to nine months ago. If we use the real data, the inflation is not three percent, is one point five percent, and it seems to give the reason that, oh, well, inflation is still there. It's three percent, that it's not two percent. It's a false logic, a totally false logic. So this increase that
the FED just did was completely unnecessary. It increases the risk in many different dimensions that we are pushed into an unnecessary recession.
So, Professor Harvey, this is Barry Ridults. Let's pretend I'm in your class at school, and I want to argue this proposition that the not only have we seen homes underbuilt since the ear and the financial crisis, but the FED raising rates as aggressively as they have are actually making owners' equivalent rent and apartment rentals more expensive. They're forcing people who would otherwise be home buyers into the
rental market. What's the number, Something like sixty one percent of homeowners with mortgages are at four percent or less and they don't want to pay seven and a half percent more for a mortgage. Should the is the FED two title ready? Are they accidentally driving owners equivalent rent and CPI higher?
Yeah?
So, very great points, And you just need to look at the data. So if you go to Zillow or red fan, you see that rents year every year are running at one percent, zero percent been in a negative territory. There's a big disconnect between what people are paying and what is in the actual SPI. And we've seen this before.
This is not new. This is the mistake the FED made initially in thinking that inflation was transitory, that the numbers that were using for owner's equivalent rent were really really low, when we could observe in the market that it was much higher. And there's a reason for these legs.
So the lag makes sense. So if there's rental inflation, for example, it goes up by ten percent, well that only hits you if you have to have your lease renewed, and many people have a longer lease, so that ten percent inflation wouldn't be realized until you actually renew your lease. So there's a natural leg. And my point is that this component, which is driving ninety percent of the current inflation, that is going to head down. It just takes a while.
And again this is very similar to what we saw with the so called transitory inflation, that that inflation is substantially mitigated. And the other point you're making about increasing the rates causing problems, it's like two sided. So those that have mortgages that are already attractive, you're correct, that is the disincentive to move, and it does put pressure on the rental market. But again looking at the data, we don't see that rental inflation. We saw it go up,
but now it's down and that partends the future. And again it undercuts very substantially the fed's logic.
And yes, so, professor, does does this mean that the FED is going to push us into asion? And I want to bring in also your yield curve inversion to the discussion, because I have in front of me the three month ten year yield curve. We're looking at an inversion of one hundred and fifty basis points basically, And I was talking about Jeff Sherman from Double Line earlier. He thinks that that signal signals a deep recession and he's, you know, very concerned about it over there.
Is that fair?
Do you think when you look at the history of this yield curve inversion does it?
Does it?
Is it a good signal for a recession?
Yeah?
So, as you know, this is my dissertation at the University of Chicago, and at the time pretty good. It was like four out of four. Now it's eight out of eight without a fault signal. And we've had this inversion that is like ten months inversion.
And without a false signal.
Is an important clause because Rick Reader was on with us the other day from black Rock, and he said, the yield curve inversion is forecast nine out of the last three recessions or something like that.
But I think people look at it two.
Yeah, yeah, it's totally false, And of course you need to There could be a part of the yell curve that you choose that's got a lot of false signals. I'm talking about what I chose, the ten year minus three month, and that doesn't have any fault signals yet. Of course it could be a false signal, but it's too early to declare a false signal. The lead time varies, so that's not consistent. So the lead time has been as short as five months and as long as twenty
two months, so it's too early to tell. But again, let's not just look at this signal, but look at the economic logic as to what is happening when you severely invert the ill curve, and when you averted in a way where short rates and long rates go up, then you were stressing the financial system. So an inverted deal curve is bad for banks because it hits profitability because they're paying a short term rate and kind of
receiving a long term rate. But when that longer term rate also goes up, that hits the balance sheet also. And we've already seen this play out in March in terms of you know, some banks failing. So this puts stress on the financial system and it creates other issues in addition.
So, Professor, given how rapidly the FED has been raising rates, and given that we've spent so much time at zero in the last moments we have, how impactful has that rapidity been to this inverted deal curve?
Yeah, so, the the scale of the inversion is unprecedented in the data that I've looked at. So of all of the inversions is number nine, this one is the largest relative to the long term rate. So we're in an area of the data that we've never seen before. And on top of that, the FED is pushed very quickly. And in January I said, given my look at the shelter data in inflation, they should stop. They did not stop. And what they're doing is just increasing the risk of
a hard landing. It seems there calculus is unemployment has to increase, people have to be thrown out of their job. That is not necessary. We don't need a reset, all.
Right, Caim, thank you so much for joining us, Campbell Harvey. He's a professor of finance at the Fucal School of Business at Duke University. I appreciate getting his thoughts here on the Central Banks and on the Inverted Yield cover.
You're listening to the tape can Tour 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, What a Deed?
Even deeper into metas earnings reports CEO Mark Zuckerberg, saying, look quote, we continue to see strong engagement across our apps with the most exciting roadmap I've seen in a while. Our investments in AI will continue. We remain fully committed to the metaverse vision as well. Let's again further with Meta Chief Financial Officer Susan Lee joining us. And it's not just Mark finding things, exciting investors, analysts, upgrading exciting
economy for the world at large. Today it feels here in the United States, how excited Susan, are your clients right now how resilient is this digital ad spending well?
First of all, thank you Ed Andternline for having me at. It's a pleasure to be with you guys and with your viewers this morning. You know you noted that we reported really strong Q two results. We're really happy with all of our execution efforts across our core user and
engagement metrics. Obviously, the reacceleration in our ad revenue which we've been talking about and you know which we think is the is the reflection both of an improvement in the macroeconomic landscape which the digital ads market is so closely tied to, along with our own efforts continuing to invest in and execute on quarters and years of work in making sure that our ad systems are performing well, that we're delivering measurable results for our advertisers, and we
really have seen those results bear fruit.
So that's something we're really excited about.
In Q two, we also talked about how our year of efficiency work is really setting us up for success going forward.
I think it's put us into a place.
Where we have a leaner cost structure which will serve us well as we plan for the future, and it's also enabling us to move faster, to build more and ship more quickly new products and experiences in service of what of our customers, and so Mark talked about this yesterday on the call. Threads is a really good example of that. It's something that we built with a relatively smaller team on a tighter timeline, and I think is a good reflection of the year of efficiency paying off
for us. Finally, the last theme I'd highlight from our earnings call is around twenty twenty four, we have I think a lot of compelling opportunities to invest in. We talked about our AI investments and how that will flow through and too infrastructure costs. We talked about hiring top tier technical talent as we evolve our workforce towards a more technical mix, and then of course our longer term ambitions and vision for reality labs and for the metaverse.
You know, AI also seen Susan two AI recommendations on the timeline to have a real impact on engagement, particularly on the core FACEOK platform. How much is that a driver behind the forecast for the current period of thirty four point five billion dollars in sales.
It's a great question.
First, I want to say we have been investing in AI for a really long time. We often use the phrase core AI to talk about the work that's been powering our ranking and recommendations engines, which are really the foundation of both our organic recommendations for the content that you see.
Along with the ADS work.
And in particular, one of the big drivers of growth that's been both strong on our platforms and increasingly incremental is around recommending content from accounts that you don't already follow. We often call this unconnected content, and that's been really good for core engagement trends. And then of course the AI investments, as we've put GPU capacity towards our ADS,
ranking and recommendation systems have really paid off. So I think that's really translating both into the results that you've seen. It's part of what factors and to our guidance, along with of course a big range of possible macroeconomic outcomes. At the same time, we're really excited about a newer opportunity ahead of us in the GENAI space, and that's
really around building compelling new consumer experiences. Mark talked about some of the things we're working on on the call yesterday, making it easier for people to create better, more individualized content, and then of course also making it easier for businesses to communicate with the consumers that they want to reach.
That is newer for us.
That's not factored into our revenue guidance or our revenue outlook in any meaningful way, but it's something that we're really excited about the opportunity to build new and compelling experiences, and we think it'll be an important part of our future.
Susan, why did Meta change its mind about charging cloud providers for access to Lama too, I'm not.
Sure what you mean by changed.
By changing our mind, we've made Lama to free and widely accessible. They're a small handful of really large cloud providers that we're working on specific arrangements with, but broadly speaking, we expect this to be free, and we want it to be accessible to a really to a really wide range of possible use cases.
Cloud providers, will they be charged anything.
This is a place where, again with very specific cloud providers who have very large user bases. Again we're working on specific arrangements with them, but it's not something that we broadly anticipate charging.
For and of course, we're all waiting to see when you turn on the money funnel from Threads. I'm interested as to how much inbound you're getting from clients, how many want the capacity to start advertising alongside Threads.
At the moment, you know, we're really very pleased with Threads.
It's a new standalone app that you know, we released earlier this month, and we're where it is in both user growth terms as well as engagement and retention trends. Is certainly ahead of where we would have expected for a brand new standalone app, but it's incredibly early in its life cycle. This is not something that we expect
that we're going to monetize in the near term. We know when we launch new consumer experiences that there is a playbook around all of the product foundation work that needs to be done, around core features that users will ask for, being responsive to things that futures users are looking for in the product, scaling it over time to a much larger user base, focusing on driving increased engagement and retention. Those are all things that we're going to
need to do in advance of thinking about monetization. But it's a playbook that we've executed multiple times and We're excited for the opportunity to do that again here.
Susan, I think I'm right in saying you a Facebook employee number four hundred and something, four hundred and eight. How has the launched a Threads compared internally to bringing in Instagram, WhatsApp, the launch of the hardware business and quest.
Yeah.
So I joined then Facebook back in two thousand and eight when they're around four hundred people here, and so I've seen us launch a lot of things over the course of that period. Now, some of those examples that you mentioned, like Instagram obviously were already popular apps when we acquired them. But I think that over the course of that time, we've learned a lot of things about how to bring products to market, thinking about the trade
offs between standalone apps or features within existing apps. We've learned a lot in our growth playbook and how to drive engagement and retention, and I think we're going to bring a lot of those lessons to the way that we execute against our vision for Threads.
Caroline asked you about the inbound interest your existing advertisers, saying, Hey, Susan, when can I put something on the Threads platform. I know you're being conservative and careful about the development, and that mark emphasize a lot of product work needs to be done as well. But how do you see the roadmaps for Threads going, you know, how do you change the product so it is monetizable.
Well, we're excited obviously that there is interest both in Threads, the consumer product and of course the eventual prospect of advertising on it.
But it's really just too early, i think.
To be very specific about what the ads business on thread will look like in detail. We're really focused on executing on the consumer experience first, making it a great and productive and friendly place for people to have public conversations, growing it to scale, investing in the features that people want, and we'll get to monetization at the right time.
Of course, us in the media had a field day thinking about the competitive force that Threads is Visa VX, and then we think about the competition more broadly, you versus TikTok, when I'm thinking of the success of reels of late, when we're actually more broadly thinking about how Meta makes it self not just the money spinner, but a culture spinner here where people start trends not just perhaps copy them from TikTok and bring them on to reels. Do you feel you've got that now at Meta?
I think that we've been, over the course of the time that I've been here, you know, constantly focused on innovation, and I think that we've brought that to bear with a lot of the experiences in our family of apps. And at the same time, when there are clear secular trends in the industry in terms of formats or experiences that consumers are looking for, we look to integrate those too, and I think we've done a really good job at
executing on both of those fronts. And then of course, looking forward, I think we're really excited about the innovation opportunities ahead of us. With Jenai, we think we're industry leading here and then of course over the very long.
Term with our vision for reality labs and the Metaverse.
We are of course with the Meta Chief financial Officers Susan Lee, We're welcome across TV and with our audiences and Susan, I've all started talking about everything apps now. I know you're about the money, not always developing the product, but you think about everything app as Meta as there a race on to ensure that we can build that here in the us, and you'll.
Be part of it.
It's a great question.
I know that there are other regions around the world, in particular Asia, where there are apps that have gone down this model. That's not a model that we have right now. We haven't seen that use case to the same extent in North America. But you know, I would say that we're really invested in the opportunities that we have ahead of us across our family of apps right now, including Threads, which is the newest standalone app in our portfolio.
And then there's just a lot that we can do to make the experiences across our family of apps richer and more engaging with the investments that we've made already in AI and especially recommending content that you don't already follow, and we know that that's brought richer content experiences to people, is growing engagement across the apps, and we'll release you know, we'll be releasing features over the course of the next years.
But we're really excited about what we think that this is going to bring to bear for the consumer experience and of course also eventually for businesses to connect with consumers across the family of apps too.
Susan investors were sanguine about the idea that expenses could creep up. I want if you just tell us what your priorities are, where you'll invest in talent in the metaverse, whether your investments will be on the content side or the hardware side.
Great question.
We talked about this a little bit on the call yesterday when we gave some coller into the twenty twenty four outlook. The three themes that I really want to talk about there are. First, we expect that our infrastructure costs are going to grow because of the investments we've made in AI, building GPU capacity, you know, that will go towards both the core AI work and the ranking and recommendation engines that I talked about, along with the
new GENAI investments. So that's a place where we're investing certainly in a lot of hardware, along with the infrastructure such as data centers and network equipment that you need
to support that. The second area that we talked about is we are evolving our workforce toward a more technical mix, you know, and we want to hire top tier technical talent where we can towards some of our most compelling opportunities, including AI and machine learning engineers to work on the AI efforts we talked about, and so that's a place where we are going to be investing, but we're going to be doing it in a very thoughtful way, making
sure that we're really focusing on the core priorities and making trade offs we're appropriate. The third thing that we talked about is on the reality lab side. That's certainly a very long time horizon and ambitious vision, and we're going to be investing in deploying capital toward it.
The capital coming from that you already have. Are you looking at the bond market, are you looking at raising more funds?
You know, we certainly generate enough free cash flow right now for us to invest across the organic opportunities ahead of us that we see that are compelling. We have been raising that we did earlier this year, just as we're evolving our capital structure going forward, and that's something that will continue to look at and I think do
on a measured pace going forward. But in terms of thinking about the capital available to us now, you know, we generate a lot of capital that we're always looking to allocate across the organic opportunities that we have, and we've talked about some of those and then of course shareholder returns.
Susan really quickly before we lose you. How do you and Mark split up responsibilities at the company. What's it like working with Mark?
You know, I've had the privilege of working with and learning from Mark for fifteen years here, obviously as CEO,
you know, and as a product visionary. He really shepherds the product roadmap and has defined the long term vision for a lot of the things that we're investing in with incredibly ambitious goals, and I think that's a tremendous and powerful motivator for us, and I try to make sure that we have the financial frameworks and targets that are going to enable us to invest against those things.
Innovation isn't free, and that's something that we're very mindful of, and we recognize that, especially against some of our longest time horizon ambitions, we have to earn the right to put capital towards those things in the way that we do.
What I will say, having worked with.
Mark for such a long time is he's tremendous at adapting to the time that we're in. And so whether that was leading a four hundred person startup when I joined, whether that was overseeing our transition to the public markets during the shift to mobile, or whether that was this past year, helping us really retool our cost structure and the way we operate, and leading on the Year of Efficiency.
I think Mark is tremendously good at making hard decisions, at acting on them with conviction and looking forward.
Mesa Chief financial Officer, Thank you so much.
Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews on 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 Faul Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.