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One other stuff we're watching today is Home Depot. It's off by about one and a half percent. The company said it's going to buy building products distributor SRS Distribution, a roofing company, for about eighteen point twenty five billion dollars. So I want to get more on that, and who do we go to? The best guy in the housing industry when it comes to analysts, Drew Redding is Boomberg Intelligence US home building analyst joining us. All right, what do
you make of the acquisition? The fact that stock's down?
Yeah, So this deal eighteen point two five billion, is Home Depot's largest ever acquisition. Prior to this one, it's largest was the eight billion dollar deal it did for HD Supply back in twenty twenty as I did about ten billion dollars of revenue. So for a company as big as Home Depot, this is actually a pretty big deal. And we think it fits with their strategic plan of going after that professional customer. It's a very highly fragmented market,
you know. Our view has been that if they really want to accelerate their growth, particularly in this segment of the market, they would probably have to do a couple of deals. They did a deal the one I mentioned HD Supply back in twenty twenty. They recently did a deal for International Designs Group, and now they added on
with this one. You mentioned the stock is down, you know, as I mentioned, it's a pretty big deal, and I think the fact that people are still kind of hoping and waiting for that the underlying housing market to kind of return to growth, and that's really the primary driver of Home Depot's business. I think the fact that you're layering this on top of you know, those market expectations may be weighing a little bit.
I'm looking at the structure of the deal.
First.
I go to m Go, which is the first thing I do for an M and A story, and to see who the bankers and lawyers are and ma Go does not have that information. I'm very disappointed. I have to talk to the people and it hasn't been disclosed. They're gonna go to the debt markets.
Here.
They do have a little bit of cash on the balance sheet here, but they're going to finance it with some debt. Is that okay with you and the credit analysts out there.
Yeah, so their leverage is going to tick up even are about two and a half times. The goal going forward is to de leverage over the next twenty four months to get back to a kind of two times target. So it's it's not that much of a concern at this point. You know. In order to do that, the goal is obviously to accelerate growth, but at the same time, they're going to put their sherry purchases on hold in order to get that leverage back down in a timely fashion.
Okay, well, there you go. That's why the stocks down. This is why I love angering with Paul because it's like two different perspectives. I'm like, what's the macro read and You're like, let's talk about how they're paying for it. This is perfect. This is why Paul's mean you so awesome. But to the point of like the why this is not like John Tucker renovating a closet to a bathroom, right, Like, it's not that like these are the real people.
Yeah, these are the professional remodelers, so srs caters to especialty trade contractors. So think building materials primarily roofing, as well as landscape and pools. So building materials are about two thirds of their business and the pool and landscape pieces are about a third. Those are actually newer markets that they entered in through M and A. So Home Depot's main strategy is going after an untapped two hundred
billion dollar market for what they call complex projects. And you think about a professional contractor who is typically juggling, you know, a handful of supplier relationships. For a larger scale job, they might have to go to one distributor for windows, they might have to go somewhere else for flooring, somewhere else for doors. Yeah, and so on and so forth, and so home depots goal and their strategy is to kind of consolidate the need for contractors to go to
all those different suppliers. You want to become a one stop shop.
Talk to me about just kind of the economics of that business, Like what's the Is there a difference between selling piece applywood to the John Tucker's of the world versus selling a peace applywood to you know, a local contractor.
Well, professional contractors are typically higher spending. I mean, you see that if you look at the store productivity of a Home Depot compared to Lows after the last several years, you see the sales per square foot sales for store highly much stronger for Home Deep, And a lot of that has to do with the spending nature of that professional contractor.
I see. Okay, I mean just look at Duhn Tucker, like he's definitely not going to be spending that high. He's not going to the high end place, but he.
Does high quality work though I'm sure, oh.
No, no, totally into the high quality work one d PC. So it sounds like you think this deal makes sense. Where does it put it then, in relation to Lows, which I must assume has to be trying to carve out its own niche in that.
Yeah.
So it's a good question. And the strategy, you know, in attacking the pro segment between Home Depot and Lows is a little bit different. As I mentioned, home Depot is targeting kind of that larger pro whereas Low's is kind of focusing on that small and medium sized, medium sized contractor. And this is kind of an area they've been emphasizing over the last couple of years because prior to twenty eighteen, when the new CEO, Marvin Elison came in,
Lows didn't really have a dedicated pro strategy. It was kind of all over the place. So they're they're, you know, philosophy has Let's get back to the fundamentals of the business. Let's have the right brands, Let's make sure we have things in stock, Let's make sure we have the proper
quantities and the right staffing. So they're kind of coming from a different position where they're getting back to basics, where home Depot already has that dominant position and they're looking to expand into an untapped market.
All right, let's step back, Drew, talk to us about what's going on in the housing market. What's the elevator pitch you're giving to clients these days. How are investors approaching the housing market, because I don't see a lot of houses for sale, dude.
Yeah, So, I mean we've talked before in the way we describe housing as a tail of two markets. We still think that the new home market is in the driver's seat, both from a supply perspective, and from an affordability perspective, the most important thing to remember is that builders are growing their community counts, they're bringing new products to market, and unlike what you see in the resale market, they're making financing more attractive, so they're buying down rates.
So right now, if you if you look out there in the market, you're seeing something you know, in the six point nine seven percent range on a thirty year fixed. You know, if you go to the new home market, you're seeing something much lower. You probably have a five handle, so the math looks a lot better in the new
home market. Interestingly, more recently, we have started to see a little bit more inventory come to the market and the resale side, you know, which which you mentioned has been kind of the the major theme permeating throughout the industry, So we could see that start to help volumes. We think that the the resale market starts to rebound later in this year and maybe sees a little bit of modest growth.
I have a really dumb question if if I want to sell my apartment and I have a two point seventy five thirty or fixed, can I sell that rate along with the apartment. No, it's a harder.
It's hard the buyer in your market is going to be coming with something significantly higher. Now, there there are ways where, you know, through various concessions, a seller can help buyer kind of lower that rate. You know, if the buyer were to pay points, and then you know, the seller can contribute to closing costs. That's one way to do it. But you know, as you mentioned, that's one of the well, that's the primary reason why people
aren't putting their homes on the market. It's also what's what's keeping people from making purchases.
Yeah, okay, well that that's very clear. Also, why would I do that?
Yeah, yeah, there forever.
No, I'm there forever. I'm for sure. This is not like a promo, like unless I win the lottery.
You just know, way right, yes, because that interviraces.
Just makes it it's unreal. It's also a condo, so then it can always rent it out, like if I move somewhere else or whatever. Like it's from that perspective, even a co op, though I wouldn't in a million years. He drew. Thanks a lot, really appreciate your reading Bloomberg Intelligence, US home building analysts and just so you're all clear that it is a two point seventy five percent thirty year fix that I got in twenty twenty. Just putting that out of there, I feel like.
It's on the other handing in twenty twenty three March of twenty twenty three even six percent.
But that now feels cool.
Yeah, Like I felt like a complete knucklehead at the time, like, oh, you're supposed to be a Wall Street cat and you're just paying through the nose here on the rates. But boy, then they went up to seven.
Yeah, no, no, yeah. I have a friend who's trying to buy a house first home home buyer, like you know, ground up, like thirty years old kind of thing, and it's it's really hard, Like it's really tough, and it's like when do you do that? The prices haven't really matched up with those higher rates. So anyway, there we go. I'm glad we got that.
On out of the way.
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All right to the markets we go. We're seeing a little bit of a sell off in the front end, yields up just a touch, despite some pretty hawkish ish messaging coming out from Chris Waller yesterday evening, where it seemed like it was we're gonna be waiting. We're gonna be waiting and waiting and waiting. Ira Jersey as Bloomberg Intelligence Chief US interest rate strategist, joining us. Now, Ira,
I'll reach you the quote. In my view, it is appropriate to reduce the overall number of rate cuts or push them further into the future in response to the recent data. There's still no rush. These were to remark to the Economic Club of New York as of yesterday. What does that tell us?
Yeah, well, it's a continuation of what some of the more hawkish members of the Federal Reserve have been saying. You know, we think that Governor Waller probably is in the two cut this year camp. So you know, there's an when you look at the dot plot and we only received it, you know, last week, so so it's very fresh. We think that he's one of one of
the people in the two cut camps. So but but so that means that he's maybe kind of the spokesperson for the more hawkish members of the committee, whereas you know, it's still a bulk of the committee is in the three cut camp.
I think the.
Important thing about Governor Willer's comments is, you know, you can't you can't be assured of a June cut at the moment. Like, in order to get a June cut, you need to probably have a continuation of slowing economic activity and certainly a decline in inflation. And and you know, we put out a piece just this morning saying, look, if we keep getting you know, point two inflation prints for the next couple of months, that's not going to
lower the year on year inflation number at all. So yeah, you know, so it's it's unclear to us whether or not, you know, June or July, or even maybe that the Fed might have to wait till November.
And that's where you can.
Get a lot of a lot of market pricing shifts if if we don't price in for a junior July cut anymore, and we wind up pushing things out even further.
So Ira tomorrow, I'm not going to be here. Markets are going to be equity market's going to be closed here.
Yeah, we get US bond markets closed too, there, Paul, what's that bond market is closed too?
Okay, I don't want I don't want to speak for the bond market people. You guys have your own little club over there. PC deflator, we're gonna get some meaningful information tomorrow. Odd timing aside, how do you think the Fed's thinking about the data tomorrow? The PC deflator? The core deflator expected coming to zero point three percent?
Yeah, so zero point three is a continuation of the trend. And yeah, you know, given that we have CPI, I think that PC will kind of take a little bit of a backseat to some of the other details that that we're going to parse through, particularly since the market's closed, so there won't be the same kind of knee jerk
reaction you might get in in the US markets. Anyway, Europe will still be opened, so that'll or parts of europeill still be open, So that'll be interesting to see how they react, and that'll give you a clue as to how we'll open up at seven pm on Sunday night in the treasury market. The you know what, I'll be looking for in this in these numbers is a
continuation of the actual consumption trends. Because remember, even though we get that very important PC deflator, so the inflation component of the PC report, you also get personal consumption numbers. So actually what people are spending their money on, how how things are growing, And what I like to look at is what's called the quantity the quantity indices, So these are basically real spending and how those are developing.
And what you've seen of late is that even though you've had a little bit of a leveling off in people spending on durable goods, the number, the amount of money that people are spending on services continues to go up. And you even saw that today in the GDP report. All of the revisions of the fourth quarter GDP came because of higher consumption of services and that was revised higher.
And as long as services continue to be a big focus and people are content to continue to spend on services, there's a feedback loop because that's where most of the people in the United States are employed. So as long as people are spending on services, that means that services are going to be making money and that people can request wage increases those wage increases, they go back and be spent again on services.
Right.
So I think that that those are the kinds of numbers and some of the detail that I think will be important as to whether or not, you know, the economy is really going to be starting to slow and if that will feed into then lower inflation, because even in the inflation components, what we'll be looking for is how much is services inflation versus goods inflation. Goods inflation has been zero basically for the last six months, and
it's all everything. All of the inflation has really been coming from the services sector, so that that has to be everyone's focus right now.
Oh sorry, it's that pesky button where I press off, but I mean on, And anyway, I wish my cousin Probed wishes he had that button. But anyway, what I was saying is that goods inflation too. The disinflation narrative around that is also coming into question. Potentially, when you have the Baltimore Bridge collapse, et cetera, you're still at two. Is the risk that you actually pair that down to one or zero or is the risk that it's actually three?
Yeah, Well, I think that the well, the market's still priced for three cuts this year. Now you know what we were pricing just two months ago, six cuts, right, six one hundred and fifty basis points of interest rate cuts. Yeah, I think the risk is that the FED starts a little bit later, but the path looks very similar to what's being priced right now. So it's more that things
get pushed forward and forward and forward. And keep in mind, you know, the market will often price for outcomes that aren't going to be realized, and that's where you know, we try, that's where strategists and portfolio managers can kind of you know, make their living in trying to determine
what's kind of mispriced and what are the highest probability outcomes. Yeah, you know, interestingly, you know, to your point, you know, there is a risk that there's actually no cuts this year, and the market is actually pricing for upwards of a twenty percent chance of that if you look at options on short term interest rate futures like the futures on sofa, So our options model suggests that that you know, there's a pretty high prob possibility being priced that you know
the Fed's on hold, and you even saw some activity this morning, you know ed Bollenbrook, who does a really good job with looking at flows in the short term interest rate markets for Bloomberg News. He even noted this morning that there were people buying buying puts on on these futures that suggest that the that the FED might
not actually cut at all this year. So so I think that there is a there is a growing kind of community out there that's that's fearful that the economy won't slow down enough for the FED to actually cut.
All right, we'll see Ira Jersey, thank you so much. We appreciate that. As always, Ira Jersey, easy you have his interest rate strategists for Bloomberg Intelligence. Joining us from Princeton, New Jersey via that zoom thing.
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So let's get back to what Governor Waller talked about, and that was basically like we're just not there yet. Let's wait, let's wait, let's wait, and then it's raising the risk of maybe no cuts this year, which leads me to the market reaction. The overwhelming idea in the first quarter was that you're gonna have bonds outperformed stocks because we were gonna get cuts. That obviously didn't work out for you. So what do you do for the
second quarter? Joining us now is David Kudla. He's founder, CEO and chief investment strategist over at Mainstay Capital Management, and he joins US now. David, is this going to be another quarter of stocks outperforming bonds?
I think it will be. I think the stock in rally mode.
We're almost in a melt up situation that the increase we've had in twenty twenty four a loan, the increase we've had now over the past five months has just been incredible.
And the problem.
The problem for bonds is that we keep you know, we've talked about six or seven FED rate cuts just a few months ago. We're down to two or three maybe one. They're getting moved out. They were March, got moved out to June, moving out as far as September.
We may not see a rate cut this year. So that's problematic for bonds obviously, and we've seen what the ten year and the rest of bond's done because of that what we've done, where you do have opportunity in bonds though for your portfolio, for someone in a sixty to forty portfolio, they need that bond allocation. Stay ultra short on ultra short term bonds, so you have very
little duration, very little indust rate sensitivity. But we have these high yield we're still getting with rates being this high, so that is an attractive part of the yield curve for a bond allocation. But you know, stocks I think continue to be en rolled. We we are due for a pullback at any time here of four or five percent. We've gone so long without as much as a two
percent pullback in a day and any meaningful pullback. But you know, we're still very constructive on stocks and constructive relative to bonds.
So, David, where are we in terms of valuation here? How do you think about the evaluations any equity markets? If you know, maybe we're in this melted up kind of mode.
Yeah, so we're getting a little rich.
We're at twenty point nine as let's call it twenty one forward price startings on the.
S and P five hundred.
The five year average is around nineteen, so we're you know, we're a little bit rich, not as not as rich as we've seen in the past. And you know, there's a lot of people referring to this as a bubble, and I think that people that think we're in a bubble for stocks haven't studied a lot of bubbles to know, you know what that really means when we look at
the fundamentals. You know, we have some of these gross stocks and the megatech stocks trading at higher pees than twenties and thirties, but they deserve it, right, and so you know, we think that we can still and you never want to make a market call based on valuation, right, stocks can stay undervalued or overvalued for a very very long time. So while they're starting to get a little bit stretched, that's not a big concern for us because I think the fundamentals are still there to support it.
So based on that though, I guess because you're right, like, you can always still go higher even if it's overvalued, right if the equity market, for example, but do you need to also rotate so maybe not going to sell them mag seven for example, or sell them video, but do you need to rotate into more cyclicals and like what do ork quality, what does that wind up looking like?
Right, so you know what we favor right now?
Our our overall investment strategy can be summed up very easy, large over small, growth, over value, the US over foreign Outside of the US. We also like Japan.
But the key here.
In diversification is, you know, we're seeing industrial as financial, some of the other areas starting to perform better. We're seeing more breadth in the market. But we would stay with that. With megacap tech, the power of generative AI. They just announced healthcare assistance basically that do the work of a nurse. You know, there's just it's entering, so it's going to enter so much of our lives in the professional workplace be transformational. So we've narrowed our magnificent
seven down to our own fab four. We took out Apple, Google and Tesla, and and that fabulous four is that fabulous four is up thirty eight percent this year, and you know, really it's become you know, surprisingly enough somewhat of a safety trade to go to these stocks when rates are going higher.
They don't care about registrates.
They have plenty of free cash flow to fund operations in the research and development. So it just it remains to be a good core of the portfolio. But there's some other places you can look out. We'd avoid small caps until we know rates are coming down. Also with cyclicals. Mid caps, though we've increased our.
Exposure to.
Is an area, you know, the the in between ers that they've grown out of the small cap camp, not the large cap yet, but mid caps have also started to shine as well other sectors.
David, Besides some of those technology names, we've heard some folks talk about healthcare, some folks talk about financials. Either of those get your attention.
Yeah, financials, healthcare, industrials especially, think it makes sense to you know, we want to have a diversified portfolio. We are overweight tech, it's our highest weighting by far, or I t UH and communications. But we we we do think that as rates start to come down, you know, when the when the yield curve finally gets back to looking like something normal, that will be very helpful for financials. And you know what, we'll we'll see industrials can do well.
We when we look towards this year, we're not looking for recession, you know, and and we think we could have a soft landing but our we think it's more about a no landing. It's it's more that we'll have a slow down and re accelerate. We've got GDP was just revised for the fourth quarter to three point four percent. Economy strong, labor remains strong.
Uh.
There's some indicators out there with you know, the level of bankruptcy, these credit card debt, credit card interist rates, what's happening in housing. There's a worriesome air is but economy just keeps chugging a little bit.
Wouldn't that scenario they'll be good for industrials, materials, energy like those sectors.
Yeah.
Yeah, And we're saying there's some other reasons and energy there always are, uh you know, political risk, premium and so forth. We've seen what oil has been doing. Uh, We've seen what cocoa has been doing. I just it's very high, it's very expensive. Having a lot of fun with that one. Maybe needing to avoid as much. Maybe not the chocolate Easter egg this year, but uh, you know there are commodities doing better. Uh and and actually
you know, the cocoa story is just incredible. But uh, yeah, we think that Yeah, materials with more normal you occur financials, healthcare. Certainly that's a large sector for us as well.
All Right, David, thank you so much for joining us. David Kudla, He's a founder, chief executive officer, and chief investment officer for Mainstake Capital Management. Troy, Michigan is where he hails from, so we got him via zoom.
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Heb Meles, a good little m and a trade more than me. And that's what Amazon's up to. They invested two point seventy five billion in AI startup and Thropic. So when we talk about Amazon, one of the voices we have to get on board is anurag Ran, a senior technology analyst for Bloomberg Intelligence. Anurrog tell us about Anthropic. What is anthropic and as why is Amazon investing another two point seventy five billion dollars into this company?
Yeah, Paul, so think of Anthropic as very similar to opening it's a company that develops as large language models that people can use to do you know whatever AI related chat pots and other kind of analysis that they want to do. Now, the thing is, as you know open Ai, when Microsoft invested in them, open Ai runs on Microsoft's cloud. And this is what Amazon wants. It wants anthropics, you know, code business to run on their cloud.
People go out and experiment with them. You know, that's kind of feeds into their cloud business.
How much have they now spent on AI cloud stuff on Amazon?
One of the things is this is just you know, a few billion dollars over here. But I would I would argue that the base that they are doing, or the base architecture, or the base infrastructure that they have on cloud. You know, they've spent over one hundred billion dollars over it, you know, the last ten fifteen years. So this is a big enough number because you can't run a lot of these models without being on cloud.
Now that's not truly true. There are you can run it on premise, on on the device also, but a large portion of the processing will be done on the cloud.
Just to follow on that has that compared to its other competitors in the biz.
It's one of the things I would say is, you know, Microsoft, you know, I don't think they got lucky. They really knew what they've been investing in. When it went to open Ai. Open Ai came up with its product far, far sooner than anybody else, and that's why all of us talk about it. But companies like Anthropic, I think it's you know, I won't call them behind, but I'm sure that their models are going to be used by other people.
Also, yeah, that's I'm seeing just in fern of the reporting here Anthropic. So this isn't exclusive to Amazon. I mean it seems like Anthropic has you know, tie ups with Google as well, Spartan some others. So what's really a strategic value for Amazon here?
I think they call themselves their preferred cloud vendor. And again for Amazon's point of view, what they're doing is they're giving people a laundry list of multiple models they can use. They can use Amazon's own model, they can actually use Meta's model called Lama, or they can use Anthropic and in a couple others. So you know, if I'm if I'm an enterprise, if I'm a big large
bank and I want to experiment with them. It's my choice what I want to use over there, and that's really what Amazon's selling.
See, this is where an imang and I in our world can collide. Power.
Oh here, we got that coming.
Yeah.
I was like, we waited the proper amountage. I should wait for.
Like a couple more minutes, but I just had to go there. We can always go back, It's cool. So an wrong. Well, I was just down in Texas for Sarah Week, which is like energy's big super Bowl, and the only conversation everyone was having was about power h and power demand skyrocketing due to data centers and AI, et cetera, and that Amazon had bought nuclear power reactor center in order to power one of their data centers.
Can you just talk me through the more they invest in AI and stuff, does that just mean they have to just go buy more power plants.
Yeah. If you look at capital expenditures for Microsoft and Amazon, it's really ballooning up right now. I mean once trying to spend I think forty plus billion dollars a year into expanding a lot of their data center capacity. Now you could say that, oh, that's going to take out a lot of you know, operational cash flow or help you know, bend margins. Maybe in the near term, but I would argue that their business is becoming stronger by
the day because nobody else can replicate this stuff. I mean, it's not easy to come up with these many billions of dollars to come up with their data centers. And in fact, I would say that companies that have their own data centers may be forced to close out and move a lot more stuff to the cloud because these guys have so much firepower with them.
Oh interesting, Hey on rag. I know the company here, Anthropic offers a chatbot name Claude, but the companies are.
I totally want a chat butt name Claude.
Yeah exactly. But they're kind of emphasizing developing AI safely and responsibly. Where are we on that whole concept of safety responsibility for technology that most of us really don't fully grasp it?
Like one a company is like I want to be profitable. It's like, well, I hope so exactly.
You know, Paul and Alex, I'm still waiting for that in the social media applications, you know, So I do not know how that's going to shape up. But one of the things that we've seen with Claude is they are marketing themselves as being better than open AI in certain aspects. I think that's you know, again, that's the company saying, so please, you know, take that into account that a lot of their experiments have said that Claud's better at certain things than open ai is.
So I mean, what's the next thing for Amazon? Like, I'm just wondering if there's not much to go out there and buy to automatically give you AI pil a commands scale. Even if you're Amazon, you can't just write a check like you can in Hollywood for example, if you want to get into to that business. Is this just the tech industry just I guess putting their R and D, putting their capex, putting their funding to all things AI going forward?
Yeah, I absolutely say that. Now think about it this way. Currently, what's happening is Microsoft is reaping the benefits of you and I using chack GPT mode. So if we do more processing, Microsoft get the benefits of it. Now what Amazon is saying, then listen, that's one way to make money in AI. How about I do this. I'll give you all the raw materials for you to go out and build your own chat bought internally, let's say for a bank or for a beverage company. If you want
to do that, then come to my cloud. I have all the raw material for you, I have all the models, and I will do it safely for you. And that's Amazon's pitch, which means that the revenue fall through maybe a little bit longer than what we are seeing at Microsoft.
And then do we know how sticky those customers are? Like if Amazon's like, hey, I'll do all this stuff for you, and I'm like cool and I stay there or is it I guess I'm getting as their first mover advantage to that.
Yeah, from a alex From a logical point of view, once you choose a cloud vendor to do any kind of process, it could be just your back office work, and it's very difficult for you to get rid of that. And that's the whole point of cloud. So what essentially both of them are selling not so much an AI, but they're basically selling just come to micloud and start using it because once you start using it, you're not going to go anywhere else.
Does Apple have an AI strategy?
Well, we'll find out on WWDC. I believe in June that they're going to go out and basically, you know, put the AI into Apple. But that's going to be fun to see what happens over there. The initial response, or at least discussions that we are seeing, is that they're going to try to outsource that a little bit to Google. And if they do, I think that good
reception is going to be very strong. If they basically say we're going to just do it in house, then we don't know how long it's going to take for those products to really evolve. So I think this is that is one of the pivotal moments for Apple it as relates to their sales and profit growth over the next twelve to twenty four months.
Can I go to this conference s or you have to be like invite only?
I think it's invite only. I've been absolutely I'm not going to make it.
I think you could make it. You know everybody, she knows, all the people. I'm looking at Amazon, Stock, at ononanyone dot twenty one. Do you feel like all I know that their cloud business might be different, but the AI part of all of this, do you feel like it's accurately prior how do you model it.
It's it's see, it's very difficult to price any of the AI related revenue because at the end of the day, it all is, it all goes to the cloud. So I mean, that's how what we want to see. Having said that, as I said, it's going to take a little bit longer for Amazon to monetize a lot of these things. So we are not building in any kind of our projections looking into you know, when the report earnings next month, we think it's going to be still
about you know, six to twelve months out. But for Microsoft, because it's a direct you know, usage of CHAGGPT, I think they're going to get you know, a bigger boost than anybody else at this point.
At an around RNA, thank you so much. We appreciate it. On a Rod Rana Senior Technology Anels Bloomberg Intelligence, uh phoning it in, zooming in from somewhere looking at Amazon dot Com stocks up nineteen percent today, I'm sorry, nineteen percent year to date, all time high for this name.
I love putting up the long term chart like from beginning of time because remember this this stock was nowhere for a lot because they were losing money hand every fist and then at some point, Jeff Besis got the street to just switch it on a dime and say, don't worry about profits. We're investing in the future, and our future is great. You do you want us investing in the future. You don't want us delivering EPs to you.
For years and years and years, that didn't work, and then we hit an inflection and boom, because I think people realize, oh this scene, you can sell more than just books on this thing, right right, right, right.
Oh, now I understand you're just not a Barnes and Normal competitor, You're something else. But you know, that's such a great point because I feel like when when we talk to any company about look at our new AI offering, Look at this cool partnership we have with Microsoft, Look what we're doing with Amazon, it's really hard for lay people like me to understand what that means, Like is it a tangible thing? Is it just you know, a sexy bell and whistle that's not going to actually do
anything materially for you. And it's hard to kind of weed through all the stuff, to be honest, which is why I guess it's good to.
Have on it and stuff exactly. I mean, for me, AI to me, what's incremental on the CAPEC spend that everybody talks about it in the next five years, and what is just more just re position some other keepec spinning. That's kind of for me.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Apple card Play and Android Otto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station Just Say Alexa playing Bloomberg eleven thirty.
Max Chak which Ken joins us. He's a Bloomberg BusinessWeek senior reporter. He's got his piece entitled Bankman Fried's Original sin at FTX is trouble for all of crypto. Max ex much for joining us here. I really appreciate you taking the time here. I think at the crypto industry, if you speak, if you think about it as a broad entity, they'd like to put all this behind it.
Yeah.
Absolutely. And when you look at who has been most sort of most vociferous in uh calling out Sam Bankman Freed, you sort of have two groups, one or some crypto critics, but actually a lot of the crypto companies themselves. Because the idea here is this guy is a bad apple. We got to get him out, We got to excise
him for from the industry, which is understandable. But as we as we write in the story, you know, there's some problems with that, And the main problem is that a lot of the conditions that made FTX possible continue, and the crypto industry is essentially trying to deregulate the industry for further So sort of responding to this crisis by saying we need fewer rules.
Not more, is that gonna Would that have made a difference.
If there were more rules?
Yeah?
I mean, but how because he was actively lobbying sort of Congress to do stuff like he wanted that, So doesn't that fly in the face of if more rules, he wouldn't have been able to do what.
He did he So this is like a sort of common misunderstanding I think. I mean, just because he's lobbying for Congress doesn't mean that he's he's wanting to be regulated. He was lobbying for rules that would have been, you know, conducive to what he wanted to do. I mean, the central thing is FTX was operating offshore quote unquote operating in the Bahamas officially not selling products to Americans, although we know from what's happened since that Americans were finding
their way into some of these banned products. A lot of these crypto companies have been wanting to bring that model to the United States, Like that's the big thing. That is what Sam Bankmin Freed was trying to do and what many in crypto essentially still want to do.
Are there people, is it a fair criticism of the industry or maybe some of the leading people in the crypto industry that the industry itself and some of the leaders enabled Sam Bankmin Freed along the way, and that's simply trying to wash your hands of it at this point, is you know, disingenuous?
Yeah?
Absolutely, I mean FTX was entirely enmeshed in the industry, investing in many of the companies. You know, during the sort of collapse the crypto markets in twenty twenty two,
bailed out many of the companies. You know, remember all these headlines around describing Sam Bankton Freed as the you know, as the savior of the crypto industry, as as the Warren Buffet of crypto is the next Warren Buffett and those all came because because this was a company that was putting huge sums of money into all these other companies, and it's the reason why the markets crashed further in
the weeks and months after the FTX bankruptcy. So yes, absolutely, although of course that's like a somewhat awkward question, and also there have been differences in approach. It's not like it's not like all the companies are operating in the exact same way. I think Coinbase has legitimately made more of an effort on the regulatory front than say FTX, but Coinbase is also trying to deregulate in various ways.
What about the recovery, So I feel like a lot of this has been on. You know, Bernie Madoff's victims, for example, didn't get anything back, and therefore if Sam Bagman Freed's victims got some back, then that should reduce his jail time. Talk us through that.
So in fact, Bernie madeoff victims have gotten money back. So this is so this Initially, of course, they lost.
All their money.
But in the years since, and it's you know, many years now, ninety percent of the initial investment from the madeoff victims has been recovered. Now that doesn't like the Madoff victims are still very unhappy, and even if they get to one hundred percent, still going to be very unhappy because not having access to your money for years or even decades. Yeah, and they're huge and as many of the victims have pointed out in this case, getting one hundred percent of your assets back at the time
of bankruptcy years later is still difficult. People have suffered extreme emotional distress, like you know, their lives have essentially been ruined. So there's that point. But then there's the legal matter, which is it doesn't matter. And the judge
brought this up in the proceeding today. You know, if you squander, if you steal customer money or or and take it to your put in your pocket, walk into a Vegas casino and then later pay them, you know, somebody else comes along and pays them off, that doesn't change the legal situation. So so there's a moral question of like, well, what does it mean if they've been able to recover their money, and then there's the legal one. For the legal one, it just it doesn't matter.
And I'm just you know, reading your story here. Unfortunately, the conditions that allowed people to fall for schemes such as bankuan freeds. Tho's a lot of those conditions still remain here. And is there where are we in just terms of the regulatory framework? Is there any agreement maybe how this should evolve over time?
No, I mean we have seen certain I don't know if you wanna call it progress. I mean, of course there are like the SEC approved certain spot bitcoin ETFs. There's now a big debate, you know, within the industry should should they allow for other spot etfsa ethereum or or other assets that are maybe not as well established as bitcoin. The SEC Gary Gensler has been pretty cool to that possibility. You know, the industry, you know, backing up,
there's a ton of money coming in here. Crypto prices are soaring, a lot of the same kind of frothy enthusiasm that we saw in the pre FTX collapse. It's there, you know, and in certain ways it's worse, right, But during the FTX build up, we were talking about all
the wonderful use cases for crypto. Blockchain was going to change everything, And when you actually listen to what people in the crypto industry are talking about lately, they're just more talking about the numbers going up and the fact that, yeah, you have new money coming in through these ETFs, and we're seeing all of these tokens, some tokens where really there's nothing going on besides vibes. You know, these quote
unquote mean coins that are also soaring. And in fact, many of the tokens that have gone up the most are the same tokens that were going up during the FTX run up. So I think there is certainly when you're talking about huge amounts of speculation, there is going to be pain ahead for some of the speculators. Of course, there's also the potential for ever more wealth. So that's the tension.
Before I let you go, we have like a minute left. We have later on on TV William Quigley, who's the co founder of Tether, what's my question for him?
I mean, I think, like the Tether situation. One of the things that's craziest about this if you went back ten years ago or five years ago and asked, you know, which company is most likely to run into issues regulatory issues and so on, people, you know, Tether was one that cryptoskeptics have brought up over and over again over the years. And they have managed to stick it out and are still here at a time when you know the CEO of finance is headed for prison.
Uh.
You know the former CEO of ft X, former CEO of Binance, former CEO of FTX also appears to be headed to prison. So that's impressive. I do wonder how tether UH tries to adjust further or if they have plans to adjust further. Right, For for years people have wanted to see more information about what's on their balance sheets, and they've essentially resisted. So I'm curious what their plans are going forward.
Max great stuff, Zeke Fox, Max Chafkin, They've got this really good story. I just keep scrolling down and there's more and more and more good stuff here. Bankman Freed's original senate FTX is trouble for all of crypto. For all our listeners and viewers out there that are, you know, interested in this space, go to Bloomberg dot com uh and find this story because it is really good reporting, some really cool stuff in there. So check it out there.
Max chaffickin he does all that stuff for Bloomberg BusinessWeek.
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