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Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside my co host Matt Miller.
Every business day we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market moven news.
Find the Bloomberg Markets Podcast called Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot Com Slash podcast. Let's flip gears. Let's head back to the geopolitics of it all impact it has on the market. You know, the news coming out of Israel that I'm reading out on the Bloomberg kerminal Here Israel and Hamas agreed to her short truce for hostage release. Agrees to free fifty hostages,
possibly more in days ahead. The deal would mark the first lull in the war since the attacks on October seventh. So I guess if nothing else, that in and of itself is probably some good news. Bobby Ghost joins is he's an editor with Bloomberg Opinion. He joins his life here in our New York studio. Bobby, I mean, just to me, it feels like good news, maybe a little bit of thawing here. How do you read it?
I wouldn't go quite so far as to say that there's a thought it is good news. Okay, Look, it's great news for the hostages and their families. It gives ordinary civilians in Gaza a break from the bombing. It's a cessation of hostilities for fort days. And Israel is already saying Prime Minisnetnya, who's already saying, moment that ends, we go back to bombing Gus, we go back to fighting.
So there's you know, it's not really a thaw. It's a deal that was struck in Katar with very strong pressure from the United States on all parties to make this happen, and we should thank God for small mercies, as they say, and as I said, for the people who are benefiting the most from this deal, the mercies are not small.
They're quite absolutely.
Yeah, we're seeing fifty hostages from Gaza will be freed and the release of one hundred and fifty Palestinians who are in Israeli jails at the moment. But tell us fabi, because this is exactly what Israel has not wanted, in the sense that any pause is a chance for Hamas to regroup, get the military operations back together. I mean, this is that something to be feared then that there could really be maybe an escalation in the violence after this.
I think it's I think this is why it's taken this long for the truth to happen. Israel had to be absolutely certain that the chances of Hamas regrouping and rearming we were as small as possible. If I mean, there's always that possibility. But Israel would not have made this deal if it didn't have a high degree of confidence that it can prevent that from happening, or it
can manage how much Hamas rearms. Presumably this means it will be paying much closer attention to the borders, much closer attention to those tunnels through Egypt to make sure that Hamas does not get and it has already brought so much damage on Hamas infrastructure that there must be a high degree of confidence that you know, Hamas's arms making facilities in Gaza City, for instance, will be will not easily be revived.
That's kind of where I wanted to go, because I know that the stated objective of Israel is to destroy Hamas and its leadership. How do you define that? How do you know when it's happened? If I kind of fear it's like the drug cartel, tick out one kingpin and then the next person just rises right up again.
Yeah, this is not and they're not fighting a conventional military. This is a terrorist group. And you know, the leadership can change and has changed as well, has a long history of taking out top Hamas leaders. The thing just keeps coming back. And you also have to remember that in the process of trying to eliminate Hamas in this way, it's also creating the circumstances the for Hamas to be
able to recruit. You've got sure hundreds of thousands of young Palestinians in Gaza and elsewhere who are outraged by what they see, and a small proportion of that population will be more amenable to joining Hamas now, shall we say, than there were before. So it's you know, this is not this is not the kind of war where where which ends with people signing an armistice and making a
peace deal. And that's been the problem. The Biden administration has said consistently from the beginning that they've been asking the Israelis to define what victory looks like and explain what happens the day after, and until now, the Israelis have not provided that information. They've not communicated it in private to the Biden administration. They certainly have not communicated it publicly.
And of course whatever that timeline may be as well, is probably pretty daunting to think of, Like the task ahead, how long that may take makes me wonder if there could be perhaps the need for more cease fires in the time to get to that endpoint.
Yeah, So we'll see if this one works and everybody shows good faith, and that then hopefully creates the circumstances for another one down the line, and another one, and maybe this is the kind of conflict where, because everyone is so painted into their own corners and the opposite ends of the room, that the advances that can only be incremental. It might be that this is the only way, slow, painful, deadly as it is, this might be the only way we begin to move towards some kind of resolution.
Is there a scenario where Israel does not end up occupying Gaza? I can't think of a scenario where they don't to preserve the piece. I mean, does a UN player role? I mean, what do we think about the day after?
Well, so here's the thing. Now, Israel has a signal that it is willing to do that in order to make sure Hamas does not come back. But this is not a popular idea among Israelis. For a start. Israelis don't want an occupation of Gaza because they know what that will entail, not just in terms of costs, but also the risks that come with that. Nobody else wants to do that. Nobody else wants to perform that role. I don't think any Western peacekeepers would have credibility there.
The United Nations will eventually have to play a role, but until now, you know, Secret General gu terrorists has been sort of saying, look, we're not this is not going to become a protectorate of the United Nations. The Arab countries, who would logically be part of the biggest part of any peacekeeping effort. Their view is why should
we clean up Israel's mess. This can't become a thing where you go in and bomb Palestine or parts of Palestinian territories to smithereens and expect us to come and clean it up for you afterwards. So there's going to be a lot of reluctance. The crucial question for everybody is peacekeeping toward what end? If there is a clear path after the fighting is over for a two state solution, then I can see and their sort of cost iron
guarantees to that. Then I can see the Arab states saying all right, we will take some of this responsibility if there is a clear path that this never happens again.
All right, So on that two state solution, who is the biggest impediment to that actually happening at this point?
I mean, there's so many impediments, and at different times their you know, their relative weight changes, but Israel is an impediment. The current administration Israel. The coalition government that Benjamin Ettania who has put together has no interest in a two states solution. Many of his partners have openly said that's not what they want, that they will oppose it. The Palaestine authority, which is deeply corrupt, deeply completely inept, and has not dared to test its popularity with an
election in years and years and years. They are an impediment. And of course Hamas and hamas is enablers is Iran is a very big part of the piece problem too. So yeah, the problem a problem, this intractable and this complicated. There are lots of people who have to share the blame.
Just really quickly. Hear Bobby in our last thirty if you could just explain to us what this second stage could look like with a possible extension to free more hostages.
Well, so there's some talk that after these fifty, if Hamas continues to release hostages in a sort of steady set of ten and day fifteen a day, then there's some hope that the cessation of hostility the truth can be extended again. This is something we should all hope for and keep our fingers crossed. It it happens, but we'll believe it when it happens.
Yeah, absolutely, all right, Bobby, thank you so much for joining us.
Bobby go.
She's a calmnist for Bloomberg Opinion, has got a tremendous amount of experience in international affairs reporting, certainly in that part of the world over there in the Middle East. We appreciate getting a few minutes of his time. Here.
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All right, let's around table this open AI. I'm gonna call it a debacle, and that's editorializing, but that's just it just seems to me. It's a debacle, and I think Silicon Valley should be embarrassed by what's happened over the last four or five days. But we're gonna bring some smart people who analyze this stuff much better than
I do. Man deep Seeing, he's a senior tech Analystrom Bloomberg Intelligence Ed Ludlow Bloomberg Technology hosts out in San Francisco, so that he has to take some of the blank He's part of the culture out there.
Ed.
I mean, I guess we have Sam Altman going back to open AI. I guess that's good news. The next question I think most people have is who's going to be on this board and will it be an effective board?
Yeah?
Yeah, I mean the mechanics of it are that Brett Taylor, who was once the Coco of Salesforce, but he's I guess he's more famous for being the chairman of Twitter that's sold to Elon Musk, is taking a board seat. Then you have Larry Summers, well known to this program, this network. Reminder that Larry Summers is a pay contributor
to Bloomberg Television. I'm supposed to say that, and then beyond that, The news for me is that and this is you know, we've covered the ins and outs of the negotiation pretty closely, right, guys that I know that Sam Altman and Greg Brockman were pushing really hard to get at least temporary board seats in this whole thing, but they didn't. So this thing's far from settled. The reason I'm late, and I apologize for that, is I was on the phone with the source who's involved in
all of this, and Sam Altman goes back. Most people get what they wanted, but it ain't the end of the story. There's a lot we still have to find out.
Well, you know, I would like to bring in Man Deep here because this has been, as Paul said, very chaotic four or five days. And for those of us who are maybe just joining Man Deep, if you could take us back to when Sam Alman was suddenly ousted from open Ai. Again, I don't think we have really a reason yet as to why that happened, but maybe if you could give us a timeline of what has transpired from them to now.
Well, I mean clearly, you know, it was a shocker to everyone in terms of the way he was outid and there wasn't any transparency around the reasons. In fact, when they made the three new board member announcement today they said there will be an independent investigation. So clearly there's a lot to unpack. As Ed was alluding to, but look for a company like OpenAI that has a
convoluted structure. So last week they I think it came into focus that they have a profit structure within a nonprofit and now we are trying to you know, make sense of what would a good governance structure look like. We have three board members. We know, this is pretty unusual the CEO not being on the board. So if Sam is going back to be the CEO and he's not on the board, who the other board members are?
There is so much to you know, talk about here, and this is not the way it's going to pan out. I mean, the reason why no one cared until last week is because you know, open Aye was a startup and you know it had the backing of Microsoft, so corporate governance wasn't as big of a focus. But the way he was ousted, it's like, this is so unusual, and I'm sure a lot of the startups are thinking about their corporate structure now, you know, and their backers, the vcs and the early investors.
Ed, what are you hearing from your sources out there as to maybe the value the impact on the value of this company here that's been really impacted negatively and how so.
I love this question for me. This is the question because the story of the last five days is that open aiyes valuation, which right now, based on a transaction we can get into that's pending, is eighty six billion dollars. I reported a couple of months ago. Revenue has a run rate of about a billion dollar for this year billion dollars of sales, eighty six billion dollar valuation.
Wow.
And the basics of this for the audience listening all around the world is we care because open ai is the leading AI startup. Let's just accept that as a baseline. What we learned is that its value is intimately tied to the intellectual capital that's there. In other words, Sam Altman, Greg Brockman, and the seven hundred and sixty eight other people that work there, all of them started a mutiny
to try and bring Sam back. They were successful, but there was a real threat that all seven hundred and seventy employees would just resign, They would just leave. Then what are you left with? A very large building in downtown San Francisco with incredible compute costs and no one in it. That's the way to frame it, right, I don't think that that's unreasonable. And sources this morning and keep phoning me and saying that's the story like on paper.
You know the people behind this, there aren't that many of them, And I think, yeah, sorry, guys, you know I jump in, but for me, that's that's the kind of key point.
Yeah, No, I think that's spot on. And I mean, Mandy, maybe you can help us, like, you know, break down this math a little bit here. As you know, as we're just hearing that we've got one billion in revenue to an eighty six billion valuation, I mean my head is spinning. What does that make sense to you?
Well, so look at you know, all the startups and you can go back in time in terms of, you know, the companies that have ridden these technology waves. There is that promise. Okay, if you have a breakthrough technology, investors don't really focus that much on the revenue that you have right now, but the potential.
And in the works problem.
Well, I think this is different. Opening Eye does have an intellectual property and they are foundational. I mean think of Nvidia, right, they are foundational to what is going on in AI with their chips. Well, this is another foundational element in terms of you know, a lot of companies are standardizing on open Eeye's base model and they have embedded it in their tech stack. Everything is happening on top of what Opening Eye is offering at the baseline.
In terms of a large anglid model. But now I think it puts doubts in the mind because think of operating system like Windows operating system was the standard on which all these applications were built. Opening Eye had that kind of aura, and suddenly that has put doubts and that's why there was this high valuation. So I'm not surprised by the evaluation, but the chain of events has kind of put doubts in people's mind right now.
Hey, ed to be honest, before this, I really didn't know who Sam Altman was, and I certainly wasn't aware of the kind of the presence he really does command within a tech space and within Silicon Valley. How do you think, I mean, where does he go from here? I mean, it seems like he's gonna be the focus of now I'm gonna pay attention to whatever he says and does going forward. I mean, his role in all of this, it's taken a much higher profile.
Yeah.
Look, Sam Altman is a serial entrepreneur, a serial founder. He has been a name out here in Silicon Valley for some time. He has really been thrust to prominence as open Ai became the face of AI. You know, that's the reality of it. In the last year, you know, he's just beloved by the open Ai staff. You know, I'm not exaggerating. Almost the entirety of open aas entire company threatened to resign if he was not brought back.
The investors love him. The investors were adamant that he came back, and that they were behind the scenes trying to do that, including Microsoft. Right Satya Nadella, the Microsoft CEO, was a real peace broker in all of this. We understand. And yet this is why I say that this story is not finished. There will be an independent investigation as to why the board fired him in the first place. We have got no idea, to be frank, why they
did that. I just, you know, without being self serving, I did report on Saturday as an example, that he was out there weeks, within the last few weeks raising almost one hundred billion dollars for a new chip company to take on Nvidia make custom silicon for training AI models. One hundred billion dollars from a standing start. That's the kind of command he has, and the investors, like SoftBank, move battle La, they were willing to jump in.
I mean, the one thing I would point out is you know, whenever a founder gets more attention than the company, that's never a good thing. If you go back in time, you know, the focus is just on the founder and what he's doing that hasn't been viewed very well by the investors. And if they are thinking about doing an IPO, that's the last thing you want is the founder getting all the focus and taking you know, the focus away from the core product, which is the large acred model they have developed.
Could say it sounds like another sam perhaps of fts.
Ed love, thank you so much for joining us, Ed Lolo. He's in our San Francisco office. He is embedded in that Silicon Valley space. And then man Deep Singh, he's our senior technology analysts here at Bloomberg Intelligence. He's seen it all. He's seen the tech come and go, he's seen the tech mobiles come and go. So we appreciate getting their perspective. So it seems like it's quieting down
there in Silicon Valley in Open AI. And now we'll just see how it's kind of fleshes out the board and some governance issues and some ownership and you know, but I guess the last fridays it's kind of like a do over, so we'll keep on top of that.
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.
Street Kumark. He's the president of Street Kumar Global Strategies, former Chief Global Strategists and Chairman Asset Allocation Commitie at TCW Group. A little asset manager out there in LA. But the highlight on his extensive resume for me for your senior vice president at Drexel Burnham Lambert. Those folks, they were slinging it back in Maybe they were slinging it back in the day, folks, Shwi, thanks so much for joining us. You're based out in LA, but we're
in New York, so we appreciate you. You coming in here to our New York studio. Talk to us about how you viewed twenty twenty three. We're closing out a pretty decent year here for most you know, most markets here closing out twenty twenty three, and how are you thinking about twenty twenty four.
Paul, great questions, and I think twenty twenty three we had expected by now to be in recession, which is not come yep. The labor market is very strong, the consumer spending is very strong. I think what was underestimated was the extent of stimulus that was in the system, both in terms of the fiscal stimulus, which came from the final months of the Trump administration first few months
of the Biden administration. And don't forget the balance sheet of the Federal Reserve doubled from bloated levels from the beginning of COVID to the beginning of twenty twenty two. And we had zero interest rates for a long period of fact, so everybody loaded up. And one and a half years later after the tightening began, I think we are still not back yet. But the point I make and I say to my clients is that recession is something that has been postponed, but it's been delayed, but
it's not denied. So I think we are still going to see signs of a recession. And what is me the most is as you have interest rates, having risen and the balance sheet of the FED is still being tightened. It did not pause, and when the two of them go together, that there is something that's going to break in the system in the first half of twenty twenty four.
So how do you then distinguish between what a lot of people will say right now are signs that we're heading towards soft landing, and that you're in the camp here that recession is so possibility.
Yeah, I do not believe in soft landing, Molly, and I would think that when you look at what has happened in past history, it all looks very nice until the thing gets out of control. It happened with two thousand and seven, and toward the end of the year we had the FED Chairman Ben Bernanke say to us that the subprime mortgage situation was just a fifty two hundred billion dollar problem. We found out in the next year, two thousand and eight, it was just a terrible situation,
not just a minor problem. Same thing happened in nineteen ninety eight when you had long term capital management, a small hedge fund which was never going to fail because two Nobel Prize winners.
Ran its rank you.
And it was done again with no leverage, it was thought, but then they had enormous amount of leverage and a lot of risk and it failed as well. So it is all I like to say that it is all lit up till it darkens, the opposite of what we normally say.
Is there some event out there that you're concerned? Could be that long term capital management moment, or could be the subprime issue for in two thousand and seven two thousand, Is there something after that concerns you in terms of catalysts.
Paul, I have a few candidates. One is I had said before the March regional banking crisis that might be a credit event, but we survived that it was a credit event. The next one, my top candidate is a bigger banking institution, maybe an institution which is medium sized, and why do they suffer. They suffer because they loaded up on long dated bonds when Jerome Powell told us inflation is going to be transitory. So in that case, I should buy ten year treasuries to two percent because
I'm expecting it to go to one percent. Right it didn't. It went the other way. So that's one candidate.
Commercip have already happened though by now if that were to blow up, you know, similar to the small banks that we saw in March.
Not yet, Molly, And I'll tell you why I think it hasn't happened yet. If you look at the bank numbers, the deposits with the US banking system has been steadily going down, the delinquency rate is starting to pick up, and the balance sheet is being reduced. As far as the FED is concerned. When you put them all together,
suddenly something clicks. It doesn't happen gradually, so which is why I think, timing wise, I would look for the first quarter of twenty twenty four is when something breaks again. So we talked about commercial real estate is the third. You can also have again a crunch on the credit side, which is already taking place. My final candidate is the repeat of what happened in the United Kingdom September October
of twenty twenty two. Bond eels rise a lot. There it was the guilt eels, and here we are talking about treasury eels and pension funds incur huge losses. They have not done well into of general performance, and that situation worsens and puts pressure on the FED.
One of the things as we think about this economy in a hard landing soft landing recession is the labor market. We got some more labor data today. Initial JAMAS claims came in at two hundred and nine thousand, below expectations, less than we saw last month. I mean, this labor market seems to defy most logic in how robust it is. What do you make of the US labor market.
Yes, the labor market so far has been very robust, and I think the reason that has been the case once again traces back to the amount of stimulus. There is so much money that you were able to give, and also the shortage of labor which took place due to COVID with one part of the working force typically the wives who stayed behind to provide childcare, that in turn reduce the workforce. I think we are just coming
back to it. But if you look at the layoff numbers, Paul, you're seeing that after a period of very strong now despite today's initial jobless claims, the unemployment has started to rise. Yep, and they don't. Once again, it doesn't rise gradually, and history tells you that when it rises, it just surges suddenly, and I wouldn't be surprised to see that happen in the next two to three months.
So let's go back to these stimulus payments, because there right now is such a debate in economic circles of how much excess savings the consumer has. I feel like I see a different report on this every day that savings are dwindling, there's nothing left. Another one will say there's more than we really thought, and that's what's giving the consumer still a lot of gas right now to keep spending. And same with like the on the credit
side as well. You mentioned delinquencies are picking up, and we've seen credit card balances getting higher, but as a share of total deposit's still very low. So how do you assess right now these conflicting messages about the health of the consumer.
That's again a very timely question, and I would answer you, Molly by saying that while the aggregate numbers in terms of delinquency, the aggregate numbers still seem really benign. There is a difference across income groups, meaning the numbers are showing recently that even the consumer spending, a good chunk of the increase is coming from the highest one or ten percent maximum in terms of the income groups, and the lower income groups are actually cutting back delinquency wise.
The credit card delinquencies are the first to show up. And the reason is it is easy for you not to pay. You don't have to go and ask anybody to give you a loan, and so that is starting to happen the next If it starts to happen also in terms of what happens to the payments to the banks, then I would be even more concerned. But it is already happening with low middle income groups. It's not happening yet with the high income groups.
Hey, Swebaut thirty seconds left a lot of geopolitical issues out there for you know, investors to deal with. How concerned are you with again the Middle East in Ukraine and what that means for maybe the global economy.
I'm concerned again to reply to you very quickly, Paul, that I'm concerned mostly from an economic side. What happens to inflation? Okay, And yes today we are seeing a big drop in oil prices. But if the Hamas Israel ceasefire doesn't happen, or if it does, if it breaks up, then you're talking about war escalating and that in turn would mean much higher oil prices. Oil prices are nothing
or a huge problem, one extreme or the other. It either goes down or the oil price goes to one hundred and fifty dollars a battle, and that's a risk we run for the geopolitical situation.
Absolutely.
Shre thanks you so much for joining us. Shri Kumar. He's a president of Shri Kumar Global Strategies based somewhere in California and one of those beaches or something like that, but he's actually coming to the world capital, New York City, so we appreciate him coming into our Bloomberg Interactive Brokers studio.
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Earnings Deer. They put out some numbers. I guess the beat current quarter results, but their guidance was very disappointing to the street. I see the stocks off about three and a half percent, but that's the high intra day high of the day, so it had been a lot lower earlier. Let's bring on the anasto follows this compedy Chris Chile, you know, he's the industrials analyst for Bloomberg Intelligence,
joining us via zoom from Princeton, New Jersey. So Chris, talk to just about what we heard from your good friends at Deer.
Fairly conservative guidance heading into the print, just given what we've seen with softer commodity prices, lower farm income, and I think it was pretty well anticipated that the cycle was turning, but this outlook is material below what we had anticipated. Deers projecting that income will drop to about eight point eight billion dollars at the midpoint next year. That implies roughly twenty eight twenty eight to fifty dollars
in earnings, which is thirteen percent below the street. You know, commodity prices are still at historically high levels above long term averages, the edge of the fleet is still quite old, and farmer balance sheets are quite healthy, so we really see a more modest downturn. This really sets just a low bar and really an overly conservative outlook.
Yeah, it looks like, you know, this sector here Chris is otherwise showing some other, you know, some other evidence of slowing. We saw that the rival over to Deer. CNH Industrial said that it's reducing salaried workers, that their equipment sales are slumping. In Corteva, which makes seeds, has also warned of a slow down in demand from farmers. So tell us you know the broader outlook of the farming sector right now and really why people should be paying attention.
Yeah, I mean, we hit peak production this past year, so twenty twenty four will be a slower or lower growth year. This has been kind of well advertised by
the pullback we've seen in commodity prices. CNH certainly cautioned when they reported that volumes will be down in twenty twenty four, and we actually saw a Deer reduced production too at their harvest Works factory in their fiscal four q In North America, inventory seem to be in good condition, but as you look globally Europe and particularly South America, they plan to underproduce retail demand next year, so further production cuts to come.
What's the lead time? Like, tell to us about the cycle for a company like deer. I know it's a cyclical business and it's based upon farming, but just give us a describe as cycle for us.
Yeah, I mean, ultimately they're driven by where crop prices are and that ultimately dictates farmer incomes. You know, we've had three very strong years here in North America. So we were roughly thirty percent above mid cycle in twenty twenty three, which was you know, pretty comparable to the twenty thirteen peak. So again it comes down to where crop prices are. They're still you know, supportive of making capital investments, just not at the level we had seen over the last two years.
Tell us, Chris, about some other markets that are really important for the farming space that you know, Brazil probably being one of them, and maybe some other regions in the world that are really important when we're thinking about the outlook for farming.
Yeah, if you think about the markets that matter most for deer, it's North America and it's Brazil. Those are the larger crop producing nations. They are more conducive to the larger high horsepower equipment, which which drives higher margins for deer. And ultimately it is corn, soybeans, and wheat. Those those are really move the needle.
All right, Chris, I'm a farmer. I'm in Moline, Illinois. How often do I replace those big, big tractors that I love to drive to help me, you know, get my crops out of the ground.
Yeah.
So if you think about a piece of large farm equipment, you know, typically the useful life runs about fifteen years, but that includes a pretty robust trade cycle of four or five different users. You know, some of the larger operations we'll we'll swap out equipment more frequently, just given some of the technology and upgrades you know, really make farmers more productive and help lower some of the input costs.
And combines, you know, tend to have a little bit shorter useful life, used a little bit more intensively, particularly down in regions like South America.
So when I what's a combine? I gon to get one of us big combines that I see, you know with the big cabs and they got all the bells and whistles. What's that going to set me back?
You're gonna have to break out the wallet, and you know, a large combine could run you know, close to all dollars with all the bells and whistles and the new technology. They are a large capital investment.
And so I have to finance that, right, So if I got interest rates, they're no longer zero. So it's just like buying a car, isn't it's a lot more expensive.
It is.
But you know, interestingly enough, we've seen you know, higher interest rates, you know, to this point, really haven't had a detrimental impact on equipment sales. And I think a lot of that has to do with you know, crop
prices were you know, historically elevated farm income. We set a record in twenty twenty two, so farmers have had a lot of money in their wallets, and we've actually seen a lot of farmers go out and buy equipment with cash, the exception being more at the smaller and more consumer driven products those had ten historically been a
little bit more rate sensitive. That being said, now with the pullback and crop prices and lower farm incomes, you're starting to see some of that interest rates sensitivity deteriorate some of the buying power for the law larger operations.
Let's go back to the deer earnings call that happened earlier. Today, management brought up labor costs a lot as mentioning that this is the largest inflationary item within their production bucket, and that a lot of it is contractual, mentioning that the labor contracts that they have in their factories have these scheduled step ups in the year. So is that saying that labor costs are going to get even more expensive for Deer?
Yes, that being said, production costs we actually saw for the first time in three years this fiscal quarter turned into a tailwind. So while labor costs are going up, other costs are coming down, which is helping mitigate some of those higher and labor inflationary pressures. So net, they're anticipating twenty twenty four that production costs will actually be a tailwind.
So how's the supply chain here? I mean, I know, for while they're like the automobile industry, you know, the industrial equipment guys couldn't get the chips, they couldn't get some of the parts they need to build these things, how is the supply chain these days?
The supply base has you know, really normalized. It really is not a factor at this point anymore. There are pockets from time to time, but we've seen a normalized supply chain. I'd expect you get a little bit of tailwind some factory efficiencies as we move into next year. But it's normal course of business.
A lot of times when we see companies set really low guidance. My initial reaction, and maybe this is just the cynical person in me, is thinking, oh, you know, setting the bar low so that they can what's that phrase to under expect to outperform?
Yeah, under promise, over deliver.
That there, thank you. I knew you would say everything is that? Is that, Chris? What you think is happening here? Or it really is as dire as Deer is making it out to be.
No, I think that's exactly what's happening here. I think they set a very low bar, and I wouldn't be surprised to see beats and raises throughout the year. You know, we had an anticipated fairly conservative guidance just given some of the macro uncertainty, pharm economy uncertainty, so that was to be expected. But to see you know, double digit top line to crime declines across all businesses, pretty heavy decremental margins, you know, thirty five percent plus, that's more
indicative of a more severe contraction. We just don't see that as a realistic scenario at this stage.
I remember when Chris was young, he wasn't so cynical. He would take management's guidance at face value. But now he's calling him out, saying that maybe either kind of thrown in the kitchen sink here. That's that's a mark of a good analysts. He's become a great, great analyst for us. Chris Gielino, industrials analyst at Bloomberg Intelligence. He follows all the fun companies. I think like Deer. He gets a ride around on tractors and stuff like that.
Is that part of the job.
Oh yeah, you go to an analystate, you got to check out the merch so they take Yeah, it's okay. Yeah, so it's good stuff. They have good time. Now my job is better because I used to get to go to movie premieres for the Disney, go out on cruise ships with Disney and all that kind of fun stuff.
And now you're here in the album here one of the biggest in person office proponents I've ever.
Met, exactly, and I've thrown into talent that I've kind of figured it all out. My kids are saying forget about it. You've lost that fight.
Thanks for listening to the Bloomberg Markets podcasts. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three and on Fall.
Sweeney I'm on Twitter at pt Sweeney. Before the podcast. You can always catch us worldwide at Bloomberg Radio