Inflation, Israel, And Intel Job Cuts (Podcast)

to Intel. I'm looking at I NTC Equity Go and then I hit the f A function for financial analysis. I got revenue going from seventy five billion last year to sixty five billion this year. I got free cash along going from ten billion last year to negative three point four billion this year. What's going on with Intel? I thought this was the steady eddie of all technology stocks. No, I mean, look at the management changes they've had over

the years. They brought back Pat gould Singer, and the reason was Intel has been behind both in terms of chip manufacturing as well as chip designed. Remember there were the vertically integrated players. Moore's law was really all about law, which is like every something every year gets I mean basically the transit. You can pack more transistors in a chip because of Moore's law, and that Moore's law paces declining.

But that should affect everyone. The problem with Intel is it's really trailed on the process, not technology, the geometries that enable more transistors to fit in that chip. And that's where t SMC has really hive on semiconductors. So Apple and Video, A, m D, all the fabless chip makers, they give their designs to t SMC. T SMC makes them and that is why they're doing so well in terms of market share. Until on the other hand, is losing its relevance in CPUs because of processed note as well.

As you know the nature of computing is changing now we keep talking about more and more AI. AI is done is done not just using CPUs but also GPUs and other types of custom chips. So lots of job cuts. Who cuts jobs in Silicon Valley? Well, it's inevitable here everybody, Yes, everybody. I think you make a great point, Matt. You will see that with big tech across the board, and Intel more so, because clearly something is not working in terms

of you know, their designs as well as manufacturing. And even though they bought a company Tower Semi, that was a recent acquisition to you know, scale up on the foundry side, I think they have a lot of inefficiencies in just how the companies run. So I wouldn't be surprised if you see ten to fifteen percent in fixed cost custs and we estimate that to be you know,

around two to three billion just in cost. I think one of the things that's hard for us man deep wrap our heads around is over the last couple of years, um, no one could sell enough products to match demand because nobody had chips. And it didn't matter what segment you were in. If you're talking about cars, mobile phones, refrigeration, eiders, you didn't have enough chips, so you couldn't meet demand. Demand was so high and your uh, your your production

was too low because you couldn't access these things. Now, this year I look at the Socks Philadelphia Semiconductor Index. These guys who were the most in demand product like in the world for last two years, every single one of them is down. There's not one of the thirty semiconductor manufacturers on the Philadelphia Index that's had a game for the year. Why, Well, because this is a cyclical sector. You you go and you know this time is no different.

But it's like it turned on a dime. It was boom and then bands and that's where I think you have to go segment by segments. So Qualcom really is big on the mobile chips side. Apple does their own chips, but on the PC side it's Intel. On the AI side it's in video, and then m D to an extent as well. You know, they have diversified both on the server side as well as the client PCs and gaming. So clearly all of those names. Who I'm just saying,

who are the winner? Intels down year to date, and videos down sixty one percent year to date, a m D is down sixty year to date. Who one are the winners here? Who's up? Well? Long term, you know there will be more demand for AI and machine learning, these kind of workloads, and that's why and videos still trades at a premium to a m D and everyone else in the group because they have the highest share

over there. So if you go by that token, the market is already rewarding in video with a horror multiple. But clearly expectations are coming down because we are in that blood situation that I mentioned. Our former colleague on Entrini Bouston, he taught me, like they won when I was asking about Semis, this is a this is a this is not a place for you know, the pain of heart, because these things move big, and they move in these big cycles, and you've got to be in

front of the cycle. You're gonna get crushed. Look at memory yep, you know, down just because of the blood situation. It's a commodity at the end of the day, all right, So real quick on Intel, finish up Intel. It's a big name, you know, a hundred billion dollar market cap. It's got a five point eight percent dividende. I like that, but that's is that at risk here when I look

at a company with negative free cash flow? Absolutely, and I think the fact that they're talking about cutting costs, I mean and and obviously they were a beneficiary of the chip sacked. They are getting those government subsidies. If they continue with the dividend, I think there will be questions asked around why they are going out with such a big you know, uh cost cuts. So clearly I do expect, you know, given the negative free cash flow. And it's not as if you know, when Sammy's come back,

which again, Sammy's a cyclical things will come back. But then Intel's problems are more than you know, the cyclical nature of this semi cycle that we are witnessing their position. Yes, so the dividend is at risk. I mean that's the scariest part. I mean, think about like original Silicon Valley companies.

You think into else Santa Clara, California, UM, some of the you know in the garage kind of thing, but you know, as Mandeep suggests, you know, in the very beteen garage, a spotless garage with zero particles per million exactly. Sing Senior Annals covering technology for Bloomberg Intelligence, joining us Live and our Bloomberg Intelligence studio. He does not mail

it in, he comes in. We appreciate that. Well, we got earnings kicking off in Earnest Friday when the banks kick us off here, and we'll have it for the next few weeks. But it really just feels like the this market is really focused on one thing and one thing only, and that is the photo reserve. How high will the FED take rates and how quickly will they do that. Let's have a little roundtable discussion on that.

We bring in Vince Signarolla, global macro strategist with Bloomberg News and and along chief US economists with Bloomberg Economics, and let's start with you. You had and your economics team had a really bold call, I'm gonna say a couple of months ago, and you said that you think the Fed funds rate might go up to his high is five when I think the consensus is probably somewhere in a three three plus range. It kind of feels like you're on the right side of that trade. Here.

What is your call about how high or how aggressive this Federal reserve will be? Right? So, Um, the reason why we thought the terminal rate would be five percent, so the Fed will have to rate raise rates to five percent around in late spring next year. The reason is because we think that the Fed is very concerned

about a potential wage price spiral. Um. And in their reaction function there they are basically assuming a natural rate of unemployment or some people call it nehru uh to to be four point four percent rather than the you know, before the pandemic it's around four percent and and um, so if you make that assumption, then five percent would be the optimal monetary policy. So that's why we arrived at that number. And I do see risk that they

could have they might have to go higher than that. Um, if the neighbor really is more more around the ballpark of five, as Larry Summers is suggesting. All right, Vince, you've had access to Anna's research for months. Where did you get it wrong? Where did I get it wrong? I don't think I got it wrong. Didn't you think the Fed was going to turn around and and start to cut? I mean, shouldn't we be at a point

where they are done now? I think the Fed may have one more in them, but I think that that's about the last one they're going to have in them. Um, we're closing in on a potential recession. The numbers don't look good. Uh. Today's price PPI numbers were really mixed. And the market right now is actually trading off the yield of tenure guilts, not really trading off us inflation.

When UK ten you're guilts at a two thousand eight high. Uh, this market tanks and I think people looked at that and thought, oh, well, we're reacting to the PPI numbers. That is not the case. Now we're see down in the S and P and the green and that's because UK ten, your guilts are off twelve basis points from their eves. It's it's about financial conditions and the risk

that is what's wearing financial markets right now. And if the Fed wood raised to five percent, I think they would crush financial conditions and close an all out jailbreak on risk. And I don't see how they could would would be able to stay in higher rates in that scenario. I mean this this started with Balley. Frankly, what I would say were your responsible comments yesterday by basically saying to pension funds, you've got three days before we close

the door on you. But they've known that for weeks. Yeah, But I mean, you know, the hope in these financial markets is that they will always give them more time if the situation persists. But you've got to have some spine, right as a central banker, You've got to have some backbone. You can't let the markets wag you around all day long. I mean, in the in the last fifteen years, when have they had it? No. I think that's the precisely

what J Powell is trying to reinstate here. Um, they're gonna raise rates until they break inflation and break the idea that there's a FED put and if you're on the wrong side of that trade, it's gonna hurt. I think they're gonna break a lot of other things before they break inflation, very likely coming from it seems like

they know that as well. That's that's part of the trade. Well, I don't see how that's a FED mandate that they need to break everything just to get inflation down where it's most of the inflation is food and energy, and it's out of their control. I don't see how razy weights is going to lower the price of gasoline or lower the price of groceries. I mean, what how you know Volker did the same thing and he's he's hailed as a hero these days. Completely completely. He broke a lot,

went over, you know, the country went crazy. People were throwing bricks through the window the Federal Reserve. He still did it, and he won. This is not the seventies, trust me. Um. What led to the inflation of nineteen

seventies was part Mr Burns. Every time, every time a component of the CPI would go up, he would remove it from the CPI, so the CPI number would re maintain it's I would argue that this is a difference between PC and CPR, when when Greenspan removed food and energy and by moving over the core PC instead of CPR,

he did exactly the same thing. He took out the components that that are essentially what are driving inflation right now, and may things look to him for a long time today if they could so, Anna, Anna, do you share the concern that this FED may go too far? Well, you know, I'm actually on the side that I think Powell and and his colleagues might lose their nerves and could possibly decide to to cut late in three or

four if the recession is deep. Keep in mind that during Bulker's era, Bulker did a change the monetary policy operation to allow um you know, instead of discretionary um UM FED funds right targeting, he moved to reserve targeting. So actually he took that really uh that that that

that decision of raising rates to off his hand. It's not his doing, he can claim to the politicians and you know main stream back then, it's not not our fault because we we didn't raise it to this automatic, you know, algorithm working in the background, whereas today Powell has to make the decision whether they have to keep raising.

And if you look at the dot plot in September, you can see that in four there's actually a dispersion of views among the f O m C members as to how much to cut so and and in their projections they only have unemployment rate at worse to you know, four point four to four point six percent. So I think that if unemployment rate turns out to rise to like five or five point five, they might lose their nerve. Okay, we'll have to see. It's a we'll see if they

can keep their nerve. There, great stuff, great round table of Insignarella, global macro strategist with Bloomberg News and An Alan, chief US Economists with Bloomberg Economics. Matt, we've got a special guest in the student. Yes we saw, I saw you run over there. Yeah, into the TV studio and grab him and bring him in here for ray. Well, this guy you heard Chief market Economists UM or chief economists at banks. Gary Shilling was the first one. He

started that. If I'm not incorrect, UM after what after Stanford? No, I I worked for Santral New Jersey first that was now uh standard, and then went to Merrill Lynch. Okay, so, but it was Merrill Lynch, Pierce Fenner and Smith. That's he did it back before? Is that right? Okay? Carling's first being and then Smith because wyn Smith was short

of the modern farmer of the firm. In any case, Um, fast forward to the Great Financial Crisis, and you were one of the big bears, one of the few people, um warning as we were also sighted and buying five houses, fully levered up and I thought the prices would never go down. You were one of the few people warning of that. What do you think now as we are entering another crisis of sorts, right? I mean we had

the pandemic, which was something completely different. Um, then we I guess spent printed and spent as much money as we could. And now we're going to pay the price for that. We're gonna get the hangover for that party that we had. Right. Well, we we don't have anything huge like the dot com uh nonsense of the late of the late uh the unities early two thousand's, and

we're certainly in housing. You know, we've had a bubble and housing you've had the flight from city apartments to the suburbs, rural areas with a pandemic, and a big run in single family housing. But it's it just doesn't compare with the with the subprime mortgage nonsense that we saw a decade ago. So but it's it's more a

little of this, a little of that. And again I think that I think the overall arching theme is there's just been too much money in the economy pumped out by the UH Congress administration in response to the pandemic, and then of course the FED just I mean, you know, there are assets went from from four billion to nine billion in a matter of five years, I mean traillion. It's unbelievable. And of course what the problem now is the FED is embarked on the on the mission to

get rid of that liquidity. Now, how much they're going to get rid of Uh, they're taking Their target is a month, but just add that up and see how many years they were taking it to even go to trillion back it's uh, it's what do you think? And and it wasn't even five years by the way I'm looking at If you type FED val so f E D space B A l go on the Bloomberg terminal, you can see the one I learned their balance sheet.

We went from UH in two years three point six trillion, let's say two eight point five trillion, so in two years, um, So what is the FED now? It seems that Powell is intent and we were just talking about this within Signarella and along, intent on raising rates until he breaks inflation and doesn't care what else he breaks. Is that the right interpretation. The one thing he doesn't want to break has already bent is FED credibility. I think that's

the whole, the whole secret to the FED action. They were behind the curve. They clearly did not recognize that inflation was more than just supply chain disruptions reopening the economy very ephemeral UH features and so they they really are playing catch up. And and you know, Paul Is, he's made it clear he's he's an effect said we're

going to do this recession or no recession. And of course he's also fighting the string of puts, the Greens fan put, the Bernankee put, the yelling put, and everybody thought there was going to be a pole put, you know, was the FED would bail out Wall Street and so he has he was really behind the behind the a brill there and and uh, I think it's as they say, the FED normally, uh turns towards ease even before the

peak in business. They never know where the peak in business is until National Bureau Economic Research says so, and that a year later, and that's you know, and when you find out it's about those hand as a pocket in your underwear because it's three or four quarters later. But their point is, Uh, the FED, when they see that they've done the dirty deed and precipitated recession, they ease off. This time. I think they're going to continue. We and we probably are already in the recession, but

I think they're going to continue. And they really want to see confirmation that inflation is down and that their credibility is re established. And you know, I think there's still a lot of of question is whether Fed and the and the and whether Paul and the Fed half teeth right. So I mean we're speaking with Gary Shilling, President a Gary Shilling and Company. Gary, how about the consumer? It seems like the consumers still hanging in there, buying stuff,

going on trips. You know, it doesn't feel like the consumers really uh Bloomberg column a few weeks ago, pointing out that it's the real economy declining. The nominal economy isn't well when you get eight point three rear inflation, you know, if if that that that's on top, that's the that's the veil of inflation. And this is what

we had in the late sixties and nineteen seventies. Uh. You know, I can remember back then, Uh the uh, the gal Jones industrials were skirting back and forth around a thousand for uh for ten years in real terms, in real terms, it declined. It declined seventy percent. Yeah, And it's the same thing here. And I think I think the media is And that's why I wrote that column when we're calum because I think the media is very off base and not realizing that the real economy

is real. Real retail sales are down, real hourly wages are down. Uh and and and you know the consumer is is really retrenching and there and the consumer doesn't have a lot of spending power a lot. I mean maybe that's what is driving the Fed here. Got to get that inflation down. Well oh yeah, oh yeah, oh yeah, they've got the bit. They've gotten their bit and their teeth.

But you know, you look at the consumer and they they've spent a lot of that of that, uh the money they got from uh pandemic, uh stimulus and where else where what else they got? Housing? House prices are declining, stocks stocks are collapsing, So people really don't have the money, you know. Obviously the guys on the top are okay, but the rest are are are in trouble. And so we're gonna we're gonna see further declines in real spending. In all likelihood, no more money, But we got honey.

When's the next batch coming out? Garry is also the probably the most famous apiarist on Wall Street, Is that right? Okay? Yeah? You keep bees in I think two different places, right yeah. Well, I've got some out on Fire Island, Beach House, most of them in New Jersey, a couple of locations. But I gotta tell you, this is the worst year for honey I've ever had. We normally, we normally take off three or four thousand of those one pound jars that we hand around you guys, and this year we got

si wow, WHOA, Well, we'll have to I'm glad. I don't try to make my living in agriculture. All right, Gary, thank you so much for joining Gary Shilling. He's president of a Gary Shilling and Company. Joining us live in his Bloomberg Interactive Broker's studio because Matt Miller went and grabbed him from the television studio. I'm going is that I want to get right to our next guest, Matt Winkler. He's the editor in chief emeritus founder of Bloomberg News.

He's usually in our Bloomberg and Actor Brooker studio, best in our San Francisco Bureau, which is a phenomenal office by the way, right on the wharf. They're overlooking the Bay Bridge. Good stuff there. Who knows what kind of trouble he's getting into, Matt. I hope he's going to Humphrey Slocum, No Hill, No Humphrey Slocum. That's the ice cream place that's near the office. And I'm gonna say, if you get a chance, stop by there and order a scoop of secret breakfast ice cream. Okay, so there's

actually he needs to go to Taddich Grill. That is the oldest restaurant in San Francisco. It is awesome and I think it's right up. Matt's Ali, Matt, You've got a great column out today about Israel. Ignore Israel politics. It's economy is thriving. When I think Israel economy, I think technology. What's what's driving Israel these days? Well, you just nailed it. It's great to be with you, and

it is technology. And and essentially what happened is during the past decade, corporate Israel, if you like which is you know more than six companies, was transformed to something much more diverse. And the diversity is really what's driving the economy. Where Israel ten years ago was mostly you know, if you like pharmaceutical Tiva is obviously the name comes to mind. And you know some industrial companies today you're

talking about UM. You know dozens of companies with more than a billion dollars of capitalization market capitalization, and they're in tech and it's food tech, and it's every other kind of water tech, it's climate change, it's sustainability. UM. Everywhere you look, there's innovation and that really has transformed the economy. As you said, I think that you know, to me, innovation is the key. I UM consistently see

companies that aren't afraid to take risk coming out of REEL. Lately, there's been a spate of documentaries as well on cannabis research and hallucinogenics, and it seems that they lead the world and research. They're not just saying that because those things sound fun, but because they don't have this kind of puritanical UM sort of regulatory system that we have in the West. What do you what do you think allows them to get out there and do this kind

of innovation. I think there are two things. One is, as you just said, it's there is a lack of fear of failure. There just is no fear of failure in Israel. People just do what they think UM has potential, and they don't worry about whether it's going to fail or not. The second thing is probably UM they're often creating, if you like, solutions for problems that have yet to

be defined. If that sounds crazy, uh, that is very much a characteristic And an example of that is if you go back to UM when Mobile I. UM really came about UM and Mobile I today is you know, of the auto market, cars everywhere around the world are using the mobile I equipment for driver assistance and UM you can't miss a mobile eye product really in any vehicle, um, anywhere and so UM at the time that invention, if you like, was dismissed. UM, and people were very skeptical.

And so it's a good example of you know, Israel doing things really way ahead of where the world is at the moment. And Matt, you've, as always you've got some great charts and some great data in your columns. I'm looking at one here, just amazing. I never even thought about it, but among the thirty one currencies mobily that trade against the dollar actively over the last ten years, only one has outperformed the US dollar, and that's Israeli shuckle.

That tells you that the market really believes in this Israel story. Yeah, that's really, if you like, the leading indicator, and a very consistent one. Um. You know, if if I told you ten years ago that the shekel would be the top performing currency in the world, um all yeah, when the dollar is as robust as it is, um, you know that that just would have been dismissed out of hand. And yet Um, as you say, it underlies

really what's going on in the economy. Um, and most people are really not paying attention to it because we've got these perennial headlines about you know, West Bank clashes, missiles from Hamas and Gaza, and of course a nuclear showdown with Iran, and you know there far too often, you know, the stories that we read and listen and watch, and yet um, the real story is the innovation and the strength of the Israeli economy and how stable it is.

I'm curious also about the academic institutions there, because you know, research is often rooted in universities. You touch on Hebrew University, but I see uh, tons of researchers. It's almost like they have a whole system of Stanfords there. Yeah, um, you know, I didn't mention this, but um, it's well known. You know, everyone in Israel who is um, you know eighteen or so goes into the armed forces and it's part of their requirement national service, and you know when

they come out, they then go into university. But there already is a if you like a focus on a maturity level, uh, that you find in Israeli universities, and it's not you know, anyone in particular, it's all of them. And out of that comes the innovation that we're talking about Yeah, and Matt, I wonder you say something that geolitical risk investing in Israel, but they seem to attract

the investment dollars despite those risks. Right, there isn't a company that you know about that doesn't have R and d uh in Israel. You know, whether it's Alphabet, whether it's Apple, whether it's Microsoft, there's there isn't a company that is in technology that doesn't have uh, something significant as a presence in Israel. And that's because of the engineering that's that's vested there, and uh, you know, that's probably an asset that just continues to grow. Alright, good stuff.

As always appreciate getting a time from Matt Winkler, editor in chief emeritus and founder of Bloomberg News, calling in from our studios in San Francisco. I will I will again say, definitely get some ice cream, Matt Humphrey Slocum. It's right next to the office, and they have My favorite flavor is called Secret Breakfast Delicious. I think cocktail cocktails at Tatach Grill later in the day, Matt, thank you so much. We appreciate it. I want to talk

about the airline business. Um. You know, people will definitely. We're back on the flights on the planes this summer in a big way. Every people traveling everywhere, taking advantage of the strong dollar heading over to Europe and other parts of the world. The question, though, is, you know, how profitable are these airlines going to be in this

new world. George Ferguson covers Airlines Aerospace for Bloomberg Intelligence and one of the airlines that I have not flown because i'm you know, I'm in a new work person in Neworks all about United Airlines is Frontier Airlines. George talked to us about Frontier Airlines. What are your thoughts here? So with the merger of Jet Blue and Spirit will be the only ultra low cost carrier in the US right now. I'm sure another one will rise, uh, you know,

to to compete with them. Um. They lease a lot of their fleet, which means that it's great for growth, right. There's no cash out when you take airplanes. You can expand pretty quickly. The challenges in a downturn when you want to lay off capacity, it's really hard because you've gotta pay rental payments and everything you got out on you know, on the tarmac. It's not like you have airplanes your own out there that you can park and

not have the painting against it. So it gets hard to knock down capacity, which means they're typically an adder of capacity, you know, or or maintaining capacity again through ups and downs, and that can be very dilutive unfares in soft periods, and so that may be a challenge for them as we as you're going to economic slowdown as we get into the you know now through the end of the year, begave in the year, but they, um do they you know, the benefit of leasing, at

least I know from cars is that you always have the newest and best and most fuel efficient thing. Is that the case with their fleet as well? Yeah, a lot of what they're leasing is the is the newest, uh airplanes, which are most most fuel efficient for sure. Uh yeah, So I mean it's absolutely advantage Again, it's it's one of those things where you can expand faster because there's no cash out. You definitely have most fuel efficient equipment. But if you get to a downturn and

you've got to park airplanes, it gets very painful. Are we coming to a downturn? I don't know, you tell me it looks like the tenure Treasury is telling me that, and and inflation tell me I said, was to keep raising rates and that's got to slow things down. So I think they're so stepping back, Georgia. On the airline business, what are the companies telling you about kind of their demand? Again, they had a presumably from a traffic perspective, of a

strong summer. What do they think about the next six or three to six months? Maybe? Yeah, So, I mean, you know, we're getting ready to go into earning season here, we'll get Delta tomorrow. Um. But we had American sort of pre announced most of their results earlier this week, and what you know what I thought interesting? One, they're they're all touting the fact that they're beating UM levels

of revenue. They are American beat. Two, the revenue was up fourteen against that, but costs are up to and so profitability still lacks twenty nine. So was it a strong summer from the volume of you know flyers they carried? Absolutely, that was good. Costs are costs are higher, right, and that's why revenues are higher. Fuel right up sevent depends at what point in the in the quarter you wanted to measure it uh and labor. Right, there's a lot

of labor inflation out there. The airlines aren't. I the into that we kind of dial in five to ten percent kind of labor inflation, and that means that they're against still lagging their twenty levels of profitability. I mean, I think if they're carrying close to twenty nine levels of passengers, they ought to be able to find a way to get back to that profitable profitability level. They

haven't yet. They've got to drive more efficiency into their businesses when you look at when you look across the sector, um, who's got the biggest who's the best positioned in America? You know? So I think that as we go into the winter here and the business travel recovery continues, I think the airlines focused on some of those more premium travelers,

business travelers, high end leisure. I think they're better situated, right, and so American Delta United, Right, They're going to continue to gain from more overseas travel, from more business travel. And I think the more that you're catering to leisure, especially low end leisure, which I think is getting pinched the most by inflation, the more challenging challenging is going to get and those airlines like Frontier and Spirit will be putting all their capacity in the marketplace instead of

cutting some of it short. And that means it's going to get very competitive at the bottom end of the market. So where are we, George, in terms of capacity? And you know, are are there enough planes? Are there pilots? Are there enough baggage handlers? Where are we? Again is an industry capacity versus pre pandemic, you know, so they you know, the airline's kind of started the summer out trying to fly about twenty levels of capacity, maybe a

couple of percents shure. Now we're ten to fifteen percent below twenty nine levels for lots of the carriers, you know, the ultra low cost are they're above, but they're they've been growing throughout the pandemic um and so that that's relaxed things a bit on the marketplace. I think there are plenty of airplanes. I'm just looking at Boeing's report for deliveries this month. They've delted fourteen airplays into in the Southwest in the last month. Um, they've got more

parked than the tarmac out there. If you need some so I don't think there's a sort of of airplanes. Pilots are a bit of a challenge, but again I think at these lower capacity levels they shouldn't be too bad. But they're a bit of a challenge. And everybody's got a problem with labor. But again I hear there's less

hiccups right now. So I think operations are stabilized a bit, and some of that that stuff is when more stabilized, maybe I'll go to pilot school, Matt, and you know, get my pilots lace and I'm gonna fly some of these big birds. I think it's it's difficult. I mean, it's probably fun to get your pilots license, but then to fly some of the big planes that might might be past myspired day, those are the most fun. Those are the most fun, exactly right. George Ferguson he covers

airlines aerospace for Bloomberg Intelligence. He's been doing it for decades. Before he was a Wall Street guy, he was actually in the United States Army, believe it or not, an intelligence officer of all things, which go figure. George Ferguson, UH aerospace analysts, Bloomberg Intelligence, PepsiCo. They reported some better and expected numbers because people still despite inflation, despite a blooming recession, or still drinking the pepsicola, still eating their fritos,

which are my favorite snack. By the way, for those who care, Ken scha he does his stuff for a living. He's a senior equity analyst for Bloomberg Intelligence. He's been covering knees, you know, beverage, tobacco, cannab stocks for decades. Tons of experience. So I can should I be surprised with PepsiCo? They just reported some better and expected numbers. Business seems to be okay? Should I be surprised? Or is this what these companies do kind of in and

out of different cycles. Yeah, hi, Paul, gait to be with you today. Um, no, you shouldn't be surprised. You know, I you ran the numbers and today represented PepsiCo's twenty straight EPs beat. So this is a company that has really leveraged it's uh diversity by product line, geographic reach, by channel. We did they beat your estimates as well? They did, And you know, next time you estimate Pepsi earnings, why don't you just add if they beat everybody twenty

times in a row, then there's a problem. You know, you've got a point there, um, but you know it speaks to the strength of its brands. And these are iconic brands, as you mentioned Paul Prito Lay, Cheetahs, you know, Lady Chips, Quicker Roads. And what we learned is, even though they're effective, net pricing was up a real eye popping number of volumes are only down one. So consumers,

you know, they accepted the price increases. They treat these brands as necessities and uh, it's it's no it's no surprise that the shares are up and other consumer staple stocks are benefiting today from you know this good news. So, um, what kind of innovation or or or you know, other products as pepsi out with them. Obviously we're addicted to cola, soda and salty snacks. What else are they doing? Well, they have something called nitro soda. If you but if

you pour, it comes out and you'll follow me. It doesn't like it doesn't it sound like a big deal. But for you know, loyal consumers of these products, you know, little things like that do make a difference. Gives them another reason to go down the soda io and try it out. Um, and you know the company's innovation, particularly lays chips, you know they had the campaigns are going down for a while now about you know, asking consumers what your favorite flavor is, and you know they respond is, Uh,

that's where the company's strength is. It's it's willingness to stick its neck out and take some chances with different flavors, you know, different formats and things like that, and consumers love that. You know, these are fun, these are fun products. These are not you know and assesses like you know, motor oil. These are uh, you know, fund So I have to be entertaining as well as you know, pursuable. So all right, let's switch over to another beverage company here.

All right, So when we talk about like these energy drinks like Red Bull and Monster, I never got into that. I don't think I'm the demo. I think it's some more of the younger folks. But I look at Monster Beverage Corps. It's a publicly traded company. M and st is this taking to put into your Bloomberg terminal. This thing's got a forty seven billion dollar market cap. It's outperforming the market this year. Like a lot of the consumer staples down only about six talk to us about

that that segment, Kennedy. It's it's a really big segment of the beverage market. It really is. UM energy is a fifteen sixteen billion dollar category or so Monsters had the biggest share for a long long time. Very quietly.

You know, energy has been uh the strongest segment within the beverage category for a quite a number of years now, and that's why you're seeing companies like Coca Cola, which owns about Monster by the way, but particularly UM PepsiCo you know, just bought you know, Red Bull last year. It's got a new PepsiCo Red Bull, you know, the PepsiCo bought um Rock Star Star Uh and they have a deal with Celsius Holdings, which is an up and

coming energy drink taking the healthy energy angle. But they've been more aggressive in the energy space because it's done so well and so Monster though, bat your question is that they remain the leader. They have a very asset light model, so they really leverage just that category and kind of outsourced you know, distribution of Coca Cola. They even distribution, UH outsource a lot of their co packing and so UM it's really been a pure play on

energy and it's worked out really well for shareholders. Um. Alright, so Paul and I, neither one of us really needs any of that energy stuff. I don't need drink coffee. You're in coffee, but I haven't express everyone. I mean coffees for closers anyway. UM, I prefer to mellow out a little bit. When are these companies going to come out with some THHC infused beverages? Well, um, when the FDA provides better clarity on what they can do with it.

You have us DA came out a while ago and said, yeah, you know, you can grow hemp by CBD products and so on. But the FDA quickly stepped in as a few years ago and said, you know what, that's great, but when it comes to a package product and in testing these products, we need to have more testing. So you know, it's one of those gray areas, like many things in cannabis where some states where it's state legal. Um,

you have generally small beverage companies selling CBD infused beverages. Uh. In Canada you have quite a bit of th HC AND's beverages. They're not legal in the US. Haven't seen any th HC beverages here yet? Um, which th HC that's the th HC is the one that makes you high. And C b D is the one that I guess like there are some THHC beverages in it, but again it's it's state by state. These are small producers. You

don't know the big guys in there yet. I guess The bottom line, ken is are we going to get the Safe Banking Act past? This is what everybody's waiting for, some real federal regulations so that these companies which have

you know, tremendous growth and revenue streams can bank. Well, you know it, it's hard to predict, you know, Um, you know, our track record predicting the safe banking hasn't been you know, spot on like everybody else's, you know, like like many things are cannabis, it's been much delayed. And I think hope is the key word with cannabis. We know that people like to consume these products. We

know it's legal in many states. But until we get that federal legalization or at least a loosening of laws in a more minor way like safe banking or whatever, um, you're going to get a lot of skepticism out there. These companies have a tough time growing when they're fighting things like I R s to a D, which prevents them from taking normal business business expenses. They have a tiny valuation, like it's I haven't seen anything else like it.

They're trading for two time sales. Yeah, well, you know, because they're buying large unprofitable. They're profitable on the E but online, they would point out. But because of two A D and their inability to shield themselves from from federal taxes, um, a lot of them are unprofitable. And there's, like I said, there's limited growth, and there's a lot

of limitations of what they can do. They can't, you know, take products across state bounds, which means they state boarders, which means you can't have the economies of scale that are typical you know, consumer product goods company can have. All right, so we can I guess, you know, I guess the point now it's just kind of you know, for this is just continue to wait for federal legislation. Ken Sa, senior equity analysts for Bloomberg Intelligence, walking us

through all things consumer products, including the cannabis business. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three. Pet On Ball Sweeney I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio