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MASUS is down one and a half percent. I was looking to see if there was anything that came out recently, and it hasn't. So I just wonder if you know, it had a nice run up in their earnings or still just a few months away from fifty two week high. Maybe it's that, but we want to get more insight onto that. Yes, raising a full year outlook good, same store of sales falling less than estimated. Rachel Tenbrink is general partner over Red Bike Capital. She joins us Now
in studio. Rachel, you deeply cover the retail industry. What was your broad takeaway from Macy's.
So, I think that there's new CEO. The clock is taking there's a lot of pressure, and so I think that he's trying to as quickly as possible make an impact. But truly it's hard to see the short term sort of real pop I think what you're seeing is there's a lot of focus on top doors. There's a lot of focus on top performers in the Bloomingdale's and Blue Mercury,
but overall, the consumer is still challenged. They still have inventory issues, and if you look at the overall performance, they did a little better because they had better operating but the top line was down.
So when I think about Macy's, I mean, obviously it is the quintessential department store. What's the strategy for Macy's going forward, because it just doesn't feel like this has been a long term trend for department stores in general, you know, with e commerce and so on, kind of.
A tough place to be.
What's the strategy for Macy's these days?
Do you think so?
I think the reality is just a smaller footprint, a smaller company. I think it's shocking if you think about the fact that May Season the last twenty years has lost about twenty five percent market share and so to whom to basically retailers, Amazon Discounters. It's just a much smaller company than it used to be twenty years ago. And I think that if you think about the fact that they're going to close one hundred and fifty stores, they're going to be left with three hundred and fifty stores.
It's just I think that it's a tough place to be. I think there's still a place for it, and I think they can thoughtfully talk to those customers, but it's just going to be a smaller place.
To that point, what as their inventory functioning, Like are they doing that well? Like having a smaller footprint might be good into inventory management, How are they managing that?
So from what I read, they were struggling a little bit trying to figure out the transition between spring and summer, so they did have a little bit of elevated inventory levels, but they seem to be doing okay. I think what they're trying to do is create more proprietary and special experiences, private label things that you can't find anywhere else. But they need to hit it on the nose, and the consumer is being very picky right now about where they're spending.
You guys know why I asked that question, right Why too much inventory means sales? Sales means ALEX shops there. Good inventory management mean Alex is not shop there. I'm not paying full price. But I mean I asked that I say that in Jess, But it does speak to the promotional activity and if the consumer stretch and they're being picky, that's going to rely on the promotional world to kind of get them in the store to help for more volume. Is Macy's part of that, Yeah.
I mean, I think what's interesting if you think about Macy's is that they're sort of picking this biffurcated strategy where on the one hand, they have their own, you know, the Mace's nameplate stores, and I think they're focusing on top doors, sharpening the inventory, sharpening the offer, and then they're going high end with Macy's and Blue Mercury, sorry, with Bloomingdale's and Blue Mercury to try to attract that higher end shopper that's willing to spend a little more.
Rachel, I don't know if you're aware, but the big news in this studio over the last week was, for the first time ever, I went to a Walmart store over the weekend. Hugely impressed, blown away everything. You know, it is as you would expect because we had some Walmart earnings last week. What do you take away from Walmart?
They seem to be doing pretty well well.
I think that you always have to look at the relationship between Walmart Target, right, they're always head to head, and I think right now the consumer is feeling the financial pressure, they're feeling inflation, and they're trying to find deals. And what's interesting is there is still this perception that if you want to find lower price points, specially in things like food that are basic, you go to Walmart.
Now it'll be interesting. Now, yesterday Target announced that they're lowering prices on five thousand skews, And so how is that going to affect the dynamic between Wall. You know, they're they're still trying Target is still trying to keep that upscale image that yep, but you know they're fighting for consumers that are really caring about every penny.
I mean, I was five thousand skews. I mean, how often does that happen? I don't think I've heard that.
I don't know if I know that. I mean, I think that's pretty dramatic. Walmart has been lowering prices as well, so I think they're just sharpening the competition.
So they have actually already cut prices on about fifteen hundred items, and they had so that thousands more of reductions are planned over the course of the summer. Yeah, exactly right. One analyst over Barclays was saying that these may have been planned as part of sort of the second quarter inflection that was embedded in guidance. In the second half maybe gets a little bit better, but obviously
that's going to be a key topic tomorrow. Also, these items that we're talking about are milk, bread, soda, fruit, veggies.
That's good because that's where I've seen it.
Yeah, but that's also I wonder if that's a direct competition then to Walmart, because that's where you can make an argument that if you go to Walmart for groceries, that's where you buy your other stuff.
And I wonder if Target's trying to play with that exactly. I think that it's sort of a double edged store. Target always tried to be like, you know, better quality, higher end, but still affordable. And I think what they're realizing is right now the customers really focusing on the affordable and they're really focusing on the basics. So they're going head to head on that piece.
Is there still too many stores out there, department stores or big box I mean, particularly the department stores. I've always heard like in the department stores. There's still too many stores in America, but now maybe the pandemic solved for that. I don't know.
Well, I think part of the challenge is, you know, Macy's did announce one hundred and fifty store closures, so they're definitely that's big. That's a big hit for them. I think a lot of it is, you know, when you think about stores, you also think about location and real estate, and you.
Know, what are the top malls.
There's obviously you know, it's not just there there are too many stores. Is that there are too many malls and people aren't going to those malls, but there are some shining places. So I think it's about like finding the winners and having a smaller sharper footprint versus so many doors.
And it was interesting you say that, Paul, because some of these malls are being anchored by Target. So you also have to wonder if Target has to retrench a little bit here, what does that wind up meaning then for the mall what would be good from Target when they report?
So I think the expectation is that they're going to be up slightly about one percent, but we'll have to see. I mean, I do think that this news of better pricing is going to have an impact on them?
Mean yeah, meaning that that would be helpful volume, but then obviously not with margins correct, So interesting, where.
Do we go from here for retail? I mean, what's your takeaway on the consumer?
Here?
The consumer seems like it's I guess that K shaped economy where some small percentage are doing quite well, particularly those that don't said stocks, bonds, houses, and everybody else is really feel into pain. Is that what you're hearing from the retailers?
Absolutely?
I think that there is this sort of biffurcation of like the have and the have nots, And so for some consumers it's a small group, but they're very profitable. They're doing okay, they're still spending, they're still going to Bloomingdale's, they're still buying their targe, And for others, they're really struggling. And I think it's sort of come to that breaking point where when you start to see stores lowering prices there's a real pressure from the consumer.
Good point, yeah, but.
Then obviously hurts the margins and then it's like as a stock investor, you're like, well, do I like that volume versus margins in your experience when the retail sector, which ones are kind of crushing it right now, because it does seem to me that what names that people like are very targeted, right like a specialty retail store is the winner? Is that true?
Yeah?
I mean the first name that comes to mind is Sephora and how it continues to outperform. You know, there's a lot of talk about Sephora kids, but.
You just see, so what's a kid?
So a Sephora kid is my twelve year old daughter who enjoys spending hours at Sephora. But guess what it means she buys? It means I buy. And I do think that there is an interesting approach where you know, these gen Z consumers that everybody thought, well, they don't really have that much disposable income, but guess what they bring along others?
And have you ever seen the line and over here their story always a long line depths of the pandemic lockdown, I mean ground zero, the lockdown people in support.
A they didn't close the store, and B there were people in there, I mean triple massed up or whatever. They were there and they were in our chocolate store downstairs.
You know what we do, Paul, We invest in our face, yes, yes, and that comes in many different forms. And after we go eat chocolate, and that is what we do. Very good, all right, good stuff. Thanks a lot, really appreciate it. Rachel Tenbring joining us. I'm a partner over at Red Bike Capital. We'll see how those numbers wind up stacking up.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Apple car Play and androyd 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.
Let's top Low's.
I mean I went to I've been to a Low's and now I had not been to a Walmart until this past Sunday, but I've been to Lolaise. Now I'm not John Tucker, but I know my way around a Lows. Drew reading those his way around the Lows. He's the home building autost of Bloomberg Intelligence. Joining us from Princeton, New Jersey. Forgot about the whole New Jersey transit can get into New York City thing?
No, apparently not today. It's really. Oh yeah, it already broken down.
It's like I'm just ignoring it and hoping it'll be fine by the time I leave here.
That's my That's how I'm approaching this.
Drew talk to us about Low's here. Are people still kind of remodeling their basements.
Yeah, So the quarter was a little bit of a tug of war between sales and margins, and I think you're seeing that reflected in the stock today. Same store sales were down about four percent, which was better than the five to six percent decline consensus was looking for. But part of that sales performance was due to the fact that there was a more promotional environment out there. If you think back to when Home Depot reported last week, they cite a late start to spring as something that
muted sales. Lows actually said Spring got off to a good start, and that has to do with them being more aggressive on promotions as part of their Spring Fest, and I think that really speaks to you know, what we're seeing really across the retail landscape with the consumer, and that's that they're looking for value wherever they could get it. Now. They did reaffirm their full year operating margin guidance, but that's going to require the company to
execute on some internal initiatives. In the back half of the year, Low's has made good progress in improving their their margin profile and them narrowing the gap with Home Depot has really been a key that investors have kind of, you know, grasped onto. So the fact that they're taking a little bit of a step back here maybe making them a little bit uneasy.
When how much would the stock have to rerate for investors and analysts to say, okay, fine, the margins are suffering, but at least the volume and the sales are there.
Yeah, well, the stock is still trading above you know, the ten year average, even if you go back to prior to the pandemic, So from a pure valuation perspective, you know, it's still a little bit elevated. That being said, I mean, if you take a step back, the move they've made on margins and narrowing the gap with home Depot has been impressive over the last couple of years.
So I think, you know, the bulls would argue that this is kind of a one off, and as we get to the back half of the year, margins start to improve as they implement some of their PPI initiatives, and in terms of sales, you know, we're not expecting a huge rebound in sales this year and the second half comps will definitely get easier. But even Lows has stated that comps may turn positive, but that's not a reflection of an improved demand environment. It's strictly a reflection
of easier comps. So we think as we get into twenty twenty five, that's when we would expect the market to see more of a turn, as we get more of a rebound and existing home sales.
How about lumber, That's something they buy a lot of. How's the cost of lumber these days? How's that impacting their margins?
Yeah, lumber is about ten percent of sales for both Home Depot and Lows. Lumber was really more of a story last year was extremely volatile, so you saw the impact on their top line. There not so much of a story this year. I think commodity particularly lumber, are going to have less of an impact in the near term.
So you feel like we're not going to really see a benefit in HOLD twenty twenty five. I mean, some analysts are looking for the back half of this year. Maybe some improvement. But for you it's really like a year out kind of thing.
Well, I think as we get to the end of this year, I think you'll start to see a little bit of a turn, and a lot of that predicate upon with what happens in the housing market. Obviously people are looking for the FED to cut rates at some point this year, obviously not as much as we had
hoped for previously. But we think that you know, when you when you look at existing home sales, we're you know, at the lowest levels in you know, more than two decades, So there's not a whole lot lower we can go absent you know, a broader economic decline where you start to see a lot of job loss. So we think that, you know, if rates come in a little bit, you could kind of start to build a little momentum ending
this year carrying into next year. When we think, you know, bigger picture about the home improvement market, there's some there's some solid tail winds out there. You know, you have homeowners who are sitting on record amount of home equity.
When you think about you know, the rise and home prices we've seen over the last several years, you've got an aging housing stock, and I think the fact that mobility has been so low because of those high interest rates is going to continue to encourage people to invest in their house and I think what kind of triggers that is rates coming back in a little bit so you can start to tap that equity.
True, how many stores as Lows have and are they adding stores? Are they pairing backstores? Kind of worthy with their store count these days?
Yeah, so they're under two thousand. It's an interesting dynamic. So their competitor, Home Depot, is actually embarking on their first store expansion in a long time. Lows, on the other hand, has cut back. They got out of their Canadian business, which reduced their store a count. But what they're doing from a store perspective is really introducing new formats.
So they're starting to go after the rural customer. Their stores tend to be located in more rural locations compared to Home Depot, which are more densely populated locations, and they found success with that, so they're starting to compete more with the tractor supplies of the world. They're also introducing Low's outlets, So if you think of you know,
appliances that might have things and scratches. You could go there and get heavily discounted items, and that's another way they're looking to kind of, you know, drive traffic through the lows brand.
Okay, now you're speaking my language. You put outlet there, and I'm like, boom, we will go find things that are cool.
I don't do outlets either.
You don't.
I know, you don't do outlets. That's my thing. It's just my thing. Even if I had a bazillion dollars, I wouldn't pay full price. Part of the hunt.
Okay.
AnyWho so drew based on all this, If I wanted to play this housing market right now, what is the best play? And I say that because it's not like the housing market that the demand isn't there, the supply might not be there. The costs are a little too high, mortgage rates are too high, but eventually it'll normalize. What's the best way to capitalize.
We think right now kind of sitting at the top of the broader housing ecosystem is the home builders. We think, you know, from a supply perspective, they're in a good position their ability to buy down mortgage rates and make payments more palatable to the consumers is something that differentiates them versus the resale market. They're going to grow community accounts in the coming years, so we really think that they're still in a good position from a competitive perspective.
And when you look at you know, within the home building space, you have the large, well capitalized, publicly traded homebuilders who have access to land, access to labor, and you compare that versus the smaller private piers, and you have to remember home building is a very fragmented industry,
particularly outside some of the largest markets. But those smaller private peers tend to rely on regional banks for growth capital and with you know, a slowing economy and more concern there, you're starting to see a poolback and lending. So we think it's a good opportunity for those larger builders to continue to take share.
Great stuff. Drew, really appreciate it. Thank you so much to reading Bloomberg Intelligence US home Building Analyst. Joining us there.
You're listening to the Bloomberg Intelligence podcast. Catch us live weekdays at ten am Eastern on Focarplay and rout outo with the Bloomberg Business app. Listen on demand wherever you get your podcasts, or just live on YouTube.
This is Bloomberg Intelligence Radio. I'm Alex C alongside Paul Sweeney and John Tucker. We bring you all the news in finance and economics through our lens of our Bloomberg Intelligence analysts. They cover about two thousand companies one hundred and thirty industries worldwide. We also use this time to talk about stuff that Paul and I are interested in, so media, maybe some retail, maybe some sports, oh and maybe some energy. Joining us in studio is a doctor
Jeff Chamberlain. He is CEO of Volta Energy Technologies. I don't know what that is, so I'm going to learn about it, doctor Jeff Chamberlain. Welcome, thank you for joining us. What is Volta Energy Technologies?
Well, thank you Alex for having me. Volta Energy Technologies is a venture capital firm that we spun out of Argon National Laboratory, which is one of the seventeen Department of Energy labs and the lead in battery and storage tech and development for vehicles and for the grid.
So that means that you are trying to find good battery storage solutions that we can adopt on a cheaper scale.
YEP, that's going. That's it.
Basically. And I'll tell you the big thing that we've noticed is a couple of things. One is, a lot of people are focused on the downstream device. Who's going to be the next big electric, who's going to be the next Tesla, who's going to be the next Panasonic
or CTL in terms of the battery manufacturing. But before I worked for the government, I worked in the chip industry, and we expect this to go just like the chip industry, where costs down will be king, and cost down will come from innovations in the supply chain and in the adjacencies, things like fast charge, things like power electronics on board the vehicle, new ways to make batteries, all the way
upstream to mining lithium. So while the while a lot of investors tend to be focused on those very downstream devices, the truth is lithium is king and it will be for decades going forward, just like oil and gas has been king for a century, just like silicon has been king in the semiconnuctor industry and yet created trillions of dollars of wealth by modifications and wealth generally in the supply chain and in the adjacencies. So it's going well,
We're finding a lot of good tech. Where does lithium come from? And then how are you investing in that? Yeah, if we go all the way upstream, let me start by saying, there is no better time for investors in the private markets. And this is a counter two to thought from what you read in the mainstream media. Investing in the kinds of technologies that we're investing in because the needs of the end users are increasing, and by
needs I mean lowering costs and improving performance. There's a reason one week ago today the Biden administration put in tariffs that are one hundred percent for electric vehicles coming from China. That happened because the US automotive groups lobbied for that to happen. They know those cars will sell. A lot of the mainstream media says nobody wants to buy electric vehicles. They just leave off the second phrase unless they're lower costs. But when we go all the way back up to mining,
it's notable what the big companies are doing. Last fall, after I was here talking to Paul, actually Exon announced that they want to become lithium suppliers. They're going to do it is to leverage their own downhole and refining capabilities and to adopt and scale something called direct lithium extraction or in my industry they call it DLE daily. It's a new way to extract and refine lithium and
it's like it sounds, it's direct. If you can remove process steps and use less water, use less energy, you end up with a lower cost production. So prices of lithium in the market have been fluctuating substantially these last five six years, where the cost of manufacturing has stayed the same.
So where you guys would play in that, for example, like I know that's Exxon's investment, you'd be investing in the technology that would make direct to mining lithium precisely.
Precisely. In our fund one, we invested in a company called Summit Nanotech and Canada that is now scaling in Chile with one of the big lithium suppliers to supply that tech to lower the cost.
When you go fully, when you go further up the supply chain, is that where it lands for you in lithium you're not looking at like graph or cobalt or other stuff.
Yes, thanks Alex, you know they claim, Paul and as claimed they don't know a lot here, but they clearly do.
Yes, I know, I know, I lot.
That's great. That's just by Midwestern heritage speaking their modesty. But the the the answer is we look at it all. Graph fight, it's it's fascinating. Even graphite. There is not only a tightening on the supply, but it's mostly in China. So there's massive moves for the supply chains coming out of China being localized for cost reasons as well as
geopolitical reasons. But we look at it all from from graphite, cobalt sulfur actually is a technology that can be used in batteries lithium, and then downstream from that to things like new microchips that enable power control and can lower the cost of electric vehicles.
Do we need to be concerned about the security of the resources for all these electric vehicle components, like are they in China that that's a risk or are there in parts of the world where it's a risk to the US and others?
Is that a risk? The short answer is yes, there's a long or more nuanced ance or graphite and lithium in particular, depending on which material you're talking about, eighty to ninety five percent of its processed in China, but it's not sourced in China, which means there really is an opportunity, especially with the advent of technology that lowers manufacturing costs, to move that supply chain out of China
because the resource itself is not in China. However, magnetic materials, the core called rare earth elements that are used in magnetic materials for electric motors, most of that is in China. So there's been a ten to twenty year research effort in the Western world to find to develop new magnets that don't require rare earths, and those are all going to becoming commercial in the next three to five years as well.
I was talking to a graphie producer yesterday who doesn't and he was talking about the tariffs or put on. I know you mentioned EV's in particular, but then the nuance of say the raw materials going to Canada or Mexico, and then because we have a free trade agreement, they just come into the US. And so there's a huge price discrepancy versus what you're willing to pay for localized
materials versus how cheap China can get it. How do you solve for that because that's really going to be about lowering the costs, which is really technology, which is really you.
It's really a good question, and I'm not being a politician. I don't know how to handle it from a policy perspective because there are loopholes that you can go through in Mexico and Canada, et cetera. Ultimately, the answer is things like graphite. There's graphite all over the world. That the largest graphite mine in North America is in Becancoorp,
north of Montreal, and that's natural graphite. There's also something called synthetic graphite where you can manufacture the graph height from carbon, and there are big oil producers that are looking at doing that as well, right to grow their business in that direction. So in my view as a technical and as a technology investor, it is fine the
innovations that can lower the cost for localized supply. And I think there'll be bumps in the road between now an adoption of that technology in terms of what's happening worldwide geopolitics, but I think ultimately it's localized supply that will win the game.
Where does mister Tesla get his batteries, Where's Elon Musk get his batteries for his car.
You know, I used to joke on Capitol Hill when I worked for the government that if you peel the t off the factory, the gigafactory in Nevada, you see a big Panasonic logo underneath it. Originally it was a Panasonic deal that they cut and embedded themselves together in supply chain. They since have expanded to LG and CTL and others. So CTL is the big dominant battery supplier
in the electric vehicle supply chain that's in China. But they, you know, they've onshore manufacturing, and as American citizen, I don't think it's about even before IRA became an active Panasonic, LG, Samsung, they'd all announced twenty gig one hours of manufacturing in the US.
All right, Jeff, thanks so much for joining us. Doctor Jeff Chairperlin, CEO Volta Energy Technologies, Joining s here on a Bloomberg and Director Burgos.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar Play and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station. Just say, Alexa, play Bloomberg eleven thirty.
I'm Alex seel longtied Paul Sweeney. This is Bloomberg Intelligence Radio. We make sure you're up to date on all the news that you need to know in business and finance. We have great analysts that cover at two thousand companies and one hundred and thirty industries worldwide. We also have a huge staple of reporters all around the world, and we're going to one of them now on this story.
So apparently ASML and Taiwan Semiconductor Manufacturing so TSMC have ways to disable the world's most sophisticated chip making machines in the event that China invades Taiwan. It's basically the idea of here's a ca'll switch your press the button and all of a sudden those machines stop working. Really, it's something right, Isn't that sounding tucky, doesn't it?
Though?
Let's get to the guy behind the story. Deerdrik Basil joins us Bloomberg Dutch government reporter. He joins us on Zoom from Amsterdam. It's a real pleasure and I know you're staying up late for us, so thank you very much. As well, are working late for us? I should say, walk us through this story? What do we know?
Hiah? Thanks for having me. Yeah, what we reported exactly is that ASAML has a so called kill switch and it can use it on his most sophisticated machine, does the EUV machine or the extreme ultra hided machine. And this basically means they can kill the machine remotely when they choose to. And this capability was indeed discussed in the context of a possible Taiwan invasion and was discussed
at least with the Dutch government. So yeah, it's an important capability in a very sensitive geopolitical company.
So I guess it's it sounds good. I mean from your reporting, is there a belief that this really can be achieved, because it sounds like something that could be I don't know, hijacked or something. It just it seems like it's too good to be true.
Yeah.
The sort of thing is ACML has contact with when the machines to do updates the machine need anyways, uh, And this connection they have can also be used for this capability. So it's not a building kill switch, but it's a capability that can be used for different purposes. And yet what we have heard is that a ISMAEL has told government officials that they can do this if that is what they decide to do.
So so I'm assuming though that officials say in China might not like that, Like is that a legal thing to do?
Yeah, Like an invasion is also not really legal, I guess, so if you end up in such a context, you need to ask different questions. But yeah, that's that's the context we're talking about. If an invasion would happen, then this is a possibility.
So but I guess today China is still a SML's biggest market, isn't you know, even after some restrictions.
Yeah, close too. Yeah, like TMC is the biggest client, but China as a as a country is definitely a big market for as well. Yeah, so what are not for this? Not for this machine though, not for the eu V most sophisticated extreme ulti virus machine. That machine isn't allowed to be exported to China.
Ah okay, So the machines that a SML does export to China, does that have this quote unquote kill switch?
So this know, we were talking about the eu V. So that's the most sophisticated machine, and you have plenty of them in Taiwan, and that's why it's essential that two let This capability exists in the context of the Taiwan invasion, but has been subject to export control for a while. They have been pushed by the US and they have been mostly focused on this EUV machine. The
most sophisticated is no chip machines that he needs. Those machines to the most phisticated chips you need for any ai development or any military purpose, and those machines aren't in China at the moment.
These machines aren't cheap, are they. What's one of these big chip making machines.
What do they go for?
You said this, This eu V is I think it's about like two hundred million apiece something like that.
Yeah, And SML does something very unique, not very unique. They do something unique in the semi space right there. You can also license. It's a lithography, right, it's like the machine you need to make the chips. Can you walk me through what exactly that company does and then why it becomes so important to the sector.
Yeah, So basically, ASML is the only company able to make this machine, and like all the generation chip machines, you have more company that they are able to make those but to make the best chips with the lowest nanometers you need for what I mentioned ai those machines she needs for those chips. ASML at the moment is the only company that can make them, so yeah, that gives them an important, massive market position, and yeah, you also end up in a geopolitical struggle as we see right now.
Yep, absolutely all right, Dieterrek, thank you so much for joining us. Die Derek Bazil, Dutch government reporter for Bloomberg News, joining us from Amsterdam via zoom. Again, ASML TSMC big chip makers, apparently they can disable chip machines if China invades Taiwan. You think about that cybersecurity, and it just kind of goes to the issue of this what seems to be a growing technology cold war between you know, it's called it China and the West broadly defined it.
I'm not sure how you do that, but again, governments are making plans. Companies here we see from this reporting are making plans.
But this also devetails with Vault Energy that we spoke to in the last hour, So that company makes investments in technology that can help reshore the supply chains for batteries and storage. Right, So think like lithium, how to extract lithium more cheaply and more cost efficiently. It's all
part of the same story. How do you decouple after a few decades of coupling when you're a company, whether it's tech, whether it's rare rare earths, whether it's another asset as a CEO, how do you capital allocate from that?
Right?
Like some companies like a Caterpillar, they make their stuff, they train technologies. For example, it's an age back company. They make stuff in China and sell to China. Right, So their China sales might be fine, and then maybe you're you're insulated, but otherwise I would think it'd be very very difficult.
Yeah, And you know, and one of the companies that I think when I think of just China risk broadly defined, I think of Apple. I mean, you know, twenty percent of their sales go there. It's obviously a huge growth market. It's also critical to the supply chain, as we just kind of learned a little bit here from DEETS reporting in terms of where the chips come from and where their hardware is manufactured in China. If you're Tim Cook, boy, I don't know how you manage that. I guess you just kind of.
Go to India.
You go to India, but that's going to take a long time as we're told to build that whole infrastructure out. But I guess if you're Tim Cook, you go to China as often as you can and try to, you know, just try to keep a good I guess dialogue going with the government officials or to keep the status quo going.
Yeah, and we were talking about that when we had a great story about maybe Tim cook succession plan and sort of you know, do you need a full time China ambassador? Basically as a as a company, you need to have someone who can really help secure that relationship. In addition to all the other stuff like capital allocat you frend of an ends like invate his job.
Elon Musk's job has also got a lot of exposure to their you know, CEOs. Jamie Dimond has been over there recently for Japo Warton Chase, So a lot of CEOs you know, going over to China trying to I guess, maintain decent relationships in the face of governments.
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Let's go to the bond market. Here we are seeing a little bit bit into the bond market. Ira Jersey, Bloomberg Intelligence Chief US interest rate strategist, is joining us. IRA the mark it supposedly the narrative is that it's waiting for Nvidia. What does the bond market do with Nvidia.
I don't know if the bond market's going to do a whole heck of a lot with you know, story stocks in particular, But the bond market is, you know, still waiting for the Fed. We have a ton of Fed speak this week. We have the minutes coming out tomorrow, So the bond market's going to kind of be on edge as to you know, when the Fed's gonna cut,
how do they see the balance sheet shaping up? And you know, you've had a lot of speakers like I literally just before walking on, we finished up with with Governor Chris Waller, who you know, gave not anything significantly different than what Jay Powell has been saying, but certainly certainly some details that you know, I have people talking about the future of monetary policy and things like what is our star, what is the neutral FED fund rate?
And where should it be given given the current environment?
All Right, For all of the listeners and viewers out there who maybe don't have a Bloomberg terminal in front of them, one of the most widely used functions is ea ECO go. It gives you a nice list of all the economic data that's released by the government so you can stay on top of it all. And of course on there is for tomorrow FOMC meeting minutes. My question iras who cares because we hear these FED people speaking all day every day except for like a fifteen
minute blackout every quarter. Did the minutes really tell something since these folks are always speaking anyway.
It does, and it tells you a couple of different things. I mean, firstly, it tells you the entire committee, right, because there are certain people who speak more frequently in front of the media. For example, Raphaelbostik of Atlanta FED. He's on TV all the time, right, he was on
Bloomberg Television not so long ago like yesterday. We also have we also have you know, Chris Waller speaks a lot, so it but it gives you all nineteen members view and then you know who believes what in a more SYNCD fashion, then you can maybe glean from a lot of the Q and as that wind up generating a lot of headlines. But it's hard to kind of get a complete narrative of where what everyone is thinking. So I think that the minutes are useful. They're also useful
from analytical perspective. What we use the minutes for in determining where we think the future path of policy is going to be is we compare what's being said to other periods, and so we actually have a model and natural language processing model that says the FED is hawkish
and dubbish. And the nice thing about the minutes it says a few members, most members, some members, and we're able to get an idea about how many members have that view, which is not something you can get from the post meeting press conference, which is not something you can necessarily get from just listening to you know, three or four or five speakers instead of all nineteen That's where I wanted to kind be pretty helpful.
I saw on your research, which I do read despite you know all what, Yeah, I read it grudgingly because it's great stuff. In their natural language processing model you use for the minutes, what is that all about?
Yeah, So our model basically takes every sentence that it has to do with monetary policy and the economy within the minutes. We also do the same thing for the post meeting press conference, for the prepared remarks that Jay Powell makes, and tries to determine whether or not it's a little bit hawkish, a little bit dubvish, neutral, or very hawkish or very dubbsh. And in doing that we
can then wait it right. That's the advantage of the minutes over some of the other over some of the other models that you can potentially use that are similar. Where the minutes I have other indicators. For example, it says a member thinks, which means one person, right, Whereas if it says many members think, then that's less than half, but more.
Than a couple, right, more than three or four.
So you wind up with probably a better overall gauge of how hawkish or dubvish the FED is, and what our model shows right now as of the last meeting minutes, which will probably remain the same this week this week presumably, is that they're very neutral. They're basically right in line with what would be an on hold FED. And that's
very consistent with what we're seeing now. I suspect that unless the economic data deteriorates or improves very significantly, like you see in optic and inflation, that the FED will probably remain in that neutral territory with a little nuance there, which just means that they're going to be on hold. And you know, Chris Waller said today that he thinks that rates are going to be on hold at least until the fourth quarter.
Bostic said the same thing.
So those are those are indicators that the minutes have, you know, at least are in line with the other speakers that you hear in them, you know in the.
Media, Bostic talking up neutral. As for what is neutral, I feel like J. Powell in the last press conference really didn't take that bait. How do you view what the neutral rate is and how important is that to the conversation right now?
Well, so, ex ante, it's very difficult to determine what the neutral rate is, right, because you don't know what the propensity for people to take loans are and how high or how low interest rates need to be versus inflation or some other measure for you know, where interest rates are going to you know, not increase inflation or decrease inflation, and there's really realistically no way to know that,
which is the reason why you get these cycles. The idea though, and I think this is what everyone in the academic land and you know, rate strategists all over the world we're talking about, is, given how low we think the neutral rate was between twenty ten and twenty nineteen, has that moved up? And the answer is unequivalentally, yes, it just it had to.
Right.
We're in a much more we're in a tighter labor market environment. We don't have the same type of globalization pushing pushing down goods costs that we had ten years ago. So all of those things are probably true. The problem is nobody really can guestimate the magnitude.
There's a lot of models to do that.
You know, is it two and a half percent, which is kind of what the FED seems to think that it is based on the dop plot. Some people think it's a bit higher than that. I actually think it probably is a little bit higher than that. But the you know, but there's no realistic way to know beforehand exactly where our star is. But you have to you have to guess if you're if you're a member of the FED or any central bank, because otherwise you don't know,
you know, are we restrictive or are we not. I'd argue that the FED probably is modestly restrictive, maybe not restrictive enough, but they are certainly, you know, more restrictive than they were when interest rates were at zero.
Hey, I'm just looking at the ten year treasury just in the last i don't know, three to four weeks, it's kind of come down and yield from four to seventy range down to about four forty. Does that tell us anything or is that just kind of trading within a range?
Yeah, I think we've hit that range.
We talked I think it was last week, Paul, where we were mentioning on that that kind of four thirty to four fifth might be the new range for now until we get a significant regime shift. It's not telling us much of anything except that again, the market is still pricing for the Federal Reserve at some point in the not too distant future will be lowering interest rates. And that's why you have the continued inversion of the yield curve where the ten year yield is lower than
the two year yield. But even that has contracted quite a lot. Right that was as much as one hundred basis points between the two and now it's less than fifty. It's forty ish basis points right now. So that's just saying that at some point the Fed's going to cut. When the Fed cuts, ten year yields are probably going to rally a little bit. But we're already priced for at least part of that cutting cycle.
All right, IIRA, thanks a lot. We really appreciate you. Thank you very much. Our Jersey Bloomberg Intelligence Chief US interest rate strategist adjoining us there.
And the way to get all that research, Alex is BI space r ate. B I rate will get you to all the interest rate analysis for our Jersey and his team on a global basis.
You pull up.
There's stuff about Canada, there's stuff about Asia, China and all different languages on this dashboard, but it is the global view of interest rates.
And you can't beat them. You just really can't, Like, I mean, you can't be the model that goes through and looks at speeches like you just can't beat.
That a large like a language model.
I don't know. There's also a MOSAD, the Israeli Intelligence Agency, uses a very similar type of software to look at conversations that they intercept. We use the same thing for conference calls and.
Well yeah, no sentiment, yeah.
Just to look for keywords and whatever so you don't have to sit there and listen a long thing.
Well, I listen to conference calls all day.
I have just spent a career doing it.
I mean, come on.
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