Such Strong GDP Isn’t Sustainable: KPMG’s Hunter

It came in ahead of expectations three point five percent. And interesting, that's an annualize right. Interestingly enough, the director of the U S Office of Management and Budget mcmulvaney came on Bloomberg Television. He said he expects this pace of growth to be sustainable. That is a key question here, and we are going to ask it of Constance Hunter, Chief Economistic APMG, who joins us here in our eleven

three studios. Constants, do you think that three point is a sustainable annual rate of growth for US economy in the years ahead? I do not, and let me tell you why. There's a couple of reasons. First, if you look at potential GDP, which is the growth rate of the sum of the working age population plus the growth rate of productivity. That puts us it about a one

point eight percent GDP growth. Now, we could have a productivity surge, right, could happen, But productivity is very difficult to predict um and so far we've had very lackluster capital deepening that is the amount of capital investment per labor hour during this expansion. It really lacks previous expansions. And so that would suggest that a productivity surge, while possible, is not something I would bank on. Now you put together,

you and the folks at KPMG. You put together this great chart where you break down all of the components of g d P, and I want to go through some of them if you don't mind talk a little bit about residential investment. Yes, so we actually looked at just to sort of analyze this question. Okayen does it put it on a on a different trajectory than the previous years and the expansion. So we have took the

first half and annualized the pace of growth. And now we've taken the first three quarters of the year and annualize this pace of growth. And it looks pretty good. Consumptions a little stronger, we have business investment inching up

a little bit more. Uh. But the thing that's really concerning is that residential fixed investment is down compared to UM the full year residential fixed investment, so that's housing investment is down, and that is a big concern because housing is a leading indicator and if you recall it, prices started to detern for housing in two thousand and six, when everybody was still popping their champagne and saying raw

raw c D O S. Well. But I want to pick up exactly on this, right, this decline of the first time since late to thousan date in early two thousand nine, right, So this is uh, this is an unusual development, this decline in residential investments. And I'm just wondering, given the fact that homeownership has changed and that more people rent, fewer people own and have their sort of net worth tied up with their residence, could it be different this time? Well, it could be different in terms

of the impact on households. And certainly, UM there have been tighter lending standards, so I wouldn't expect if we even had I mean and remember, house prices declining is actually not the norm. What happens when housing gets softer as you see less investment there, you you see you don't see the multiplier effects of an expanding um expanding housing markets. You don't see another housing crash coming. Is

that we basically housing crisis? But but I think it's a warning sign in terms of the overall strength of GDP. And there are some really important structural reasons why housing has an advance. I mean there that is one area where there are severe construction shortages. Another area where there's

shortages is in transportation, so getting the materials to the builders. Um. And then there's of course increase in prices for building materials, so you've an increasing cost of labor and increasing cost of materials and a shortage of labor, so people can't do projects that they want to do. So this is a classic macroeconomic business cycle situation. Right, This is exactly what causes slowdowns of the business cycle, is you have supply constraints that prevent expansion and then in fact bring

about declines. Tell us about business investment right now? Yes, so, um, we saw this quota decline in structures. Well, let me actually go out to thirty feet first, So business investment has been on an upswing for about six quarters seven quarters, and uh when we started this year, of course, we had the tax law change, and we saw a surge in business investment in the first half of the year. So moving up around ten percent is five point three

percent for all. Now it's a little bit more moderated, Right's up six point three percent on an annualized basis, So a faster pace, but a faster pace that you would expect. This had been accelerating, and I say you would expect absent any tax law change. So this is

going to be debated for a long time. Has this increase in business investment this year been as a result of the tax wealth change or a result of the trend that was already under way at the end of into So given the fact that we actually saw not a decrease but a slowdown in business expenditures investments in the third quarter, does that give you confidence in one view or another in terms of the tax cuts playing a role or not? No, Um, I mean it, and

it doesn't even make me overly concerned. In general, we sell structures decline, but we saw um and we saw a slower pace of growth in intellectual property and equipment, but those numbers fluctuating in quarter to quarter. It's also the first reading, so I I'm not going to get overly concerned about that. But if you if you think about how much of this was tax driven, I think

it's too soon to see those results. If you look at surveys of business leaders and ceo s, they say of them say they weren't planning to change their investment plans based on the tax I'll change. And as Pam and I were talking about before the show, right that this is something that business leaders take a long time to plan. It's not something you really can do on the fly. There's maybe a few investments, but basically this is a long term trend. Thank you very much for

coming in and spending time with us. Constance Hunter, Chief Economist KPMG, and of course you can follow Constance Hunter on Twitter at Constance Hunter. We're looking at a sell off in stocks, the SMP five right now down one and three quarters of a percent. You're listening to Bloomberg Markets driving the action today and markets very much is the Amazon and Alphabet reports that came out overnight or after the bell yesterday basically giving a very negative tone

even though the uh the actual earnings were okay. Joining us now, David Garretty, chief market strategist at laid Law and Company in Brooklyn, David, thank you so much for being here. I wanted just to ask you. Can you start by saying what was your impression of the earnings? Do you think that markets are misinterpreting them? The earnings

themselves are fairly solid. However, if one looked at Amazon, there was a deceleration in terms of growth quarter to quarter, also Google showing some challenges in terms of their top line revenue growth. Obviously, the bigger thing here is the fact that even though interest rates have been going up, even though the market has been selling off, we hadn't seen analysts bring in their own expectations. And anytime there is a shortfall relative expectations, there has to be a reset. Obviously,

analysts need to start bringing their numbers down. But as we also looked inside the results for both of these companies, Alphabet as well as Amazon, we saw that they're raising their spending levels, which is going to have an impact on near term profit margins, which is going to further

serve to further reduce earnings expectations. So, from that standpoint, anytime there's a shortfall versus expectations, yes, one could say it's the fault of the street, but the fact of the matter is that these companies shares trade within something called the stock market that's populated by expectations, and if the company's performance is out of line with expectations, there

has to be a reset on both sides. David Garritty, if you love the shares of Amazon at the end of September, you have lost about seventeen and a half percent. Is it time to buy Amazon? If you love it at two thousand and six dollars a share? Do you

love it at six and thirty three share? Certainly, we're at a point in time during the year, going into the fourth quarter, with the year end holiday shopping season in front of us that historically has been the seasonally strongest quarter in terms of earnings and results for Amazon, going back historically, if one wanted to trade what one's own expectations might be as what that fourth quarter is, fine, this may not be a bad point in time to

consider a short term trade. However, at the same time, offset that against the fact that we had a very solid, better than expected GDP growth print for the third quarter at three and a half percent, which obviously is going to leave the Federal Reserve in a position of raising interest rates going further into two thousand nineteen. Higher interest rates always mean greater valuation challenges for high pe valuation names such as an Amazon, especially as they don't pay

a dividend and give you a total return. So if you want to have a trade around the fourth quarter results, but it's just a trade, it's not a long term buy in your opinion, I think until such time as we're out of the woods terms of the FED tightening cycle, um, these names are going to be a little bit challenged.

You're certainly seeing reallocation by investors away from tech names towards more lower volatility, higher earning certainty names such as Staples in terms of its sector over the course of October. I like how you talked about spending, and I think this is important because not all spending is equal. What are they spending the money on and is it something that could give them growth leader on and keep them

as being growth stocks. Certainly there continues to be investment on their part in terms of high ticket items such as data centers, which certainly give them the capacity for

future growth. But as we know, looking at the results that came out of Microsoft earlier this week, Microsoft in terms of their online cloud services Azure, we're doing much better in growth terms than you saw either coming out of Amazon, who has been the leader in this category with their Amazon Web Services business, or with Google in

this regard. So clearly you're seeing more competitive market. Um. I would also add maybe not so much for an Amazon, but I would say that relative to a Google, along with other social media names like a Facebook and a Twitter. You know, we're not only going up against the Federal Reserve tightening interest rates, but we're also facing greater regulatory scrutiny, which might intensify should the Democrats take the House of Representatives On November six. David Garritty taking a look at Apple.

They report their results after the close on the first of November. The stock is up about twenty seven and a half percent so far this year. It pays a dividend. What are your thoughts on Apple? In terms of Apple, I mean, the company has demonstrated a policy of returning capital the shareholders, either through buybacks or through raising their dividend.

Um we see the company's growth in their services business being a certainly an important driver for further gains in cash flow to sustain that kind of pattern of return generation. We do note, however, that smartphone volumes as a whole looking across the mark it, the growth there basically has come down to low single digits, a more competitive market.

But we think if we look at Apple from evaluation standpoint, and we look at us a total return vehicle, we're far more comfortable owning an Apple than we are saying owning UM, an Amazon or a Facebook. Alright, So over the next two years, since you don't see this as a long term by if the FED does continue to raise rates, how much more do you think the fang stocks have to sell off before they've become attractive on

a long term basis. Some of the work I've seen coming out elsewhere on the street have indicated that, you know, if we were to see an under performance by tech names versus the staples sector by maybe another three to five percent, that there might be what people would call

sort of a near term bottom being put in. But we also have to consider that, you know, we've been operating here in a stock market since March of two thousand nine, where we've had a commendative monetary policy, not just in the US but globally, and all of this obviously has to be wound back, if you will, if we're going to position ourselves to address the possibility of a recession in two thousand twenty, which other companies such as a JP Morgan have started to put odds on

that we're going to have a recession in eighteen months. If that happens, the monetary authorities have to have the capability to respond to that downturn, which means that they do need to unwind this easing that we saw so for earlier in this cycle. David Garty, I'm taking a look at Facebook. You mentioned Facebook as another stock where you're not necessarily that eager to add to position or even engage a new position. The stock has lost more

than thirty percent of its value since July. Since mid July, you'd have to go back to June of last year to find a comparable price. Trading at a hundred and forty six dollars a share. Is Facebook on sale or is it just accurate more accurately priced I think Facebook is pricing in the greater regulatory burdens that they're dealing with. Clear we spoke earlier about congressional scrutiny here in the US.

We have also previously on this air spoken about in the EU the imposition of the Global Data Privacy Regulations or g DPR, which took place in May. I'd make the argument here that until such time as we start to anniversary i e. Going into the second half of two thousand nineteen of GDP g DPR being put on the books, Facebook is going to be under a bit more pressure. So they're not just fighting the FED, but

they're fighting regulators here at home and abroad. Before we let you go, I'm really curious on your views on Twitter, because Twitter is bucking this trend, reported better than expected earning is even with the decline in actual users due to their crackdown on bots and other things. Um, what do you think about Twitter going forward? Um? Twitter faces

the same dynamic from a regulatory standpoint. Clearly, Um, you know, we would argue at the same time that you know, while they may be getting to profitability by shrinking their base. I've followed other industries in the past where shrinking one's way to profitability was not necessarily one's way to higher

share price. So I think until we start to get better definition as to how it is that the social media names are going to be able to operate after these regulatory changes are put into effect, we probably sit back on the sidelines in terms of these stocks and let them find their own level. Well done, Thanks very much for being with us. David Garerty, chief market strategist for laid Law and Company. Congratulations on your new position.

Much appreciated. We are broadcasting live from the Bloomberg Interactive Broker's studios just to reiterate this development. The US Justice Department said that one person is now in custody in connection with the mailing of suspected explosive devices that targeted high profile democrats. They are holding a news friends today at two thirty pm Eastern times, so we will bring

you more when we get it. Right now, though, it is time to turn our attention to the semiconductor space, the chip sector that has been beaten up pretty broadly over the past few weeks. A non street of Austin joins us right now. A non street of Austin, a senior Semiconductor and Hardware analyst for Bloomberg Intelligence and on.

It's actually a little bit challenging to get a consistent story when you look at the shares across the board, because Intel is doing great, but a m D is absolutely getting crushed along with broad common Qualcolm, what's going on here? Yeah, it's kind of hard to um sometimes separate the week from the shelf if you, if you may, but to schools of thought here, right, So it's all

semi conductor cycle all the time. The semiconductor index has gone from a level of four hundred to four hundred over a period of five and a half years school thought. School of thought number one is that this was an unheralded extended up cycle, and we will pay the price on the downside and it will be an unnerralded extended down cycle, in which case this is time to abandon

the chips for an extended period of time. School of start number two is that this is a substantially better industry with multiple demand drivers, more diversified, and as a result, you're going to have a shallower downturn, and semiconductors being the new industrials, you will have shallower up cycles. And shallower down cycles as has been the case, the smaller dips being more indicative of of the downturn. So UH

semmy's have been beaten up pretty badly in the last month. UM. If you look at a m D and video down in video down, so they've been beaten up. But there's no question that down cycles underway. The question is how shallow or deep will it be? On does this reflect and market demand? So so Intel's UM. Intel has an opportunity to really change in the narrative here and then try to spend it such that PCs and servers are somewhat exempt from that that this is a vertical specific downturn.

I'm not a big believer in that camp. Usually once UH the bug catches, it spreads all through the all through the sector, So no particular in market is usually immune. And it's also reflective of the fact that UM corporate I T spending has been on a boom. UM service spending has been is good, PCs uptick for the first time up to percent UH in several years. So all

of that you can make a case for UM. But you can either say, Okay, it hasn't broken yet or it's actually been a little bit on the mend, and

the other sectors have to catch up. I watched away in exactly sort of the potential scenarios that you initially laid out in particular, you know what do we have to see to know that this is going to be a protracted and deep decline in this entire industry at a time when we do get some disappointing We have gotten some disappointing earnings at a big tech and they're kind of a saturation point when it comes to certain technologies that really are are heavy in the chip industry.

Absolutely look so UM semi conductors are sort of the tip of the spear, if you may. In order to see a protracted, extended downturn, there has to be a macro collapse, right UM, semi see. At first, you can make the case through tariffs. You can make the case through global GDP growth. UM, But I'm not in that camp UM, not being a macro sire, but also that UM, there are just too many irons in the fire. From our demand perspective. You have a third of the demand

being the PC supply chain. You have a third of the semiconductor industry being the handset supply chain. But you have autos, you have industrials, you have um other subsectors that are perhaps not as big and and PCs are doing okay right now, so you can make the case, but autos are not, so a bunch of those other other parts are not. That's a that's a great point. Autos and industrials, however, are growing, but more due to

content rather than gizmo growth. With PCs and handsets, gizmo growth was almost as important as stuff inside the gizmo. Semiconutters grow in two a way, two ways, right. Once you ship more handsets and PCs option A or the content within the handset and the PC expand. So when these particular devices grew, the stuff within the gizmo also grew versus. If you look at autos and industrials, these are pretty well established market, but stuff in the gizmo

is growing. So if you look at content growth within a car up from two seven years ago to somewhere in the five plus range right now, depending on what subsectors you include in there. So industrials, the same thing IoT distributed, so you can make the case for an extended, extended up cycle. But these are smaller subsectors a third of the business, handsets a third of the business, pecs, um SO and and therein lies the ama of their two schools of thought with the cycle, Ana, can you

speak to the memory chip demand issue? Yeah? So memory member, that's a great point um and memory is ubiquitous. It goes into everything, right. Memory density or memory capacity for device has been on a tear across devices. But there has been built up of over capacity in the industry and the question is is there enough absorption of that over capacity over a short period of time to get

supply and demand back into balance. The big driver of that was the cloud data center market um and um UH and the SSD business, and there was a big move from flash from heart descrives to flash. So those are the big consumers, but prices collapsing the way they are given over supply. Will that extra demand be absorbed and how soon will be absorbed? So I'm just wondering it.

Just to wrap up here, which companies are most exposed to the o an industrial space where the insides are expanding and maybe the gizmos aren't versus those that are more exposed to the PCs and phones and things where you know there's much less kind of room to expand. Absolutely so um n XP Semiconductors, which is UM which was just coming out of the broken M and a deal with Qualcom. Um is one of the leaders in auto market share. Um Texas Instruments has high auto market share,

st micro Electronics and in Finian out of Germany. Well, thanks for being with us as always illuminating on on Trinivason, senior semiconductor and hardware analysts for Bloomberg in Intelligence. We are broadcasting live from the Bloomberg Interactive Broker's studios on this Friday. President Trump yesterday announced a drug pricing proposal, and here to talk a little bit about that is Max Sneathan, Biotech, farm and healthcare columnist for Bloomberg Opinion. Max,

wonderful to see you. So first, can you just give us a sort of outline of what President Trump is proposing. Yeah. Absolutely, So it's a three part plan, a demonstration through the Center for Medicare and Medicaid Services Office of Innovation, so not something that requires extra legislation and sort of a three pronged approach. The first is to give some some vendors in the private sector more power to negotiate with

drug makers. The second to change the way that doctors are reimbursed for some medicines from a six percent on top of the average will sale price to a flat fee. And then the most important one is to benchmark a series of expensive drugs paid through for medica through Medicare.

Part b uh, they're gonna benchmark them too cheaper international prices and over the period of five years, UM mandate that you know, Medicare will start reimbursing at that low or average rate because the rest of the the world pays substantially lower lower prices for those medicines that we do. By some analysis, Americans spend nearly nine hundred dollars per person on prescription drugs each year. That's twice as much as Australians and three times as much as the people

in the Netherlands. Why uh so that actually ends up being a really interesting question with this international price index. The reason is that other countries are much more willing to say no to highly priced medicines to enact price controls. All of that comes at a cost to access you know people, Um the average person well those countries is less likely to be able to access the most advanced

possible therapy uh than someone in America usually. But the kind of upside of that is the fact that they end up paying dramatically less for medicines because they're willing to play hardball in a way that we're not. Nope, Max, you've come on the show before and you've talked about previous uh proposals from President Trump for people who work for him, and you've said, this is kind of no meat.

Here is this the same thing? I think this is the first time that that I really think that that you know, if it happens, and that's un enormous if and we can talk about why it would bring down prices. And again, this is a subset of a subset of the drug market. It's just half the country uh and

just part B medicines for the National Pricing Index. But since those prices are so much lower, um, if you actually you know, follow through with this index, prices in the United States will come down for for seniors um. And you know, it's sort of a curious way to go about it in that we're sort of importing the sort of price controls and restrictions that we you know that the administration has said it previously doesn't like just kind of doing a back war way, a backdoor way

of of importing them. So so it's an interesting way to go about it, but it should actually bring down prices that mostly because you know, theoretically drug makers could raise prices elsewhere. That's sort of the angle that the administration is going with to sort of explain ideologically what seems like a a sort of incongruous move from them. Um, Basically, they're saying, you know, we're they're freeloading off of us. We're paying for the innovation and they're benefiting from us.

But it's it's not so easy as to go to the UK and say we're raising the price. The UK can just say well no, then they they've proven themselves willing to do that. So um yeah, that's why I do think the price will actually come down here if this goes goes ahead. All right, well, let's just to offer us I'll offer some examples and get your thoughts on this. The price of a vast and, which is a cancer drug. In the United States, you're gonna end up paying about four thousand dollars for a vast and

in Switzerland you pay under two grand. In Spain, you're paying about and you mentioned the United Kingdom, you're paying a at five dollars for the same drug, harvony, which is the HEPSI drug. You're paying like thirty five thousand dollars in the United States, and in you know, Switzerland, you're paying sixteen seventeen thousand. Way do those numbers come from? Who sets that price? Uh, it's it's the drug maker, and and it's all within the context of a different system.

Like you know that that harvony price after discounts in the commercial market is probably a little bit lower. But of vastin is actually a really good example here. It is a biologic administered in doctor's office, is so apart be drug and one that's used for cancer patients, so one that has a lot of Medicare reimbursement UM. And in this case, you know, part of it is just that these healthcare systems are are willing to play hardball

when they negotiate. They negotiate on behalf of the entire country in many cases, as opposed to kind of the piecemeal way we do that UM. And also the other thing is that there's more robust biosimilar competition in other countries have been quicker about um getting competition to the market for these expensive drugs. So we're hoping to sort of both import that more aggressive negotiation and the more

aggressive competition for biologics. So of these markets, I want to go to something that you hinted at, which you said that if this gets implemented, and it's a very big if, and we could talk about it. So let's talk about it. Why is it such a sort of

long shot? It sounds like you think so. Um. One thing that this is reminiscent of two people that have been following drug prices for a long time is a similar CMS demonstration by the Obama administration that also tried to move physician reapbursement to a flat fee and implement a variety of reference pricing, though though a different one in many ways, it was actually a milder proposal, but it was absolutely ripped to shreds by the farmland physician

lobby and Republican lawmakers. This is really interesting, in other words, that they're taking a page from the Obama administration and crafting this proposal Republican Congress when we're not in favor of this. Now President Trump is proposing it wouldn't it potentially have a greater chance of getting through because there is more likely to be Republicans support for it given President Trump's leadership. Or do you think that that's still it's not enough to sort of get this pushed through.

It's it's pretty unclear. It'll it'll take some time for that to play out, but so far, Um, you know, I'm thinking of a statement that that or and Hatch made the center from Utah it was to call it tepid would be would be exaggerating a little bit. Uh,

you know. So it's it's just sort of an awkward and a little bit out of character proposal for Republicans to support, and time will tell whether kind of the Trump effect, um, you know, the kind of move towards the populist will lead them to support something that they they vehemently opposed. Another version of in the past, Max, the United States has no government panel that negotiates drug prices. Correct, Uh,

that's correct. It's all left, for example, in the Medicare part D to private plans and in part be the part it's just kind of left up to the drug maker. Supposed there's not much negotiation at all. Does that make any sense. Um, you know, I mean the government is

the bill. It's basically, you know, letting one of the world's largest purchasers of healthcare services and tossing one of the biggest benefits of that, which is a huge amount of negotiating power, tossing it by the wayside, and instead of using that um going by this very complicated backdoor um importation of other people's negotiating power for part of

the market. So yet that would one would think that the more impactful proposal would be to just use that negotiating power, but that that appears to still be off the table. Thanks very much for being with us. Max Neeson is always an expert when it comes to all things healthcare. Bloomberg opinion columns covering the healthcare industry. You're listening Bloomberg Markets. We should just say that the SMP

five hundred has fallen from its all time high. Also ciana's reporting that authorities have arrested demand in Florida in the explosives package case. We'll keep you posted. This is Bloomberg. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo.

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