The Compelling Case For Front-Loading A 50bp Rate Cut

the week, of the month, possibly of the year. It is the Federal Reserve decision that will be announced at two pm, and more importantly, the two thirty pm press conference with FED Chair j Powell indicating perhaps how the Federal Reserve is thinking about future rate cuts. Joining us, I'm so pleased to say is at Al Hassani. He's senior interest rate, rates and Currencies analyst for Columbia thread Needle Investments, which overseas nearly four hundred and sixty billion dollars.

And thank you so much for being with us. What are you expecting from the Fed today? Great to be with you, so you know when the Fed decision and today I mean, let me just start by saying that the case for a frontloaded easing cycle. It's pretty aggressive, starting perhaps with the fifty basis point cut today is very compelling. And yet at the same time, on the from c UM, I would say this is pretty violent

disagreement in terms of whether to proceed with something that aggressive. UM. So I think the base case has to be a basis point cut with some guidance in terms of UH cuts later on this year as well. But in my mind, again, the case for frontloading and being quite aggressive at this stage is very compelling. So at your case again, your case for more aggressive frontloading of interest rates maybe fifty

basis points today, UM, what's that predicated upon? Because it seems like some of the cyclical data that we're getting recently is actually pretty decent, whether it's UH jobs or you know, other the consumer seems pretty strong. Yeah, And look, and I want to acknowledge that there there there's basically two buckets. A factor is driving this decision. There's the cyclical factors UH, which really kind of focus on some of the shorter term data that we've had come through

over the past six months. There's obviously a manufacturing stall, there's a slowdown globally UH, you know, quite pronounced in in Europe that was confirmed by GDP data today. Obviously a slowdown in in China and Asia and more broadly uh, and weakness in domestic capex. Uh. The labor market in the US looks relatively healthy, but there as well, we're seeing on the margin weakness versus where we were last year.

And you see that pretty clearly in in in wages, wage growth has stagnated or on three and you see that being confirmed by the employment cost in next day as well. So there's some short term data that I would say has weakened. And if you if you focus in in terms of data flow over the past six weeks, you can feel a little bit more optimistic. Uh. Like you said, labor market is okay. Uh. Confidence both in

terms of consumer confidence and business confidence is pretty solid. Um. And the household sector in general has been very healthy, and that's been true for for a number of years now. So UM, go ahead, But I was gonna say that, you know, the structural reason is really a risk management reason. From perspective, real rates remain quite low, uh, and yet we are significantly above real rates in the rest of the world. Uh. That's a dynamic that's unlikely to be sustainable.

So while real rates are coming down, growth continues to decelerate. UM. Whether our potential is somewhere between one and a half and one seventy five, we're we're going to that level um and the margin for error for the FAD is shrinking. And we see what happens when that margin disappears in terms of outcomes in Europe and Japan. And that's a

place we we desperately don't want to be. So here's here's my concern actually with all of this is that ultimately this comes down to a currency play, because if this is a relative value game with respect to the rest of the world, it comes down to weakening the dollar uh and and thus lowering yields. Here and I'm wondering, I mean, is that the ultimate goal sort of implicitly

of the Federal Reserve at this point? I know how much put back against that a little bit in the sense that the currency sensitivity of the U. S economy is actually quite low. The pass through of the currency into inflation is quite low. Obviously it has a it has a short term impact. But as we've seen, the dollar has strengthened uh and as weekend has gone through cycles over the course of the past decade, and the

pass through and the impact of inflation is marginal. Although although that said, a lot of people say that the reason why yields on on U S treasury treasuries are so high relative to the rest of the world is only because of the FED, and frankly because the FED

is in a raising cycle or has been. UM that has kept the dollars stronger, and the hedging costs have been higher, and the hedging costs will come down if the FED cuts, and that will draw more foreign investors back into US UH assets, and then we'll just lower the rates substantially. I mean, do you buy that argument? I don't think so. I mean, like the curve has flattened as the set has heighted, so the feeds ability to impact the longer end of the curve has been

relatively muted. Um. This is this is I think quite similar to hikes that we saw in the nineties and the two thousand's right, So we have the curve flatten. Um. The hedging cost issue, UH, I think you're right of it, but but it's I think it's much more relevant for risk assets in the US. If you think about foreign demand for risk assets and the fact that you know, about half of fixed income outside of the US now

yields below zero. There's obviously robust demand for US risk UH from Europe, from Japan, from the broader Asian complex, and high hedging costs have kept some of those buyers on the sidelines. UM. At the same time, it's not the Fed's job to manage hedging costs for international investors. UM. That's that's a byproduct of what they're trying to do here. That's the book. It's not in their band aid book. I mean, um, um look at it. It's a fairy

thing to say. UM. If we zoom out a little bit, Foreign demand for treasuries, for example, has diminished, and it's been in structural decline over the past five years, but domestic demand has stepped in and we're really not seen any impact of that on the long end of the curve, despite the fact that issuance has increased obviously due to the deficits and demand. Foreign demand has stepped back UM.

And as a thought experiment, I would say this, if we didn't have this fiscal um um SURPLUSA and the fiscal deficit of the last several years, UH, US long end rates would be substantially below where they are today, and that should be very worried for the Fed. UM. It means we would be much closer to where Germany is today. UM. And that's again a reflection of our growth and inflation dynamics rather than anything that the set is trying to do. Ed Al Hussini, thank you very much.

Ed is a senior interest rate uh IN currency analyst at Columbia thread Needle Investments, based in Minneapolis. Well Apple reported some pretty decent results, better than expected for its fiscal third quarter fourth quarter forecast, also a little bit better and expected than looking at the stock here on the Bloomberg terminal, up about four points re percent today, up about thirty for the year, so investors certainly liked what they heard there. They'll us break it down a

little bit. We welcome back our good friend Lauren Martin. She's a senior analyst that need him in company. She joins us live here in a Bloomberg eleven three oh studio. Laura, thanks so much for being with us. Key takeaways from Apple. You have a strong buy on the stuff we do.

It's our one strong by name, it's our top pick for this year, UM, And what I would say is this, I think the three most important metrics that drive Apples upside are the number of installed based unique users, and then um the actual revenue per user, and then how long they stay in the Apple ecosystem, which generates this lifetime value per user. And what you saw yesterday from their earnings, which was so important, was that they hit all time highs in every product, which means the installed

basis growing. The penetration per unique we think there's nine and fifty unique users. The penetration is now one point six products per user, up from one point five a year ago, so they're getting deeper penetation of products. And finally we're getting we have four four hundred and twenty million subscriptions, up from three sixty ninety days ago and

up from three twenty ninety days before that. All of which said, and that lowers churn, because every time somebody subscribes to a service, it lowers your churn, which elongates the amount of time someone stays in the ecosystem. Coming on that, looking forward as the next catalyst, we have

the Arcade service coming, we have the card coming. Apple Pay is getting more widely used they're going to try to add services that displace other services in the market, which is one of the reasons Spotify is correcting today. And all of that should lower churn, which makes the lifetime value per customer go up, both because they're in the ecosystem longer and because they're spending more money on

new services. Although some people would argue that they're trying to shift their focus to a services company and yet their services revenue came in below expectations, So what's sort of your reasoning behind why that's okay? So I think I think the important point for me anyway, is that services has a seventy percent profit margin and product has a thirty percent profit margin. So I think an interesting frame way to frame Apple is razor, razor blade. Let's

give a loss leader on the product. Okay, it's a thirty percent margin, not a loss like a razor, And then what you're really selling is the seventy percent margin services. So every time they tell you they're adding a new seventy a new service, that's another new green field of

adding a seventy percent margin. So to me, that's the more important point here, because that's like a supercharger for the Ebat dog growth and the stock trades on a pe and it trades at fifteen times earnings and it's going to grow seventeen percent, which means you're buying this stock at a PEG ratio of nine point nine zero point nine, meaning below one. Even though it's now the biggest company on Earth. It's has a nice growth now they've got When when the China trade issues flared up,

Apples certainly got hit. It was highlighted as one of those companies that's really exposed. They sell a lot of product in China, they manufacture a product in China. Did there have anything last night on the conference call to talk about kind of how they viewed China. Yeah, so, I mean I sort of thought one of the things that came out of last night's call was they've sort

of solved China. And what they said was they had to lower price for sure because the US dollar has been so strong, but they said that the Chinese consumer has not had a negative reaction to American products, which was something we're super worried about. That the Chinese government had become much more aggressive at stimulating the consumer economy, so they were getting more acquisitions of in China of iPhones UM, and that the trade talks. You saw that

the the administration said they were constructive. The China trade talks were constructive today UM, so that all of that sounds like China might be solved at least for the near term. And it definitely was a driver of Apple's unit upside in the quarter. I want to shift gears a little bit as we head into the second half of this earning season and go back and look at some of the ones that came out earlier. Netflix reporting on July sevente July eighteenth, and they showed that they

lost subscribers. It was a big disappointment. You saw the shares decline substantially. I'm wondering what your view is here. Is this a buying opportunity? We would say no. I mean our thesis is that UM subscriber losses in the US is the new normal. Uh. They raised price, which is what drove the subscriber losses in the June quarter. But starting on November twelve, you're gonna get the Walt Disney Company coming in UM with a new competitive enter

at half the price. It's going to be seven dollars versus Netflix is now you know, sort of twelve to fourteen dollars, and um, you're gonna have every movie that Disney's ever made in that service for seven dollars, from Lucasfilm, from Marvel, from Pixar, and from Disney Animation like Frozen. So every big film they've ever made in fifty years will be on that service, watchable fifteen times by your twelve year old girl if they want to. So I

think you're gonna get trial. What we saw from Game of Thrones is that so long as Game of Thrones was on, Peep will subscribe and paid fifteen dollars for HBO, and they had stopped paying for Netflix. Then Game of Thrones ended, they went back to Netflix. So it's gonna happen is people are going to turn off Netflix and spend seven dollars buying Disney, and when they finished watching all those movies, Disney's challenge will be to transport them

to the Fox programming, which is more TV series. Otherwise they're going to go back to Netflix. But meanwhile, it's going to be a hellish three months six months for Netflix U S subscriber subs as people go over to Disney and and sort of rewatch all those great movies.

So one of the things we've also seen, as it relates to Netflix and a lot of the traditional media companies, which you've covered for a long time, law, is a lot of the media companies are bringing some of their content that they had been licensing to Letflix bringing back because they are launching their own service, whether it's Disney or Comcast or NBC, you know all those folks. How big of the risk is that for Netflix losing some

of that content. Yeah, I mean, I think it's a I think it's a risk because the value proposition is getting worse because they used to have The Office and they used to have Friends, and those were two of their highest rated shows or viewed shows. And now those are leaving and they're splitting up. One's going to Warner

and one's going to NBC. So what's about to happen to the consumer is he's going to have five choices where it used to all be aggregated for a ten dollars a month under Netflix, which was an awesome value proposition. So what the consumer is going to have to do now is figure out which services he wants. And so we're gonna have this chaotic period of sort of open, free for all competition for let's say three to five years, but at the end of five years, consumers are all.

The research shows that consumers are going to take three of these big entertainment services, probably including a spinning bundle or the big bundle, plus a couple O t t s. So the consumer will decide and it will be winner take all, and then whoever wins, they'll have to license the contract for the guy who went out of business.

Who are the three winners? So I think the three I think Disney wins because they're big, they got a balance sheet, and they bought Fox to do this for seventy billion to do this, so they're really all in on this name. I think at biggest risk is Warner because they have to price that HBO product above fifteen dollars and so they're going to throw the turner stuff in UM and so you know, we'll see if they can market around that high price point, because that is

at the Netflix price point. I think Netflix loses. It's already has to raise three point five billion a year. It doesn't have the balance sheet withstand a fight. And I gotta tell you if you're if you're a T and T, Warner Brothers or Disney or Comcast, the NBC Universal. You can lose money for ten years on this. It doesn't matter. Netflix cannot. Laura Martin really interesting points. Thank you so much for being here with us, My pleasure.

Laura Martin is senior analyst at Needham and Company. Joining us here in our interactive broker studios. The earnings parade continues this week, in particular for the autos sector. Christ Are reported earlier today General Oters tomorrow. Joining us here in our interactive broker studios as Craig Trudell, us Autos

team leader for Bloomberg News. So, Craig, before we get started into digging into some of the results we've gotten, because we've already gotten forward, Um, let's just talk about where we are in this secular decline of the auto industry. How low our expectations going into this earnings period. Well, we so we started the year with an expectation that we would tread water on a global perspective. So so the US market is sort of was sort of widely

expected to start to decline. Uh, there was sort of a false positive last year of of sales being up just a smidgeon, but it was mostly driven by the fact that the car makers were selling a lot more to rental fleet companies and and it was you know, not really actually a strong year from a retail perspective. Relative to the last couple of years. We've seen a continuation of retail weakness and uh you know, uh sort of a move on the part of the car makers

to sort of pad the numbers by selling more to fleets. Uh. In Europe, the market is deteriorating, especially in the in the last month. I think it sort of caught people off guard a little bit just how much weakness has has been over there. But the big, big story has

been China. There was an expectation that the government would step in, as they have so often uh over the years when the auto market there has shown sign of of signs of weakness, you've seen uh state support to kind of you know, keep the market growing, and we haven't seen that. And we've seen China really, um, you know,

continue to deteriorate. And so you know, a lot of suppliers, a lot of O. E M s are talking about the idea that you know, they were entering this year thinking, you know, the global industry would be you know, roughly treading water, when in fact it's it's down roughly about five percent. It's looking like for this year down five percent globally. So we've got Fiat Chrysler Um numbers and stocks up four percent. What do we what are the key takeaways there? So with f c A, the the

big big story is trucks here in the US. So they've they've taken Ram truck. Yeah, Ram ram is you know please ram Is. Ram is really cutting the checks in Detroit. So uh. They they've got a new Ram Ram pickup that is really doing well. They also have this sort of dual strategy of they've they've continued to

make the outgoing generation version of the Ram. Uh. They actually announced today that they're going to sort of continue that two pronged strategy of being able to offer the newer, uh, you know, more expensive, higher margin, you know, lucrative truck uh that that has been really successful. They've put a massive touch screen into that pickup that has you know,

surprisingly gone over extremely well with with truck buyers. But they also have this older generation truck that's a little bit more for the budget buyer, and they're giving GM a real run for their money in terms of the pick up market here in the US. And that's huge for profitability, which brings us to General Motors, which reports tomorrow. Ford reported last week shares plunged seven and a half percent the day that they reported, so not a great day for Ford. Are we going to see a similar

type of disappointment from motors? From what analysts are saying, given the fact that Fiat Chrysler might be taking away some of their market share, the key for them is going to be trucks. So so they too have a new pickup on the market. They for who is Truck's not the key? Everybody in Detroit. It's everybody. I mean, it's it really is still the story is It sort of feels like, you know, it feels like a broken record talking about Detroit and pickups. But it remains to be.

It remains the case, despite all of this hype about electrification and autonomous vehicles, that is still what pays the bills around a town in Detroit. Uh, they have a new pickup as well. They've they've had a lot slower a ramp for that vehicle than than Fiat cry Sler has. UH. And whether or not. They're able to sort of resolve that, you know, work out the kinks of of getting that new truck onto the market and and sort of help

the bottom line. That's important And for GM an important factor too is they got out of Europe a couple of years ago, so they're dodging the recent market weakness over there. Uh, the sort of impending doom that is being warned warned about in terms of the stricter emission standards over there. So GM has really sort of, uh, you know, said, you know what, we're we're out of here. They sold opal To to p s A a couple of years ago and that's no longer a concern for them.

So that being said, China's weakness is a big deal for them. They are huge in that market and they're feeling feeling the pain just like everybody else. All right, now, we're gonna get to what I really want to talk about, which is Elon Musk tweeting production numbers. I thought he had an agreement with the SEC not to do that.

I thought so too, uh, you know, And in the past, we've we've heard, we've seen him, you know, talking about car earlier this week it was it was about the solar roof which, uh in and of itself, was already a very controversial product. He showed that a couple of years ago really to sort of seal the deal on on buying Solar City, which everyone uh you know knows

as as being a pretty controversial uh merger. Um. He talked about, you know, sort of towards the end of this year, his hope for how many of those roofs he's going to be able to make. He's had real, real trouble actually just sort of you know, getting production going whatsoever on that product comes out and says a thousand a week by the end of this year. That's

not anywhere you know there. There hasn't been any forecast whatsoever from the company from that perspective, and the amended language that Tesla that Musk and the SEC agreed to earlier this year specifically said production numbers that the company has not been communicated previously. He needs pre approval to to post about that, and Tesla has not said whether or not he got that approval. So all right, I mean, I'm amazed that you're surprised. This is this give me him.

It's funny the stocks not moving because nobody else's was going to change. Sorry, I just I was hoping that, you know, the Securities and Exchange Commission in the United States might have to be able to you like watching a train wreck. Craig Trudell, thank you so much for joining us US Autos team leader for Bloomberg News. Joining us here on Interactive Broker Studio. Craig and the team, they do a great job covering the global auto industry

for Bloomberg News. I've never seen ball this red before. I'm so excited for this conversation. We're gonna be talking, but it's a very serious conversation. It's about women's underwear during athletic endeavors. There is a question what do you

wear under those yoga pans? And you know, it's interesting because there's so much in terms of male athletic underwear and it's not awkward to talk about that market, and yet for some reason it is to talk about this one, even though this is a very real market and it doesn't seem to be very filled. Joining us now Stacy Hunter Harrington, owner of Quoactive, specializing in exactly this niche that has otherwise been largely unfilled, which is women's athletic

underwear Stacy, how did you get involved to this? Well, uh, twenty five years plus in the industry, started mostly in the textile side. UM and being an athlete and going to enough yoga classes and spin classes and seeing women stripped down in a studio going wow, I can't believe

that that's what they're wearing underneath their leggings. And it was either, I would say, without putting a direct stat on it, it was women were wearing underwear and the other forty were not wearing anything at all, And I was shocked. So for me understanding that there had to be there's a reason why we wear technical fabrics to work out with our leggings. Why did no one create a true technical underwear to wear underneath? So it's been a topic of conversation more around a white space of

the market, but really more about hygiene than anything. So what does your product do? So, I mean, what's the secret sauce? Well, it's kind of it's got some patent product around it. It It was knit on a seamless machine into two pieces, so it's um got I guess most underwear has a thing called a gusset, which is the part that sits underneath the women's private parts, and of those products are cotton and cotton. I'm here to kind

of break the myth on what cotton is. Cotton is great to wear every day, but not when you sweat. So I knit a total seamless gusset part which is made of nylon and spandex and it has anti microbium moisture WI properties in it, so it keeps you dry. Um. It was just something that was missing in the market. All right, this is where I'm going to get to a place where Paul is going to be awkward. But to me, I feel like this is key. Why not just wear nothing? I mean, why not go commander and

just have your wicking pants and be done with it? Lisa, it's from I think it comes down to preference. Um. I think I look at it as a different having another layer too. When you get on a spin bike. Oh that's sorry. Um, sometimes you see too much when you're in a yoga class, you know. I think it just gives a little I think having that little extra layer is important and quo is meant to not shift and roll and you'll I can't wait till you try it.

I mean, but This actually goes the whole Lulu Lemon thing. When there was a problem when you turned over and you saw too much. Yeah, this was the reason why you saw too much. Right, it is absolutely Let's talk about the business, shall we? Alright, how long has the company been in existence? And revenue and sales and numbers? Let's go to numbers. Numbers, okay, Um, we launched about a year ago. UM. Direct to consumer sales are doing

really well. Um. Wholesale has been challenging, just as the business and retail, and you know, kind of I didn't take a traditional route in wholesale. I kind of wanted to go after the gym's um there. That way, it became a point of purchase. I mean to you know, Hanky Panky was a sixty million dollar panty program. It's at the beauty about what hanky Panky was? Is it

sad at the register? I kind of in my mind when I created Quo, I wanted that to be this product where women would be, oh wow, I didn't know I needed that. Why is it that the market for men's wiking underwear I'm actually googling that right now, and there's so much The options are incredibly nothing nothing up, seam comes up. It's all of these lists of companies that sell this everywhere, from your local uh, you know,

Haynes to everything else. Why is it that the market is so vacant in the in the women's space at least? I don't know, I mean the panty market. I mean Victoria's secret a loan is going to be a twelve billion dollar you know lingerie brand. I don't. I don't know why no one's specifically done it here. I think I think people have tried to do it, but it gets lost in an assortment of a line. Whereas men, for some reason, it just became the it was more

the under arm or effect. It was a base layer product. How much is it twenty four dollars? And how have sales? And sales have been picking up? Yeah, I mean we're a grassroots you know, we're growing, um in stores or both. So what kind of stores? I mean, are you in a sports store or wearing them like Barry's boot camp, yoga studios? Bandiers are really large. Um uh, fitness retailer um Netta Porte picked us up. Yeah, it's growing. So mrs sort of anathema to what you should be doing.

Which is marketing your brand, which is why you're here. I'm sure. But if somebody did not have your underpants, do you recommend commando or underpants? I would say, if you don't have quote or something close, I would say, go commando. It's better than wearing cotton to swedding. All right, Paul, that's your answer. There you go. I'm not sure that question and I woke up this morning, but now you go. And by the way, you can wear quote on the streets of New York too. When it's hot like that's

been the last two days. It's it's okay. It's not good. It's not going to affect your health if it's just meant to break a sweating So there you go. Yeah, for your wife's day. Very good. Stacy Hunter Harrington, owner of Quo Active, joining us live in our Bloomberg Interactive Broker studio. Thank you so much for joining us. Wasn't that fun? I survived? Honestly, I don't understand why right that you used a good point. I mean, on the men's side, there's so much product on the women's side

and it's not awkward or funny. And I think it has to do with people being a little bit less inclined to talk about female health in certain areas, uh than male health in certain areas. I'm sorry not to get on my soapbox, but I have to say this does highlight that point yep and quote was filling that niche so very well. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer.

Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa Abram woids I'm on Twitter at Lisa Abram Woyds one. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio