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Obviously, the big macro story is what we saw with CPI and then looking ahead to that FED meeting. This is the first time since twenty twenty that we get the Central Bank decision on the same day as CPI, and you could read the CPI in many different kind of ways. So let's ask Jeffrey Cleveland. He's chief economist at Peydon and Regal. He joins us, Now, hey, Jeffrey, what was your read on CPI.
Well, good morning, happy FED day. I think you put it in context. Sequentially, to start the year, we had a point four reading, then another point four reading, then I think we had another point for reading, and then we hado point three month to month percent change for April for four CPI, and then this morning point two or if you like, on the out to do two decimal places, it was point one six. So this is
great news. This is great news. Uh, we you know, it shows a little cooling off in the underlying pace of inflation on goods. Goods prices were down, but also services price is cool during the month. So everything's sort of moving in the right direction or I think for the soft landing narrative, but you know, also in the direction that policymakers would like to see. So it's a great start to FED day.
All right, Jeffrey.
So given that, how do you think how do you think our good friends at the FED will digest this news.
Well, I don't know if it's irony or it's the perfect day for this, but I suspect at you know, two pm your time, eleven am my time here in Los Angeles, we'll get some news in probably the median estimate for core PCE for twenty twenty four we'll be nudged up by policy makers. So they as of the last projections they gave us two point six, that probably
gets pushed up to two point eight. So in a day where CPI came in soft inflation is seeming to soften, they're going to raise their inflation estimate for the year a little bit, just based on the math, similar maybe to what the ECB also did last week, so that's possible. They probably also reduced a number of ikes or sorry cuts cuts. I didn't say hikes an when I said cuts Italy in the dots.
Yeah.
Yeah, so they had three in there. That probably goes down to two. I could go down to one, but I think two is probably more likely. So that'll be interesting for the rest of the day. And then we'll see Chair Powell how he puts this into contest. I suspect he'll say this is good, this is good, but we need a few good months, not just one good month, so then we can argue later is that free? Is that four?
I was saying, is it five? I've heard like how many months?
Is that?
Constant tute? Which brings me to that infletion point. You just pointed out that they might raise it to two point eight percent. Is the market going to take that as good news or bad news?
You know?
I think this is pretty well telegraphed. I mean, if you're looking at these numbers in the forecasting community, I think that's not controversial. However, the market, yeah, could react negatively. The other thing might be alex would be not just the twenty twenty four dot but the twenty twenty five, so the median for PCEE for next year. If that moves up a little bit, that could maybe send a message that inflation is a bit stickier. That could disappoint
the market. So that there's a lot of movie parts here that will have to play out over the course of the day.
So, Jeffrey, what do you think the Fed does here? I mean, I think the market is now pressing in, you know, maybe certainly a November cut and bringing September back on to the table here. How do you think what kind of messaging we'll get around that?
Well, I think that's where it comes back to you. Okay, this is a good report. How many good reports do the policymakers need to see to become confident? Is it three? Is it four? Is it five? If it's four, I think that rules out a cut before the election, so that we still have the first cut in December in our projection, I'm pretty comfortable with that. We'll have to listen to the bed share today and see if there's
any reason to speed that up. I mean, the other thing to keep in mind here, talking to colleagues this morning doesn't need to do a lot I don't think they're in a good spot. I said that a few times over the months on this show. The stocks are, you know, at all time high. Labor market is holding up pretty solid.
You know.
Some of the concern was if the bed remained too high for too long, it would sink the labor market. That doesn't appear to be happening, and inflation is you know, things cooled off in May. This is good news, I fully admit it. But we're still above two percent on the year on year, whether you're looking at four piece
or you're looking at course. Yes, still rush to do anything here, So I think, you know, we'll just wait and see see how the data comes in the next couple of months, then make a decision.
And that is why Bank of America. So if you discim, Renni and who was on surveillance, said things are kind of awesome for stocks, like cue the Lego song, Like that's exactly the point that you're kind of laying out My big question that I just don't really understand or shelter costs. So I appreciate that they were the biggest
component of the May price increase. Why are we not falling faster like we have been waiting for the rents to reset, for things to cool down and shelter for years at this point.
Yeah, that's come up a lot with clients, and I think the issue is a lot of clients point to the you know measures, private sector rent measures that may be capturing the marginal renters cost of renting. So someone moving into a nice building there and in Manhattan, you know where they have a nice door person, you know the door for them, those rents may have come down. I don't know. You tell me, I don't know.
We don't live there.
That's on a lot of those private sector rent metrics capture. The BLS is running a different exercise and trying to look at the average cost to all renters, and this tend this series just tends to move a lot slower than investors at Hope. So you know, the patients from a lot of investors, it's like, hey, this we need to we're seeing it. We're seeing the disinflation in the private sector rent metrics. That's got to translate, and it's
just taking it's taken longer to play out. So that's my preferred story.
Jeff for giving us an economic or inflation backdrop that we got I guess a better handle on today. What's your call in the US consumer? Can US consumer continue to power this economy?
For yes, yes it can. I mean we look at the consumer, We look at how many people are employed, how much they're working, what they're getting paid, And when you look at that, that that measure, that aggregate measure PAUL is still running almost six percent year on year. So and we know the US consumer is not a big saber. What they earn, they tend to spend. So really earnings matter, and earnings are holding up through the main data, so I think the US consumer will have
ample spending power. The other thing, if I have a few more seconds, is that in addition to income, US consumers can rely on borrowing capacity. We don't think borrowing capacity is maxed out, so people could borrow more. Some cohorts of the US consumer could also sell assets or borrow against assets to spend. Net worth is up a lot in the last few years, so we think that's a big component that could keep the consumer spending. So that's why when you look at our GDP call, we're
still above trend for twenty twenty four. We think GDP will grow around two point four two point five percent this year, and that's driven by the consumer.
You were just like so awesome. You have so much energy and so much enthusiasm. I don't know if you get off air and you just like go to sleep, but it's so nice and refreshing to hear like a solid opinion and some enthusiasm. To that point, you talked about the consumers holding in. What about like restaurants and services and things that are directly tied to the consumer, of those prices coming down or is that demand and those sticky consumers keeping prices elevated.
It's possible that just the pace of consumer spending will keep prices stickier. Doesn't mean an acceleration. It just means that, you know, on core, maybe we'll hang out three percent, three three and a half percent on core, we won't get back to you know, the pre COVID sub two percent level. So that's entirely plausible. It's also, you know, possible that consumers are shifting away maybe spending less on some retail on goods, they're spending more on services. So
that's a shift that's underway. You seeing that with air travel. So I think that's that's one thing to keep in mind, it's not necessarily a slow down in consumer spending, but a shift in how consumers are spending those dollars.
All right, Jeffrey Clevelan, thanks so much for joining us. Jeffrey Cleveland chief economists have paid in and regal joining us a via zoom from Los Angeles.
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It is FED day, it is CPI Day. So what do we do? We talked to one of the best, Danielle di Martino Booth. She's CEO and chief strategist for QI Research. We love the strong opinions that you have, and we love how you look at the market. Okay, so you're pessimistic on the economy. Is that a fair statement to say?
It's? Yes, it is fair. I'm right there with Anna Wong, and I've been saying it since January that we likely went into recession in October of twenty twenty three. That's when the McKelvey rule was first triggered. It's got a flawless track record back to nineteen sixty eight. It's kind of like the Psalm role, but it's devised differently by
the former chief economist at Goldman's Acts. He was interviewed in January of two thousand and eight, and because his mckelvy rule had been triggered in December two thousand and seven, and they said they asked him at the time the Wall Street Journal, are are we in recession? And he said, oh, I'm gonna have to wait and see. So of his own rule, he said it might be different this time. But it wasn't. It wasn't. We didn't find out for three hundred and sixty six days from the National Bureau
of Economic Research that it did. The recession had been dated to December two thousand and seven. But we know that once the mckelviy rule is triggered that we're typically in recession.
But then we have this whole like record high in the equity market. Oh, everything's kind of awesome.
It's supposed to be this way by bonds.
Y'ls are lower, It's supposed to be like this right now.
It is you typically get a good ten percent blowoff rally the time kind of when main Street starts to understand that we're in recession, which Bright Chairpowell acknowledged that last time he was at the podium, he mentioned indeed, dot Com, he mentioned University of Michigan and households starting to say, oh my gosh, if I lose my job,
I'm not going to get another one. Kind of from that moment of the Fed recognizing that main Street sees that we're falling into recession, until when the Fed actually cuts rights for the first time, you tend to see a good ten percent rally in the stock market.
So what we'll be hear from our feeder reserve the cerconion you believe.
I think we're gonna hear either two or three. I would not be surprised to see the three rate cuts. Say on the table, the unemployment rate was not rounded up to four point zero percent. It was three point nine six percent. It was a good strong four percent. And given what we've seen in the past, when the unmployment rate moves up, inches up a tenth of a percentage point a tenth, a tenth a tent right, that's exactly what we've seen for the last thirteen months, very
small movements. But typically when we see you know, your Bloomberg bc y function, when the when bankruptcy start to run, as they're running this month at the fastest pace since the pandemic, companies with fifty million in liabilities or more. There was coach last night at five Transportation company. Typically when we see an acceleration in bankruptcy filings, we also
see the increases in the unemployment rate tick up. So it's feasible that we could see in July and in August a large enough move to put the FED in play come September, September, November, December. Maybe those three dots stay on the plot today.
So see why Go?
You see why Go?
It is really awesome. Has a nice little pie chart that shows where the bankruptcies are are coming and the most are coming from consumer discretionary and this is a period over one year. It breaks down industries, it breaks down the name and then the liability is very cool.
One of the richest functions on the termin that.
That's our desert island function.
Is what you said, now, that is my desert island function. My desert island go to financial indicator would be the move index, which should be a pure play on treasury market volatility. However, when treasury rates fall and the move moves up, it's telling you what's going on in BCY that there's a credit event rumbling. So we're under the surface because if treasury rates are falling, then treasury volatility
should fall. When they move in the opposite direction, there's a lot of tension in the system that typically starts to flag you know, there's issues with the banking system. We're lending and what are we seeing. We're seeing commercial industrial lending contract right now?
Should the Fed have already been cutting likely?
Likely? Right, We're eleven months in to the Fed holding after their last rate hike heading into the Great Recession December two thousand and seven, the Fed held off for fifteen months. It was the longest in history. So the longer they kind of hold off, hold off, hold off, the bigger the potential for a policy here that they've waited too long.
So I have to say, when Danielle's on, I get right ins to be like, ask you this, ask for that, ask you this. So this comes from a listener. Do you think that the next rolling six months of economic data remains noisy, or does the deterioration remain consistent, So it's like a drip drip, or it's like a cliff.
I think we're starting to see something that more closely resembles a cliff. You have essentials inflation at QI Research, we parse them out running at four point seven percent year over year. It also happens to be completely out of the Fed's control, pure discretionary inflation. It used to just be a goods deflation story, but what we saw this morning was goods and services that are discretionary in nature. These are things at households want to buy but do
not need to have. That's at zero point one percent year over year. At the cusp of falling into negativity. We've got hotel rates falling, car rental rates falling, air airfares are coming down. So the services inflation that had been the happy story post, well, everybody's bought enough of what they need, so they're not going to build themselves an extra deck in the back of their house. We're actually seeing that combining now with massive disinflation on the
services side. So the Fed's job is basically done because all they can can control is what's discretionary in nature?
Do they not look at that data? Do they not value this high as maybe others do.
Of course they look at the data. But but Powell seems for some reason to want to stay higher for longer. Maybe he gets up at the podium today and only talks about non farm payrolls and not the unemployment rate and not the zero print on headline CPI. Maybe he just says, that's an anomaly of energy prices.
Who knows, where's the disinflation? You mentioned a lot of services disinflation where.
Well, we're seeing it in hotels. They're down negative, they're one point seven percent uh year over year. We're seeing that play out in very weak occupancy trends. We get the str data on a weekly basis. City does a good job of providing reports on that. Outside of a bump at Easter, we've seen occupancy negative year over year, week after week after week, beginning the week after New Year's And that is telling you what a lot of ged Why is this hotel selling for pennies on the dollar.
That doesn't make any sense. Americans are still spending on services unless we've pulled back, Unless we're just focused sheerly on okay, fine, auto insurance rates tick down just a little bit, they're still up twenty percent. You're over here the things we must buy. That inflation's running at four point seven percent year over year, you are pulling back on anything that is discretionary, including travel.
Dot plots Do I care? I mean, I've got a function for it.
We care a lot about the dot plots today because the dotstab you could have a mac truck between the difference between the market reaction of three staying or being whittled down from three to two. I do think that markets right now are assuming too given today's CPI print. If they keep three, then you're going to look to Powell at the podium to talk a lot more about the second mandate of maximizing employment.
Great stuff, yep, always always.
Danielle, thank you so much. We appreciate you stopping in.
Great to be here.
It's great to get a counterintuitive, passionate voice on stuff. Daniel de Martinez, Booth CEO and chief strategist for a q I Research. Interesting. I don't I don't want to be an economist. I feel like everything is a worst has test. Everyone has the same data, But then how you filter it through your models gets you to different conclusions, but you have to wonder.
I tell you the market likes to today, the S and P five one and a quarter percent, the NASTAC up one point eight percent. The Russell will point out, that's kind of where the game is right now, up two point nine percent here today.
So we're broadening out, which a lot of.
Market strategies will tell you that's a healthy thing for the markets in general.
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Alex Deal and Paul Sweeney.
We're live here in our Bloomberg Interactive Brokers studio and we're also streaming live on YouTube, so you can head over to YouTube dot com and search Bloomberg Podcast and that's where you will find this. Charlie was just reporting S and P at record highs, just a big big I think, embraced by the marketplace and risk assets on what we saw was a little bit cooler than expected inflation data. Couple that with a FED meeting in the
stair for noon. A lot of folks taking this as an opportunity to jump into the market's check in.
With a professional on this whole thing.
David Kodla, founder, chief executive officer and chief investment strategist at Mainstay Capital Management, joins us. David, the market likes what it heard this morning. I guess anticipating an accommodati of FED going forward.
What's your take.
I think that's exactly what we're seeing. Good morning, Paul and alex. I you know, we here's the quandary, right We have an inverty deal curve for the longest in history and an inversion very deep that is eight freight on predicting a recession. We have these stats out there, credit card interests at an all time high, delinquencies at an all time high, auto loan defaults rising rapidly. That
is anecdotal data pointing towards problems in the economy. At the same time, we had positive GDP in the fourth quarter, first quarter, and GDP now from the Atlanta FED is currently above three percent for the second quarter, and that's a very volatile number. Earnings are beat expectations by a wide margin for the first quarter. We're expecting good earnings for the year. We're out of the earnings recession, strong
earnings going forward. And the S and P Global PMI has manufacturing and services at twenty four and twenty five month highs. So there is a lot of conflicting data out there as to where the economy is at right now and where the economy is going. And as far as the Fed, UH, Yeah, we saw we saw another slight decrease in UH in CPI and we know though that it's going to be you know, Powell is, we'll see what we hear in the presser today and what kind of guidance we get what the dot plot shows.
But we're you know, we're seeing we're seeing UH inflation being sticky. Even their preferred gauge services PMI is a two point eight. They're not a target yet, and it's and inflation is being is remaining sticky and stubbornly high.
So you think the Fed eventually today takes away that punch bowl by sort of pouring some cold water here.
Well, I think that, you know, and it's it's it's you know, become a parlor game like calling the the level of the S and P five hundred at the end of the years to win, the FED will cut and see economists and wirehouses with each data point jumping back and forth between July or December or September. Uh, but we see the fact of the matter is until it's clear to the fo MC that inflation or CPI is getting close or pc is getting close to their target,
they're not going to cut. They're not going to cut. And there's plenty of economic data they can point to, uh that that that says the economy is really doing okay, although there's some economic data out there that scares the heck out of me.
So given that backdrop here, how are you thinking about your portfolio construction?
What kind of.
Tweaks have you been making maybe over the last several months, would you anticipate and over the next several months.
Well, and that's and that's what we we haven't We haven't really We've been on the on the equity side. Uh. You know, we continue to favor, we favor large cap over small cap, and we've seen that that valuation spread keeps, you know, setting multi year records as well, large cap over small cap, US over foreign growth over value growth over value being and large over small being very important. Mega cap tech continues to rock and roll. Look at what we've got today. I mean, how many how many?
How many people have come on the show and talked about shortening the megacap stocks over the past year. Short, No one.
No, I haven't heard anyone saying short the megacaps. No way. That's like standing in front of a train.
Oh well, I agree with you, But but we have, I mean we have. And and likewise, on the income side, how many people have come on the show and said they're adding duration because the FED is going to cut rates.
They've had their head handed to them. The US aggregate bond index is negative year to date, and what we've been saying is that where you want to be at a sixty to forty portfolio, whatever the income oriented portion your portfolio, has to be an ultra short maturity, high yielding with zero duration risk that produced about a seven and a half percent return last year with those types of all short bond funds about three and a half percent this year versus a negative US aggregate bond index.
So that strategy, that combination of leaning towards large cap growth. On our equity side, ultra short, high yielding, zero duration risk in our bond funds ETFs bond allocation. It is continued to work very very well.
And David, you know you mentioned the US AGG bond index, the Bloomberg Index down zero point nine percent year to date, But are you surprised that the corporate US corporate high yield is actually up a couple of percent here and has been outperforming really over the last couple of years. Given concerns about our recession. Are you surprised that the highield market set as well as.
That has Yeah, I mean, crowdit spreads are tight, uh, And you know, we don't want to be high yield with long duration, right, We're talking about where we're holding high yield, where we're holding bank loan, where we're holding floating rate. I'm talking about an income portfolio or a credit debt portfolio with the duration of about zero point one, not five or six or ten. Right, So we want to you know, in each of those categories, we don't want the duration risk. We're not ready for that yet,
because look, we don't we think we think. I said it my notes and I'll continue to say it.
FED.
The FED rate cut is the first FED rate cut is months away because they're nowhere near target or there's still far enough away on the target. We have a slight improvement, you know, in this in this release, but they've got a long way to go unless they change their target to get to two percent.
I know this is sacrilege, like a couple hours before the FED. But what about x US with the ECB having already cut, but the politics situation there is really up ended. In France and also the UK. Anything our overseas that strikes your fancy.
Yeah, a good question that you know when we when we look abroad Europe, you know whether the ECB should be cutting yet or not. They cut a quarter point in Japan. We've loved Japan for a long time now, uh, with with the weakness and the end uh just tremendous for their exporters. Other corporate reforms Japan has been we've had an allocation too.
Uh.
With all of this, you have to be very careful to hedge the currency because what's happening with the FED staying tight, ECB cutting, what's happening with the end. You don't want that, you know, you don't want to affects affecting your return. You don't want you need the currency hedge in there. But yeah, we're seeing more and more opportunities abroad in that respect. That's why I said our growth over value are large over small is the important
US over FORORN. I still think it's America first, but there are opportunities abroad, specifically Japan, and I think coming on in Europe.
Now, all right, David, thank you so much for joining us at David Kudla, Founder, chief executive officer and chief investment officer, Mainstay Capital Management. Appreciate getting a few moments this time sticking with the large cap growth names. And I guess why not. That's kind of where you know, we've seen all of the action.
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I'm Alex the alongside paulse We need this. At Bloomberg Intelligence Radio, we bring you all the top news and business and economics and finance. But there are lens of Bloomberg Intelligence analysts. They cover two thousand companies and one hundred and thirty industries all around the world. One top news item here and so interesting that it comes on the day of the shareholder TESLA vote, which would come tomorrow, is the European Union's decision to put tariffs of up
to forty eight percent on ev imports from China. It just escalates trade tensions and adds to the cost of buying an EV. Craig Trudell is Global Auto's editor for Bloomberg News, and he joins us now from London. I got to ask questions on this one, but broad strokes, what are the details with these tariff increases.
Yeah, this is huge news. It was anticipated, but the particulars are something that are very fresh. So the European Union launched this investigation last year into the extent of the subsidization of electric vehicles by China, which are are increasingly you know, coming into Europe and you know, really able to compete with local manufacturers. There's been concerns about you know, Chinese cars being able to undercut companies like
Volkswagen and Stalantis and and renaut. The details here today sai See, the maker of MG, which is a British brand that you know, was sort of brought back from the brink by a state owned company in China. Sa see. They are going to be subject to a thirty eight percent additional tariff. And MG has really been sort of lighting, you know, lighting things on fire here in Europe and in the UK in terms of really, you know, being able to push a lot more volume the last couple
of years. Another big manufacturer that's going to be subject to a substantial teriff will b g Le. They of course own Volvo and Pollstar and some other big brands. Byd is another company that will be subject to seventeen percent additional tariff, and the rest of the industry will be subject to an a weighted average duty of twenty one percent.
So talk to us about just the EV market and the China's percentage, Like what's China's market share in Europe of evs forrady defined because you can't find one here in the US.
Yeah, I mean, it's it's tricky because it of course depends a little bit on how you define it. And I think one of the things that's really interesting here is that it's not necessarily just Chinese companies that are that are doing this importing.
UH.
The biggest importer as a matter of fact is Tesla. They have the plant in Germany where they make Model Wise, but they don't make Model threes there, so they've been shipping an awful lot of Model threes from their plant in Shanghai.
UH.
They interestingly are going to try to to have a lower duty rate UH and make the argument to the European Commission that because they've been, you know, benefiting less than other manufacturers, uh, you know, from subsidies, that they should have a sort of commensurate duty rate. Other manufacturers are able to make that request and have you know,
what's called a a you know, individually calculated rate. But if at this juncture the only company that we know that's asked for that and may get it as Tesla, Here's what I.
Don't quite understand, and I know I'm kind of beating my head against a all on this one. But if the goal is to go green, why wouldn't they want to flood the market with a ton of Chinese ev imports and get the green stuff going. And I appreciate that they want to protect their current manufacturers, but you know, importing cheaper evs also spurs competition. So the line to thread the needle I find to be very confusing.
It's absolutely needle threading or you know, tightrope walking, pick your metaphor, and it is a very valid question. And depending on who you ask, they're they're doing absolutely the right thing here or or they're really sort of shooting themselves in the foot Folks in Brussels. The debate here is is to what extent do you know, local manufacturers need to be protected from the fact that kinda has jumped up out to this huge lead. They're dominant in
this space. They're able to, you know, bring electric vehicles to market with much cheaper batteries that people can actually afford, and that's been you know, the the major you know, sort of pain point for the industry is they have not been able to bring prices down far enough fast enough for you know, more mass market adoption. China has been able to pull that off, uh, you know, in large part European companies have not been able to do that.
So while you know, we've seen quite a bit more momentum in Europe relative to to say the US, that momentum has really slowed of late, particularly as we've seen you know, the cost of living crisis and inflation really hitting consumers pocketbooks. We've not seen you know, the the growth rates that you know, just in the last few years. We're really eye popping and you know, getting a lot of people excited about you know, this transition being doable.
So that's kind of where I wanted to go.
Great because here in the US there really seems to be a palpable i guess, decline in the adoption rate for evs, and people debate whether it's price, whether there's some political issues out there, whether there's lack of autequate charging infrastructure, whatever, but there's been a palpable you know, kind of sense of the market's cooling off. Give us a sense of how the market is in the UK and the EU.
Yeah, I would definitely recommend that listeners take a look to the extent they have access to the Bloomberg Neft's report out today, their annual ev outlook. It really goes into a great detail on just you know, sort of the ins and outs here. What we've been seeing is you know, one manufacturer after another coming out and really sort of dialing back there and ambitions. You know, Mercedes did a few years ago talked about being able to maybe go fully electric, you know, around twenty thirty. In
certain markets, they've really walked that back. You've seen Ford and GM and Volkswagen, even Tesla you know, put off or sort of indefinitely delay factory investments. You know, Tesla of course, you know, made a big announcement about building a factory in Mexico that is very much on ice. Volkswagen canceled a plant in Germany. Uh, there's just a lot of concern among manufacturers about being able to profitably
make affordable electric vehicles. And again, you know, the the way in which the Chinese have been able to achieve this has been driving down battery prices. And that's one of the most compelling things in this report for me, is just the amount of capacity that we've seen in China.
So when you want to talk about you know, competition and fairness, that's something that Brussels in Washington they really highlight as what's problematic here is that they're essentially making the case that China is flooding the market and artificially driving down prices. That's good for the consumer. But you know, risks putting their companies, you know, out of out of business or you know, if that's too extreme at least you know, at a significant disadvantage.
Greg really appreciate it. Thank you so much. Craig Trudel, a Bloomberg Global Autos editor, joining us there. Yes, and that Bloomberg ANI report that comes out is widely cited by most auto analysts on the street is really seen as the definitive ev demand outlook and supply outlooks. So if you can get your hands on it in any capacity, you should definitely do so. And it feels like a chicken and an egg thing. You need the supply and then you need the demand and the chicken in the egg.
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So one thing in the market is if you look at, say, the top sectors in the SMP so far this year, you get tech, you get information, consumer communications. Thank you very much. But you also get utilities, and a big part of that utility story is sure you get some
nice yield and it's that safety defensive play. Okay, but I'm starting to wonder how much of a growth sector it is also, as you see massive power demand build from data centers and AI in addition to the energy transition, utilities kind of sit in the middle of all of that. And one company is Next Era Energy. It's ticker n E. The stock has had a nice run up this year, it's not done so well in the last couple of days, and we'll get to that after an investor presentation. We'll
get to that with the CEO and president, John Ketchum. Hey, John, it's so good to see you again. Thanks for coming in Alex.
Great to see you.
Good to be here.
So tell our viewers first, what does Next Era Energy actually do well.
We're made up of two businesses. One we own the nation's largest rate regulated utility floor to power and light, and two we are the world's leader in renewables when solar battery storage, a unique combination bringing those two companies together.
But you still have like nuclear and too right like.
We do for the utility side, we do, so we cover it all. We're in every part of the energy value.
Chain, not only a renewables. We have six gigawatts of nuclear and we're one of the best operators in the country on the nuclear side. And we also own gas fire generation. Seventy two percent of our generation fleet in Florida is actually natural gas fired. So we view ourselves really as a very credible source in being able to advise our customers on what the lowest cost option is for generation.
Owning a utility electric utility in Florida would seem to be a tough business with all the weather down there. What happens when these storms come through?
How do you guys?
You have to almost be in a constant state of emergency almost to be able to react.
We are battle tested. That's one of the great things about our company is that nothing catches us up by surprise, and it comes from a culture of continuous improvement and innovation, and we practice and we drill, and we've had what forty nine hurricanes in the last twenty or thirty years. We're never caught by surprise. We're a company that is used to managing through diversity, and that's one of the strengths.
So you mentioned catch by surprise and I mentioned the stock price in the last couple of days. So there was an investor presentation that you made and where you outline your forecast this year through twenty twenty six. You're also twenty twenty seven midpoint profit forecast. That's the one that analysts said that falls short of our estimates. Yeah, and I guess the question is if data demand and data power is going to drive so much demand for your stuff, why isn't that midpoint higher.
Well, here's what we see, and we talked a lot about this at the analyst day yesterday. There are three things that I think really differentiate next Era as part of our value story. One, we're seeing an inflection point and power demand. Two, it's going to be met by renewables because it's low costs, fast to deploy, and it's clean. O companies better position to meet it than we are. And our business model has always been what I would
call a replacement cycle. We're building new renewables to replace higher cost coal plants, higher costs, less efficient gas fired units, oil fired units. We now have this new opportunity that's really emerged in the last six to nine months, which is what I call our growth cycle opportunity. It's a new demand that has come and it's across industries. It's not just data centers get a lot of discussion, but
it's industrial electrification, reshoring, and manufacturing as well. But when you think about it, we're having all these discussions with these customers now. Take data centers, for example, it takes two to three years to build a data center, so they won't need the power until twenty twenty seven. We might sign a contract today, but the power comes in
twenty seven, which means it contributes in twenty eight. And so we're trying to explain to investors yesterday is look, we have a tremendous long term growth outlook, but a lot of this growth cycle demand is really going to start materializing and producing revenues and earnings in twenty seven, which means it really starts to contribute in twenty eight.
As you walk through midtown Manhattan, you probably see some empty office space here. I think they all move down to your state. Talk to us about how that's impacted your business in terms of demand and maybe what you have to invest back into your grip.
Yeah, and that's what's great about our business, right is the Barbell approach. We've got the nation's leading great regularly utility in Florida and the world's leader and renewables in Florida. We're seeing tremendous growth over the next twenty years. We're projecting a forty four percent increase in GDP. We have one thousand people a day moving to the state of Florida. Four of the five fastest growing metropolitan areas in the United States are in Florida.
Florida.
We're a country, it would have the fourteenth largest economy in the world, and we're there to power all that growth. So our growth story is not only about what I just discussed about all this renewable demand that we see power in AI and industry and manufacturing across the United States, but it's also all the growth that we see right in our own backyard in Florida.
Talk to me about rates. So you're going to need to invest a lot, right, Like there's maybe an enormous investment cycle, as you mentioned, like the growth cycle for utilities. Right, what is it like on the regulated side of going back to the government and saying, Okay, guys, I got to invest it you've got to raise the rates.
Yeah, And so what we do is we have done a terrific job of taking cost out of our business. So when you look at what we've been able to do over the last twenty years, our O and M on a dollar per megawate hour basis is seventy percent seventy percent lower than the national average. That's three billion dollars we put in our customer's pocketbook every single year compared to an average utility. And we've always been able to make really smart capital investment decisions around bringing low
cost generation into the fold. And today the lowest cost generation option that we have in Florida is solar and storage. So although we're investing more capital, it's actually lowering the bill because it's a lot cheaper than other generation alternatives, combined with our ability to take cost out with the way we operate.
But from your investors perspective, is a.
Unit of power from a renewable source, what's a profit margin on that versus maybe an existing source.
Well, when you think about renewables, I mean renewables you know have really strong returns and their low cost And you talked about, you know, interest rates being one of the factors. We pass those costs through to our customers, and so the cost of WHEN and solar has gone up a little bit as we've seen some pressure you know here from the macro environment, but so have cost increase for every other type of generation. Actually, gas fired
generation has really gone up in price. And so you know, what we have seen with gas fire technology is a fifty percent increase in the last twelve months. That has not happened to renewables, making renewables even lower costs than they've ever been on a relative basis to gas turbine options.
So what I hear is that everything is just more expensive because that's the environment that we're in. But because you're able to take costs out, the rate payer may not get hit as hard. Is that a fair statement?
That's exactly right.
And so what we've been able to do in Florida, our bill is thirty seven percent lower than the national average thirty seven percent. It's because of our ability to take all those costs out of the company and also offer them low cost renewable solutions as part of the generation mix. And when you put those two together, that's how we're able to achieve that thirty seven percent lower
bill than the rest of the nation. That's a really compelling investor, customer value proposition and investor value proposition.
Man, I have like seventy five more questions. We didn't get to nuclear, we didn't get to you know, hydrogen. Okay, you're coming back, John. This is so helpful, and you're really in those two parts like the here and now and then the future, and I think that's just so fascinating. So definitely come back. We'd love to further the perspective. John Ketchum, President and CEO of Next Era Energy, based in Florida. Great to see you.
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