Apple Services to Be a $45 Billion Business, Munster Says

Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of course on the Bloomberg How can Germany be an exploiter of the Euro, Sir Howard, given the laws of the European Union, I don't think it is in this in that sense an exploiter of the Euro. What happened was that the Germans joined the Euro at what many of them perceived to be an uncompetitive rate, and they thought that they had been manipulated by the French, if you like, who agreed a rate that was too high

for the Deutsche mark. In the years following the introduction of the Euro, the Germans then focused on productivity increases and wage discipline. Unions in in Germany worried about the impact of competitiveness agreed very very tight wage deals, and

German competitiveness improved dramatically. Many other countries in the euro Zone seemed to take the view that having joined the euro Zone, that couldn't have a balance of payments problem anymore, and therefore competitiveness wasn't really problem, and wage rates rose in Greece, in Spain, in Italy particularly, but also to some extent in France, and they became less competitive. Now, if you call that manipulation, well, I think that's a

rather difficult word to use about it. It does, however, mean that the Germans are now operating with the currency which is an average currency for Germany, Italy, Greece, Spain, etcetera, which is certainly lower than it would be if it was just the Austria and the Netherlands. That is certainly true when you look back twenty and thirty years back the time of Green Span Ruben in Summers. Is the US the ultimate manipulator of their exorbitant privilege. I think

that these loaded words like manipulation and illegal, etcetera. Are really not a helpful way of thinking about this. Barry I can Green coined the phrase exhorbitant privilege of being reserved currency, and that to some extent is true because it does mean, you know, the traditional phrase, the dollar is is our currency, but your problem is typically what

fread Treasury secretaries have said to people. But I think that is just a fact that it is the global reserve currency, and that gives you certain freedoms if you like, in terms of the way you handle your own monetary policy. People don't have a voice but to own dollar assets, and that creates a kind of underpinning for you. But then to turn that round and use words like manipulation that people are doing this deliberately, I just don't think

that's the way policy makers think about it. How disruptive will Donald Trump's presidency in b for European elections this year, Well, it's I'm not sure how disruptive will be European elections. It certainly is causing European leaders to think about how they come together in response to what they do perceive clearly more more so than here as a as a threat. So I think you will see more pressure for common

European positions being taken. Whether that will really read across into the individual elections, where I think there's a lot more national things going on. So how do you worry about Marine Lapin becoming president of France? There are fresh allegations against possois Fillon. We now have the latest pulsing. Actually Manuel and McCallon, the Independent who used to be Finance minister under Mansieur Land, may actually win and go to the second ound. What happens if we get an

e manun Malpin stand off? Yeah, I think this is quite worrying. Until recently I thought that Fillon was likely to win and that he would appeal to a lot of the kind of traditional goal list and blue collar people who are flirting with Marine le Pin. But we've now come across what I think of as Welsh wife risk, which has appeared in the case of Fion, and that has unsettled things. Macron obviously very plausible sort of guy, but with no political roots whatsoever, never been elected to anything.

So I think that the idea of him in the second round versus Mary Lepin is a big throw of the dice because he's got no party to back him except his small organization called oh Marsh. He doesn't have any kind of tradition. How would he behave in a big campaign? I think this is a big throw of the dice. I would be much more comfortable if it were Lepine against either Fillon or if he has to pull out back maybe to Juppe. Okay, what happens if

Marin Lepine gets elected president? And I don't know whether that's at the moment a ten percent chance or a fifty percent chance in your eyes. I think it is very serious indeed for the euro project in total, because although she has been a bit cautious about saying she wants to come out of the European Union, she wants to come out of the Euro and I think that

the European project would be in big trouble. I cannot see Mrs Merkel wanting to stand there in a press conference with Marin Lepine talking about how the Franco German alliance is going to be re established. That just won't happen. So I think that's an existential threat to the European project in total, in the way that Brexit is not, Sir Howard, when we look at all that we're talking

about a populism in a political turmoil. Our markets and I go to John Plender in the f T today, our markets just wildly betting on the advantages of a Trump reflation, or is a Trump reflation literally to use the British phrase on money illusion. Well, I think probably there will be a Trump reflation in the form of low corporate taxation and eventually some infrastructure spending. Though whether there are enough shovel ready projects for that to be a big factor in the short run, I don't know.

So I don't think it's a complete money illusion, but maybe at the moment people are putting too much emphasis on that side of the Trump presidency and perhaps too little on the trade risk. You know, I look, sir Howard, it at all that's going on and the idea of a Trump reflation. Help me here with what Janet Yellen should do. I mean, if we we forget almost fancy and I've never seen this where we've in so much way ignored a FED decision and do a two pm today,

all my radar is up on that, Sir Howard. Help me here with the response of a leading economist in Cherry yelling to all that's going on in Washington. Well, I think the FED will be asking itself whether the Trump reflection will really occur and whether there will be a corresponding depressing offset on economic growth from worries about

trade policy. So that to me, if I were the Fed, would cause me to wish to hold my fire for the time being and not to take it as for granted that we are going to see the economy growing more rapidly and therefore that they can raise rates quickly. So I would expect the Fed to adopt to wait and see posture for the moment, and I think those factors will be what's in their mind. Francy. Here's the Trump reflation right now, very quickly the election. The day

after the election, up we go. We've shown this chart too many times in Francy. And here's this indeterminate charn right now, the chair yelling faces this afternoon. Yeah, and so I was going back to what you were saying looking at Tom's chart and actually bring the duck want up on the Boomberg terminal. It would see outdoing once again. You see that, Tom, You see that is that we started the year where there was an alignment between what the dots were telling us in the FED fund futures

put it no longer. The Feds are still saying three to four and actually the Fed funds are saying two interest rate hikes. Yeah, that that's that's not surprising because I think what I've been saying risk repeating myself, is that people are now starting to just try to weigh up the totality of Trump presidency. I think in the first week they were saying, well, it's all going to be about reflation. We're going to see the dollar rising

and everything. And now people are sun say, well, maybe there are some serious threats on the horizon on the trade policy front, that that might create a bit of grinding of gears, even if you know, eventually you get to a more rational outcome, but in the short run, that could be somewhat disruptive. Thank you so much, sir, Howard Davis. What a great, great interview with the RBS chairman there, Gene Munster. Where this Loup Ventures, of course

more than iconic, Piper Jaffrey. What is Loup Ventures? How's it different than the day today? Grind it fortress, Piper. Uh, From a day to day, I'm still doing research. I'm head of research, so I still write three research. No, you still stand out in front of Apple stores? Oh yeah, we uh we do that. It's not every daytime. We do that, but I would say maybe once a month. Once a month, you're out there looking at what's uh going on? Help me here with what I need to

know about Apple's balance sheet. I look at the lack of goodwill, it's it's it's it's the most unique balance sheet I've ever seen. Why is that? Well, because they have a lot of cash, first of all, called billion. They have a lot of debt to call its sixty or seventy billion, you know that's correct, And they have h a boatload of that debt is outside of the US.

And so if you look at the boatload of that cash is so if you look at the total cash outside the US, it's called probably a hundred a hundred billion dollars, and so that's net of debt. So there's there's a big chunk that's offshore. Still three and a half million more iPhones to new customers. Who who are these new customers buying these phones? And how is how many more can they recruit to the Apple world. Well,

some of them came from Samsung. Samsung obviously had a tough fall here, so they probably we picked up about half of those from Samsung people, and they still are getting growth in merging markets, and China mainland was flat ear rear, uh, the Brazil was particularly strong. So they pick up that. I think you're getting to a bigger question around the story, which is is this really a

growing market? And the answer is that it's not. The smartphone market doesn't grow um and Apple knows that, and that's why they're talking about things like augmented reality and and these shift towards wearable. Yeah, David, just so you know, the augmented reality is we're trying to break a record and get to twenty four Apple products in our house. That's our augmented reality. What it defined it for us? What is augmented real? We know virtual reality, what's augmented reality?

And what's Apple? What's Apple's game plan for it? So it's super imposing um things onto the real world and stuff Pokemon Pokemon goo exactly, but but something that would be much more advanced and more usable than what I think is a clumsy game. But that's a great example. How is Apple's approach different from say Google's approach to augmented reality. You have these big companies getting into this space. What is each doing differently? Apple is gonna put position

as more as a hardware play. Google seems to be. They had Google Glass that failed and their new efforts they've restarted it. Now it's kind of under wraps. But they also have a significant investment in this company, Magically, which is a very controversial company but a lot of high expectations. But Google is one of the majority investors

in that. And so Apple's approach is to the hardware themselves, and they just filed a couple of patents last week around augmented reality and wearables, and Google's approach appears to be more partnering our college. Sheer Ova, who writes for a Bloomberg Gadfly, had a column yesterday looking at the Apple results saying that you can draw the comparison here to Walmart, and she sort of wondered what Steve Jobs

would think about that comparison. When you look at growth, when you look at the balance sheet, Uh, what is it that's gonna kickstart growth for for applicant to get back? Can I get back to where it was, to the kind of growth that it saw before. There can be some periods where growth is going to be much quicker, and so for example, this fall, when we come into the iPhone ten, there's going to be a large pool of million plus people with really old phones and that's

gonna drive growth. Should step up at that point. Uh. Then they'll come out with a foldable phone, probably the next three to five years. And so think of it as having a phone the same size that you have today, but then you can fold it open. It could be a small iPad that will be good for growth, but it still doesn't change the long term trajectory. The car

is what's needed. Uh. And and the before or wearable, whether it's yeah, something along those And David Sure's comment is really important in terms of this desire for growth. General Mills, which is the ultimate basic company his return eleven points seven percent per year for the last ten years. Apple can be am I right, Gene, Apple can be

a General Mills and still meant money for shareholders. Yes, And I think you're gonna see that when and even more when they report their March quarter and talk about capital allocation and buy back and improve dividends. So I remember reading, you know, Bloomberg reporting on Apple's return to services hoping to improve the services they offer. It seems like yesterday was a good moment. For the Apple portfolio of services. Are you satisfied with how well they've done

turning that around? Is there still room for them to make more improvements? Services a big deal. When we look at kind of the Apple model for the next five years, the growth is going to come from services. So the iPhone is going to kind of EBB and flow, but service is going to go from college twenty billion dollar business this year to probably a forty five billion dollar business. Right now, Apple services business is about the same size

as Facebook, not growing as fast. But so when you put all of this together and look at the profitability, which is much higher. Services is a critical part to the Apple story longer term, and they need to embrace it even more aggressively than they are today. It's a quick question about Google and and UH and AI. How far have they gone towards monetizing that. In other words, you have the innovation part of things, is the monetari

monetization side of things close behind. It's it's slowly starting. And think of AI. Google set on their last conference call that they're going to be an AI first company, their mobile first company. They they're gonna become AI first, and they talked about three fifty AI innovations in the court.

And what this will be is in terms of monetizing it, it's not going to be like an AI product that you're going to download, and it's going to be the existing products you have are just gonna get smarter in yourknees the more. Okay, Jean, if you forget your Apple I D. So if the kid wants to download apps on their iPod but they can't do it because I

forgot my Apple I D, what do I do? Well, you do uh A reset and I D reset and eventually you're going to probably come up against some password problems. So the good news with Apple is you can actually have real uh support, real tech support around their services and you can call somebody. You know, there's the question you needed to get from gene Muster Hell Loop Ventures. Jean,

thank you so much. We continue. This is Bloomberg, brought you by Bank of America Mary Lynch, dedicated to bringing our clients insights and solutions to meet the challenges of a transforming world. That's the power of global connections. Merrily Pierce Veneran Smith Incorporated Member s I p C. We are pleased to bring you worldwide very Ion Green Professor, Good morning, Good morning Tom. How are you? I'm very good.

For President Trump has an exorbitant privilege, which is I guess he can talk anytime seven on dollar strength, dollar policy, dollar weakness. What is the icon green prescription for any president to do when discussing the US dollar? To hold his fire? Basically, Um, I think the term strong dollar policy has been unfortunate. It's really code for uh, don't comment on the dollar because the exchange rates at the single most important price in the economy, and random tweet

can drive it up or down. Do you help us with that? A term that is thrown around so much, strong dollar policy goes back to Bob Rubin? Of course? Are we are we seeing a change here in policy? Do you think when it comes to the dollar? I don't think policy has been defined yet, but we are seeing much more uncertainty around policy. We don't know whether Mr Trump will tell his Treasury Department to intervene in

the foreign exchange market. We don't know whether the administration will job ow the FED to adjust policy in ways with the with implications for the dollar or not. All we know for sure is that everything is on the table, conceivably at this point, everything's on the table. Mentioned there that came came via Twitter. What have you learned here over the last few days. It's hard to believe it's just been about a week plus of this administration. What's

your takeaway from this this first week? The clear takeaway is that something big is likely to happen on the trade policy front um. Getting corporate tax reforman is going to be hard. Getting individual and come tax reform is going to be harder. Getting big infrastructure packages going to be harder. Still, all of those things require cooperation with the Congress, which is time consuming and can't be taken for granted. Trade policy is the one place where the president,

if he grows in patient, can move in laterally. I think that's what we've seen. Going back to your wonderful in focus, this is a fabulous short read. Globalizing Capital or very Ikey Green talks about the many shades of globalization, starting with a gold standard and and moving forward from there. I can't say enough about the effort. If you were to write a chapter eight, you go chapter five, Breton Woods,

chapter six, A Brave New Monetary World. You end up with a conclusion if you need you to write a back chapter on the back end for Mr Trump to read. What would your new chapter be? Look for the third edition in Tom, Thank you. UM. I think, uh, we have learned over and over again that flexible exchange rates are the worst alternatives except for all the others. We

have to learn to live with this world. And what it implies for Trump is that everything that he is contemplating, from expansionary fiscal policy to create protectionism to destination based corporate tax reform is apt to drive the dollar up, uh serpificantly and frustrate his own intentions. I don't think there is any way around that other than to try

to moderate a little bit those extreme policy initiatives. UM, quickly question here just about about that trade policy are we Are you any more confident what the shape of that policy is going to be? As you said, it's going to be a big event here, we're gonna see something happened with it. Do you have a better sense of what it's going to look like? No, I don't think any of us do. But I think there's some

more obvious targets than others. Mexico is an obvious target, China less so, because China is a very large economy with geo political reach, and Germany even less. Though even though Germany has a big external surplus, it does not have its own currency, as Mrs Merkel reminded Mr Crump in the world. Yet that makes UH Germany a more

difficult problematic target. Professor, I look at I think of Douglas or when at dartmous work on mercantilism in zero sum, in the phrases thrown around right now, are we working our way back to a colonial world? Are we becoming inward and a more closed economy like an autarchy? Again? Are we doing that? I think what what's happening is that the age of hyper globalization, when cross border creating

finance for growing faster than everything else, is over. If we follow sensible policies, we don't have to have regress from here. The word you use Tom Meth's on point is mercantilism. If you look at the Peter Navarro Wilbur Ross documents from the Fall or their Financial Times column, it was all about imports bad, exports good. And that's classic mercantilism, which we know can be good politics. That

is bad economics. It's not. However, zero sum. It's negative sum once we get into trade warfare and retaliation and breaking up global supply chains and so forth. When I look at the games theory that will occur, you are these students of the mistakes we made in the thirties, beginning with golden fetters years ago and the works of the International Monetary Fund. When someone says to you, does this hearken back to nineteen thirties regionalism in block thinking?

Are they right? They are right, and they ought to focus on two risks that developed in the nineties. Number One, when the US lapped on the Smooth Holly tariff, we destroyed the financial position of emerging markets. Basically, indebted countries couldn't earn the dollars to pay back what they borrowed, and that then collapse the global financial system. So if we have a Trump tariff and a strong rise in the dollar, that could happen again. Number Two, trade conflicts

billed over into other forms of geo political conflict. Imated much harder for countries to cooperate in opposition to rising threats like that from the Third Reich. So I I worry as well about how trade tension could spill over into other tension as it did in the nineteen You mentioned that Navar piece and the Ft, and I wonder sort of what the takeaway is from the commentary he

made there about the Euro. We saw the euro move on the release of that that column in the Ft he talked about the sort of the fact of dutsch Mark. I'm misquoting it there, but you know that that there is a larger German role in the Euro right now, what's your takeaway from that? What was the importance of that to you? Number one, It doesn't seem to me that Mr Navarro really understands the Euro or how it's determined, or appreciates the fact that Germany does not have a

central bank anymore. But it does reflect that same mercantilist thinking that we were talking about a moment ago, that Germany has an external surplus. Therefore, the inference follows erroneously that it must be part of the problem, even if there are other euro Zone countries who have external deficits and off set the chairman position at least in Park. What are you going to be watching. We've talked about the upcoming elections in France and the Netherlands. You've spent

some time in Europe recently. I think we last spoke to you were in Berlin. What are you gonna be watching here in two thousand seventeen for indications or indicators of the eurozones health well, first and foremost growth UH. Europe has been dragged down economically and politically by a decade of stagnation. The Eurozone economy is doing better now in terms of growth. That's a big positive that not

everybody yet appreciates. But number two, the banking system UH banks in Italy, in Portugal and elsewhere still a mess. The head of the European Banking Authority yesterday came out making the case for a europe wide bad bank to

clean up the nonperforming loans. That they actually make progress there, that could be a positive first, so I could agree, and I want you to launch into the debate that your colleague in crime brand DeLong started, which is looking at NAFTA, looking at trade, and Danny Roderick at Harvard and Jared Bernstein a Wonderful Economists with Vice President Biden and Washington saying that there was not enough emphasis on what it did to a select group of low skill Americans.

In a hindsight, should we have had a much more overt um solution or prescription or cash treatment to these people that lost their jobs in NAFTA in w t O, there's no question that the answer is yes. I do think, as that's my colleague bread DeLong, that it's mainly been technology and automation rather than NaSTA or China that has

led to the decline and manufacturing employment. But in the United States, the two sets of factors trade and technology have hit the same groups of people in the same communities, uh in the same traditionally labor intensive manufacturing sectors. And to neglect the fact that they had been hit by both maralds I think has led to this political backlash and we should have been quicker to anticipate that and

do something about it. What do we need to see a G twenty and G seven meetings in the coming months with the shock of populism in the developed economies? Number one, we need the Trump administration to show up. I think that would be helpful. And the United States still needs to play a role if there's going to be any kind of concerted response to this decline in this rise in volatility and uncertainty, big exchange rate movements are going to cause troubles for a variety of G

twenty countries. But I don't think intervention all of the Plasa, Plaza and Louver accords from the eighties is going to work. We need sensible policies in order to get sensible exchange rates. And again G twenty is a good talking shop for raising consciousness about that, But policies are made at home in including in Washington, d C. Professor I could Green, thank you so much. Good news. It will look for another edition of Exhorbited Privilege in eighteen months or so.

I'll put that book out on social media. It was one of my books of the summer a few years ago. Barry Iken Green, with the University of California at Berkeley joining us now, is truly one of the most interesting people in twentieth century politics. His public service includes governor of Missouri. I believe he was a Senator from Missouri. He was us. None of this matters. He brought Tony LaRussa to the St. Louis Cardinals, and that that's what

John Ashcroft U did, among other services. Attorney General. Wonderful to speak to you this morning. I would respectfully suggest sir, that you were not as polarizing as our attorney general to be. Will Mr Sessions polarize the dialogue so much that we will think of saying ed mess of another time? Well, First,

I have great respect for the Attorney General designate. I think he's going to be a great attorney general because he believes in the rule of law, and I don't believe he'll be that polarizing if you look at his record as a public servant. He last ran for public office in Alabama, and I believe he was unopposed on either the Democrat or the Republican ticket. It's hard to say that a person is really polarizing if he's so acceptable to people on the broad spectrum that he's unopposed

in a race for the United States Senate. So I I believe his dedication to the rule of law, the fact that he uh sees his responsibility to inform the President exactly of what the law is on matters and to counsel him effectively there, and to prosecute and administer the justice to bartment based on the law and not based on the character of people making inquiry or the character of people who make offense. I think that will serve America. Well, so I don't see him as that polarizing.

Help us understand the role of the Attorney general visae what we saw over the weekend. We were speaking with Noah Feldman, the constitutional law scholar at Harvard University, columnists for Bloomberg View, and we were looking at Sally Ates his statement at which she issued before the weekend, and he he notes in his most recent columns she referred to the Institution's solemn obligation to always seek justice and

stand for what is right. Help us understand what happened here and whether or not you think she was right in speaking out after that immigration executive alarity was signed. Well, first of all, it's my understanding that the professionals at the Department of Justice determined that the execut to order was in accordance with the law. And given what I know about the Immigration Act of nineteen sixty five and its amendments and section to one two of that Act,

it looks like the President clearly has the authority. And it appears to me that she had a sense of justice that didn't make as its primary reference the rule of law. But but concerns that she had personally and very frankly, it is the job of the Attorney General to defend the position of the United States and its laws and the administration of the United States, unless there isn't a legal argument in its favor. I remember on several occasions I was asked to do things in defense

of policy which I disagreed with profoundly. McCain fine Gold was a campaign finance measure which I thought offended the First Amendment of the Constitution. But I defended it as a matter of my duty because it was arguably defensible, and frankly, we defended it so well that it was sustained by the Supreme Court. This is not that happened in a number of cases. David, I want you to jump into you're smarter at this than I am. But

this is not a nineteenth century discussion, folks. The Attorney General is flat on his back in the hospital with pancreaitis, and you had two political guys for President Bush wanted you to take out the quill, dip in the ink, and sign the document. Right, Attorney General, Well, I really don't comment on on on my council to clients, either in private or in public, but that that that's that's

a report. If you're making reference to whether or not the attorney general has a responsibility to counsel honestly the administration he does, and uh, he would disserve an administration if he would tell a president something is legal when

it's not. And the idea somehow that if it would be uh uh, there's a danger in an an attorney general who would collude with the president rather than tell him what's right and what's wrong, would be to describe an attorney general who would not only be trade the American people, but would be trade the administration. No administration should want to do that which it has no authority

to do. And an attorney general who has reference to the rule of law, has a profound duty to say to the president, this is outside the scope of your authority. And and you know, there is a sense in which people sometimes want to act to the limit of their power without reference to their authority, and the law describes their authority. And an attorney general should be very clear to say to whomever asks his opinion in the in the federal government, this is certainly the little level of

your authority, and you should not exceed your authority. Even if some there is some way in which you have the power to do so, help us with the historical import of what happened over the weekend? And what do you think the messages for civil servants, those who have spent their careers at the Justice department, as they should unfold it over the weekend. Well, they have a duty like a lawyer has a duty to represent a client.

If a person in the private sector were to disagree with what his client was doing in spite of the fact that it was legal, and were to decide to rather than defended in court, simply to walk away and not defended, that lawyer would be subject to disciplinary action

by the Bar Association for failing to serve the client. Now, a person who believes that his own sense of justice is offended by doing something legal in behalf of his client has a duty either to go forward to represent the client, which lawyers do all the time, or else

to resign. But the idea that somehow, um you as an attorney, have the right to make a judgment uh in favor of your own personal preferences and against the interests of your client is bankrupt And for a public let me just make this one other point, I don't know how much time you have. This is a nuance.

But when when you decide you're not going to represent the United States and defend its positions in the court, you're basically saying I don't trust the court to come out of this case with something that is uh congrol with my personal opinion, John Ashcroft, We're gonna to leave. We have to leave it there. Unfortunately, we so much want to get you back on again. There's too much to talk about with the former Attorney General of the United States, John Ashcroft, of course of Missouri. Thanks for

listening to the Bloomberg Surveillance Podcast. Subscribe and listen to interviews on iTunes, SoundCloud, or whichever podcast platform you prefer. I'm out on Twitter at Tom Keene. David Gura is at David Gura. Before the podcast, you can always catch us worldwide on Bloomberg Radio. Brought you by Bank of America. Mary Lynch. Dedicated to bringing our clients insights and solutions to meet the challenges of a transforming world. That's the

power of global connections. Mary Lynch, Pierce, Fenner and Smith Incorporated Member s I p C.