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Terminal and the Bloomberg Business app. To weigh in on all of this, and please to say that we can catch up with the Disney CFO Hugh Johnston. She is wonderful to catch up with you, sir. As always, we've got to start with the price increases. First of all, it's on the minds of a lot of people I can tell you around this table as well, So let's get into it. We've heard from a lot of companies that have talked about a lot of pricing power and
sliding sales. What have you seen in the streaming business that gives you confidence that you can hike prices without that delivering increase churn.
Great, well, good morning, great to be with you all.
Obviously, terrific quarter for us, and you all have mentioned the numbers a few times. The entertainment business is doing exceptionally well right now.
We had the top movie in May, June and July and the.
Form of Planet of the Apes Inside Out too and then now Deadpool. That's real value to the consumer. And as we think forward to what's going to be appearing on the streaming service, those three great motion pictures, the IP that we've produced ourselves are going to be on the streaming service, as well as an enormous number of Emmy nominated TV shows including Avid Elementary and The Bear, Only Murders in the Building, and of course Showgun.
The huge hit.
And when you deliver that much value to consumers, consumers are willing to pay a little bit more because frankly, they're getting so much back in terms of entertainment.
You have got to say, I'm with your Showgun was awesome. I said that last time just to endorse it once again, one of my favorites of the last twelve months. Clearly, the streaming business is doing well, which opens the door to high prices. You can't say the same thing about the theme park business, just what is going on next to you.
Yeah, So one of the things to keep in mind is the theme park's business.
We have actually grew in the quarter.
Revenue is up two percent, so we're not talking about a business that's going negative in terms of growth. Earnings were down a little bit because we had inflation, and we're making some investments back in the business. What we see happening more than anything is the lower income consumers are a little bit stressed and shaving a little bit off of their time at the park, and then higher income consumers are tending to travel overseas a little bit
more right now. But given the strength of the ip that we have in the park, given the quality of the experience, when the consumer is soft, it tends to hit us late, it hits us a little bit less, and we tend to recover. Really, so we really just see this as a few quarters of slight perturbation in the numbers. Frankly, I think we're going to be right back as we get into the middle next year.
One of the other complaints commonly hear with the consumer is about bundles, not that they're not good, but that there's just too many of them and it's given people fatigue. Do you think there needs to be some consolidation. Do you agree that there's just too many options right now?
Well, consumers do seem to appreciate having a limited number of bundles. Now, what we've tried to do with our own offering is offer the individual pieces or if people want to get a discount by bundling, we're.
Happy to do that. So that said, I think you do see.
A trend where there's probably going to be a few big competitors in the marketplace and streaming as we see right now between Netflix, Amazon and ourselves, and then there'll be some smaller competitors out there and they'll have to decide how they're going to run their businesses.
Well.
Another huge draw of some of these is sports rights, and on this year, the NBA has had this very odd bidding war where you've come out on scathe but Warner Broods loses out. You have Amazon dot Com a new entrance in there. You have all these streamers coming in trying to get their hands on live sports events. Do you think this is a healthy or unhealthy development for the industry?
Generally speaking, what you see is sort of the leagues are choosing to go with the big winners in all of.
This, so they've obviously been with us.
ESPN the third quarter had forty nine percent market share of sports viewing, which is.
Obviously a terrific number.
So we have the a package with the NBA, we'll have the NBA Finals for the next twelve years. Beyond that, I'd be speculating is to get into what their decision making process was, but I think in general they're quite pleased with what we've been able to do for them, and obviously we're happy with what they've been able to
do for us. And you combine our NBA rights along with college football along with the NFL, we've locked up sort of the most important sports to us in terms of being big and quite popular for an extended period of time.
So we feel good about where we sat.
Hugh, I know there's a different price point whether or not you want to be an individual that has to sit through advertisements. Are you seeing uptick of political ads given the season we're in.
No, we really haven't seen much in that regard, so I can't certainly say that, So do you.
Expect that to happen?
I mean, everyone says after Labor Day, this is when the campaigns are going to be in high gear up until November. Are you expecting an uptick of political ads on any of your streaming services?
Yeah, it's a great question. I couldn't tell you the answer to that one. So what I can tell you more broadly is the advertising market right now is incredibly healthy. We grew advertising as a company eight percent in the quarter. Our upfronts for next year were quite successful. The upfronts were up five percent, and in addition to that, the streaming service saw a twenty percent increase in advertising in ESPN saw seventeen percent increase. So generally speaking, the ad
market is healthy. The biggest place is that it's healthy are consumer and then technology.
Are you concerned that consumers right now potentially are going to shrug off the price increases, because what we hear from a lot of companies is that we do see consumers trading down. Why do you think they're willing to pay for a higher price point?
Well, I think the biggest reason is it's always important to focus on this. The consumer receives value and what they pay is price. And because we're delivering so much value, I mean really an enormous amount of value in terms of the hits that I just mentioned. But then in addition to that, the combination of Disney plus Hulu and then we're going to have an ESPN tile and ultimately
ESPN flagship on our streaming service. That's a huge amount of value for consumers, and as they're allocating their entertainment dollars, I think they're going to view us as as a great place to put them.
So you mentioned hurdu just how close are we to an agreement with comecast.
Where are we?
Yeah, we're in the middle of an arbitration right now, and as always I'm not going to comment on that on arbitration outcomes and all of that. My guess is it's going to take a little while, but ultimately we'll get to a good place for the Walt.
Disney but it takes what the timeframe is here, what a little while is?
Yeah, probably talking a matter of a few quarters, it'd be my guest. But that's just a guess. So take it as that well, just.
To guess as one of the theme parks as well. I just want to know you down on that too. You talked about the middle of next year for the theme park business to be sort of bouncing back to where it was. The guidness has sort of shifted out here. What's the firm guidance coming from the company now, Because I remember it was going close to year end, we'd get that bounce.
What happened, Yeah, the consumer came in a little bit softer, and it was really the consumers that I mentioned earlier. The lower income consumer is is choosing to spend a little bit less, and again the higher income consumer is doing more overseas and outside the US. But again I'll remind you we're still growing in that business. So it's not a question of the business has gotten way off track.
It's just a little bit softer than it was before because we're seeing toward the end of the quarter we saw a few consumer trans You have.
Quite a unique advantage point of course. You I used to talk to you when you were over at Pepsi during the pandemic. Coming out of the pandemic, you're now with Disney, so you have a very very unique view of where the consumer is. What gives you the confidence just looking at your dashboard that it bounces back, that it comes back. Where does that come from?
I am more than anything. I do believe there's resilience in the US economy. Obviously, markets are very very sensitive right now and very fragile of you, as you all been talking about in terms of news. But I think the US economy is a little bit stronger than people are giving a credit for, and the consumer will come back as the economy continues to strengthen.
Interesting, Hugh, appreciate your time as always, sir, Hugh Johnston. There the Disney CFO call data of rough MKM. Isn't waiting for that to draw conclusions, He says, bye, by soft landing.
It was nice knowing you.
We may be finally entering a bad news is bad news environment, with analysts double digit earnings expectations for the next twelve months looking increasingly out of sync with the evolution of the macro economy.
Mike Data joins us now for more.
Now, Mike, before we move on, I just want to explain something to our audience. That quote, the timestamp on that quote is really important. That wasn't on Friday, that wasn't on Monday. It wasn't in the last twenty four hours. That was last Tuesday, on July thirtieth. It pre dates, what we heard from the FED, what we saw in payrolls. I can see you're smart and you're feeling good, and
you should be. Mike, can you tell me what you saw that was guiding that view of things before we saw it for ourselves on Friday?
Yeah, thanks a lot, John, I really appreciate that.
What we were seeing when we wrote that note was the Conference Board data for July. So this is survey based data that essentially asks people about their labor market perceptions and their current circumstances. In what we saw from that data in both June and July is that the present Situations index had tumbled about twenty index points from
where it was one year earlier. Since the data goes back to nineteen eighty or so, we haven't seen anything like that, a move down like that, outside of actual recessions. And then, equally importantly, there's a spread between those saying
jobs are hard to get and jobs are plentiful. That correlates very strongly with the unemployment rate, and that pushed to a new high for the year in July, and lo and behold, you know, we got another pop in the unemployment rate, But those trends were underway even before the July jobs data. So I think we need to consider that given that, you know, there's a debate about
whether the data last Friday could be fluky. These trends have been underway, they're persisting, and you know our fear is that the soft landing could be slipping away.
Does that also imply that the FED is just too far behind, that the data has already started to slip and they didn't go in July, therefore going in September, there's only so much they can do.
Yeah, I think that's exactly right.
I mean, if we've listened to fedchair Poul what he was talking about at the last FED press conference was this idea of a totality of the data, And if you look at a totality of the data, it really is a mixed picture.
Right.
GDP and jobs look okay, and some of the other data that I spoke about, some of the survey based measures and the move and the unemployment rate look more recessionary. And so this is why business cycles come to an end. When you're at an inflection point, it looks a little bit messy. It's not totally clear cut. So if policymakers are waiting for a completely obvious recession to slap them upside the head.
Then they're going to be way behind the curve.
Mike, you had a couple of triades. One was long duration inequities, it was focused on defensives. We've had a big reset in markets since since that call.
Where are you now on where we should be in markets?
Yeah, I think probably investors should still stick with the defensive categories for now. We've been an advocate of the utility sector since last fall. You know, really got smashed hard last year with long term interest rates rising so violently, up to five percent on the ten year, and so a substantial chunk of that has been reversed. I think we're going to have to be a little bit more
patient for some of the cyclicals, even small caps. You know, the valuations have come way down relative to the overall s and P five hundred, So I do think there are some increasingly attractive areas here that are cyclical, but the business cycle matters a lot, and so you don't want to be too early there. Typically those areas are bottoming out as you move into like the middle part of a downturn. So I think for the cyclicals more patients. I would not be chasing large cap growth concerns here.
The valuations going into this correction were super high. We've been using the phrase rarely seen and never sustained. So the forward pe on the infotech S and P five hundred infotech index was above thirty coming into this correction in mid July. That's even above where we were in late twenty one early twenty two before a big downdraft in the equity market led by infotech stocks. So my concern there is that the expectations are just way too high.
I mean, overall earnings expectations growth for the S and P five hundred and now is thirteen percent over the next year. That looks totally out of kilter with all the other indicators that we look at, and certainly a slowing economy, if not recession. So you know, I think we're probably going to be in a bit of a volatility storm here for a while. So defensive categories I think makes sense to stick with for now.
Mike great Co has quite to catch up, so we've got to talk long the next time. Michael Dado of rough M Camp, I want to send banks they not of stice. No, we are baby being Macro Associates making some headlines co writing a paper saying the Treasury is
manipulating death issuance to boost the US economy. Treasury Secretary Jennet Yellen rejecting Repeating's arguments, saying it quote suggest a strategy that is intended to ease financial conditions, and I can assure you one hundred percent that there is no such strategy. Nor how jo just now for more, nor how wonderful to hear from you, sir. Let's just take
it from the start, from the top. For the people that missed that and haven't read that paper the U co author and put out in the last couple of weeks activist Treasury issuance, just take the opportunity to explain to our audience what you're talking about.
Well. Treasury usually instead management as what they call regular and predictable issurance, they say how many short term bills as opposed to coupon clipping bonds they are going to issue. In the past, the rule has been that not more than fifteen to twenty percent of the stock of that should be bills that are short term less with being medied in the long term. But since last year, the issues of short term bills has been something like the margin the flow of it something like sixty to seventy
percent of the issues. So they have an issue much less of the long term bonds and more of the shorterm bonds. That like a backdoor version of quantity basing. Because it reduces the supply of long term bonds, it boosts the price and reduces the long term interest rates on ten year treasuries. We estimate that the amount of it has been such that is equivalent to a reduction of twenty five business points in ten year treasuries four one hundred business points reduction of the Fed funds rate
by the Fed. So the Fed is trying to tighten financial condition to slow down the column inflation, to achieve a soft landing, while Treasure has been trying to ease financial conditions by trying to boost the economy.
So that's what's been happening.
No, rather say suggestion in the pace. So this is a deliberate political project. What gives you, what tells you that that's ultimately what they've been doing, and something of course that they deny.
Well, first of all, they do admit that what they're doing as an impact on financial condition. They cannot deny that, But then the question is about the motivation. Now, Treasury traditional issues more of the shortened bills when there is a recession, a financial crisis, a liquidity shock, an episode like COVID, or other types of turmoil like a severe recession. That's normal and that happens. But believe in a time in which there is no financial crisis, growth is about potential.
Inflation is still above target, and financial conditions are normal, and until recently effectively acid prices like the stock market where at all time high. So the question is why they're doing it at this time. And my explanation was the last summer when ten year Treasury went to five percent because suddenly the bond vigilantes globally woke up and
realize that our deaths are large and associate enable. Treasury got nervous about it, and they decided to effectively afford a backdoor que by buying more of the bills and issue more of the bills and less of the long term months. And that is financial conditioned quite significantly.
Now.
The Treasury official that oversees debt issuance, Joshua Frost, had this to say. He said, the autumn slow down, added issuance of ten, twenty and thirty year securities amounted to roughly a one percent change. So how is that basically the Treasury knowingly trying to what it feels like, manipulate the markets or make financial conditions easier if it's only a one percent change.
Well, what has happened is that the range of the stock of term bills was between fifteen and twenty. Right now it's significant above twenty. And the flow in the last few months has been something like sixty to seventy percent of the new issues being bills. And on top of it, now the Treasure is started even for our guidance fed style. They've been saying for the next few quarters, you can expect the disions of TA bills are going to be significant like in the last few months or quarters.
That's a signal that this policy has gone in a very different direction from regular and predictable, very different from the norms that they choose themselves about fifteen to twenty percent, and it's continued to go in the same direction.
Well, no real the way that it's the same of norms. And you kind of hinted at this that at every turning point. This is what the Treasury does, and not that it's a crisis. But the contention is that interest rates are coming down. That's why they issue more at a turning point because essentially interest rates come down. You don't want to lock in long term debt when it's
going to come down later. So, putting politics aside, if you thought interest rates were coming down, isn't this the right policy?
Well, first of all, the treasure is never trading rates, that's not their jobs. Secondly, the year curve until recently was significantly inverted. So by issuing bills that are boring at much more expensive rates than you would otherwise, the subject to refinancing risk and rollover risks. And we're seeing that there is episodes of market turmoil and we know that body years and not going to go back to
zero one percent. There are fundamental reasons higher inflation, lower savings, more capects why they equalibrium long term real and nominal rate for long term treasury is probably closer to five percent, if not higher. So the right thing to do will be that to issue long term debt rather than border get much higher shorter debts. I don't believe right now there is an episode of risk of is going to
be probably temporary years are slightly lower. But if you're looking at the midium term, given what's going to happen to the deficit. If Trump is elected, is going to have tariffs weekend, the dollar is going to have permanent tax cuts are not funded. All these things imply higher nominal.
And long term interest rates.
So this policy doesn't make sense. And fraserle is not supposed to trade rates. They're not speculators.
Ultimately, we're exploring two things here. One is consequences outcomes. The other is motivation. It's much much difficult, much much more difficult to decipher motivation. Let's talk about outcomes. Give the economic dator of the last week or so, no reale. Is there any evidence this.
Is working.
Well?
What's happening in the last year the week is that markets are getting nervous about a recession. But I would say the stock market is predicted ten out of the last three recessions. Same thing with the bond market and the inmerted year curve. And the markets have been mistaken even about the Fed. You know, at the beginning of the year they expected six rate cards or the Fed said three then when the FED went to one, the expected three. Now they expect that the Fed is going
to do four of them twenty five business points. So the markets are often wrong about what's going on with the economy and what the FED is going to be doing. There is some significant, i'd say, evidence of some slow down of the economy, but I don't think the data suggests that we're going to have a hard landing anytime soon. If anything, Actually there's some elements of strength.
In the economy, elements of strength from Nuria Rabinis. So that tees up quite an obvious question. Let's talk about the market. You think it's a time perhaps where the economy is stronger than people think, which might come as surprise the people watching this program, given how BEARISHEF once become over the last few days. I think we all noticed now last week an application for a new ETF. You're one of the three portfolio managers listed on the
Atlas America fund. Noel, with everything you've said in mind, what is going to go into that fund? What are you offering that perhaps we're missing.
Well, first of all, we're trying to hedge against scale risk like inflation. The basement of your currency, digitalization, global climate change, pandemic protection is the globalization, cyber warfare, social bility, instability, and so on and so on. When those risks occur like the recurrent the recent past, your stackflacury shock, inflation is higher, growth is lower, and the traditional defensive act it is long duration treasury. That's terrible. Look what happened
in twenty two when treasure did worse than SMP. Look what happened last summer. We need one to five percent and treasure loss ten percent. So if inflation was even only five percent, bondies will be something like seven over the medium term. Today they're less than four, So we'd have another forty percent loss on what is supposed to be the defensive aset That is twenty three dollon dollars outstanding of long term treasury. So you need something that does well in bad times and also helps you to
rebuild America. We need to have climate resistant real estate, new communities, infrastructure, food security, reshot, green metals and rare earths and so on. So what's going on in this new fund is several things that are hedging you against those risks. First of all, climate resistant riks. We have looked at all the reach so we see which one are in the parts of North America will be less
subject to climate change. Secondly, is itf allow you to invest into fifteen percent of we liquid assets new communities? Even Trump is talking about creating ten new freedom cities. Brighten and Harris want to invest into new infrastructure. We want to have food security, we want to reshore critical things we need. Gold is the youf to edge against social, political,
geopolitical and financial risk. And if inflation's got to be higher, you want to stay away from long term treasure into stuff that's going to be having higher yield without having a price effect, short term treasure and tips. So they dynamically optimize combination of all these assets. They provide you a new, much more resilient, defensive asset and one that invest actually in rebuilding America at the time when we need to do so.
That's the pitch. Fascinating stuff. Noria.
When you're back in New York, which I think is next month, we're going to sit down and have a longer conversation about this. Appreciate your time this morning. There of Rabbeini Macro Associates lots of work through there beneficials refusing to overreact to last week's payrolls data, former New York Fed President Bill Dudley suggesting that patience might be misplaced. Right in this the FEDS wild ride has only just begun.
A deteriorating labor market tends to be self reinforcing. The longer the FED weights, the greater for potential for damage. An immediate rate cut is in order, but that's very unlikely. Prepare for more volatility in stock and bond markets. Bill joined us. Now for more, Bill, Let's start the labor market. Then we can get to the Fed lack of response to it. What suggests to you that this is self reinforcing? This is the beginning of something much worse.
Well, a couple of things. Number one, we've seen rise in unemployment claims. We've seen a drop in the higher's rate. We've seen a drop in the quits rate. It looks to me like the labor market is cooling off quite significantly.
We've also triggered a so called samrle.
Where if the unemployer rate rises by more than a half a percent ver a twelve month period.
Every time that's happened, we've ended up in recession.
So there's a lot of risk out there to the downside in terms of the labor market. On the other side of the mandate, the inflation news has been very, very good recently. So it seems to me that the FED needs to hold both sides of the mandate with equal weight right now, and that implies that monetary policy should be neutral, not restrictive. And we're a long way
from neutral. I mean, people don't know exactly what a neutral monetary policy is precisely, but nobody thinks that five and a quarter of five and a half percent FEDI ful fund trate's consistent with neutral. Probably somewhere in the three to four percent range is where the Fed should be.
Bill, You've had an enormous influence on how people are thinking on Wall Street about what's ahead. So I want to ask you, if you think an immediate weight cut is not on the table, that they won't move into meeting, what would you recommend they should do in the next few weeks.
I think what they should do is change the messaging a little bit and make it very clear that they're now focused more on the liver side of the mandate. Get the market tuned to the notion that if we get weak data over the next six weeks, that fifty basis points is highly likely. At the September meeting, you can put fifty basis points firmly on the table if the data kept flow continue in the same direction.
And do you think that'd be willing to do that. This has been a very backward looking FED and now they need to regain control of the narrative. Do you think that that by itself at Jackson Hole, for example, would be enough to regain control of the narrative?
Well help a lot, because if the Fed, if people feel that the Fed's got it, financial conditions will become more accounted, stock market recover and he'll provide support. You know, the problem here is when the labor market starts to deteriorate, confidence starts to decline. We saw that over the last couple of days, you know, the big change in market sentiment. And when market sentiment deterirates, that can be self reinforcing. People start to pull back on hiring, people pulled back
on spending. Next thing, you know, the unemployer rate hasn't gone up a half a percent has gone up a full percentage point or two percentage You're in recession. Now, the good news here is that, you know, if we have economic weakness, the FED has.
Plenty of firepower.
They have there a long way from zero percent short term rates, so that fifth can respond.
Pretty aggressively if needed.
And I think you know, my view is that the risk that they're going to need to respond aggressively has increased significantly in recent weeks.
Well, I just want to put a fine point on that, because you did write about two weeks ago before the FED decision, before we got the jobs data, that not going in July would increase the risk of recession, and.
All of that happened.
So just how acute is the risk at this moment?
Well, I think that what's happened is there's quite a bit of stress in a couple areas of the economy. Number one, low income households are really feeling it, both because they they're tapped out the savings that was generated by the fiscal transfers during the pandemic. And two, they're the ones who pay the higher short term interest rates in terms of credit card debt.
And not a loan debt.
And number two, we're seeing softness in the housing sector, especially in multi family construction. So you're seeing areas of weakness that are leading to softer labor market. And that's a softer labor market, though is the key thing. If it frightens consumers, then you have weakness and consumption and the thing becomes self reinforcing.
I think the confusing thing for a lot of people bill is for every week point, there seems to be a strong point for every issue. At Airbnb, there is a disney that can raise prices. There is an uber that people are willing to buy. How do you distinguish between a lower end consumer that's dropping off a cliff and one that has just gotten more picky with where it spends its money.
Well, it is difficult to sort out. And high income consumers are doing pretty well. I mean, they've locked in low mortgage rates. They have been the beneficiaries of a very strong stock market. Even after the recent decline in the stock market's still up quite over ten percent this year. So the high end consumer is feeling pretty good about things, but the low end is not. The other thing, of course,
is also what's happening on the investment side. The Biden administration had a number of initiatives that boosted investment, spending, infrastructure, chipsacked climate and the question is what's the impetus from investment from those programs.
Has that peaked or not?
And if that has peaked, that's another source of potential restraint in coming months.
Bill, It's great to catch up with you, sir as. Always appreciate the comments. This morning, Bill, don't be there, the former New York Fed President. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angiopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app.