Surveillance: Apple's Disappointing Q2 With Munster

of questions on philosophy. Let me ask you a cash question. They raised the dividend six of Apple. They've retired percent of the stock in about five years. What's the January first cash return to Apple to shareholders? Can I say it's as high as seven percent? Yeah, it's that's exactly the right number if you look at the dividend plus

the buy back. Uh. That's the numerical piece. There's also the message behind that fifty billion dollar increase, something that I did not anticipate unpressed these times, and I think it is probably elementary to connect the dots that that is a sign that they believe that despite largely being a throwaway year for Apple and most companies, I think that it will. The company feels confident about the cash

flow to continue to support this massive growth opportunity long term. Yeah, disappointment this morning and overnight Gene that we didn't get a forecast. But from what I hear from you, you're saying that is the guidance, that is the forecast. It's the increase in the buyback, right. That's well said, John, They uh that that is what investors should undoubtedly take away from this too. And another piece around the forecasting is that the product line is intact. These are product companies.

I mean every company Facebook as a product company, Google Awful. It's a little bit more clear just because they have physical products. But ultimately is keeping that product woradmap on track is critical. And what if I would kind of take a step back and look at this quarter and the contours of the quarter. I think that the messages that yes, it's difficult, uh, that they will be impacted, but ultimately they're making the right decisions to be leaders

and to benefit. So what if you're gonna put all this into the math, the business is probably gonna be down five or ten percent in the June quarter. But fast forwarding to next year, it will probably be up fifteen percent, So I think we're gonna see some kind of a return to growth off of easy comps, but

the return of growth nonetheless next year. Yeah. It's kind of amazing that this is the kitchen sink year for when you think about what some of these companies are throwing in and yet Apples still manage to eat out a profit and increased dividends UH and share buybacks. I'm wondering if in some ways we're seeing actually a strengthening of the core businesses of some of the big tech

companies with the idea of diversification. We're seeing that with Apple with an increasing sales away from their iPhone UH product and towards services, which they've been pushing. And we've seen this certainly with Facebook and some of the other things. I mean, are you seeing this pretty much across the board, diversification and a greater resilience of big tech despite what

the share price is saying. Well, I think yes, to look at it like spaying on a case by case basis, But in the case of Google and Facebook, is less deplification more about their core advertising businesses. Not a lot has changed there in the case of Apple. You're exactly right. I mean, you've had the services scheme for a long time,

wearables out of nowhere, AirPods and did an impact. They don't break out the wearable segment, but based on commons that they periodically make, weaken back into what that growth is. And so in the March quarter was up two percent year of a year. That compares up forty four and in the two previous quarters. So it did decelerate and they expected to decelerate again, but that does not change

the message. You're absolutely right, is that in Apple's case, Uh, this is still a large part of their business, desire phone half of the business, but ultimately this is going to be much more than an iPhone story longer term, all those wearables, and uh, they did give a teaser if you're curious about some future features within Apple Watch that should continue to boast a wearable segment. Just got

a headline crossing a bloom bag. It comes from an oil company, Xon posting its first quarterly loss in at least thirty two years. And of course the big oil companies have got to cut back on capex. So let's move to Amazon. Amazon has this amazing luxury of acting canta cyclically, just flicking the spend switch all over again.

And when Jeff Bezol says, you may want to take a seat, which seat the un gene you in the back seat or the front seat, Because if I'm a shareholder right now, I'm just surprised how disappointed some people are that here's a man leading the company, willing to invest in his company the time like this, so it's in a better position in years to come. I think the investors are are largely on board with everything that

he's doing. The stock has moved fire since uh you know the peaks in the market, so it's near all the time. Has obviously down today, but I think that the big messages investors are largely supportive of that. I want to put quickly into context the amount of spending that he's talking about to sit down to four billion,

what does that mean relative to their past? In the September quarter last year, they talked about a nine million dollar step up over the next or in that quarter the September nineteen quarter n hundred million for same day delivering a WS investment. So we're talking about essentially a four x acceleration off of one already high numbers. So this is some pretty steep um spending that they're going

through the right thing. Longer term, Amazon is going to become foundational to the US in terms of infrastructure, delivery, commerce, all that. But I think when as an investor, one question front seat, back seat is what do you what do you pay for this ultimately? And I think that uh, you know, they generated two and a half billion dollars in gap men income, Apple generated eleven point two billion, and they both had the same one point to chilling

dollar market caps. I think there is a question about valuation that has to be answered, Well, is that going to come to the cloud and seventy of business or whatever it is or Gene does it just come through this continued capture retail. I should point out folks that his Amazon was dazzling all, including John Farrell with their public performance. Jake Crew, j C. Penny, Macy's are on oxygen. I mean, Gene, do they have more room to take retail or is this all going to be done with

the cloud? Uh? Probably more room in retail. Cloud is more competitive and not growing as fast relative to the other cloud competitors. In aws still a big business, the largest one out there. But let's just take the retail

piece alone. Is that it seems obvious that e commerce has done well, but it's still relatively small college what people spend in the US, and so the offline piece, what they can do there about transferring, deliver, remaking some of the frictionalists, bringing more that online is still an incredible opportunity. The biggest opportunity for the company Gene. This has been too short. Let's do it again. Jane Munster

Luke ventures with this on technology. Where we are We love folks, great conversations with the like of Mr Munster. John's introduction there Mohammed and I think it really points to the president and his trip to Arizona manufacturer here for I believe may fifth to honeywell, real simple, does he have forward momentum away from the eight zip codes

covering him in the East Coast media? That's a really that's I think that's the sort of a million dollar question him and his team are trying to figure out. I'm really happy you started out with the presidential approval number. Overall, it's John's idea, not mine. Yeah, so it's but what's interesting is that when we asked sort of March to April UM, how people are doing in terms of these key actors in the crisis. The President and Congress actually lost the most support. So in March he had six

approval on how he was handling the crisis. In April he had fifty UM. Congress went from fifty nine to So I wouldn't rely too much into the take up to forty nine. It's obviously an ongoing sort of saga. What's really interesting is that, unlike most periods in presidential approval eras UM, there's a lot happening right now. I mean, there are a few times when the President of the United States is directly addressing the nation on a daily basis.

We've pulled on whether or not people are tuning in to the press conferences to get information UM, and a minority of Americans are doing that. As you can imagine, Republicans are tuning in more than Democrats. But on the whole, I think it's still really early to sort of make too much of any movement there. The other really key factors are UM as, you know, the economy, and I think whoever is going to come out sort of on top in terms of figuring out how to get America

out of this situation. Um. Instinctively, for the politicians, right is going to get a reward, and that's I think what everybody's grasping towards. Interestingly, though, when you ask Americans about how to get out of this economic goal, their trust is in local actors. Um. So Americans when you ask them, for example, UM, who do you have confidence in in terms of getting things back to normal with the economy? The governor in your state at per cent

getting a great deal or fair amount of conference. And that's the highest that goes down after that to Jerome Powell to eight percent, Steve Venusiante, President Trump forty seven, the Republican leaders forty seven, and then the Democratic leaders in Congress forty six. So Democratic Republican. Um, that's not where America is really looking to solve this problem. But that's exactly where I wanted to go, this idea of what Americans are looking for to direct whether they like

someone and they're not. In terms of President Trump's approval rating, what are the main issues that week to week seemed to sway the population the most? Is it the consumer comfort which seems to be deteriorating deteriorating rapidly? Is it the expectation about personal financial situation? What are the main

issues here? The major issue is the economy. I mean, we've been asking Americans two questions and creating something called the Economic Concepts Index since the ninth and it basically asked how economic conditions are for you today and your perception of the future. UM. This month we had a fifty four point drop in that index that sort of levels at zero, goes up to plus a hundred and

negative hundred UM. It was the largest one month change in our tracking since UM that fifty four point dropped among Republicans, it was actually seventy two point dropped UM. So that's a very kind of when you talk about the partisanship thing, Americans tend to assess how the economy is doing based on whether they like basically the leadership

in the White House lately. But what we know for much longer that's really a phenomenon sort of the post Obama Trump era, but we know for a longer period of time is the economy is always the number one thing when you ask Americans, what are the economics? What are the policy issues that are going to drive your boat? That in healthcare. UM. So the economic issues are going to be really really key more than ever, I think to this election. The other pieces getting this getting back

to normal. Um. And we've been asking Americans whether there if there were no restrictions currently sort of would you just get up and go back to doing what you were doing At this point, Only of Americans say that they would sort of resume normal activities right now. Uh say, after there are new cases in your state, declined significantly. Another third day after there are no new cases, about twelve fe cent say that they're gonna wait until a vaccine is developed. We do see a partisans split on

those issues. So, for example, compared to that sort of for the national average, percent of Republicans say that they sort of get back to normal right away. UM. But it's interesting that it's you know, it's been an increased nineteen point increase in a month for Republicans, but it's still only forty so UM. As Americans now have a

more optimistic view. I mean, they're still very concerned about the crisis, but when you ask about is it getting better or worse, we see more Americans now saying things are improving. UM. And the rollout, you know, sort of plays out in some of these local areas. Uh. I think it's going to determine how the policy explains to the economical I'm great to catch op with this morning. We appreciate its. Let's do a brief here, folks on this May day, of course, a big deal in China.

Henrietta tres joints her FATA partners on Washington policy. Henrietta, this is John and Lisa about out front of me on this. But but Henrietta, this is really really caught up quickly. Let me look back, as John did yesterday on Twitter, asking if Phase one is dead? Is a whole tariff dance of the last two years? Is that like done? You know? That's that's maybe one way to

put it. I think we're actually ramping into a different kind of a gear that I find a lot of similarities to the trade war that we've had to the last two years. Um So the tariff specific conversation. I don't expect, especially during a recession or even a depression, that we're going to escalate tariffs from here right now.

But they're certainly not going to come off, and they're acting on and exploring a whole host of other ideas from export control restrictions, which they meaningfully expanded on Monday, from the b I S two proposals to fully decouple, whether it's on the pharmaceutical side or broader health care side, that is the next phase. So it's not tariff specific, but it is absolutely um a redo of the trade

war and just a different arena. Well, hen RT's on this topic of decoupling, what is the that you think we should pay a lot of attention to? Obviously send it to Rubiot has been pushing the financial aspect of decoupling over the last couple of years. Should we focus there? Is it elsewhere? Where are you laser focused? Well? I think decoupling is something that we need to watch from a number of different fronts. So first start off with the sectors that you think are going to have national

security implications, because that's well they'll start. So that's on the pharmaceutical side. That's on chemicals you know they make uh not, we we use Americans use generic drugs which come from generic products that are produced in China from their chemical plants, and they produce nine of the world's supply. So it's a whole range of components that they need.

But then when you think about decoupling UM, you have to remember that if you're the FDA, or you're a company that's creating ipprofen or a knockoff generic product, you need approval from the FDA, which takes anywhere from three to seven years just to form a new plant. So you can't just make a new plant in Ohio. You've got to uh sort of repeat or have a have another one UM somewhere else that you start to slowly get ramped up to speed so that three years from

now you can eventually begin coupled. But it takes a long time. But I would imagine they start in the pharmasector or chemicals, uh, and the healthcare space with ppe and masks and all that as well. Henrietta, I remember back when we were dealing with the trade wars in their first iteration in this cycle, a lot of companies were pushing back and saying, this isn't good for our business and we want to do business with China and we depend on these supply chains that are complicated to

have been built up over time. Is there a different tone now from Corporate America saying we need to domesticate our supply chains. We need to couple for our business,

not just a political reason. I think the business reasons are being driven by the political I still, you know, despite the last three years of what we've had under President Trump and a sort of cry for nationalism and protectionalism, a lot of business owners in most them is still saying that free trade is actually the best way for you diversify in the event of a pandemic like this or in the event of the need for global growth later on. If you have global trade, you use your

trade and your productivity as efficiently as possible. That's a pretty standard economic model, and I think most businesses still have used that. What they're layering on top now is political risk, and that sometimes is superseding the economic arguments.

And so they're saying, all right, well, you know, if we can't go to China because we don't know what's going to go on with tariff or even more insidiously, these export control restrictions, you have to get your financing outside of China, you need to get your staff outside of China um and you need to probably produce outside of China. So a lot of folks who looking to Mexico um as a natural backstop for another another's country,

that might be a better opportunity for them. So I think they're still free market, still free trade, but have to layer on a political calculus as a result of both President Trump's policies but also now coronavirus, which is going to be a bipartisan opposition situation. That's it, isn't it. That's the political story, and that's the story. Free trade doesn't win the November election, does it. Nope? And sure doesn't. And that's going to be the problem here on now.

So let's talk about the other side of the aisle. What's Vice President, former Vice President Joe Biden's position on all of this. Yeah, that's a great question. I actually think there's a possibility that Biden could be even worse, and that's because what we've seen under Trump is a very US exclusive approach. He's actually said to the EU and Japan and other nations, you know, get in line, We're going to get our deal with China. You can

get your own. Um. What President Biden would say is, all right, these tariffs are all on three hundred and sixty billion dollars worth of stuff. I like, what you've done here. Now let's think about how we can get more out of China from the environmental front, from a

human rights front, from an economic front. And he says, let's let's let's use the global rules based world order and try to prop up the w t O UM, get the EU in Japan to join forces with US, and we all target China together, and that way China can't just stop purchasing our pork and bring the United

States farming community to its knees. We can combine forces with the EU, with Canada, with Japan and other nations with w t O bolster that and then really extract concessions from China, get them to become a developed nation, get them to more fully participate, be more transparent, and actually exact extract change. So I think Biden is actually a worse situation for China than just President Trump, who they sort of know was playbooks already and night upon.

Michael Gapen is hugely qualified at Barclay's our chief US economists, but was serious international experience as well. Michael thrilled you with us. I want to get right to wages because I know that's what all of our listeners are worried about what will be the wage dynamic forward given claims and given that job's report we see in exactly seven days, Well, I think it's going to be a very thoughtful labor

marketers Jonathan was just alluding to. And we we have the unemployment rate probably going to rise to the eighteen nineteen percent range in April, and it will be elevated we think for several years. We might get a lot of re employment over the next day, several months, and several quarters, but we think that there will be a tail to this in terms of of a high unemployment rate and thought to labor market conditions for some time.

And I think what's been interested what we're watching. Um if you if you look back to the O eight, o nine experience and even previous recessions, there's been a lot of nominal wage rigidity in the US. As you know, that's been one of the reasons we think cor insulation was so stable even though we had wide swings in the macro economy. Firms historically have been reluctant to give wage cuts. We're seeing a lot of reports and reading a lot of news stories where that's not the case

this time. So in lieu of even more layoffs. We may actually be getting wage cuts in the near term that could persist for some time. Now, those could be taken back, but it might take some time for that. So I think I think we have a two uh, potentially a two prong problem here where we have a lot of slack in the labor market, and at least in the near term, to preserve some employment, some actual wage cuts that may persist for several quarters through the

rest of the year. That's what we're worried about. And Michael, we have seen that from a number of companies just saying we're going to cut salaries across the board by a certain proportion in order to remain solvent through this period. In a recent story in the New York Times, you were quoted saying that you expect the unemployment rate to

hit nineteen and a half percent in April. Also, you said, given the trillion spent, we would have hoped that federal efforts would have been more effective at stebbing job losses. Given the fact that we have seen the surge in jobless rates, what does that tell you about the efforts? Can you just sort of extrapolate forward in terms of

what that means. Yeah, I think that the risk here is that you know, any time you get laid off, even though you think it's for a short period of time, your employer says, look that we're going to do this

now the expectations we can hire you back. You risk detachment from the labor force, You risk a longer spell of unemployment, You risk a deterioration uh in in skills, and obviously the longer you're unemployed, the harder it is to to get back uh and And so we we think what you're you're you're ultimately risking slower potential growth and higher unemployment and flack or for a period of time. Connectivity to the labor market is is hugely important. We

know that. And the way that we've done this here in the US is different than than is being done in the UK and across Europe, where federal support is going directly to firms to keep employees on payrolls, where in the US it's going indirectly through the financial sector.

And I do think the way we're doing this has been more unemployment than than I think we would like, certainly uh and and our concern is it's going to lead to a lot more prolonged spells of unemployment and we're comfortable with So obviously nobody is pleased with where there's unemployment rate is going to go. And I do think that the way that we structured some of this

aid is a contributing factor. The Federal Reserve is likely going to want to keep rate to low for a long long time, and Tom has been on top of this through the morning. Michael. Just sitting on the front end of the yield curve will be the Federal Reserve, and I imagine they're going to produce some kind of forward guidance to convince us that this is going to

be the story for a long long time. And I think what is forgotten often is that two year rates after the financial crisis ten years ago actually didn't bottom out until it took a long time, Michael, for this market to come around to the idea that rates weren't going higher back to where they were anytime soon. What is the FED learned from that period and how do

they apply that to guidance this time around. Well, I think they could move directly to threshold based guidance just does depend on how they conclude their their framework review and they moved to a makeup strategy on inflation, but I think they can shift right away two thresholds of unemployment and inflation that that would dictate how long they

expect to be at zero. I also think that they're strongly considering yield curve control, that you could do that out to say two to three years on the yield curve to complement and strengthen that forward guidance. So it would be a signal that guest, we have an outcomes based approach, of course, and we're not going to raise the funds right off to zeroo abound until we get this combination of inflation and unemployment data, and just to reinforce it, we're gonna we're gonna send the yeld curve

and zero. If you're just joining us, Michael gave in with us with Barclays thrill. He could be with us on this may at first, I'm trying to figure out yield curve management within the banking and financial system of

the US. I just that'll be sport, Michael. One of the big splashes this week was an Arianna Cuchula code in our Feller Reserve show talking Michael about negative interest rates, and he created a model uproar and economics by saying to three meetings from now, this FED will be considering negative interest rates. As John mentioned, the suppressed two year yield, and there's economists that just say, the guy from Dylan

Read is never going to do this. Is it even thinkable, Michael Gabon that we would have the facts change so that we would consider going out of Europe? I don't think so. I'm in the camp that says the set has studied this extensively for years. When I was at the board in two thousand and eight, two thousand nine, this was under discussion, and I think it's it's been about a ten year story where every time they've looked at this, they consistently come back and felt that it's

more trouble than than it's worth. So I don't think we're going to switch to that. I think there are other ways to deliver monetary policy support to the economy. The structure of the US is different than than it is in Europe, and I think it would cause a lot of disruptions to short term funding markets that the SETTE doesn't want to deal with. Just to sort of continue with the Federal Reserve, its balance sheet. The latest read which came out yesterday evening six point seven trillion dollars.

That's the current size of its balance sheet. Many people expect that to exceed ten trillion dollars by the end of this year. How concerned are you about an increasing politicization of the Federal Reserve as its actions and those of the of the Treasury Department get more interlinked in

the FED essentially monetizes the US IS debt. I think in terms of balance sheet size, I'm less concerned because now we had a democratic administration and a republican administration, and that the balance sheet have expanded under Bold, So we've had both sides of the political aisle, except the fact that a large balance sheet is what we need

to help support the recovery. But I think you bring up a good point, which is virtually every one of these lending facilities as a joint said Treasury facility, and we think that there's going to be a deficit of fourteen or fi of GDP this year, and i'mgoing said purchases in some ways can be viewed as potentially monetizing

some some of that debt. So certainly we need coordination between monetary and in fiscal the said just has a tough communication act here really to say, look, we're just acting as an agent of the treasury, and so they want us to do this. We're facilitating this. This is our role to help get liquidity and credit to households and business. It's a tricky line to walk, but I do think that they can execute it without getting dragged

into the political phrase too much. Michael, before we let you go, just quickly, ten am, one hour and twenty minutes from now, the is M for manufacturing new orders, prices, paid employment, What are you focused on? How should we digest that data when it comes out? Well, I think certainly there is obviously going to be a bad number. We were We're going to be paying very close attention to the new orders component and the export component as well as employment. So I think it's this is it's

another one of these numbers that we know. It's that we know were shut down for for the entire month, But we just we need to know how that. So I think that we'll we'll take our lead mainly from the data points that suggest to us how intertwined is this globally and new orders and and export orders are are one way to look at that, you know, and what I would do is relate this to what we've seen in China. China can't rebound is strongly when the

rest of the world is is contracting. Their manufacturing sector has rebounded, but it's been a pretty moderate and tepid rebound, in part because global demand is so weak. So I think it's it's that type of inter in a relation that could show through in this report. Michael, fantastic to get up to speed with you, that's for sure. I have the team at Bankley's are doing well. Michael Gypanett of Boncley's, the chief US economists. We start May with

a wonderful medical coverage. We have tried to bring you among universities worldwide and particularly in Baltimore, Maryland, the Johns Hopkins University, and each of their professors has a different expertise, a different character. Are Francine Laquis in conversation with Andrew Pekos de Virologists, Let's listen. So when Desivere has had

a couple of reports out this week. UM one report from the NIH has shown that there's some significant promise of that treatment and that if it's given early enough in the course of infection. It seems to improve the time in which people get better and can leave the hospital.

UM a report out of China has suggested it was less successful, but it looks like those patients were being treated much later in the disease process, at a time when it's not just the virus that's causing damage, but it's also your immune response to the infection that's causing damage. So I would say this cautious optimism right now from Desavere, but it certainly does seem like it's going to be a treatment that is probably more effective the sooner one

gets it. Instuction process, What do you think will be a real game changer? So we talked about having apps. I know there are concerns about, of course, you know, personal information and but that could you know, let you get in contact with people that have been touched or have been in close contact with someone who is COVID nineteen positive. There's also antibody testing. What will be a real game changer of you know, saving lives but also

getting people to get out of the lockdown. Yeah yeah, so, so you know, I think the better we are at treating individuals and getting them out of a hospital, UH, to free up resources. That's gonna be one important thing, because what that will do is that will free up more medical resources, it will free up testing resources, and that will allow us to switch to this sort of late phase of dealing with the pandemic. UM. We have

a lot of hope for antibody tests. Over the next couple of weeks, we should get some idea of whether or not antibodies, what kind of antibodies are mediating protection from reinfection. And once we know that, we can really go after people in the population and identify people who should have a higher as distance to infection, and that will then really allow us to come forward with a much more detailed plan for how to open up our economy and loosen some of the public health interventions that

work that most of the world is currently under. Andrew in twenty seconds, are we going to be much wiser about this virus in two months, two months or will it take longer? Two months? We will know uh incredibly more about the virus, in particularly how we treat it and um how we respond to it. UH the Johns Hopkins University, and we thank him and all of his team.

Early through April and March for their wisdom. Here we should point out that with Johns Hopkins University is the Bloomberg School of Public Health UH, and they've been a big support as well. We should point out that Michael Bloomberg, the founder of Bloomberg LP and also this television and radio station, has been a philanthropist his Johns Hopkins University.

Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to reviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio