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July fourteenth, That is Why, and Jacob Mordon kicks off the earning season Apple and the Likes later in the month of July twenty eighth will come out with some of those earnings. Your emphasis on that is an important one.
Chris Harvey wasn't a KEM major, but he was a bucknell which is like the Buckneil bubble. All you do is study financiers here because the winters are so cold. He joins US now Equity Strategy at Wells Fargo. Your note, Chris is absolutely brilliant about thinking back to nineteen ninety eight, ninety nine into two thousand and two thousand and one tech the analog of looking back. What's the number one message in your study of this tech bubble versus that tech bubble?
So the number one issue is tech is not going to roll over. The major theme is not going to roll over until you crack the economy. That's what happened back in ninety nine. That's like what's going to happen now. And I don't think you cracked the economy until the FED gets more aggressive, and so we'll have some wiggles.
I think we'll have a pull back in the market, we'll have a pullback in big tech, but that for all theme is still in place, and not until the economy breaks do we really think about that trend breaking.
Is tech in a set of individual companies you study at Wells Fargo or is it this a morphous sector blob up there like a nineteen fifty sci fi movie.
We do study tech, we do study individual companies, but what we do is we focus in on a lot on the uber what we call the uber cap or the top fifty names. You can look at one or two names and that's great, but that doesn't give you a trend. And we look at the uber caps because as you go across capitalization, small cap, MidCap, large cap, they all have characteristics, and the uber caps are the ones that really have that AI exposure, that tech exposure.
And again going back to nineteen ninety nine, that's one of the things that we did see. We saw that uber cap out performance, we saw that tech oup performance, and before all that, we saw the economy and the old economy stocks roll over.
You said something I want to pick up on. You don't crack the economy until the FED gets more aggressive. Are you saying the FED hasn't gotten aggressive?
They said the FED has gotten aggressive. But I think we can all agree that the economy is a lot less interestrate sensitive than we thought. The way we're characterizing the economy is an economic malaise. We did think we were going to We thought the probability of recession spiked with the banking crisis, but now we think that's come back down, and so we're really looking at an economic
malaise more or less than a recession on the horizon. Right, the consumer is still okay, still has cash on the balance sheet, eating through their savings, but still has savings. Corporations still have plenty of savings. Balance sheets are much better, and so really you need some sort of shock to get us into a recession. We need a lot more time. This is taking a lot longer than we expect, and I think it will take a lot longer than we expect.
Do you think that the amount that people are willing to pay for goods will come down, that there will start to be some consumer pushback at a time when we just heard FedEx. Yes, you're seeing volumes down, but there's still increasing prices more than expected. And that is a theme across a lot of different industries.
So I may go off on a little bit of a tangent if I do, just pulling back in because I.
Talk about don't worry, it'll lot care about it.
So I talk about the consumer a lot. And if you think about the US consumer, the US consumer has been buying, and I'll exaggerate a little bit since he or she was five years old. Right, it's a very savvy consumer. We've been spending a lot of money. We know when there's utility. And what I'm seeing is the US consumer has been pulling back. They've been pulling back on goods. They're not finding a lot of utility there.
If you look at at real retail sales, if you look at at retail sales in general, it's not as strong as you would have expected. You are seeing if you go to the walmarts and the targets, you are seeing a trade down. The US consumer's behavior has changed, and I think the US consumer is a lot more savvy than we give here or she.
Credit for going forward? Then do you think we have seen this rolling recession in certain areas that offset something that's deeper than an economic blaze?
Regardless of what FED does.
They are cracking certain segments of the economy and others continue to chug along because of different advancements and less interest rate sensitivity.
You really hit on a great point, and this is something we talk about in the office a lot. You can't paid to this economy with one brush, and you are seeing kind of a it's a very heterogeneous economy and market. You're seeing certain sectors that have already rolled over and are beginning to improve. You're seeing other sectors that are beginning to roll over for the first time in a while. And so one of the things that's causing this to be in economic delays is there's not it's not synchronous.
Right.
The economy is very very If you look at a housing market, the housing market, the new issue market or the new market is very strong, but the old one is three and thirty. I'm not going to leave my house because I have a thirty year mortgage at three percent. Very different. If you look at some of the construction spending, manufacturing, warehousing, it's through the roof, but other parts of housing and construction are begin to roll over. So again, I think
you hit on a very important point. Is something that we really have been diving into and it's it's hard to kind of disentangle. But this economy is not it's not really synced up and you cannot paint it with one brush, which is why the economy has been a lot more durable than a lot of people have expected.
And a huge seam of the program this lack of aggregation right now is tangible.
I want to point out one thing you can do.
This off the Bloomberg folks, the Bloomberg terminal and the description screen toes JP. Morgan is owned by institutional seventy five percent. Apple is owned sixty one percent. I know you don't want to talk individual securities here, but you know what was me, Big Tech to the Moon. We're all going to die, except can I make the statement big Tech is under owned by institutions?
I would agree with that one hundred percent. And what I what I would say is we do a lot of positioning work, and in our position work, what we've seen for years is the Byside community is underweight tech, but it's mainly underweight Apple and Microsoft. We were talking about this in the office five years ago, kind of a flip title, but we entitled the Return of the Mac. And what we had seen back five years ago is a very big underweight, an exceptional underweight in Apple that's
never closed. And what we're seeing is one of the things that that's giving us pause andive. I think one of the things that's pushing the market is this underweight in uber caps in Apple and Microsoft and a few of the others, so I would agree with you. What you're saying is the institutions are much much more underweight.
Branda John from Italy emails in and he says, get a new SPX quote from Chris Harvey here forty two hundred?
Can you lift it up?
Come on, I gonna make some news.
Here's what I say. So are you in target? But hey, no one's watching go so.
Our forty two are your on price targets for two hundred? At the end of last year, we also had a soft landing target that was forty four hundred. Right, we cannot two targets.
Do you have a Harkwark target? If we get a.
Horkwarks, I can't give you forty five hundred. But this is why we go back to it's about the economy. Because I can make certain adjustments, I can change my estimates, but really do I have a lot of confidence in that?
No?
But what I have a lot of confidence in is it's really about the economy. The major trends is not gonna break until the economy breaks.
Chris Harvey Wells Frio.
Francis Donald is a manual Life global chief economist and strategist she's very good at rining blistering bullet points to cut to the chase. We're gonna cut to the chase, which is, we all know the US is way out front on inflation versus what we saw in United Kingdom today and even Europe Japan being the oddity as well. And you look at the non linearity here. You picked the point three percent. The answer is core inflation's coming down.
There's a little bit of a vector in place. But you say the path to two percent, it's going to be brutal.
Well, the path to three percent is probably going to be quite easy. We'll be there in the next couple of months, and then a lot of people will claim bakery.
Yeah, for sure, and I don't see it.
Well, a huge element of this is base effects that are coming through. That's just a big part of it. But you do point out something really critical, which is that if we talk in a year over year, inflation is healing. But for most Americans and in fact global citizens of the world, their price pressures are not coming down. They're still paying substantially more than they did several years ago and are still going to have that embedded view
that prices are substantially higher. And that's why these central banks, the FED, the Banks Canada, the Reserve Bank of Australia, the BOE cannot cannot imply that rate cuts are coming. If they do that, we will see a reinflation of inflation or reinflation of inflation expectations.
But they've basically said that, and you're still seeing a group of people say inflation is going to be hotter for longer. They don't have what it takes to actually come through with these expectations. So at this point, if they don't raise rates further, will they lose the battle with inflation?
Well, no, because a big segment of inflation is not coming from interst rate sensitive sectors. Yes, some portion of it is. But we are in a new paradigm in which inflation is being driven I know, we've said it for years now, more by global morse by supply side factors.
So as we move.
Forward, and this is why you know this year is interesting, The July meeting is interesting, But what keeps me up at night is twenty twenty four and onwards, because we're heading into an environment where two to three percent inflation in our view, will become the norm and central banks
are going to have to make a decision. Do they continue to launch us into recessions or lower growth in order to put us towards two percent, or do they admit that the nature of inflation is changing and two to three percent is more what we're going to be looking at.
This is so important and there's a lot to unpack within this. If two to three percent becomes three to four percent, how do they make sure it stays within a certain range and keep their credibility? Are you saying that it would be a mistake for this Fed to reserve to go to five and a half or even six percent in terms of a FED funds rate in order to bring inflation down faster, because all they would do would be to torpedo the economic growth without necessarily changing that paradigm.
What I'm saying is that it's a mistake to ask central banks to solve inflation all by themselves. That is the nature of inflation changes. We have to have some hard conversations about what we're asking global central bankers to do. Now, the FED has a little bit of an out because it has a dual mandate. It can look towards the employment side of the picture, which, by the way, they're going to have to change the metrics they look at in order to do that.
There are other.
Central banks that have single mandates that are only targeting inflation. Those central banks are going to have to say, what is the cost of two percent? Now that the nature of inflation is changing.
If you see the disinflationary trajectory you're outlining assumed be serious disinflation, what does as a labor component non firm payrolls do I mean we have people that come on that suggests we could see abrupt decline in non farm payrolls.
Do you buy it?
Here's the issue with the employment data. Now, in the past we would look at non farm payrolls as a good indicator. We look at the unemployment rate, which of course is what the federals. I am looking at weekly hours worked, among other indicators. And the reason for that is we have companies that have been very clear they are still scarred by the labor shortages that have persisted over the past several years. They will attempt to cut costs,
likely in ways that are not laying people off. But what we're likely to see is you stay employed, you get to check that box. But the amount of hours that you're asked to work decline. Now, weekly hours is already back to pre COVID levels. And yet I hear all the time, but the labor market's on fire. Well not if you look at the actual amount of labor being consumed in this environment. The unemployment rate is still
going to be probably rising very slowly. We don't actually have it going above five percent even in a recession. But the amount of labor consumed is going to be lower. This is why our metrics have to broaden.
Lisa mentioned earlier something we've talked about in surveillance for quarters. I would say, now, which is a solution as patients and expansion of the X axis where they stay higher for longer.
To me, that's just it's a.
More efficacious move than to worry about twenty five to fifty beeps up down.
Do you buy that?
Absolutely well? The solution to most things is patients, Tom and Lisa, I agree with you on that one. So when we discuss our forecasts, yes we have penciled in one more rate hike for July, but what we spend much more time thinking about is the response to the next recession. And at this point, what we're looking at in twenty twenty four is yes, the central banks do cut, the Federal Reserve does cut, but only towards what they view as neutral, that they don't actually go into easing territory.
They stay restrictive, And of course that brings a question that I know you love to ask on this, what the heck is neutral? That we don't know for sure?
When you talk about the resilience in the face of the rate hikes and the lack of interest rate sensitivity in certain areas, what do you make of the fact that markets have continued to rally, that we've erased all of the losses incurred since the beginning of the raid hikes, and that we've seen to your yields rise by one hundred basis points in the past month and a half.
I think you use the word reckoning earlier, which is I think an important moment. We have historically, for my entire career, believed that as you face a recession, central banks respond, and indeed, you know, my job on the byside, working for an asset manager is to input our forecast to see what different asset classes are going to do in a recession. We start saying Okay, there's going to be an opportunity for equities for fixed income throughout this.
But when we start modeling recessions without material rate cuts or with less rate cuts, then we actually see a very different asset class return. It is not a standard recession playbook. So what I think is happening now is a market that's coming to that realization that recession or bank failures does not equal rate cuts. This is a paradigm change from how we've looked at things.
So why is there such a resilience right if that's not going to be rate cuts to the rescue? Is that reckoning going to be lower or is it going to be that Maybe this economy just isn't interest rate sensitive in the way many people expect it.
There is an element of that, and there's certainly no shortage of soft landing.
Now.
The issue I have with that and why I think there's a disconnect right now between equities which are being distorted by the AI story. There's no question about that, and fundamentals is that every single leading indicator of a recession is flashing red. Deeply read Lisa like flashing red. So even if I say to my team, okay, I want you to have cut in half those indicators. Is
it still a recession? The answer is yes. So if you want to make the point that it's a soft landing, you have to discredit the bulk of indicators that have traditionally told us a recession.
And you can do that.
And there are some strategists that have made very good points about excess savings and labor shortages, but I'm not quite there yet. So a recession ahead means there's a disconnect between prices and fundamentals. That's when we make money, Lisa.
Thirty seconds quick. Is a stock market disassociated from your cautious economic.
View, Yes, but that's okay. We have tactical time frames, medium time frames. Macro is not everything all of the time as much time. As much as I would like macro to be the driver, sometimes you have to trade off momentum, technicals and sentiment. If you're a tactical portfolio manager, that's the moment and recession may still be a couple months away, So sometimes there's a disconnect depending on your time frame. That's also an opportunity.
Francis, thank you so much.
Francis Donald with us with the manual life of Montre and Manual Life Investment Management.
I should say as well.
By amandam Line, I'm head of macro credit research at Blackrock joining us now, Amanda, how much more restrictive do five percent rates get as time goes on?
Well, thank you Lisa and Tom for having me. Good morning. Look, I think it's a challenging.
Environment for a large subset of the corporate credit universe, specifically the subset that has a large exposure to floating rate debt. And you know right now, we've already seen, as you well know, the all in cost of debt for the leverage loan universe double more than double actually
since the first quarter of twenty twenty two. And the signaling that we receive from central banks, both the FED and the ECB is that there's probably more room to run there, and President Leguard was very clear on that in her press conference recently. So I think that there's more upward pressure. But as you noted at the start, I think whether we get an extra twenty five or fifty basis points from here is probably less relevant than the amount of time that we stay in this kind
of higher cost of capital environment. Because corporates are looking at these upcoming maturity walls, which yes they are in mostly twenty twenty five, but that will need to be addressed sooner rather than later. And for those corporates, we're not really expecting any sort of relief, certainly not in the form.
Of rate cuts. And I think actually, if you look at.
Where the all in yields are and a lot of the subsets of the corporate credit market, the risk free rate has done a lot of that heavy lifting, and spreads are fairly contained, and so there's probably some room for spreads even too high.
There's a lot of math to mat You get that from Milando line, Amanda, let me cut to the chase. Finally, we have a risk free rate. William Sharp is happy we got a risk free rate. And then you've got spreads up. And Lisa's pointed out how narrow spreads are. What are the ramifications if the actual yield in an aggregate corporate space widens out, what actually happens to our listeners and viewers.
I think the first order implication is that you uptick in financial distress, and you're already seeing that in the default rates. For example, in the US market, the leverage loan default rate is outpacing the high old bond default rate by the largest magnitude since the data on the Moody series that we use began in nineteen ninety six, and realistically over the past two decades, there have been very few instances where the loan default rate is outpacing
the high old bond default rate. And I think really that speaks to the point that you're raising. It's that that real time marking to market of the higher cost of capital in the market. As the policy rate has moved higher, borrowing costs for floating rate debt, if they're unheedged, have moved higher in tandem, and that's causing stress for a subset of smaller issuers that don't have the pricing power, they don't have the financial flexibility, perhaps they don't have
the refinancing options, and so they're added disadvantage. Now that's not a common subset throughout the best maturity of the market, but for the small nswers that will be stressed.
Is commercial real estate, either actual or securitized. Is commercial real estate and opportunity are just a massive weight for the washout.
The way that we're viewing it, is another reason for banks to be more selective in lending. So, as you know, it's a more than five point five trillion dollar market, banks both small and large, own roughly half of that, and I think it will take some time for the
price to discuss process to play through. You know, it's reasonable to think that metrics that we used in past cycles, like LTVs, like cap rates may not be as relevant in this cycle given the significant change in prices that we've seen, and also given the interest rate volatility, and so I think it will take some time for investors to get clarity on the macro which determines the cash flows of those assets, and then also to figure out
where the real bottom exists in price discovery. That's probably going to take longer to play out than, for example, the stresses that we might see in the corporate credit market among those smaller issuers. But it's something that we're definitely wanting because it's so interest rate sensitive. I think the real point, though, Tom, is that just like commercial real estate can't be painted with a broad brush, all cre is not created equal.
Office we think is perhaps the most vulnerable.
Similarly, in the corporate credit market, quality means much more than ratings. It's really nuanced it means pricing power, refin dancing options, business model resilience, and those are really things that I think will be increasingly important in the second half of the year because the fact of the matter is that we didn't make as much progress on taming
inflation as we liked. There's probably upside risk to policy rates a higher cost of capital environment, and so we need to tread carefully when we think about what companies and sectors and asset classes are best positioned for that environment.
And the upside risk to policy rates is what people are focused on when they listen to Fedho J. Powell as he takes the seed on Capitol Hill in about two and a half hours from your vantage point, you say, it's more important how long rates remain high. When does it start to bite the most one of the maturity walls the most painful, and you start to see the interest rate sensitivity really come to the foe.
Yeah, so we've seen some early signs of that in the default rate, but I would say at current levels the default rate is still pretty well contained relative to
the history. There's probably some upside risk to that. I think when the twenty twenty five maturity wall really become an issue is twelve months prior to those bond maturities, because for a host of reasons, we know that highield corporates in particular don't like to let their maturities become current on their balance sheet because has implications for the
year end audit and going concern language. And so even though twenty twenty five seems far off in the distance, it's actually not that far off if you think that corporates will start to address that in twenty twenty four. One really interesting point, and I don't think that this favorable technical will persist. The magnitude of high yield supply and the purpose of highyield supply has been incredibly bondholder friendly so far here today, it's kind of the best
of both worlds. We haven't had a lot of high old supply, and the supply that we've had has been used for bondholder friendly needs like refinancing and debt repayment. As we get closer to those maturity walls, that volume of supply likely picks up, and so that favorable technical has probably been an anchor for kyld spreads. Frankly, yere today will probably ease up a bit and so that's something certainly to watch as we get closer to those
maturity walls. But yes, Lisa, to your point, I mean the length of time and the willingness, as you alluded to earlier in the program, for the FED to really stay the course and keep rates in restrictive territory or even move them higher, is really the key consideration for corporate credit quality.
Avanda. Thank you, Amanda. Aligning with us with black Rock this morning, I'm going to talk China here at least is all fired up to talk to China with Greg Valier, and that's the lead part of his note this morning's chief policy strategist at AGF Investments.
But there's Eric Canter, Greg.
Valier, and you and I know he was absolutely flattened in Republican politics of a good number of years ago. Has a Republican Party changed it all since Eric Canner? I mean to me, McCarthy's in the same place as John Bayner, and there's an Eric Canter right now trying to help McCarthy and he can't get anything done.
Yeah, I think the party has gotten more strident in many respects in the House, which makes life, as we all know, very difficult for McCarthy. I think the other big story is China. And just a couple of comments quickly, Tom on that the little progress they made in the last few days was negated overnight with Joe Biden inexplicably ripping into z I don't know why he did it.
And number two, I think that these stories out on a military base or a spy base or a training base in Cuba by the Chinese really is a serious, serious issue.
I agree because you and I lived in I have the clearest memories of my youth and the Cuban missile crisis.
But I would suggest.
Greg, there's not missiles involved here. It's going to be X number of soldiers one hundred miles from Key West. I get that tension, but can you really equate it to a Cuban missile crisis of John Fitzgerald Kennedy fair point.
It's not as serious as nineteen sixty two. But at the same time, it's going to give fodder the politicians who don't like China in both parties, whether it's Chuck Schumer or Kevin McCarthy, and both parties, China is not popular, and I think this will simply add fuel to the fire. To speak out against the Chinese.
Greg You mentioned Joe Biden inexplicably in your words going after Jijinping. I'll reach you the actual comments. He was speaking at a fundraiser last night, saying that the Chinese leader had been blindsided by the spy balloon, saying he didn't know it was there. That's what the great embarrassment for dictators. Well, they don't know what happened, and that was what really keyed off some of the concerns with people calling that irresponsible and saying that really does heightened tensions.
What do you make of the why behind President Biden's comments. Was this some sort of diplomatic foray or was this another folk pa that's going to be sort of highlighted as kind of emblematic of his presidency.
Well, first of all, Lisa, you've got to say, it looked to me anyway that the balloon story had been buried. I think we put that behind us three or four days ago, and Biden resurrected it. So this could be just part of a string of gas we've seen recently by Biden. After one speech last week he said, God
Save the Queen. There's things that he says that leave people scratching their heads, and it could be serious for a second, it does plant seeds of doubt among a lot of Democrats who are reluctant to vote for him.
Well, just putting aside the election for one second and just doubling down the theme, do you actually think that this could materially worsen relations with Tina? That the relationship is already so fragile that a gaff by the President just simply mentioning the word dictator could undermine everything that Tony blinkn accomplished while he was overseas.
Well, it doesn't help, does it. It makes things more complicated. And I'm sure you've just as you have angry lawyers working for Donald Trump or shaking their head over Trump's interview with Bret Baher, you see a lot of people, I'm sure close to Blincoln shaking their heads over why Biden would say something that to me reckless?
Greg, What do we follow into July?
I mean, I think for so much of our audience, we're exhausted by this story, this story. We glance at the Post, glance at the Times, glance at Bloomberg, politics, etc. But what's the thing to follow into July.
Well, we've got today, as you know, we've got jerown Powell. But I would say throughout the summer the number one story is Ukraine. If this war doesn't go well and they got off to a fairly slow start, I think it'll lead to a lot of anxiety that the West and the US may lighten up on our aid. We're not at that point yet. I think that this is still a winnable war, but I think there's got to be signs of progress. So to me, that is the story for the rest of the summer.
I want to take the military and it's effort in Ukraine, swing it back to the Pacific ring Greg Value and one of the clear things we see is an expansion of the United States military across a Pacific rim.
It seems to me to endure.
It's not only a discussion, it's now being budgeted and planned.
Is that how you see it?
Yeah?
I think so. There's going to be controversy in the House on how much we're going to spend on Ukraine and the budget, and I would say the number two issue for the next two or three months will be budget. And I don't want to sound like the little boy who cried Wilf. But I think chances of a government shut down on October one are a little bit above fifty to fifty, so that's going to be a big deal. I think at the end of the day, the defense industry and Ukraine get plenty of money from the US.
We know that.
Just to double down what you're talking about with respect to Ukraine and that you think that's going to be the key worry. Are you expecting to hear exactly what the progress is how Ukraine is defending against a Russian offensive that, by a number of reports is getting perhaps a bit perhaps more savvy. How much are you looking for intel from the Rebuild Ukraine conference currently ongoing.
Well, of course, as we all know, the first casualty of war is the truth, so it's hard to discern what is true and what isn't. I just think this is going to be a long slog I think people were unrealistic thinking that the Ukrainians were just romped during June. Well they haven't, but we still have a long way to go this summer.
Greigvillier, thank you so much, greatly appreciate it. With AGF investments. There is a movie it is called North Side seven seven seven. It is of a Chicago long ago. Jimmy Stewart takes a lens and is fabulous in that movie until halfway through you realize there's an old lady on her knee. He's at the Wriggly Building taking the movie, stealing the movie from Jimmy Stewart. And of course that is the iconic grandmother and mother within called Northside seven seven.
This is an extraordinary book. I really don't know what to say Jenny Rametti Romedy, as you know, it's the most mispronounced name in corporately. Well, Jenny Romedy with us this morning on a hugely courageous book. And I want to start with the blistering first fifty pages of your childhood.
And Baba came to the rescue.
Who was Baba my great grandmother? And you're right, and you speak of the Wriggly Building, because I was raised by really strong women who.
All suffered great tragedies.
And that was my great grandmother who came here from Belarus, the last person alive from her family, who worked third shift in the Wriggly Building, cleaning bathrooms, never spoke a stitch of English English, and saved every diamond us savings bonds and one day it would would allow us to have a car.
What was the first day?
Like at Northwestern there were fancy people from New triermutants from New.
Jas you know that. And there I was, Yes, there I was.
No I I was there, by the grace of God right, just lucky enough to get a scholarship. And what I what I remember is having gone to the store and bought one pair of Jeanes and topsiders.
To try to fit in a slide rule. I did use a slide rule.
You're dating this is like a nerd. Yes, go to the woman from Chicago, wouldn't know a slide rule if it hit over the world.
From a slide role to today, it's actually an appropriate kind of pathway at a time. Win Tech is at the epicenter of how to get from the slide rule to the graphic calculator and beyond right, how much can you see some of the lessons that you learned at the helm of IBM of how to bring a company up to speed with technology that moves more quickly than anyone could imagine.
Yeah, this is it's timely because even though the book took me two years to write, Good Power there's a whole section in it on it A because a decade ago I spent quite a bit of time trying to bring AI into the world to solve really tough problems. And here we are now, and to me, the things I learned. Everybody wants to talk about the technology, this is going to be a people and a trust problem.
That is what I learned from all these years.
And that you know, with something like AI, I see it as two sides of one coin, and if we don't manage the good and the bad at the same time, we're going to have trouble.
When you look back on your legacy at IBM and you think about some of the advancements that perhaps were shrugged off at the outset, whether it was cloud computing or some of the others, what would you do differently, or how do you understand what to identify as something that holds promise versus the next you false hope that everyone's going to cling to.
Yeah, look, I think this is difficult. It's difficult because actually many of the bets we placed were correct. Some timing was not exactly right on those. But today everything we did around AI and now it's hybrid cloud is
what the company is really growing from. So the idea when you run a company, and IBM's the oldest tech company and clearly I had to lead it through its most tumultuous reinvention, is that you've just got to make those decisions for the long term, even if you may not see them play out during your tenure.
For joining us on radio and television, good power. I can't say enough about it. It's summer read thin. This is great but very dense. Two hundred and thirty pages here on a life story that's extraordinary and also the realities of IBM. I'm going to address it. You've been You've had critics like a Pinata here on the transformation of I've been moved. I want to get to Gersner
in a minute. But the way you used to read the statement from Sam Palmisano as you looked at the free cash flow on page two of the on your report and you said, IBM to the moon.
What happened? How did Palmisano get this so wrong?
Look, I mean what we had done, we had done very well to a certain point. But then the world changed.
The world changed.
There was there was not just one tech trend, there was cloud there was data, there was AI, mobility, social media, and that's five tracks.
Now the meetings was it? Did you blame mackenzie? Did you bring in consultants who screwed this up? Why did you have such an inertial force where you couldn't change faster?
Yeah, I think Wich always had. When you're an incumbnent in something, it is both you're trying to protect them and not just protect a pass.
You've got customers that you've.
Got to serve, yet you've got to move to the future at the same time. And so that realized how every one of us had a challenge, and mine was to now prepare a whole new technology portfolio for the future. But I had a double sort of challenge in that I also had to reskill the workforce, and so when I began, folks weren't prepared for future skills.
It's de late in the book, You're phenomenal on this. You go to Brian Moyne at a Bank of America, who's an animal. I mean, I love you know, Brian, you go, what's the FED gonna do? Belowning he's a bank animal. He knows the deposit flows in Kansas City, and he talks about hiring for skill. Yeah, does that mean you only hire engineers?
Yeah.
Look, this is something that I work passionately on now, this idea to hire for people for their skills, not just their degrees. I I came to it having had a mother. You know, I was abandoned as a kid and my mother had no education. So but I quickly saw access and aptitude were not equal, meaning she had aptitude no access to education.
So she got a little bit of education and.
Can get an hourly job, a little more, a little better job to get us off of things like food stamps. Fast forward, I would be searching for people like cyber They're not in the marketplace. In twenty twelve, we'd start to work with community colleges and high schools, and I'd say, why aren't we hiring these people? They can do the job.
Will one hundred percent of our requirements are college degrees, and it would lead me down this path for really, now, almost two decades of a movement, I think it's essential to democracy in this country that we revisit. Having found fifty percent of our jobs were over credentialed, requiring a degree to start when you didn't need one to start. This idea that where you start shouldn't determine where you end.
That skills first, you.
Join the show at a really important point, and you're an important voice at a time where we talk so much about and how much that's a divergent story from the rest of the economy. Do you think that the big tech names that have really become the behemoths are doing a good job managing the technological trends, managing to train people in the appropriate ways, and creating a path for a longer type of trajectory.
Let me answer that two ways.
One is there's a whole chapter of what I call stort in good tech, and it isn't just the tech companies. It's now all of us and has much efforts got to be put on preparing people to see a better future because of this technology.
I mean, my biggest learning with trying.
To roll out AI, particular with professional people, they don't trust it. They unless they're part of its co creation and how it's used, won't use it. So as you go forward, now this is about reskilling, not just your current workers. You know it will be multiple times in our lifetime once and done. Education is over now, and so that idea that. I think that side of the coin about preparing the workforce is totally not paid attention to right now, and to me, that is the biggest thing.
And second is is really getting people to trust the technology. You know, I had a lot of experience with a big company with a big brand, and when you introduce AI, there's very little tolerance for it to be wrong. When you're a big company, a startup, no problem. But when you start using it for health financial services, you're in a whole different ballgame with how people react to it. So that issue of trust and preparing people are what I think is not being acted on enough.
I'm out of time, but I got to squeeze this in. I got fourteen more questions. I got time for one question. What was the best practice of lou gersnerh My?
You know I you know I have a men's respect for low and to this day is a very good friend of mine. I think he was a brilliant both strategist and execution leader both sides of the coin.
He got his hands dirty issues.
Absolutely and to this day this is a gospel to me. Yes, absolutely, You and I share.
Nothing on the show. Everybody puts it together for me, I just show up.
No, No, we share that admiration. He is able to simplify the complex and an amazing way.
This is a great book, Good Power, leading positive change in our life's work in world. The first fifty pages is blistering.
There's no other way to put it anything. I'm not going to pronounce your last name.
That's all right, joins us.
Good Power here this morning.
Subscribe to the Bloomberg Surveillance Podcast on Apple, Spotify, and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern on Bloomberg dot Com, the iHeartRadio app, tune In.
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You can watch us live on Bloomberg Television and always on the Bloomberg Terminal. Thanks for listening. I'm Tom Keane, and this is Bloomberg. Thanks for listening to the Bloomberg Surveillance Podcast. Now, stay tuned for today's edition of Bloomberg Daybreak. It's your daily news podcast, delivering today's top stories to your podcast feed by six am Eastern. It's all the news you need in just fifteen minutes. The Bloomberg Daybreak Podcast. It starts right now.
From the Bloomberg Interactive Burgers Studios is Bloomberg day Break for Wednesday, June twenty. First coming up today, A.
Hopeful sound noises are detected in the search for the undersea vessel near the Titanic.
New tensions emerge with China after President Biden refers to Shijin Ping as a dictator.
Fed Chair J.
Powell delivers his first day of congressional testimony this morning.
And FedEx does not deliver for investors with its latest earnings.
President Biden prepares for his state visit with India's Prime minister. Plus New York State is banning employer's use of non compete agreements. I'm Michael bar More Ahead.
I'm John Stansharon.
Sports Garrett Cole pitched the Yankees too much, be did and win over Seattle, the Mets, and Justin Erlander lost in Houston.
That's all straight Ahead on Bloomberg day Break, the business news you need to start your day in just one fifteen minute podcast each morning on Apple Spotify, the Bloomberg Business Appen everywhere you get your podcasts.
Good morning, I'm Nathan Hager and I'm Karen Moscow. Here are the stories we're following today.
We want to update you first on the missing submersible near the wreckage of the Titanic and what may be a hopeful sign. The Coastguard says underwater sounds have been detected. Now search teams are being redirected to find out where those sounds came from. Coast Guard Rear Admiral John Mager says they're using planes, remotely operated vehicles, and underwater robots to find the five people on board the titan.
It's a really complex case.
Their active debris field down on the bottom of the ocean, and a lot of complexity of working at that time.
Rear Admiral John magertell's ABC News it's a race against time. The titan is designed to carry up to ninety six hours of oxygen. At this rate, the ship may have less than twenty four hours of air left well.
Another major story that we're following this morning, Nathan, involves the fallout from the plea deal for Hunter Biden. The deal may help avoid a messy public trial and key President Biden's son out of jail, but the agreement also provides fodder for the president's political opponents. Bloomberg's Amy Morris or Poorsermer ninety nine one newsroom in Washington.
Hunter Biden's legal troubles haven't stopped the President from supporting him.
Very proud of my son.
The Republicans are outraged with the deal, vowing to continue their probes into the Biden family. Congressman James Comer is chair of the House Oversight Committee.
This has absolutely nothing to do with our investigation of Joe Biden, and we're going to continue to move forward with that.
The Congressman Jamie Raskin, the top Democrat on that committee, says, if there is a double standard, it's with the Trump family, not Biden.
They should check out what happened with Jared Kushner.
He registered to create a newport, which promptly received two billion dollars from the Saudi government.
Judge still has to approve the Plea deal, even as the lead prosecutor says the investigation is ongoing. In Washington, I Amy Moore as Bloomberg Daybreak.
Thank you, Amy.
While the rhetoric heats up between the parties over Hunter Widen, intentions between the US and China may be rising again. China says President Biden made a quote public political provocation by referring to his counterpart, She Jinping as a dictator. Biden told a California fundraiser that the Chinese leader had been embarrassed by an alleged spy balloon because he didn't
know it was there. The President says, quote, that's the great embarrassment for dictators when they didn't know what happened.
Well, turning to the markets now, Nathan, all eyes today and tomorrow are focused on Washington. That's where Fed Chairman j Powell gives his semi annual report to Congress. We get a preview from Bloomberg's Michael McKee in.
The House today, the Fed Chairman will have the opportunity to clarify what some feel was a confusing message on the path for interest rates would lead central bankers to raise rates again, something their own forecasts suggests will happen. Does inflation have to rise, does unemployment or does it just have to remain flat? What is the ultimate end rate? And how soon after that might they begin the rate
cuts they foresee for twenty twenty four. There will also be questions about the impact of March's bank failures and on possible regulatory changes for the industry. Tomorrow poll comes back to testify before the Senate. Michael McKee Bloomberg.
Daybreak, Okay, Mike, As investors await possible clues on the future of rates, Brown Brothers Harriman, head of Securrency Strategy, when thin thinks the FED is far from done, when.
All it does settles, I think the Fed is going to go higher for longer. The market still doesn't quite believe the Fed one hike pricing, but the fest single number two, and I said to a lot of anas, I don't think the Fed will hike again.
That this isn't just a pause, this is the end.
I wholehearted disagree.
Brown Brothers Harriman's whin then expects a stronger dollar the rest of the year.
Well.
Rates are also in focus in Europe. This morning, Nathan, after a hot inflation reading over in the UK, and we get the latest of the Bloomberg's Ewan pots in London. Good morning, Ewan, Good.
Morning Kardon Nathan. It's hot in London again today. But while the weather is nice, our fourth inflation reading high that estimates is not so welcome. Consumer prizes rose eight point seven percent in the year to May. To find forecasts for a slowdown in price gains core inflation unexpected. The rose on last month. It's now at a thirty one year high. It's all a headache for the Bank of England as they weigh their next move in tomorrow's
policy meeting. Traders are ramping up bets the bank will need to administer stronger medicine in their fight against rampant's inflation. In London, I'm you in pots Bloomberg.
Daybreak, Marry Ewan, thank you.
Back here in the US, We're watching shares of FedEx in early trading. They're down about three percent after the company gave a twenty twenty four profit outlook that came in below analysts essamates, and we get the story from Bloomberg's Charlie Palette.
A drop in package demand offset CEO Raj subramanians four billion dollar cost cutting plan. The company has sought to reduce expenses as the industry deals with a decline and package volume following two years of surging demand fueled by pandemic driven online shopping. In a separate statement, FedEx said CFO Michael Lens will retire effective July thirty first.
In New York.
Charlie Pellett's Bloomberg Daybreak.
Right, Charlie, Thanks, and JP Morgan ches is making a fresh round of layoffs in Asia. Bloomberg News has learned the bank is cutting about twenty investment banking jobs as deal flows remain muted. Sources say the reductions impact mostly junior staff and associates and analyst levels, and sectors including consumer, healthcare and private capital markets.
Time now to take a look at some of the other stories making news in New York and around the world, and for that we are joined by Bloomberg's Michael Barr.
Good morning, Michael, Good morning, Nathan. New York is joining other states on banning employee on compete agreements. The bill coincides with Federal Trade Commission and National Labor Relations Board actions to fight non competes. The measure now heads to Governor Kathy Oakle's desk after the state Assembly passed it yesterday. Employer's use of non compete contracts, which restrict workers from going to work for a competitor, cover an estimated one
fifth of the US workforce. The FDN and Y confirmed what many suspected, a lithium ion battery was the cause of Tuesday's fire that killed four people in Manhattan. The blaze started in an e bike shop on the Lower east Side. The shop is downstairs from their apartments in the sixth story building. New York City Fire Commissioner lower kevinough his.
Exact scenario where there is an e bike store on the first floor and residences above, and the volume of fire created by these lithium ion batteries is incredibly deadly.
The FDN Y says the shop was inspected in August of last year and summons were issued. A former NYPD officer is among a group of people convicted of working for China. More from Bloomberg's Dan Schwartzman, three.
People, including a retired New York City Police sergeant, have been convicted of acting as agents of the People's Republic of China. Prosecutors showed that the three carried out ill legal law enforcement operations in the US, including trying to
pressure dissidents to return to China. The three were in a group of eight originally charged back in October of twenty twenty of participating in Operation fox Hunt, which a Chinese government says was a legitimate operation to track down fugitives in New York I. Dan Schwartzman Bloomberg Daybreak.
President Joe Biden is hosting Indian Prime Minister Narindra Modi for state visit this week. Biden hopes to improve his relationship with the leader of a nation of one point four billion at the US administration sees as a pivotal force in Asia for decades to come. Dozens of Congressional members are urging President Biden to talk to Modi about human rights concerns. Todaymi is highlighting inner tranquility. His public schedule for the day opens with a group yoga session
on the United Nations North Lawn. Global News twenty four hours a day, powered by more than twenty seven hundred journalist and analyst over one hundred twenty countries. I'm Michael Barr. This is Bloomberg, Nathan.
Thank you, Michael. Time now for the Bloomberg Sports Update, and for that, here's John stash Out.
All right, Nathan, Yankees back home after the rough weekend in Boston, and thankfully Garrett Cole was on the mound, dominant in seven to thirty means, allowed one run, only four hits, struck out eight. Clay Holmes got the last five outs. So much needed a Yankee win. Three to one over Seattle. They beat the Mariners George Kirby, the Ryan native who had shut them out in a recent game in Seattle, Billy McKinney to the two run homer
off Kirby in the second inning. Before the game, Yankee g and Brian Cashman met the media to discuss the Yanks' recent struggles.
Got a really good team when we're flying high and playing the way we're capable of. Right now, we haven't been doing that, So it looks bad. It feels bad, It tastes bad, and no one likes losing, so so I understand why the fans are upset and not happy with how it's playing out.
Cash but said he still has belief in rookie short staff Anthony Volfe, who's among many Yankees who have been struggling.
Mets at Houston.
Justin Verlanders faced his former team, and Alex Bregman hit a two run homer off him. The Astros won four to two. The Mets ten only four hits, didn't have a base runner off Franbur Valdez until the sixth inning. They didn't score until the eighth Freeway Series. Dodgers shut out the Angels to nothing behind Clayton Kershaw. The Cincinnati Reds last season lost one hundred games. They just won their tenth game in a row, and the Giants, a
five hundred team last year, won their ninth straight. The ex met Marcus Stroman has the lowest DRA in the National League. He pitched the Cubs to a shutout win over Pittsburgh and the ex Yankee Aaron Hicks, who's still getting paid by the Yanks. They released him with a one eighty eight batting average. He had a homer four RBIs in Baltimore's win at Tampa Bay. Hicks with the orioles is batting three four John stash that were Bloomberg.
Sports from coast to coast, from New York to San Francisco, Boston to Washington, DC, nationwide on Sirias Exam, the Bloomberg Business app in Bloomberg dot Com.
This is Bloomberg Daybreak.
Good morning, I'm Nathan Hager. While a flurry of legal news came out of Washington yesterday morning. First we learned the trial date for former President Donald Trump in the classified documents case. A federal judge set that for mid August. It was also announced that the current President's son, Hunter Biden, is facing tax and gun charges and reached a plea
deal in that case. Bloomberg's Joe Matthews spoke with former White House Chief of Staff mcmulvaaney on Bloomberg Sound On to break down the political fallout for the current and former presidents. Let's hear part of that conversation.
Anything short of a felony indictment of Hunter Biden was going to be interprened by some folks as too.
Tier.
I think it remains to be seen as to what in what are the facts, what was the circumstance behind Hunter Biden's tax issues. Now that the Chairman Comber's made a really good point, which is now that we are either you know, at the end or moving speedily to the end of the investigation of Hunter Biden, then the Department of Justice no longer has an excuse not to
share information with Congress. So as between both the public hearing on the plea deal and the congressional investigation, my guess is we'll see a lot more about Hunter Biden than we know right now, and only then will you be able to sort of have an informed opinion as to a two different tiers of justice in this com.
Does this quiet the voices of concern who thought Hunter Biden was never going to be acknowledged here in Washington, that this would never actually become a case.
Yeah, a little bit. In fact, I had some conversations with some of my friends, by Republican friends who are complaining about, well, they're charging trump but they're not charging Hunter. And then you know, say, well, okay, if they charge Hunter with them charging Trumpet very quiet, very quickly. So again, whether or not it's a serious charge, I guess we don't know yet until we see the facts in the file.
Make the idea of an August fourteen trial date the all the while, and that might frankly be a bigger story that's been kind of overshadowed by the Hunter headline. Do you think a trial actually begins in August?
And no, you're not supposed to make, you know, absolute tradictions when you're dealing with politics, and there's a lot of politics here. But I'd be willing to bet my house there's no trial in August fourteen. Keep in mind, the right to a speedy trial, which does exist under our constitution, is possessed by the accused not by the government. So you know, if Donald Trump wants to have slowed
things down, there's going to be plenty of opportunities to do. So. You've made a good point about how hard it's going to be the picking jury. I disagree with your the reporter respectfully. I think it's going to be very, very difficult to pick a jury here because everybody's going to have an opinion about it, and Donald Trump is going to be looking for one juror who's willing to say, you know, I don't care what he did. I'm not convicting it because he only has to get it one
person to hold out, and the government knows that. So that's going to take a long time. The government may try to recuse the judge. That may take a long time. It's going to be flights over evidence that may take a long time. So if I'm a betting man, and I am, I'm not betting among them, and.
I am, says Mick mulvaney that said, does the trial begin before the presidential election? Or is that really what we're talking about here? Anything to delay it past the election.
I talked to a lot of my friends who were in the federal prosecuting business. A lot of folks who used to do white collar criminal defense to a man and a woman, they all thought this trial would take place after the election. I think we're all surprised by this announcement, at least of this early date. And whether or not that changes the caucus, you know, I'd have to talk to folks who've done this for twenty thirty years. I'm not sure how Donald Trump delays it for a
year and you know, four months or whatever. But I still think it's a better chance than not that it comes after the election. But again, this has thrown me a curveball along that everybody else see. It's August fourteenth day.
I don't know if you saw Donald Trump and Brett Bayer on Fox News. There were some pretty remarkable moments, and it's been suggested that some of the could be entered as evidence in the trial, particularly as he discusses moving the boxes around and what was in the boxes. Here's the moment that you might have missed.
So why not just hand them over then?
Because I had a boxes, I want to go through the boxes and get all my personal things out.
I don't want to hand that over to Narrow yet.
And I was very busy, as you've sort of seen.
Yeah, but according to the Diamonds, you then tell this aide to move to other locations after telling your lawyers to say you'd fully complied with the subpoena when you hadn't.
But before I send boxes over, I have to take all of my things.
Actually, the former president do damage to himself.
Yes, I was watching it. I was actually texting a little bit with Berett Bair. You know, the interview wasn't live. All I could think of is now the public sort of gets a chance to see why so many of Donald trump lawyers quit because he made things much much worse for himself. There's one thing that it wasn't in the segment you just picked up, but it was right about the same time where he said. Brett asked him about the papers that he held up on the audio tape,
and Trump said, there was nothing there. There was nothing there. It was just a newspaper clippings and stuffy pretending like it was favored or mus be classified.
But it's not.
In order to make that defense, he has to testify. And I can guarantee you that Donald Trump is not testifying in this case, so that is going to be used against him. Most of a lot of that video will be used to give to him.
This is Bloomberg day Break Today, your morning brief on the stories making news from Wall Street to Washington and beyond.
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