Surveillance: Pandemic Revenue Boost With Bailin

Chief Investment Officer and Global head of Investments. David, let's just talk about I think the key discussion right now the best way, the cleanest way to get exposure, durable exposure to a better American economy. Well, you know, first of all, I want to be terms repairman. But other than that, I want to think this is a pretty extraordinary time. And you've actually hit upon a couple of

those themes. Number one is incredible revenue growth for checking allergy companies and the benefit of course, you know, to their stocks, but that's what's benefiting the economies. Incredible efficiency and incredible flexibility of you know of companies, global companies and US companies. Number two is and you use the great example of you know of Stanley works, the the the idea of of what growth is to come when we talk about it economy growing six to eight percent

after a pandemic. There are two aspects to it. One is the actually ability to spend, right, and that ability to spend is due to household savings. And that ability to spend is actually due to the fact that people have not had the opportunity to leave their home to

do things, to begin doing work for themselves, right. And what we're seeing is a pent up demand from the consumer as well as right, an enormous amount of stimulus, and as well as the fact that people are going to begin to act as they did, you know, a year and a half ago. All of that is happening at the same time. You've asked another question I think in your programs you know yesterday, which is what's sustainable

and that will be very interesting. Lisa talked about this in the in the intro just now, which is, you know, some companies are gonna be able to keep this boost of revenue a company like UPS reporting extraordinary UHR shipments and things like that. The to the extent that people continue to work from home, that will continue to take place. And so this change of behavior that's definitely going to be underway for the next couple of years that have

challenged that's gonna be a big deal. The more people are adapting to work in the future based upon what they learned in the pandemic, the more we have this sustainable revenue growth that you're seeing now, David, the big fear out there. I want you to address this. And we see this a along the way for different reasons. But now front centers, margin compression o MG units price revenue down we go and on the income statement, we're

gonna see some forms of margin compression. I don't see it. Well, I do see it, and I think you're gonna see it on a temporary basis, as certain things are are really in short supply, you know, when the economy reopened. The other thing is we're going to have all of the inputs except for or except for labor. All of the inputs are going to go up a great yield in terms of their costs, right, all of the commodities,

the cost of actually shipping goods and services. The fact that there is going to be you know, a way I put it sixteen months of inventory needs to be produced in twelve months to not only satisfy current demand, but to refill the supply pipeline. All of that's going to take place now, and that will cause some delays, and it also will cause prices to go up. I also believe you, however, that this will be passed through to the consumer because the leaders are going to compression. Now.

That brings up the idea of inflation. People talk about it, and there will be I think temporary inflation for the course of the next twelve to eighteen months. We want our clients to own tips right now. And the only thing we really love in the fixed income market other than high yield our tips because they actually will capture this type of consumer inflation. But it will be forever. It'll just be for this particular boost of time well.

And the temporary inflation boost hinges in the idea that we're not going to get a material shift in the economy. And here you had Google yesterday announcing a fifty dollar fifty billion dollars share buy back. Is that good or bad for you as investor? After all of these investors that they wanted to see investment in the infrastructure of companies the investment in actual productivity going forward. Share buybacks

doesn't get that done. Well, they really don't have much of a choice when you're just handed, you know, literally boatloads of cash because of the fact that your investment is in human capital. If you think about it, that is, you know, they have excess cash. They're doing buy backs. Who else does it benefit? Well, it benefits all of their employees as well. They simply don't have the internal research and development costs that are required necessary to sustain

the growth that they have. It's not going to be building new manufacturing plants. It's gonna be hiring new human capital. And they will do that, and that's why they're going to benefit both their shareholders and their employees by doing so. David always gonna catch these quite a catch up on

this market. So, David By in the City Global webt c IO, global head of Investments, we begin with Torsten Slack with Apollo Global Management and their chief of animus towards then when you see this data in the historic moment of trade, are you elevating your g d P estimates and lengthening the boom economy? Well, it is certainly very revealing for how strong the economy is when imports

go up so much. It is certainly, as Lisa was saying, a very strong sign that the stimulus checks have been buying a lot of consumer goods that's been showing up in trade. We also have generally speaking that the economy is getting a lot of tail wind from excess savings at the corporate sector, ex savings to the household sector. And on top of that the reopening of course just continuous and now with the discussions now just just today of the mass mandates changing. So this economy is is

doing very well. And the numbers this morning on the trade bat and just confirms that this is your picture of the ball underwater that's coming up is certainly a good analogy. We aren't seeing an economy that's coming back very strongly. Let's talk about inflation, price pressure. As you pointed out, Sosten, this isn't just base effects. It's too easy to sit here. It's almost lazy just to say it's the base effects. We all know the base effects.

It's more than that, isn't it. It is? And I think this is a very very important discussion for today. As Mike was all Mike McKee just was mentioning for the press conference and the FIT, I mean, the FAT will continue to tell the dobish story about the unemployer rate is still six percent. This is just base effects. There is nothing really to worry about here in the

near term. We're still waiting for the economy to come back to full capacity or the unemployer rate to come back to a lower level, which could be around three and a half percent, which we were pre pandemic. But as you're saying, John, if you look at the data for a number of different indicators, not only UH invasion expectations going up for the household sector, you're also seeing

that it's getting very difficult to find workers. Some companies are out paying workers just to show up on an interview. You're also seeing in a number of different indicators when it comes to the i M the regional FITS surveys from the Richmond FED, from the Denver I'm sorry they tellas FIT, and then the area in particular, but also

the Kansas City FIT. They have shown significant pressure in particularly the manufacturing sector, and all this is pointing to higher input costs and as you just poke about copper prices, that makes it more expensive to produce, and the big question is what happens if input costs go up. The two things can happen. Either margins can get squeezed or selling prices meaning inflation can go up. And we are seeing more signs of this not just being base effects.

There is very strong demanding the economy pushing prices higher. So how much you around look different to the federals

serves right now, Tusten. So I think that in the near term, and if I type e CFC, go on my Bloomberg screen and I do the quarterly profile of how does the consensus expect copy CEO over the next level quarters, it is quite impressive that the expectation is inflation will go up in the next quarter or two and then it will come down and be exactly two going into the end of this year and into the next GM. I think the risks are beginning to rise that Larry Summers is right, Oh it's only blank. Shah

has been saying this is not just overheating. There's a risk this is like starting a fire. So there is a chance that inflation could be overshooting two percent. And if it might continue to say well that's okay, we have flexible average inflations are getting we are allowing inflation to overshoot. But the big, big question is if long breaks also joy going to take a relatively relaxed approach

to inflation overshooting two percent. So I would say John, to your question that the key issue here really is that inflation does begin to overshoot two percent for an extended period. One does need to look very carefully and how long raids. A long race just say okay, that's all right, we accept that, or a long race begin to say, well, wait a minute. If I'm a bond investor and I see higher inflation, that it wrote my returns and therefore I need to be compensated for that risk.

What does an inflation fire look like? Not just burning hot, but a fire. I mean, are we heading back to nineteen seventies? When we say that, people scream, no way, We're no way heading back to that. But purse out the new inflation fire. Yeah, that's a very important questions. I would say, the new inflation fire, it's very similar to what we had in the late sixties, where inflation gradually went up and it stayed at a relatively elevated level.

In this world we live in, today. The levels of inflation, of course are different readsiveto we had in the late sixties from sixty five to nine seventy, But in my book, that would be inflation at all above two and a half on core pc, which as you know, is the first preferred measure of inflation. If we get to those levels, and in particularly we get there just for several months, then I do think that bond investors will really start

to become worried. That's not my baseline scenario. I still think that inflation is under control, but we do have a few months here where we could risk some turbulence in credit, in equities, in risky assets because of this issue that rates risks and inflation risks are more elevated. And the final point of this is, I have a look at your Blueberg screen on rates. Vall implied vault in rates is very very elevated. So the moving decks, for example, is very elevated. Ready to say BIGGS, which

has just come down. So what is the shock that people are so worried about in rates markets that people in equity markets don't seem to care too much about saying things with creditble it's also very low, so there is a disconnect between polativity implied BA in braids market is very high rereative to how do imply ball actually is in almost all risky assets. I think that's telling us something about how investors are thinking about the inflation

risks for the next several months. It Tolsten really really ready smart Toustin's look that Apollo Global Management chief economist right now in Washington, Isaac Boltanski with us with a compass point, with a very sharp note, and he really I love the phrase, Isaac, from rhetoric to reality, the idea that we're loaded with rhetoric tonight. When does the reality click in eleven PM tonight or do we have

to wait eleven weeks? I would argue it's already starting to click in at least that's my takeaway from from investor calls. You know what we're gonna get tonight, Tom is an incredibly ambitious and expansive proposal that would you know, intended to remake our economy in a way that we haven't seen since since a Great Society and their lb J.

The reality is it's not going to happen. And one of my favorite lines and the one that I think we should keep in mind as we listen to the president's speak is the President proposes, the Congress disposes, and really the question for investors remains what will Congress agree to? And the subtext there is what will the centrist Democrats in the Senate allow? Okay, but I want to go out to your climb of Ohio Wesleyan University. I mean, they've got to sell this thing out where maybe the

election is actually pretty close as well. How do the moderate Democrats were around the acreage of Ohio Wesleyan adapt

to their president and to their liberal wing. I think that the main point there is that, and this is I think an important timing point to highlight is that Infrastructure Week is going to last another five months or so tom It's going to be iterative, it's going to be time consuming, it will include myriad bruising fights over really detailed and nuanced see issues from like tid exchanges all the way to that basis. It's going to take another I think five months, most likely until September or

October to get something done. But my view is that there is a window of both political and legislative opportunity that Democrats will seize on and that we will get something. We're not going to get what the President calls for tonight, but we will get something of significant. Isaac, giving your experience in Washington, d C. What is likely between the two point three trillion dollar infrastructure spending the one point

a trillion doll our American Families plan, what's realistic? Look, I think that right now we should focus on physical infrastructure. I think that that clearly has a considerable amount of support on Capitol Hill. Uh. I think there's actually bipartisan negotiation now, even though I wouldn't bet on that, I still think that we have to go through reconcstiliation. So I think we should focus on physical infrastructure, and then

on the tax side. Here's my framework. Any thing that's seen is narrowing the gap between wealth and work has a highlihood of being included in the final package because it dove tails with the Democratic economic fairness agenda. So here I'm talking about the higher tax bracket. I'm talking about the increase in capital gains. I'm talking about the end of stepped up basis. Well, let's put some numbers on that, equalizing the treatment of earnings and capital gains.

The band is quite wide the spread is quite wide right now, Isaac, how narrow do you expect the spreads together? What kind of numbers are you thinking about? Yeah, Look, I think that anything that we here tonight should always be viewed as a negotiating um marker, not a red line, and I think the White House has been clear about that. So we will not see a capital gains rate of of for I think that ultimately that will be negotiated down um to something closer to range. I think there

are a number of reasons for that. We have the same interest democrats, but also I think there's an awareness that we want to incentivize long term investment. Furthermore, there's an equilibrium where if you raise it too high, no one wants to sell, and so I really think it's fair to assume percent on that end again for the highest earner. Well, let me just add an additional question and then, Isaac, because what they're trying to achieve is

to close that carried interest loophole as well. And from what I can tell, and you tell me if your interpretation is different, that they're trying to do that by equalizing the treatment of capital gangt in wages and the end outcome would be closing that loophole. Now, if they can't equalize that, can they just close the loophole by doing something else? And do you think they should do that? Yeah, I think you have a nail on the head and

it's highlighted in the fact sheet here. Their focus is really on capital income broadly, and so capital gains and dividends by the way, we're included. And if we just talked about increasing that threshold and ending stepped up basis, he really handled the carried interest issue in its own right now. I'm telling you I don't think that they all the way to treating his ordinary income. So there will be a focus on a more narrow fix to

carry interests as well. I think this time Democrats are finally prepared to close that, especially with the overarching changes to the rate for capital gains. And again I can't underscore how important it is the end of stepped up basis. Isaac got to catch up. Go ahead from you. I was about Tansky taking the realist approach to the situation down in Washington, d C. Will Power joins now from

Beard really been looking forward to this. With this outperform on Apple, Will I want to note the privatization of Apple. Since two thousand and twelve, they've eliminated a very large percentage of their shares are down to seventeen jillion right now. Share buybacks are part of the fabric there. Do you just assume that continues in this boom economy. It's Tom's great to be here, thanks again for having me. I think the answer to the sort of answer is yes.

I think it has become a key piece of the fabric of the company, and the reality is become a good way to try to help reward shareholders with the prodigious cash really that they continued to produce. And this is a company that we forecast produced free cash flow approaching eighty billion dollars, and despite spending a lot on R and D and other growth initiatives, they continue to

produce excess cash. And I think, as you know, they've had a policy to try to turn that net cash position to neutral or effectively zero, and that suggests we're going to continue to see aggressive buybacks. They've approached called, you know, thirty billion dollars a quarter. We expect that to continue going forward. Are they going to announce a dividend increase today? I've seen that out in the zeitgeist. And if they do that, do they reaffirm their position

by making it a near double digit dividend increase. That's a good question. It's not gonna surprise me if we see it did a dividend increase, whether it's double digit or not, I don't know what my suspicion is. We'll see, uh an additional kind of double data, if you will, on commitment both buy back and dividend increase, and I think it's likely we'll get that as part of their owning.

Theres no official announcement of respect. Well, what did you make of the announcement yesterday or earlier this week from Apple that they were going to invest four hundred thirty billion dollars. I can't even say it's that much in US infrastructure. Well, look, it's a commitment to the United States and investment generally, right, because certainly making investments outside of the United you know States as well. I'm sure

there's a political angle to that as well. I think they like to emphasize the fact that they are a significant taxpayer already give it all the tacks that they're taking on the regulatory front. But I think it also just speaks to the compidence they have in the business going forward, right, and investments they want to make to ensure they have the production capabilities, the skill sets UH in R and D investment they need to continue to

remain in a leadership position. Well, and Tom accused me perhaps of being a little bit cynical yesterday because my immediate reaction was, this is entirely a PR move ahead of different antitrust regulations potentially coming down the pike, as well as higher taxes. And yet how much does this sort of underscore the supply chain pressures that we expect

to hear about in today's earnings release. Well, I think that's certainly an element of the two Right, and Apple's a company that's been a master of supply chain over the years and has continued to look for ways to diversify of supply chain. And I think you're right. I think there is an element of PR. We've we've seen similar announcements to the batter three hundred fifty billion dollars and the like over the past, you know, couple of

years respective commitment. So I think it continues down that path you know they've been on in terms of laying out a longer term vision. And again I think also as I said, you know, I think speaks to the competence of the business and the opportunity opportunities they still see ahead. Real part of the last him around the Joy was it rebuild in Asia, not just China and Asia in general. Do you look for a further recovery of their Asian growth? Well, I think they've continued to

see success across the globe. I mean, I when you look at the uh, you know, the terrible situation in India and Brazil and some of these other geographies, and you know, it's unclear to what degree they get impacted short term, um, you know from COVID, So that's still a wild card geography, uh, you know, by geography, but it is best we can tell demand remains robust across

product lines and across geographies. You know, we're get expecting twenty percent plus growth across you know, really all the product lines move into this quarter, and I think solid growth across pos as well. I gotta make some news here will power your targets to one fifty five. But what's your some of the parts valuation when you break this down and your value services and all the rest of it and all the products and that what's your some of the parts statistic? Yeah, well top a good question.

You know. Look, I mean I think one of the things to call out here is if you look at wearables and services on a combined basis, that's almost a hundred billion dollar business. How much is that share wearables and in the stuff Lisa Bce, how much does that for share? Yeah, well, I'd have to go back and do that math and come back to come on, you know, on a first air basis, but I can tell you a revenue basis, it's almost a third of the business and on a combined basis doing no right and that's

what's helping ding ship. Yeah, talk like an economist. We're not going to get a straight answer out of wheel power to them. All I could say is that my tech cash is probably less robust than vet bills. There is a question, if you want to talk like an economist, Well, when you zoom out, a lot of people say, especially

with tech stock valuations, they've gotten somewhat divorced from fundamentals. Yes, fundamentals look amazing, and yet the valuation is hinged very much on yields remaining This low on inflation remaining low. What's your view on that. How vulnerable are apples shares

to the idea of yields moving materially higher. I think less vulnerable than some of my hyper growth names, so you know, as an example, I cover many of the high growth software SASS names and names like Zoo, Ring, Central, Trulia, right, which were all rocket ships last year, but they've been under more to rest due to rising interest rate, and so I can't be I think it's a much bigger focus there than it is on some of the big tech names. And the tax rate will be something to watch.

Something with Apple and some of other big tech names against the kind of speaks of the fact that they pay us afficant uh you know percentage of profits uh, you know out in taxes. So it's certainly starting to keep an eye and as a pertaining to the broader market in the text space, I think, you know, a bigger impact on the true high high growth names Apples

growing at a much faster page right now. Um, I think buying large and seeing still as a as a double digit law term or at this point, well, when you talk about taxes, what would have a bigger impact in your view, a higher overall tax rate or closing some of the loopholes that big tech companies have enjoyed to evade or to get away from some of the high taxation rates. Yeah, that's a good question, and I'm

not sure I have the perfect answer to that. I think it's probably you know, the higher tax rate um overall. And again think is Apple points out, you know they believe to the highest proble taxpayer in America, you know already right, So it just at some level they're not using perhaps every single loophole that perhaps, uh, you know they could, but but you know they all companies are

always gonna look to try to maximize right there, the profits. Well, Mrs Keene emails in and she wants to know it hit her like you when you go to these roads shows and you do all your Apple chit chit chat and all that. Do you get like the Airmas Thermas watch swag? Do you get like the watch bands? Some mermaz at four hundred eighty nine dollars for the watch band. I know, I'm like everybody else, I'm still paying for it. If you want to talk to you know, Tim Cook

about that for me, you know that'd be great. I'd love to build to test out some of those products. We'll do that. When we talked, yeah, I mean I mean if I'm sorry, Lisa, that just says I mean dollars. Lisa is a watch band, That says Lisa bramowoods, Oh, yeah, you know me. It's basically how much is that air tag again? John? You said it was something like four hundred dollars. Happened to this conversation this morning run will Power best Sadia Research analyst. Thank you said. This is

the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom Keene, and this is Bloomberg