Surveillance: Potential Rate Cuts with RBC's Porcelli

and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course on the Bloomberg With the Call of the Morning, perhaps the Call of nineteen so far, JP Morgen's Bob Michael with a major multi year called Here's Bob on where he thinks ten year treasury yields a headache all the way down to zero, and I think that's where we're headed over the next

couple of years. We've had the recovery, it's coming to an end, and now the central banks, one after another, are falling into line and cutting rates. We saw it overnight with the Bank of Korea. We've seen it with the Bank of Indonesia. You're going to see it at the month at the end of the month with the FED. You may see it from the ECB sooner than people expect. And we think at this point in the cycle you

need some shock and all. So I'm not saying we're going to get there right away, but that's the journey we're on until something different happens. But Michael that of JP Mulkin Asset Management a wow moment. Tom Keane on Bloomberg TV about two hours again, I think we'll frame this and those will be a huge source of conversation through the year. UH. And and let me frame just you know, within the time that we've got UH. John Farris, you know this is Jan Lowe's UH work and Mr

Michael giving him all the credit for it. And what's so important here is how it's commingled with other nations. It's not a discreet US call. It's about the international economics and finance we're living in so very familiar with Bob's thinking over the last few years, and he's believed the ten year rates across the world, in the developed world would come down to policy rates worldwide. We've seen that in Europe, We've seen that in Japan, we've seen

it in the United States. Now his new call effectively the way he is thinking about this many different reason as to why we can head towards zero. But he's looking at the amount of money that has gone into money market funds over the last couple of years as rates have grinded higher, and it's the Federal Reserve starts to cut interest rates. He believes that will need a home, and that home says the Treasury markets price up, you'll down. And again this extends off of what we've heard from

Street Camar Steve Major. It just bcing a course of legendary girls showing have all had there but they have a major house. Uh. John put a vector on the tenure. You're like that as a wow moment here in New York. To join us and continue the conversation. Tom por Sally of RBC Capital Markets, the chief US economist, Good morning

to your Tom here. Good morning. Good. Let's just start with a question that I asked you as soon as you walked into this studio, just how frustrating is it covering this Fed at the moment and especially over the last six or seven months. Yeah, you know it's um. You know you you sort of realize that that sort of age old idea that you're you're taught, you know, your first year of working in research, that you're supposed to uh tell people what you think, um the FED

will do, not not what they should do. Uh, and uh you know it's um uh and here we are. I I hate that we are talking about cuts, um, but we are. I think that there's no economic justification to cut rates, but they are. Uh. And you know I'm not. It's funny I said to someone like, I'm not going to stand on some high economic moral grounds um and and not forecast to cut because it's it's clearly coming. Powels made that abundantly clear. But I still

struggle with the justification on this. Uh. And you know, I just find it. There's so many ironies here, but here's just at least one. You know, you're gonna have three days before the FOMC meeting, Uh, You're going to have a Q two GDP report that's probably going to show that consumption grew to four percent pace. Um. You know that that that sort of defies um, I think sort of rational thought process. But but again it I've I've I've I've come to grips with the reality that

that they are going to cut. So you don't think they should, but you think they will. Let's talk about the potential impact of that potential interest, right, So so here's I mean, look, I think it's I think it's a goose is the backdrop, right, I mean, goose is mark if nothing else that goose is the markets, right, I mean I think this is more of a risk

on backdrop. You know, the one thing I I we wrote about recently was you know it stated very simply, Um, it's pretty fascinating that we are we are lowering the discount rate in an environment where capital expenditures and consumption are moving along at a really good pace. What you know, what do you think happens in in in that backdrop? And John we featured this morning Honeywell buried in the

honeywe and forks. To be clear, Honeywell has one of the best press releases out there and earnings buried in that. Their CEO says, their goose in their nominal view for to six percent on our good ex sales. This is buried. First of all, you gotta do bigger fun personally. You

can see this on radio. Are you kidding me? I think it says end of two thousand, twenty two point four, what are the economic conditions we need to get the jpet Morgan's call, So I not to zero, but to get you from a two five to a So you know, I think what what needs to So let me be clear, I don't think that tens are going very far from where they are right now. UM, And and our our house view is more or less a reflection of that UM tip tip. For yield to continue to drift lower, UM,

you know, you need an event. Uh. Let me be clear. In the immediate term, if this we're talking about a structural dynamic, this is a totally different conversation. But in the immediate term for race to really drift materially lower from here, you need an event like like a recession like the FED to really embark on UM and a real easing cycle, not whatever this is, this notion of

insurance cuts. UM. I think that's uh, in the immediate term, how you get there in the longer term, which I think is probably the much more interesting conversation, UM, what what you have to have happened is exactly the path that we're going down now. You need the structural dynamics I eat, the aging population idea slower trend rates of growth. UM. All those things are are they lay in front of us.

And as Tom, you and I talked about a little earlier, you know, one of the things that could help save the day is is productivity. UM. But again short of that, which again is much easier said than done. Um, you know, I think that you're in a sort of a more permanent as a sort of a tricky word, but for lack of a better word, right now, you're in a permanently low U rate structure. What do your conversation sound

like with clients at the moment? Help? Yeah, T John, I I love this question, so you know, and and again something you're not were sort of talking about a little bit. Uh. People keep on saying the market wants cuts. Um. Uh, you know, I don't know. I speak with a lot of people that are you know, quote unquote the market. Um, some some pretty big investors in various markets, whether it's equities or fixed income. Um. No, no one's clamoring for a cut. No, no, No one is demanding that the

Fed cut rates right now. So so this idea that, um, you know, sort of the quote unquote market want to cut like, I don't. I don't know where that is really, um, because I don't see it in in any of the conversations I'm having with clients. What do you think, Shaman pals herring, I think Chairman Pale is hearing a lot of nervousness from the the sort of the c suite slash executives that he speaks to around the country. Look that yesterday's bage book is a perfect reflection of that.

I mean, you know, the amount of time that you know, sort of soft words were used, you know, like the softening or weakening and etcetera, etcetera. It was pretty significant. In fact, it jumped relative to what we had seen recently. And I think that that that that permeated the bage book and I think it's I think it's absolutely influencing the chairman right now, Tom Person, Thank thanks guys, always

going to do with you coming in today. George Kessidy joins us with RBC Capital Market's twenty years or more of experience watching the game. Is a game gonna be there in five years, Gerard. For young bucks that want to have to term Bloomberg terminals in front of their desk and they have the Royal Dalton shina on the lunch served to them to the next side, and you know they've paid a good amount of money and then a ginormous bonus every three or four years. Is that

game over? I would say the games on overtown, but I think the Royal Dalton dishware probably is um. I think what you're going to see is that when we look at over time, there will be fewer players in the business because we have too much capacity, and so for the survivors, it's kind of like the USS Indianapolis. It was the guys that survived the shark attacks in

the end. We're find the same thing here. It's the survivors that will be fine, but there are a lot of people that are going to go the way of others and not being in the business. In five years, what will the concentration look like will be three and four giants and then a regional player here, a regional player there, or is there a different Cassidy vision to that.

I think you're going down the right path because economy is a scale are very important, more so today than we've seen in your my career, in your career because of the cost of the technology, the need to have this technology to be a player. So I do think you're going to probably see five or so big players and then you'll get some regional players. But it's the ones in the middle that cannot make that commitment to

the Economy is a scale that may really struggle. You know, three to five years down the road, Joe, I get to some of the valuations of some of these banks in just a moment. I do want your view on what is happening with equity trading over at Morgan Stanley. Big part of the bank and a big drop, He thoughts, Yes, John, what we saw was when you look at the equity trading for all of the investment banks on a year over year basis, it was down now relative to expectations.

In the quarter it was in Morgan Stanley's case was better than expected. But you're bringing up a good point. You think about for a moment the amount of trading in ETFs and these other types of passive investment funds. It's not just retail investors that are using these funds, it's institutional investors as well. So you're seeing there's less of less volume on the exchanges relative to some years back, and as a result, it's affecting the equity trading areas

for these very reputable firms like Morgan Stanley. So, Jared, we wrap up earning season for the Wall Street players with Morgan Stanley your tape. You're great so far, Jerrard. I would say that generally speaking, the numbers were in line to slightly below expectations for everyone. Now that being said, when you compare it to a year ago, the numbers

for the group were not very good. So though on an expectation standpoint they were okay, but when you see the declines d c M, DICK capital markets, FICK trating you know, fixing income, commodities, and currency, those numbers are real weak for most players. The equity markets and the ECM area were the better of the areas. Advisory was okay as well, but generally speaking, year of a year, the numbers were weak, no doubt about it. One of the concerns for the outlooked in an interest income over

places like JP Morgan and Bank for America. The money made on loans and minus the money paid on deposits and as race get cut at the f at the Federal Reserve seemingly over the next year or so. Jerrard, the view is that it's going to get difficult for these guys. You don't necessarily agree with that. You think that these stocks can perform well, just like they did

in the mid ninety nineties. Gerard, just walk us through this big idea that you and my may, however, at whilst not a share at the moment for the valuation of these banks and how these stocks will try Sure, John, and you bring up the critical point today, I think literally this quarter is the maximum pain point for this issue with interest rates, because when you look at what happened in the second quarter, deposit rates continue to go up from the December hike, and libor fell more so

in the quarter than anyone had expected. But to your point, John, when you look to the mid nineties and you see the steepening of the curve caused by Greenspan at the time the FED chairman cutting rates, we think that eventually will filter into the thinking. Over the next twelve months plus, you're going to see growth. The loan growth on the consumer lending side was especially good for these big banks

to this quarter. So what they can do is grow their balance sheets to offset any pressure in the margin. But right now, I think the maximum pain point on the margin pressure was this quarter due to the impact that deposit race and not come down yet. They will come down when they start cutting interest rates. Granted, acid needs will come down too, but I think there will

be some relief there for the banks. Gerard when I look at the screen, I see a nice thirty margin bank to bank to bank to bank, but what I really see is flatline revenue growth. Institutionally and strategically, do they manage for flat revenue growth or by definition do

they have to merge. It's a great question, Tom, because if you think back for a moment, Mike O'Neil, the former chairman of City Group who just retired, he was the CEO of Bank Hawaii back in the early two thousand's when the place was a mess, and he did something what I would call shrinking to profitability, and when you look at the stocks back then, the footings of the company came down by almost a third. It was the best performing bank stock because he brought back his

stock very aggressively. So to a I think it's somewhat similar. Either you can merge, which I think some will choose to do big mergers, and on the other hand, you can manage for profitability so you don't necessarily have to have top line growth if the excess capital is given back to the shareholders. And you know what's interesting, Tom, look at the tangible books that you growth here over year. Some of these big banks are giving us ten because

they're buying back their stock. Okay, this is usually Gerard where we go to you on some small bank I've never heard of, where you always meant money, which is why you're retiring large up in Maine. We're not going to do that. Today we got record heat degrees drees whatever, New York, it's cool in Portland, Maine. Eighty nine degrees. How are the lobster doing? I mean, it's the water warmer and they're crawling north. I mean, what's the give

us the cassidy main lobster report? Right now, I'm literally looking out my window down on the lobs of boats tom here in Portland at the the guys of some of them have left for the for the day to haul their traps. And I would say that the lobster season so far has gotten off to a slower start because of the colder weather. But with the warmer weather coming in, this is peak season for catches and they are fighting actually some regulations for regulators, but right now

it's it looks good. The business is strong, and I you know, one of these times, hopefully you can join me up here. And well, I was just gonna say, I mean, one of your kids, has got to be doing the college trip at the tent company, Me and Pharaoh with a tent set up on the dock that John, have you ever had Maine lobster? I have ane, There's there's no other lobster. I've tried them all. Cassidy has a franchise on this. What are we doing, kids? You're

looking out the window. It's dunk. Cassidy is so sensitive and environmentally correct. He never lets a three pounder in the house. You know that's right. You have no idea what I'm talking Michael. Can we explain to Pharaoh how good America a lobster is main lobster. It's it's like nothing else meant written a love your faces. It's great. I mean I think we should do I'm not it's not great. I'd love to be that Monday Monday. We could do that Monday Tuesday. Why don't we do that Saturday?

So let's get a plan. Let's talk to Al from New Jersey. Thank you so much. Have a lobster r us. Mr Cassidy, of course, legendary at RBC Capital Markets. Some important comments there in the beginning, and John, this is really dead serious. The future of trading on Global Wallster generally. You know it's again into question breaking news. Is Netflix is broke? John Farrell? Since you are glued to netfix, Netflix and all the Stranger things and all that, why

don't you our street He's never seen it. You've never seen strangers now. And by the way, I don't like the way the Netflix is laid out, so I don't like my totally agree to prefer Amazon Prime. I walked into the tiles and the layout of the Afterthoughts bedroom and she's watching all this garbage on netflixing is it appropriate? Oh? Yes, it is. I can't find anything share overdate. We found her bloom Bug opinion columnist. She joins us, right now, how do you miss and miss that bad? It's a

good question. And I was surprised that Netflix didn't have better answers, But yeah, they you know, subscriber numbers are the one thing in Netflix that investors care about. Growth is the only thing that matters at Netflix, at least two investors. And they miss their own subscriber forecast by about fifty so that's yeah, pretty big miss. And they said, look, a few things happened. One is Netflix increased prices for its subscribers in many countries, including the United States. That

obviously affected subscriber growth. They also blamed um you know, some of the slate of original programming that they rolled out in the second quarter was maybe not as attractive to to new subscribers as they had expected, and the result was a big miss. The messages it's okay because Q three is going to be much much better. How much fight do you have in that? I think that's a fair question. I mean, you know, Netflix is fond of saying that sometimes they miss guidance higher, sometimes they

miss guidance lower. Generally the trend is up into the right. But I think that's a very fair point that if Netflix now says things will return back to normal in the third quarter, can you really believe that? Are you doing level four? Level five? Which is I can't remember none of the levels? Okay, if you look at the

glide path of revenue is a wise one. They're killing it with a revenue growth and it's coming down with all the competition in a Shia over day, perfectly competitive world, where does revenue growth glide to It's gotta really come in, doesn't it. It's it's a little bit hard to figure right, because on the one hand, yes, they're increasing prices, which investors like, right because you want them to have the ability. There is a right. The pricing power obviously has a limit.

That Netflix lost customers in the United States, maybe for the first time ever. I mean I I was trying really hard last night to go through the numbers going back to and I couldn't find any evidence of prayer quarters where they had lost customers in the United States. Um. But I think that's an open question about how fast can revenue grow if they're relying on price increases and not subscriber increases. What is their best practice all these

other competitors want to do. Isn't it just about content? Give me a game of Thrones, give me it? What's orange? Oranges? You know whatever stranger thing. You seem to know a lot about this stuff. I just go work in the room and say, is this appropriate? Act on here? I think you might what the I'll watch these programs. When I watched Love, I give read a book quickly and then sit down, get comfortable, relax, put on Oranges the

New Black, I Know your Friday. The last time I logged on a Netflix was a Crown did they do the Crown are mown? I mean, there are more seasons of the Crown coming. I don't know how to start into a Netflix promo, no, but I just that's the heart of it is content. Well, I think that's a that's a very good question. I actually think for Netflix content is maybe less important than it is for other

entertainment services. And the reason is the the implicit promise of Netflix is you give us your ten or thirteen dollars a month, and when you have an hour to kill when you're born on a Saturday afternoon, turn on Netflix and we will have something that you'll want to watch. Now, look, they're losing programming because people like A T and T, which which owns Friends, they're pulling it back to run

Friends on their own service. Disney Movies are leaving Netflix so that so that Disney can run those movies in its own service. But the implicit promises we will have just about anything you can possibly imagine to kill an hour or two. And I wonder if they're that everything store for video promises kind of losing some steam. One Apple question back to school, mac book, Are everybody's got a walls out? And by the cherubs stuff. Does it

really matter? Does it move the needle? For Apple? The only thing that matters at Apple is the size of iPhone sales. Size of iPhone sales, and what they're doing in China right and what they're yes, which are related obviously um and and their ability to grow at a time when the smartphone industry is not growing. Thank you for coming and share over. They always brilliant on all

this tech stuff. Thank you, huge value. Uh there the interview of the day for you in your house where content is king for me, Michael Nathanson as I walk into the children's room and goes disappropriate because that's usually the uh, the gist of it. Pault Tweeney, Please bring in the extinguished Michael Nathanson of Moffatt Nathanson. I'm content, absolutely, this is the one we want to talk to, want

to talk to Michael. Thanks so much for joining us. Michael, So a big miss last night for Netflix is stocks off about ten percent? Here? What did you take away from how how important was last night's result? Yeah? I was, guys, I was. I was shocked by the results. I really was, because what really surprised me the most was the company acknowledged that the combination of price increases and a weaker

content cycle led to slower subscriber growth. And that's the entire Bull case, right, the Bull cases they could raise prices, they can slow down content spending, and its stock is going to be you know, a billion, you know it's right now, hundred sixty billion dollars doesn't keep growing. And to me, that court really raised doubts to me, on

on on the Bull case, it really good. So, Michael, the Bull case, just to summarize that, as I understand, it has always been, Listen, we're gonna spend money on content, whether it's our own or we get it from Hollywood. That's gonna drive subscriber growth. That's gonna fund revenue and eventually cash flow, which will allow us to invest in even more and better content. And that virtuous cycle goes on and on, but it seems to be the lynch

pin of that cycle is continuing to add subscribers. So, UM, do you since that maybe that virtuous cycle might be at risk? I do? You know? I do, because our thesis has been all along and when you lose other people's content, what happens is you lose a built in audience right, So people may not go to Netflix Friends in the Office, which is still in the service. But as time goes on, as you lose the old reliable hits, the comfort food, that puts more pressure on your ability

to find new hits. Right, and you know, pause, being an analyst in media, you know prediction hits is a hard business, right, So as you mean into being forced to make more and more hits been more content, the risk profile changes. And that's been our point for two or three years now, you know, Tom, the business is changing, and you have the stock market doesn't realize that. Michael Nathan said, you know, barriers to entry, And of course we associate this with Michael Porter at Harvard and his

visits with us over the years. Or you can take it back to George Stigler or Chicago or even Bain and Company way back before that. Are there any barriers to entry in content and streaming or is it everybody for themselves? Tom, That's been part of what when Craig and I sit down and talk about this often you go back to that idea, what's what is the mode that they're building, right? And the mode of the building here, I think it's just the subscriber base and their ability

to outspend other people on content. You know, you know, the delivery itself of the content is not a mode. The technology itself is not a mode. It's easily copied. It's the idea that by spending more, you'll have more hits and you'll be able to satisfrate customer base. And I can tell you that spending more on content doesn't necessarily mean you have hits, right that. Look at Sony Studio versus Disney Studio. They may spend the same amount of money on content, but Disney is ten times more

profitable than Sony Studio. Yes, so, Michael, we talk about, you know, the competition coming. The whole landscape is really about to change in a big way with Disney Plus coming this year and a T and T and Comcast and others coming next year. What is your sense of the competitive landscape for streaming coming going forward. Yeah, it's going to be highly competitive. You have you have Disney

starting off at the very low price points. Disney pretty much shocked the system by launching Disney, you know, at a very low price point. That's going to create pricing pressure for people entering the business. So you know I'm not taking this in the past ball and my view is I'm not sure that this is a great business to go into. It be a good business. The media was a great business. So I really worry about just the cost of create, you know, the churning, the churn

up capabilities here. So you're you're skepticism. I can tell bad questions, is my skepticism, guys. I mean, Michael Nathanson. The one thing I've learned this week in economics, finance, investment is John Ferrell bin watch Binge watches Love Island. I mean that was a very informative thing to learn. And I get there are these properties and all that, but it's wrapped around Hulu at sixty dollars or YouTube TV at this or that. Are we going to get

price compression and traditional TV like you're saying in streaming service? Oh, without a doubt? Right, what's going to happen is it's all these virtual products and the virtual like which is who and YouTube TV they've been raising price, but they're still thirty free as cheaper than the then the price of a tocial bundle. Right, So are you here is that you're gonna see price impression on Craig's video side on on my my industry, Like that's just the that's

going to be a way of the world. Does Craig Moffitt does he? Binge watched Love Island Michael Nathan to thank us so much with Moffitt Naked. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews 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