Surveillance: Tech Dominance With Golub

of yesterday? What does that signal for America? You know, for the what is the signal for America? I mean, you know, I'm not sure that it represents the whole economy. But when you're investing in the stock market, you're investing in a basket of five hundred or a thousand, or

however many socks are in your portfolio. And what it says is the companies that are in the public markets, that you invested in a mutual funder in your brokerage account, they are in extremely strong shape, even though the economic backdrop is much more troubling. So here's what I hear. We've got a lot of smart people saying sell the tech move here, hold the tech move here. Can you make a case this morning that you acquire more shares of these juggernauts? Absolutely, And I don't think that the

cases because they delivered great earnings yesterday alone. I mean these companies if you look at the top five companies, and yesterday we've got four of the top five reported they returned in the last twelve months. The rest of the market delivered zero. But more importantly, these companies have no debt on their balance sheets, They're sitting with cash, they are less volatile than the rest of the market.

They're growing. In the last twelve months, they've grown their revenues something like ten times faster than the rest of the market. The p of these companies relative to the growth rate is half what it is on the market, so they're trading at a premium stock market multiple. They're more expensive, but they're delivering so much faster growth that the pe relative to the growth rate is the rest

of the market. I think the surprise is going to be that these five or seven or many companies that are leading the market are going to the gap between them and everything else is going to continue to watch John, You've done some tremendous research on this over the last couple of weeks and it's all helped made personally compare and contrast the top five now to the top five

back in two thousand. Yeah. Well, first of all, all five of them are tech today, and you had companies like ex On Mobile and and some others in back at the peak of the uh you know, in March of two thousand. But the companies back then were much faster, I'm sorry, they were much more expensive than they are today. Um they were. They were less healthy companies. Their earnings growth rates um were not um so superior. Rather compared to the rest of the market the way these companies

are today. They had the you know, the the profile of these companies, UM, just is is much stronger. And if I were to say to you that the market is growing this fast and has these margins and doesn't have any debt, and would you rather be in them, you'd say yes. And then I say, by the way, it's only five companies. People say, wow, that sounds a little bit risky. It's only five names. That's not the

key point. It's how healthy the businesses are. How does it get better than this, I think is a question some people will be asking this morning relative to the situation we faced in Q two. John, A conversation, rotation on, rotation off. It's a conversation we've had repeatedly over the last several months. Is rotation off again? No? I mean, I think the real I think the real question though is, and I know that you guys have have been addressing this.

The story that has me really concerned. You know, this this fall and interest rates is basically the market saying we don't think there's gonna be any economic growth over the decade. Forget you know, we're going to get a

bounce off the bottom. I know it's kind of slowing down and stalling out a little bit, but really the question is what is the impact of all this over the long run and all the debt that we're accumulating, and it's going to be slower the this weakening of this this bounce is really problematic for industrial companies and um mining companies and retailers and banks, and so you have a chunk of the market, maybe a third of the market, that is really susceptible to some of the

economic problems that we're having, and then you have probably about seventy of the market, not just five names, but at the market that appears to be really healthy if

you look at healthcare names and consumer staples names. Um, so you have this real bifurcation not only between just the five, but those that are are super exposed to these economic woes and then everything else, which seems pretty good when you talk about that benefit dramatically from the lower interest rates because they can borrow money at record low costs. How much do you expect the trend of borrowing money to buy back shares, to reduce the equity footprint,

to shift the capital structure into cheap debt. How much do you expect that to continue, basically the privatization of the biggest and strongest companies in America at least, I don't think that that's the way that that things actually play out. I think that what happens is these companies are generating a boatload of free cash flow from their businesses,

and that's what they're returning. So when you talk about the amount that they're buying back, in the amount that they maybe pay out and dividends and things like that, it's the fact that they're just they're generating more capital than than they need to run their businesses, and so they spew it back out to two shareholders. And I think, um,

I think that's the that's the big story. The rest the market that can necessarily do the same, John, I want you to fold in your equity call with the stunning caution I has heard from your colleague James Sweeney. I've done James Sweeney for ages. He's a brilliant economist and I was thunderstruck earlier this week whenever it was over his cautious view forward. Fold that into your optimism on holding equity shares. Listen, I I love James, and I think that his call right now is is smack on.

We have to separate out what is going on in a number of public companies that have a certain type of profile, and what's going on in employment markets and the economic data. It's really clear, especially as we move into September and October, that we're going to see some of these brilliant numbers economically that we have bouncing. I s M is bouncing. It will probably bounce towards sixty

and then it's going to roll back down. We're ready starting to see this with some of the employment numbers that have stopped improving, and I think that it's it's the reason that you're seeing interest rates UM slip the way that they are. And I think investors have to kind of separate out when they think about equities are not the economy. They're married to each other, or they're or their cousins of each other, but but they're not

the same thing. And I think his calls right, which is why I wouldn't be putting money in industrial stock today and I wouldn't be calling for some kind of a rotation out of the winners. I love James to Jonathan gollip a credit swas, let's get to throw scot Bridge Capital cod C. I try fantastic to catch up with you, sir. How on earth do you make a macro called self to data and then make the right

market called equities higher credit spreads Tita. Yeah, well, obviously it's very difficult if you were timing the contraction economy and set we're in March. You know, most macro managers had a very difficult time timing the recovery. UM. We'd say, look the trends that were in place before the pandemic have just been exacerbated by it, right, And you alluded to before that the stock market has become less and

less representative of the real economy. And you still have arguably the greatest divergence between real economic outcomes and the stock market, right. And why is that? Right? Obviously, big tech is dominating more and more. You know, the top five names of the SMP. You guys had a great article on this yesterday, have a two since January the rest of the stock markets up. That's a historic divergence. The other key factor, of course, has been the FED, right,

and their balance sheet. Even though it has contracted by about two or fifty billion dollars the past five weeks as they've taken repot down, it's still up two point seven five trillion. And so you know those two factors. I mean, you know, asset reflation is here, and really the only way to make money is to be along equities and also be on credit um and enjoy the

FED support. And then you're hoping that the real economy catches up and that there will be another round of stimulus, because that is a necessity now in order to keep them economy. Okay, where that's the macro view. I want to know what alternative investments are doing now in the world of Skybridge Capital. Are they under owned or over owned in these glory names in general? You know, long short tech funds have been lightening up on big tap

tech for the last three months. Yeah. Well, and the main reason for that is that they're obviously extremely crowded. It's most crowded trade argumently in history, and there was concern over elevated multiple given where earnings were expected to be. Now clearly the strength of their earnings continue and revenue continues to be exceptionally strong. And so it's really the story of hedge funds for the last ten years. Right, the best trade has been long tech and short nothing.

The second best tradesmen, they'll be long tech and short everything else. But if you're trying to be an alternative to that, you know you're positioning yourself to be better than bonds, hopefully compete with high yield and have less downside. But at this point, going not overweight big tech has been a huge problem because they have proven themselves again and again. I go to buy the rumor by the news because they delivered in a big way, beating expectations dramatically.

Why not just go into them given the fact the biggest risk is regulatory and based on the hearings that we heard this week, that doesn't seem to be much of a risk. Yeah, we would completely agree that. You know, we've for the last three years people have been talking about regulatory risk right in the thought that that could drive some type of breakup or some type of hyper regulation,

but it just hasn't come to pass. And so you know that that's part of being investor managers choosing you know what you're trying to achieve, and anybody can own large cap tech for free basically, so you're trying to provide alternative sources of return that certainly haven't kept up in this raging bole market, particularly for tech, but I have had the chance to outperform bonds and other asset classes. Troy,

what's the cleanest trite on the underlying economy? Well, from our standpoint, the cleanest trade is still long residential mortgage BacT securities because that's very representative of the consumer of area, presentative of the economy. Spreads are still materially wider than they were in March. You have had some normalization but

certainly not to the same degree. Um So, if the economy continues to recover and for varians requests continue to drop, that's their best way, in our opinion, of playing a real economic bounce without having material down. So what's Troy I reckon some of that with what the banks of town against? JP Morgan's Jammie Tummond basically just telling us in the last quota that the back end of the year, that's when you see the recession. We haven't seen the

recession yet. How do you reconcile those two things? Well, like he also said in his learning is called right, what type of recession do you have where you have personal incomes up by seven percent? And just like you least some very interested in the personal income and outlay report, and you have home prices up right, so that that's very different, right, And that's helped keep for beans requests

delinquency is lower than they would have been otherwise. Obviously from a banking standpoint, they're gonna have to earn their way out of their long lost reserves, and delinquencies are going up across the board, but it appears that they're gonna end up being much lower than people forecast as recently, it's ten weeks ago before the full effects the SteamOS

were felt. Are we also seeing particular strength in r mbs and residential mortgage backed securities because wealthier individuals are more likely to own homes that are less affected by this downturn. Yeah, well, there's there's two things going on,

all right. So in the in the primary residential market, you had very limited supply coming in and obviously very good demographics to Skybridge Capital CIO with the Sea principal Global investors and should write brilliant, brilliant notes extending out not so much the strategy but the opportunities, and with it some caution, Seema, there is the August of our discontent. August is here. How rocky will August be? It's sound great to be with you. I think it's gonna be

really rocky, you know. I I off my colleague the other day. When did the summer long come? It doesn't seem like it's coming. There's just too much with the fiscal cliff. You've got the coronavirus cases most importantly, and then of course there's going to be speculation about what the FEDIC going to be doing. The August of our memories. I remember around the beach, the smell of the sweat, and it wasn't the beach and the heat, it was outright fear in August. Is the financial system stealed for

this GDP plunges? The financial system stealed with less leverage than what we've seen in other crises. Well, it's an interesting question. I mean, I think the GP plans that we saw in Q two, I don't. I don't think the markets could have reacted too much to it because it was all priced in. Our concerns are is that you know, along of that momentum has already started. The plateau when you look at the high frequency data is really worrying, and you can see that it's very much

tied in with cases. So where can we look whatever out that we may have about Monty policy or even fiscal policy. Unfortunately, it's still tied into the health crisis. And until we can find a way of breaking the can extend between mobility in cases, then I think we're going to be in a very difficult spot. What's the argument to buy bonds here a second wave? I think I think that would have to be your your main reason um at this stage, you know, from what can

the Fed really do? And actually what can most central banks do at this stage? I think their effectiveness is starting to run out, and yet they still have to keep plowing in, so that's going to keep it down the pressure on yields. But also if we start to see this recovery that we've seen um started tail off and actually turn into negative territory, and that's my essential scenario. But if you were to see that, then I think

that the negative space becomes more realistic. One of the big arguments for equities right now is there there is no alternative. If you take a look at bonds, you're earning nothing to own them. And yet we have a situation where if we do get a second wave, the economy will sour considerably. Do you see an end to the Tina trade, to the sort of move into equities because yields are so low if we do get a second wave or can this continue indefinitely? Yeah, that's a

really interesting question. So when we've been looking at this, you know, we have I think I could slightly negative out look on the economy given concerns around the virus, But with bond deals where they are, you know, we can't really conceivably see excs pushing and hitting their their previous lows. So in that space, yes, you know, actually it's a pretty decent place to be, but you've got to pick your space widely. And one of the reasons that we have, you know, we've got down slightly are

exposure to US equities. But it's all been placed in in megaccount and we're really comfortable with that story and we think that's really there to run. As you're speaking, we're seeing the two year yield test new lows one point excuse me, zero point one zero seven three. I'm sorry. The bond market is speaking, and there seems to be a guarantee of yield curve control. Do you buy it? Do you buy that the central banks can be successfully

manipulative given what the bond markets doing. I think what the central banks are able to do is literally just keep things where are you know, in terms of the bond market, it's tell you something that's concerns out there, But abfully, what would explicit yeld of control? Where they going to go down the road change? At this stage, you know, yields are very very depressed and it doesn't look like they're going any higher up any time soon. You know, that's a big difference between now and ten

years ago. Tom. The last time we took FED funds rate down to zero, Tom, everybody thought then the next couple of years right to would start climbing again. It wasn't until eleven that the two year yield actually bottomed out, And that for me makes the important difference between now and back then that we believe it's a reserve now and we believe that they're not going anywhere for a long long time. Do you know where the two year

yield was at the back end of eighteen Tom? Okay, Well, John, you know, as we had the excellent headline here on the Bloomberg Right now, folks and John go to SEMA on this the tenure tip negative one point zero zero three four, John, that is so important. You can do the real yield deserve Tonoon. I'm looking forward to that, Tom, Thank you, Seema. Inflation next vactations drifting a little bit higher.

It's part of the story as the white negative yield's negative real yield to become that more dominant in the last couple of weeks. What's behind the higher inflation expectations?

I think it's difficult to say. I mean, I think one of the things is that, you know, I think there's a lot of people out there who do believe within about two to three years UM, the effect of all of this Montre policy, this fistical spending will eventually play fruit, pay fruit, and you'll start to see inflation picking up, as well as all of the structural reasons around supply chain, the globalization, etcetera. Um. Now when we think about this, you know, what, are we talking about

inflation of more than three percent? Absolutely not, because anthly it's going to take a really long time for the economy to get backwards feet and to reach its pre COVID levels. So yes, because the inflation returning to some some reality, but certainly not the kind of levels that maybe some people in the market half fears over the same we're looking at this bond market right now, How on earth do you buy the banks? You know, it's

a difficult one I have. So we are not we're not big fans of financial this at this point, and we still think the trade Renagerica acts have to be in the texting. You know, where is the set for growth coming from? It's not from many places but you are seeing in technology, and you're seeing in make ups. But when yelps those flats so low, where can it

play you through for financials? So I say, from from my perspective, from an after allocation exposure, financial doesn't really feature this stage, see my Meanwhile, it's Friday, and today is the day when the enhanced unemployment benefits run out

if there is not an extension that's passed. And we get data out today ancient history June personal income and spending data, and it shows the results of the enhanced jobless benefits, the idea that personal income dropped one point one percent, personal spending rows five point six percent, people getting money that they can spend from the government. How big a hit to the US equity market will it be if there is not some sort of extension past today.

I don't think it's been priced in sufficially by the market by any means. I think it can be catastrophic. If you look at the upturn and spending over the last two months or so, A lot of that has been driven by the fact that there's been so much fiscal help coming through. If you start to take that away, not only are you dealing with a coronavirus kit, which is already suppressing a lot of the activity and increasing anxiety, and then you're taking away the ability of people to

go out and spend. So I think this is this is something that of course Congress must be taking note of and thinking they have to resolve this as quickly as possible. And Tom noticing that the personal savings rate is and this goes to the narrative that there's a huge wall of cash just sitting in people's bank account looking to spend as soon as they get a sense of the economy is stabilizing, seem would you buy that?

You know? I think, I think what we have seen so I think there's a couple of things that play here. Over the last few months, you've had it, as I said, you said the paychecks incomjective coming in and of help, but also there's been a lot of pent up demand which has been used up and those are your easy winds.

But unfortunately a lot about savings rate. People have to be sitting out there the dream that maybe they have a job to get back to you today, But is that going to be true in six months time if we've still got the same kind of challenges going ahead, So well, actually, I think something is going to stay high. I think spending has been satiated to some extent um. So this is going to be very very challenging time

into the second half of the year. John Farah, we can close the loop of the personal savings are in which that means a few iPhones were brought. Well, that's the truth time around the fiscal plan same the Federal Reserve divorced financial conditions from the underlying economy, and Congress essentially insulated personal income from the job losses. So how on earth going forward you have any kind of calculation on what the economy is going to do for the back end of this year and what it means for

the market. So we are a little bit negative for Q three. It seems like a lot of it is turning over. There has to be some concerns around the coronavirus and the way that people are going to go and spend from here. So we have got major concerns

there in terms of how do the market response. You know, traditionally maybe you would expect markets to full pretty significantly on these kind of concerns going ahead, But as long as you have the Fed standing behind the market is difficult to see the market retesting its previous loads, and we have to make the assumption that the Congress steps up and provide all the money that is required. Without that,

then I think you have a very different story. But I think we haven't seen that that they do the right thing. Still, everyone's assumption right now that they will do the right thing. We hope they do. Principal level investors, thank you. But then if you blocked them earlier, we did the view from sixty feet on technology, the cosmic realities of Tim Cook and others have to deal with.

Now we look at the nuts and bolts, the the absolute reality and adjustment needed after the miracle that was witnessed yesterday, Gain Your Lives of web Bush has absolutely nailed the tech enthusiasm. He's frankly been a pinata on that the gloom crew has repeatedly gone after him as well, and we're thrilled that Dan Eyes could join us in web Bush this morning. Dan Eyes, your new price target gets us out to Apple near four written near two

trillion dollars. Is Apple going to be a two trillion dollar company and a number of quarters I think by the end of this year to Scember thirty percent to two trillion hour mark cap. I mean, if you look going into the iPhone twelve product cycle, which I think is the supercycle, and need numbers, that's the one to punch. And I still tep Dock Middle inning Dan very importantly here the persistency of all that we saw, the persistency on the income statement, the persistency of free cash flow.

To me, the foundational thing underneath the news yesterday was a stunning growth of the mac component and the iPad component. Nobody saw that coming. What does that signal for the next few quarters. I mean not just showed this work from home, that's just another talent that they were seen. The street was now factoring in combined with a four billion dollar iPhone indeed in China right now, this is something where if you're a bull in the story, this is never even on the spectrum in terms of the

touches of numbers we saw last night a jaw dropper. Absolutely, Then good morning. Are these companies now at risk of a breakup because they're they're so powerful and they're doing so well well? I think for them it's better They did the tech hearing the day before they reported than the day after. And I mean look with that said, look for now we think less there's a legislative fix. It's it's most likely fines rather than a breakup or business model tweak. This will game momentum in to the fall.

But for right now, in terms of in from an investor perspective, the streets viewing it, more's background noise and right now that digest these numbers, I think that the contain risk. What about higher texation if you have a new administration in the US. Yeah, and that's possible, and depending on you know, if it goes blue red or

whether it's senator or presidential. But I think for right now investors, whether it's taxation or finds, these companies they're generating more cash in some countries, so that's not the issue. It's more about the business model changes and we don't think that that right now is in play. And I want to talk about the cash. They're obviously bringing the cash down from the lofty levels before. If they go from ex. Gazillion dollars of cash down to eighty gazillion

wherever they are now, what's the dynamic forward? Do they extend more debt to buy back shares. Are you suggesting that there's pushing aside the idea of a ginormous acquisition. What does it signal that there's a lesser lesser ample cash. Yeah,

it's a great question. I would say right now, the one thing from the anti trust and obviously the target on their back both in the beltways, wasn't you is I think you'll see m and a slow down because everything's going to get a second, third look, and you've seen that across the board. You'll see more toward buy backs. You will continue to see them take out debt um you know, just given what they could do in the balance sheet, and that's something from an invested perspective that

they want to see. Right now. They stronger getting stronger, and if you look at these numbers, numbers continue to go higher if they can defend thirty eight percent and the tense of a decimal point of the margin expansion, which is surprised everyone. Do they have the price elasticity

against unit growth to do that? What is the persistency of that expanding margin if they have to defend the unit growth or that's gonna be the question, especially as you're going to iPhone twaves and in why to what we're seeing from a consumer environment. I think they could

defend it. But also I think you'll see lower price points, you know, in terms of sub a thousand on I phone, because right now it's about the in and defending their moat, especially in China and China that was the headline for Apple in terms of China that rebound that scene. They're just really a table pounder in terms of what we're seeing from China in the Apple story. Yeah, I was going to ask you actually actually down about Apple in China. Are are they going to have serious, you know, concerns

of selling in China if the trade were escalates. Look, and that's been the issue, especially over the last year, where they're worried they'd be burning iPhones in the streets of Beijing, and instead they were actually going into the iPhone stores and behind them. And I think what you're seeing is it's iPhone sales they're going to be from China. That was up three four hundred bits higher than anyone

thought in terms of these numbers. And this is now the drum roll into what I believe is their strongest product cycle. It's two thousand fourteen. Darn, I want to give you a sixty tho foot question. I want to flip it over to Amazon that don't cover Amazon. I mean, I get that, but I'm fascinated by Francine sees it on Instagram, Francine searches it on Google, Francine buys it off her iPhone and gets it in a cardboard box

from Amazon. Tim Cook said yesterday, this is not a zero sum game where he's stealing for dollar for dollar from bricks and mortar and traditional retail America. Do you buy that that there's actually an expansion of society and the good of society from this exercise. I think if you look everything we're seeing in this pandemic and even look at these numbers, it's really food, water, and fang

names in terms of the average consumer. And I think the stronger getting stronger as we're seeing, and I think that's something where that does become an issue obviously um as as we see from the anti trust perspective. But the one thing we're seeing is that that's it's a double edged sore. Then we're seeing investors like could the regulators will be focused on it? You raise your price

target to four seventy five, cut to the chase. What's the sum of the parts if they have to go oh, I had a tarbell and break up like standard oil just to take Apple. I mean, how close is some of the parts to your new price target for seventy five? Yeah, for about a new bull case five fifty five fifty five kickty for bull Case. And if I kind of break that down, I believe the services business right now

is worth potentially seven to eight billion. And then you look at the core iconic iPhone hardware business that could be worth one point five trillions. So you put that together and I think this is a three trillion dollars dock by the end of the year. Okay, unless what could derail is there one thing done that you worry about them? The mean thing that could derail it is the supply chain continues to tee mejor issues. iPhone twelve pushed out no further even past holiday season, but a

definitely that looks like a very negligible chance happened. Why do we why do we need a new toy? I mean, let me speak for my children right now. They all just got new toys. When does the gravy train end that everybody needs an iPhone twelve or fourteen. Yeah, and really the number that that I think dictates why you own the stock. Three D fifty millions of nine million iPhones have not upgraded their phones in three and a

half years. That's the supercycle going into what's gonna beet five G. And if you look in the US as well as in China from pcent, buy a new iPhone that already have one, and that continues to be why that's a golden brand, that cooking Coppertino built. Smart conversation, Dan, I thank you so much, thanks for listening to the Bloomberg Savannas podcast. Subscribe and listen to interviews on Apple podcasts, so in Cloud 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