Surveillance: Too Much Data, Too Little Analysis, Shilling Says

three or four basis points in today's session alone. Two point seven four pc is your yield on a US ten uere For year after year many strategists have called for three percent, and for year after year many of those strategists have been disappointed. When I can tell you this year we're a whole lot closer than we have been the quite a while. John gets not to discuss in New York City is a bond market legend in these pasts. His name is Gary Shilling, a Gary Shilling President.

Gary always great to get your insight on what's happening. Can you tell me where we're out now at seventy four and what kind of world with pricing in Well, we're in a world where the Fed is obviously got the bit in their mouth to raise rates, and there is a spillover effect. I mean, if you look at the entire post work period and look at the average

spill over. Now this is average, of course, but for every hundred basis point increase in the FED controlled FED funds rate, you get a forty four basis point increase in the ten year yield. And that's over about the next six months. Now when you get out to the thirty year yield, it's much less. It's thirty four basis points for every hundred basis point increase in FED funds Or isn't that's what you'd expect. The further further, what you get from where the Fed is the less the impact.

And the third year has a lot of other forces acting on it, uh deflationary forces in my view, things like globalization, certainly very important, things like Amazon what they're doing to online sales, a lot of other forces affecting the longer run. So for anyone getting excited about the reflation theme finally taking hold of the treasury market, are you saying that to state, take a step back, garyon

and look at the bigger pitch of world Watte. Hey, John, I I the yield on the thirty year bond was twelve point six and I said in writing, we're in. We're ending the bond rally of a lifetime now, all the way down in yields, all the way up in prices. The the consensus has been, oh, no, rais are going up, razor going up raisor going up, Raiser going up. I can't remember one time when there was any general agreement with this, with this position, and yeah, maybe it's right

this time. But the point is that this is this has happened so many times in the past that I'm not persuaded because I look at I look at what I consider the fundamentals. Let's say, when you look at what's going on in terms of even in the service economy, and we're increasingly as incomes. As economies expand, service has become more important than goods. You can only put so many cars in your drive away, but you can spend infinite a louts of money on healthcare, recreation, travel and

so on. And and even in the service inflation area, education, service costs are coming down. A lot of pressure. UH, students and their parents are saying, hey, this is too expensive. I'm going to go to apprenticeship program rather than for your college. Healthcare. A lot of pressure there. And you see this this recent decision by h Morgan Bank uh Um Amazon, and yeah, and you know that these things

are really coming under control. So I think there's a there's just a lot of deflationary forces in the world, and I'm not sure the feed is properly recognize those. They will be they're beginning to. They've they've an effects said that the natural rate of interest, this sort of interest rate where we're in nirvana and everything is just copacetically right off into the into the horizon, into the sunset.

You know, equilibrium never exists. It's just a it's just a momentary point you're passing through on the way to one extreme or the other. But even the FED, I think, is beginning to recognize that the world has changed. Do you think do you think that yields have to go down? Then? And I ask in this context that Feds raised rates five times and financial conditions are looser than ever, so you could argue that what they're doing isn't the problem and yields don't have to fall. Well, yeah, that's a

good point. Mike, and I think the reality is that there is so much liquidity slashing around the world as a result of quantitative easing, the FED, the Bank of England, Bank of Canada, Bank of Japan, European Central Bank, uh, the the Swedish Rice Bank. You have all this liquidity slashing around the world, and it's gonna take a while to soak that up. In other words, and and so I think, you know, if the FED raisers raised three times this year, four times, I'm not sure that makes

a lot of difference to the overall equidity now. Sooner or later, if the FED continues to do what they what they always do are almost always do, and that is get credit too tight and kill the economy, get a bear market in stocks, and and uh, by my account, in eleven or twelve times in the post World War two period when the FED started on a tightening binge, they ultimately did achieve that they only had one stoft landing in the mid nineties, But that could be years

away because there's so much liquidity out there to be soaked up. Let me ask you this, Johnna, I've been insulting Gary all day by asking him questions about the olden days. Um, But because you've been doing this for so long, do we have better data now that would enable a central bank to get ahead of the idea that they could go too far? I mean we have all these, for example, financial condition indexes. I don't think so. The problem is there's really too much data and too

little analysis. I mean you look for example, at at the data on consumer sentiment the Conference Board of the Michigan to leading surveys on this. The correlation between that and what consumers spend is lawful. As a matter of fact, the way it is that consumers spending leads confidence, it's it's quite the reverse of what you'd expect. It's not a leading it's a lagging indicator. And I just think that the that the idea of you can rely on data.

I mean that this years ago, there was this belief that this belief that you could design these huge econometric models of the economy two and three D equation jobs. And I was trained as econometrician. Uh when I got my PhD of Sanford, and everybody thought these were going to solve the world. Well, the problem is that they didn't. And and there's so many nuances, there's so many unknowns.

There's so many, so many things you have to put in to wreck the models from blowing up, from giving a nonsensical answers that by the time you get through your shower, Say, wait a minute, there's a lot of human nature in here that you never really can quite you can't quantify, at least not in today's world. Everybody hated economists after the Great Financial Crisis because nobody called

the Great Financial Crisis. Now, wait a minute, except for a Gary Sully, it seems to be that I do love the way that history has kind of rewritten itself with the words nobody predicted this. Michael. I don't know where you were going with it. But Gary, does that frustrate you that somehow we sit and we sit here and say, nobody predicted this? People did? Yeah? Yeah, And of course there's there's always a question of the degree

of prediction. I mean, it's a somebody who said, um, say five years I mean, we were on top of the of the housing bubble. The first time we started writing about this was in uh two thousand two, and we said, a bubbleist farming sooner or later. A crack Now it only crack. Actually February of of two thousand eight was probably the time that you could because that was on the A b X UH when the A b X trouble b UH minus index went off the cliff. But did anybody say February is a data ahead of time.

We didn't, and I think we're as good as anybody. But it's always a degree. I mean, when you know, and hey, let's face it, the Tennessee is when you're right to go back and say, well, I told you so, and I refer to this, and of course, uh, there're guys like Michaelill remind you that there's sometimes you said things that didn't come up and come through and that's weekly valid. But you know, it is a degree. It

is a degree of forecast. It's not a it's not a one off kind of you're either right or either wrong. Just to finish things up with you before we before we lose you. We've got one minute left. What do you think people are getting wrong? Now? Um? I think they're getting wrong. The conviction that this is going to continue forever. The complacency in markets is extreme. Now, that doesn't mean that they're gonna have a big come up and tomorrow or the next day. But I do think

and and the latest example of this is bitcoin. When you see this, when people are just desperate for returns and they're going to speculative areas like this, it tells you that they really have that that the greed has overcome fear. Alright, Gary Shilling, Um, we will continue to hold your feet to the fire because that's what I do. Okay, love you the bees. Okay, the bees are okay. It's been produced. So I wish I checked him out a couple of weeks ago ahead and give him a food.

It's called fonding his cake decoration for they can eat to get through the winter. I don't want him to starve. But uh, out of a hundred hives, and I only had about five of them that have died so far in the winter. And that's pretty good. That's pretty good. Gary Shilling, Hey, Gary Shilling Company and a beekeeper. We love them here on Bloomberg Surveillance. The story, though, for the equity market will be all about the tech earnings,

and we have had a taster from Facebook. The story from Wall Street is that less time spent on Facebook is apparently no big deal. So let's have a big conversation about Facebook. Shall we with the man who quite literally wrote the book on Facebook. It's David Kirkpatrick, CEO of and founder of Teconomy Media, David Kirkpatrick joining us on the phone. David helped me out here. Less time spent on Facebook apparently no big deal? Is it a big deal? Um? I don't. I don't think it's yet

a big deal, and thanks for having me. And I think that in the United States and North America is where we saw this trend just begin for the first time ever, that there was actually a net loss of uh daily active users. But on the global basis, which is really what the level of would Facebook operates and you have to think and where it's opportunity ultimately lies, that was not the trend. The monthly average users continued

to go up globally, actually quite considerably. So I don't think yet you can say that the decline in North America in daily users is extremely serious and that company is saying, which I probably for now would accept, that this change is something you might expect given the level of penetration this company has in the North American population.

That's something more like a fluctuation. You mean they couldn't go up forever in terms of getting you know, more than they can't get more than everybody to be on Facebook, and they've gotten perilously close to that. So that particular thing doesn't worry me yet it could if it continued to be a trend. Is it too early, David to say that in North America that we're seeing significant signs

of saturation. Oh? No, I think we've seen saturation coming for some time, which isn't necessarily a problem if they can at least keep those people there and then begin to raise their AD rates over time, which they have been able to do in many I mean, AD rates are going up on Facebook, So that's their kind of lever they can play with regardless of what happens with users. But they have to of course retain the interest of their of their community. To use the word they love

to use. To your point, ad rates are going up, and AD revenue growth still is pretty strong to me, David. So they've warned about engagement, and actually the warnings of engagement actually materialized, but the warnings around ad growth haven't really materialized at all. Is there any reason to believe Facebook when they tell us that this is going to

slow sometime soon. Well, you know what what they've said especially is that add load, meaning the amount of ads that are given user sees when they go on Facebook, will go down, and that they'd actually like to see it go down a little bit. But because they seem to have so much leverage in pricing UH, that doesn't seem to affect their results. I mean, and I think it's worth pausing to notice the unbelievable impressiveness of the

financials here. I mean, this is a company h which is growing its revenues considerably more than its costs, where you know, their profitability rates increased um and their profit growth was something like uh at a time when they're close to a fifty billion dollar company. I mean, this is this is something you haven't seen in companies like this before. Really, there hasn't been a company like this before.

And the financials remained spectacular. So I think that's the reason why the stock, even though it dropped considerably in the few minutes after the earnings were released, once people had more time to digest what was really going on, they turned around and now the stock is up from

where it was before the release. And of course it's worth a night in David that for all of these tech companies that report over the next twenty four hours, the comps for the whole of the next year are going to be really, really tough, because just last year was so so, so so good. I looked at some of the numbers in the quarterly earnings release yesterday after the close head count and costs arising materially now that may be outstripped by what they're doing with that revenue.

And that's great, David, But on the costs and the head count, what's the story behind that? Well, I mean, I think they've said they were going to double the number of people who they devote to overseeing content to try to address some of these very serious criticisms they've received from received for their social role, that it was going to go from ten thousand to twenty thousand, and they have said that in October. So some of that

increase is probably attributable to that. I think a lot of it is also attributable to just the scale of their global growth and the fact that they continue to become a more and more important platforms in literally something like a hundred and ninety countries, which means they have to have people on the ground in many of those places. Um so UM. I don't think the cost problem worries me that much. I mean, I'm just looking at the

release right now advertising increased, costs increased. You know, as long as they could keep that kind of ratio, they don't have a problem with costs, even if they're adding more people and spending more money. They've also said they're going to spend a lot of money on infrastructure and server farms and cloud infrastructure and all the back end stuff that they have to spend on to keep this service operating. Uh, and they're very aggressive in that kind

of spending. But so far there's no sign and that I can see that that's affecting their profitability. To me, the threat, such as it is, and it's something of a unique one, is a political, social, of socioeconomic threat and perceptual one. And if they if they cannot shift the narrative and begin to be seen as a positive contributor to society, I think that implies all kinds of peril, including eventually financial peril. Well, Scott Galloway of n y

U has been quite vocal about this. I'm sure you know, David. He said that the company has been tone deaf to these kind of things, I think slipping. Um, Yes, I mean there's certainly they are tone deaf. I think their immaturity as a company is increasingly evident. Um. They are a young company, especially to now be fifty billion dollar company making this kind of profit, you know, run by a someone in his early thirties who has absolute power. Um.

These are delicate and challenging realities. I mean, Galloway goes much further. He says Facebook should be broken up in no unequivocal terms. I heard him speak just last week in Munich. Um. The guy is rapidly critical of not just Facebook but all the Internet giants, but he singles them out especially for criticism. Believe Facebook should be broken up, David, No, I don't see how you could break it up. I think breakup is the wrong term. Um. But you know,

here's what I do think. Um, Facebook operates on its own with no oversight in a hundred and nineties some countries h at a at a time when we know that it is having, alongside many many deeply beneficial effects, some extremely worrisome negative effects on both individuals and society.

So we have issues of addiction, and also we have a lot of other things, including issues of political manipulation inside an ungoverned platform, which we saw very evident in the United States, and Americans ought to be clearied in realizing is a problem in every country. This is not It's not just the US election you know might have been uh manipulated, or the Russians might have attempted to

manipulated inside Facebook. They and bad actors, including the governments themselves when they're not democratic, are attempting to manipulate public opinion inside Facebook in literally every country. So we need to find a way to somehow combat that. Facebook needs to find a way to combat that. But I don't see how that could ever be found by them alone. I think somehow a new form of compact needs to be arrived at between governments, the general's public business, and

these platforms, particularly Facebook. Many of these same points hold true for Google and some of these other companies, I would say as well, but Facebook is the one where's most obvious. David Kirkpatrick, they see and founder of Teconomy Media, joining us on those facebooktarnings. Really appreciate your time, sir, Thank you very much from New York city you're listening to val Kate Warren is in just was tragic, said

Edward Jones. We've ostensibly brought her in to talk about the FED and jobs and markets ahead, and I'm gonna start with the markets rather than the Fed, because when we started the show today, futures were up and it was like, all right, you know, forget that little sell off we had. And then we've started to get some bad earnings numbers today, and now we've got these Ford and Chrysler numbers which suggests January was not at all a good month for auto sales. Is there a crack

of the armor? Is there something to start to be worried about here? Or is this just going to turn out to be one day story and into tonight, Apple or Faith, you know, or or Amazone's gonna come out and say, you know, earnings were great and everybody's buying again tomorrow. Well it's har to tell, because short term you never know exactly why where the markets are going to move. And I don't think there's really a crack

in the armor. But I think investors have gotten a little ahead of themselves in terms of thinking that all the good news we're seeing from earnings earlier was going to translate into nothing but great earnings from everyone. So I wouldn't be too worried about this. I would certainly be using it as an opportunity to add investments to

broaden the diversification in your portfolio. But I think it's a good reminder for investors also that if you have too much in stocks, now is the time to add bonds. Even though, of course the Feds on the way to raising interest buying bonds, they're going down in value. Yes, exactly,

everything is going down. And that's a situation where you look at the markets and you say, how do you protect in a world where interest rates are rising and stocks maybe you know, poised for dropping, and we don't even have bitcoin anymore to invest it, so well, we'd stay away from bitcoin. So so don't take that as

an investment careful they're so, what do you do? I think what you do is make sure you've got the right mix of stocks and bonds, and you prepare for that volatility by realizing that it's likely to be short term that stocks are going to bounce like we've seen the last couple of days sometimes, so you just you hold on for this that you said the right stocks or the right investments. What are the right investments? I think right now it's quality companies that can make their

own luck in this environment. And that's part of why tech has done so well is they've been able to grow markets, they've been able to grow market share, and they've sort of powered through whether the economy was fast or slow. So I'm not too worried about the technology stocks right now. I'd certainly be adding that. But many people may be overweight. So what you're trying to do is be sure you're not taking too much risk in

any specific place. And I think that's really the key, which is positioning your portfolio not based on what's just done great, but making sure that you're sort of looking more at over time, how are these companies going to do well? And do you have the right mix and stocks and bonds to stay invested in case stocks continue to go down? Do I wanna buy any gold or put any cash aside, or or even get into commodities or something something besides stocks and bonds, which is we're

just saying we're both going down. I think that you don't want to buy gold in this environment unless you think that the price is going higher and certainly won't know the things we've seen disconnect is typically when the US dollar drops, gold goes up instead. It's been going down too, although it's somewhat higher, so I would say no, the commodities gold are not the place to be that it really is more traditional stocks and bonds, and that's

sufficient to build a well diversified portfolio. Well, if if most of us know that this isn't gonna last forever, is it worth while setting aside some cash. Yes, I do think it's worthwhile setting aside some cash and buying when we see a bigger dip than we saw, or something will lasts a little longer than you know, a few hours. So I do think this is an environment

where part of your fixed incomfortable. It should be a little heavier in cash and a little less in long term fixed income, especially since the longer term part of the interest rates haven't risen as much as I think they may as people worry more about inflation. You've also written, I believe that investors may feel worse because of these sudden moves lower or at least against their positions, because they have not had the experience of volatility at least

for the last twelve months. Yes, actually for the last two years, because think about the fact that the last time we had a ten percent pullback in stocks was about two years ago. In last year, as we all know, the biggest drop in the SMP five hundred was less than three percent. So even the normal five percent moves up and down that we typically see in the stock

market haven't been happening. I think we're headed back into that environment, partly because of less accommodation from monetary from central banks, the FED, but also the rest of the world, but also because inflation is beginning to pick up. And after this very strong run in the stock market and even the last few months, I think investors are beginning to say, all right, what happens next. We had the benefit of the tax cuts, we've had the benefit of

stronger economic growth, of stronger earnings growth. What's going to propel stocks higher? And I think that's where you get more volatility. What is it? What are you going to watch for as a sign that this change is happening. Because we had the big sell offs earlier in the weekend, everybody said it's finally time for a correction, and then

nothing happened. I would say you never know, because think about the fact that for the last couple of years, investors have really ignored money of the risks that we knew were out there, whether it's geopolitical risk or whether it's policy uncertainty. Investors continue to be positive even when

some of the news wasn't so positive. And I think it's uh the problem in answering your question, Mike, as nobody knows when investors there's something going to switch and say, well, there's good news and there's bad news, and we're going to react negatively to the bad news as supposed to just ignoring it. And that's what you're really asking. When

are people going to do that? The psychology of markets, I think is the thing that we never know, and that's why we want to be sure we're always looking at the fundamental They can make you crazy. Kate Warren of Edward Jones, We're going to continue the theme of talking about automobiles with Mike Jackson. He is the chief executive of Auto Nation that He began his career helping to be a technician at an automotive dealership in Cherry Hill,

New Jersey. Following his graduation from St. Joseph's University. He joins us Now, Mike Jackson, thanks very much for being with us, my pleasure, good morning. I imagine you can't really fix any of the new cars now with all the technology that's in them, all that experience. It has

to go somewhere else. Absolutely, But uh, we actually love the complexity and the benefit of the technology in the new cars because as they become ever more sophisticated and complicated, those who have the training, the tools, the equipment and the skill to repair them become fewer and fewer. And uh, that is our strength, and therefore we are very optimistic

about growing our customer care business. We currently service over four million cars a year and we increase our customer care growth profit in the fourth quarter by a kind of oddball question here, but just flowing out of what you were saying there, there's a guy who knows what's under the hood. Uh, this whole NAFTA trade deal. One

of the things that hinges on is automobiles. And the Canadians came up with this concept of if you want to increase the amount of North American produced stuff, count the software and technology that they put in cars today that they didn't before. Do you think that's a fair idea. I'm very concerned about the entire discussion around UH NAFTA. It's been in place for twenty five years, clearly needs

to be modernized. But the idea of walking away from it would have a significant impact on the auto industry immediately, which has built this ballet of suppliers and assembly across the continent, with barts moving back and forth across borders UH several times a day in the in the millions, so it would really be massively disruptive. And I hope they find a solution now UH modernized, Yes, find a fair way to value where added value UH comes in, absolutely,

and hopefully they find solutions. And I'm open to any suggestions including let's let's count how much software development is in these hicals today, which is, you know, a multiple of what the Space Shuttle used to be. Mike Jackson. As far as your dealership network goes, you've got what I think it's more than three hundred and seventy new vehicle franchises in fifteen states. You sell thirty five new brands, so you have a pretty good pulse on the market.

What are you hearing from from the folks that are managing your individual dealerships. What are there is their general

feeling right now? Well, first, we have our own performance, and we released our fourth quarter earnings today and on an operating basis, uh we're our strongest ever with revenue of five point seven billion, up four percent, but even more importantly, gross profits were up uh a seven percent on the same store sale basis, driven particularly by our performance in pre owned vehicles being up uh six So the overall environment is quite good when I look at

the outlook for this year for new vehicle sales um even though the economy is going to be rather robust, and I'm a big supporter of finally achieving corporate tax reform and what that means for the US economy, US corporations, competitiveness around the world, what it means for the workers of America is all very positive. Paradoxically, I think new vehicle sales will go down somewhat from above seventeen million

to just below seventeen million around six eight. That's mainly caused by this new category of vehicle we have due to all the vehicles put in leasing three to four years ago are coming back to market, and it's four million vehicles coming back this year at a price point of around thousand. So you have a new segment that's a compelling value offer for the American consumer. So there is a certain substitution or cannibalization away from the new

vehicle market into the nearly new market. But the manufacturers will have a good year and we will have a good year. You wear another hat, and that as chairman of the board of the Atlanta Federal Reserve Bank, and I'm sure that Raphael Bostick has you in and asked you how things look in the economy, So let me ask you that how do things look in the economy. Everybody seems to be very, very confident that this is going to be a strong year. I think that is

the sentiment that we're hearing from the grassroots level. And one of the things I admire about the Federal Reserve is not only do they have their phenomenal economist, uh, but they are very keen to get a grassroot sent of what's going on in reality through their twelve reserve banks. And I'm honored to serve as chairman. I think the debate is, can you have this new level of growth without inflation, and what does it mean for We're where

are the workers going to come from? For this level of growth with an unemployment rate of four point one And when you get go down to the next level, you say, well, workforce participation has fallen in the US from the high sixties into the low sixties. And this is a structural issue that we have to address in America if you really want UH to sustain growth of

three or or even something more. And the big issues there that have to be dealt with is you you had a robust safety net from the Great Crash that a significant percent of the population got comfortable with. You have a skills gap where we have technical jobs that pay very well, but an education system that's not UH not supplying them, and a society that doesn't put a big social value on those jobs. So where where these

workers going to? I'm from And let's face an, immigration has always been a source of increase in the worker population in America and supportive growth and immigration is that we say, not exactly functioning smoothly today. So the debate centers around not so much will there be growth. I think there is a sense that growth will actually increase in maybe to three percent, But how do you manage the threats of inflation and longer term where the work

is going to come from? What you are in what used to be called an interest rate sensitive industry back when we had interest rates, now that they're going up again, is there a level at which you think auto buying would suffer at when a level where people would say that makes my monthly payment too high? Well, you know. Uh, Fortunately, I've been in this business so long that I can

remember interest rates and trying to do business with them. Uh. The key issues are availability and affordability of credit, both for corporations and for consumers. And I see no issues there. And the idea that we need crisis rates that were put in place during the Great Crash and the and the six seven, eight years that followed, Uh, we're not. This economy is not in a crisis. So a step towards normalization of rates is entirely appropriate. Uh, and entirely

makes sense. And I think the new normal of where rates settled down is lower than what it was in the past, So I think it's all manageable. And until inflation aggressively rears its head, um, I think, uh, we're fine. On both the availability of credit and the pricing of credit. Mike Jackson, in ten seconds, can you tell us what the biggest mistake is that you find people make when to go into an automobile dealership to buy an automobile,

or at least one ten seconds? Uh. First, the consumer prepares themselves like never before, uh, through digital and the internet. So the only mistake you can make is not to go online first. All right, do all of your homework. Well done, Thanks before you come in. Okay, thanks very much, Mica Jackson. He is the chief executive of Auto Nation. They are based in Fort Lauderdale, Florida. 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.