Surveillance: U.S. Economy's Canary in Coal Mine with Rosenberg

US economy this morning? Good morning guys. Well, first of all, it's good to see that you're all having fun here. Um. Well, if I if we look at the number so that the number of all is obviously not going to be super strong. I mean we are like the head of consensus. Our number, our estimate is two point zero, whether the market is looking for one point eight. But I think that's not really the point. The point is if you

look underneath the bunnet, Um, what what are we getting there? Um, and our guys over there in New York and you're part of the world, and when when they when they look under it, and what they say, well, what really coming out was likely going to come out, is that the consumer remains strong and it has been the bullwark of US growth. And if the rest, particularly if inventories are causing some of the weakness that you potentially see,

that's not so bad. So as long as the consumers stay strong, that's really one of the key things, Peter. Does it change an I think for the Federal Reserve next week? Probably not. I mean, you know, it's it's it's not necessarily a question of whether or not the economic backdrop really requires in the here and now a rate cut. They have I wouldn't say nailed their colors to the mast, but it seems like a very very high probability that would get a twenty five basis points right. Well,

it's sort of on the same theme. What would we have to see with respect to an upside surprise to make the Federal Reserve question at their current approach to cutting rates. Well, you know, I would say probably more of the same, and probably even stronger numbers than we currently had. But if you if you sort of really just look in the numbers that are coming out, and then I think the the here and now doesn't justify a rate cut in the first place, So what really

is driving it? I we think is first of all, is the is the potential risk down the road. So if if the assessments of any kind of future developments are changing to the upside, if any of the sort of looming risk on the horizon go away, I think that's probably what the FED would be really looking for.

So going forward, I'm trying to understand actually the state of the U s economy right now, given the fact that we have gotten some weaker than expected data, but on the whole you said, as you pointed out, the numbers have been pretty good. Where do you think we are I mean, do you think that there is a material slow down in the US economy that the FED is rightly recognizing. Well, look, first of all, if I you know, I don't want to sort of just pull it away from only the US. I think it is

the same pretty much everywhere. What you had is that the strength of most of the Western economies has been that virtus circle between hiring on the one hand, consumption on the other. Is who put people in people in employment, they have money in their pockets and they spend it. And it has particularly predominant in the US, and obviously

you have a very strong labor market over there. On the other hand, however, what has been lacking his investment On the one hand, and certainly in parts of the economy,

the trade picture is making it worse. That's particularly true over here in Europe on the manufacturing side, but you also see it in the forward looking indicators in the US, and I think that's sort of the fear that is not necessarily what has been making us strong over the last couple of years is the question of whether there is something on the horizon that might push us down into the future and eventually sort of eat away as sort of that that key pillar that I was just

mentioning that has been driving our growth rates, you know, for the last couple of years. So we're waiting for

Chairman Poal next week. President Dragic, seven years to the day since that bumble bee speech back in London and the pledge to do whatever it takes to preserve the euro Peter, your thoughts now that dust is settled after yesterday's news conference, right, if I may say, already after the central speech, and just because you made that reference to do whatever it takes, we send the research report out saying this was whatever it takes two point zero um,

and I think yesterday, in my mind, market reaction was slightly disappointed, of course, but I think the market is missing missing a trick here when you look at what the e c B has now inserted into their key statement, which was a reference to inflation inflation expectation, essentially again to whatever to do, whatever it takes to get inflation back. And particularly they made this reference to the symmetry of

their inflation target. So essentially, if inflation has been below the target for a while, it can well stay above the target for quite a while. Um. I think this is a substantial step for the ECB to tell markets guys, we will stay at extremely low levels or even lower as long as necessary for inflation to come up. So therefore, in my mind, the market should not be selling off here, and particularly not the forwards. The forward should be coming down,

the curve should be better. Peter. This is important and it's a point of confusion for of people. The mandate for the e c B. The actual mandate is price stability, but the Government Council defines the mandate and they last define the mandate a long long time ago, so this is a almost a re clarification of a definition or in fact the fresh clarification of how they define price stability, Peter,

what does it mean for policy? Then? What did they do now they've changed that, now they've clarified what they now think the definition of price stability is. Well, first of all, I want to stress that they haven't yet changed it um I mean the you know, or they haven't redefined it. And what they're saying is that they're really working on this and that the the and apparently there's some stories out there that they have been presented with different ways of of of looking at inflation and

these type of things. But I expect that as time progressors will get a much much firmer definition of this.

But what what seems to be very clear is that when you look at the past, and we've just put this in a research and order yesterday and post the ECB, when you look at the past let's say ten years, there's at least three occasions when inflation was above two percent, and although there were some trouble outside ahead the e c B hiked, that was before the crisis in two thousand eight, that was before the European crisis in two thousand eleven, and most recently when they adopted it in

a hiking bias. I think the ECB wants to pull the rug out from under that and will tell markets, do not think that we will do this again. If we are not anywhere closed to a medium term two percent level, we will not hike. And I think there's a very very strong message if, if I may say, even a sort of a little bit tongue in cheek, the e c B was modeled after the Bundesbank. I think they really want to drive the Bundesbank out of the e c B. So um. There's a quote that's

been misattributed to Albert Einstein many times. The definition of insanity is doing the same thing over and over again and expecting a different result. And that sticks out in my mind as we hear that the e c B is going to drop the deposit rate even lower and engage in further asset purchases and hope of igniting inflation. Is this a faulty premise to negative rates actually hinder

the ability for inflation to take off? Well, I I, first of all, I don't think so that's a very short answer, and I'll give you more meat to the bone. But secondly, I think you're starting from a m if I may say so, no offense here. I think you're starting from a wrong point of view, because what you're saying is what the ECB has done has not delivered what they wanted to achieve, which is getting inflation and towards two percent again. But then you don't know what

the counter factual is. Where would inflation be if they hadn't moved interest rates to these levels, and I would claim it would probably be even lower than where it is currently. So and that's the point that drug was making yesterday to more or less the same question as well. Um so I think and he thinks, and the ECB things that they have been fairly successful, they just have

not been successful enough. And in fact, when you're then going back to your original question, when you look at some of the research that the ECB has put out, and they have the best data on this, they're very clearly demonstrate that in an environment of very low inflation, particularly coupled with relatively large sums of reserves out there sort of que that's been printed, that lending of banks

two corporates increases, and that's exactly what they want. A Peter greater cash how with you to get your thoughts, Peter Shaffrick, there of our we see capital markets global market strategist. Least at the end of the day, in the short term at least, it doesn't matter whether you and I or Peter thinks this will work. What matters is whether the ECB thinks it will work, because if they believe their tools are effective, they'll deploy them. And

ultimately that's what's going to happen in September. Now the dust settled after yesterday, I think we can focus on September and try and work out what's about to come down from the e c B, the size and scope of QUI if they deliver, and whether we finally get some tearing to go along with that lower right, And I think that that's the key thing is what it is going to be sort of the amelioration for the banks to the charge that they're paying on their deposits.

And I think that may be a really key factor here. I'm overwhelmed by the guest appearances on this program this morning. Firstly, so Brandt's now pull Swayney joining us early. How many early white cup cools is this in the last week exactly? This is not in my contract. I'm gonna have to talk to somebody. This must be his tech earnings week. And Amazon came out after the close the stock down by a little more than one percent. Have they flicked

the switch the other way again? Pulled? You know, it's a little bit. I think it's just gonna be a short term thing. They're ramping up their expenses to you know, kind of get to this one day delivery. It's getting, you know, so competitive in terms of uh, this e commerce business, so that you know, they started this whole thing kind of with this you know, I'll get you the package in two or three days. Now it's one day. But no matter what it is, it costs a lot

of money. So they were ramping up about eight hundred million expenses just to get that one day uh delivery for a lot of markets and a lot of products. And that's that impact that their EPs and they're operating profit. But the revenue came in really strong once again. You know it's interesting. Shares down a little bit more than

a percent ahead of the U S open. So not huge move that we're seeing, but as Amazon still going to be an eCOM worse company in five years or is it going to be a cloud, computing, logistics and advertising company. I think it's going to be all of the above. You know that, You're right, they're really investing

in some of these you know, non retail businesses. And of course, the big profit driver for this company is Amazon Web Services that has a you know, double digit operating profit margin versus the core retail business which is barely profitable, um which we know. So the web is you know, a big, big driver for them. Their number one in the market, but it's very competitive about their Microsoft is out there, Google is out there, and some

other tech companies. But the advertising business is just starting to ramp up for them, and it's a question of whether how big they want that business to get. But I'll tell you advertisers would love to have a third digital marketplace in the market, UM, aside from Facebook and Google. So the advertising business, the web business, very profitable businesses,

fast growing businesses for them, and that drives profits. And this this is a company that hasn't had much profits to show for over the last decade or so, so investors like the profit story. So once they turned the tables, as you mentioned, Jonathan, a little bit on the expenses just kind of reminds people, oh, this is a company that can spend money to and that's where the focus has been ever since the numbers dropped after the close yesterday, just a WS just the word on a w S

if you can. Since they first started breaking out these numbers, we've had revenue growth of north of forty north of north and yesterday I dropped below that number. Should we be looking at that a little bit more carefully, a little bit more closely? I think so well. I mean, I think the long term trend for cloud revenue growth

remains very strong. We saw good numbers out of Microsoft UM and you know, we saw some good numbers although Google doesn't really break it out that clearly out of Google, so we know cloud average cloud revenue is growing pretty substantially. That's a big part of the tech stack right now. So and and of course Amazon has the leading play there so UM but the revenue did miss and that and that definitely spooked investors because again that's the big

profit driver for this company. But I think they're going to continue to invest in the cloud business because that's where they're spending a lot of money on servers and all that type type of stuff. I have to wonder about regulatory pressures, and I have to wonder what they're doing, how they're positioning themselves ahead of what will be an increasingly contentious period of time for big tech as elections

heat up. Yeah, exactly. And that's something that Google, Facebook, Apple, all these big tech companies have to deal with, um because as we know, the US has generally taking a very light touch to big technology Silicon Valley over the last twenty thirty years. But that seems to be changing. Uh. And it's and the companies know it, because they're stepping up their lobbying and about it. They're saying, they're saying that they're working with regulators, they you know, um, you know,

they're looking for smart regulation of this industry. I think Mark Zuckerberg at Facebook is probably the most out in front because quite frankly, Facebook is probably the most at risk here because it's personal. It's it's people's personal data and privacy, and I think they are kind of the poster child for what's going to happen going forward in terms of tech regulation. Amazon probably probably to a much lesser extent. I think the headline of the week though,

goes to perhaps Treasury Secretary Stephen Manuchin. Amazon has destroyed US retail using the word destroyed. I mean, this was really powerful stuff. And then you sort of put the headline to one side and try and work out, well, what does this really mean for this company? What does it mean? You know, I don't know. I think that you know, I think most investors that didn't really impact

the stock people kind of thought it was just political rhetoric. Um. But the fact is e commerce is destroying main street retail, and it's just consumer behavior. What consumers want. They you know, now with the Internet, you can actually order stuff online and have it delivered and you don't necessarily need to go to the mall or to the local main street to get to the store. And that's just the way that,

you know, the business has evolved. And of course Amazon is the eight pound guerrilla, so they're going to bear bear the brunt. Here, Paul Sweeney, we can hash this out pretty soon. In two hours, you and I can debate this. But I've got to say, Paul Sweeney, Bloomberg Radio anchor joining us here, I've got to say this is very controversial, John, because people say Amazon killed Mom

and Poper retail. But there are a lot of questions about the ability to adjust to an Internet age, the interference with some of these firms that had these companies incur a lot of leverage, and their ability to spend and adapt to the new environment. I'm just saying it's not so simple. Well, in reality, Walmart killed Main Street.

That's what happened, and that was thirty forty years Mike drop post, Wayne right to catch up with you, as always, Well, let's bring in David Rosenberg shown we gliskin chef chief economist David always great to get your insight, your first take on the GDP per and please, well, it's a obviously um above expected and uh, you know, I think has the FED leaning towards twenty five as opposed to fifty basis points. I think we look at the components.

I mean, as stated that it was led by the big bounce and hum, we're spending at four point three, but remember the previous two quarters consumer spending growth had a one handle. So this is I think a temporary spirit of growth and consumer spending after really two quarters of of almost stagnation. What really catches my eye though that people should recognize uh and why I might be

my treasury is here on the sell off? Is business spending UM contracted at a five and a half percent annual rate, Housing negative one point five, exports negative five point two. So when you almost look at this on a diffusion basis beyond the consumer, a lot of the components are pretty soft. Although if you think about business spending, how much is that going to lag behind consumer spending

and will eventually pick up as a consumer remains strong? Well, Uh, I guess that you're asking me, um, you know who's swagging the tail? And so is it a case where businesses are going to start to invest more because we had um a spurt of consumer spending growth after two off quarters? Or is business sector going to be curtailing their hirings because if they're cutting back on capex, employment

is not far behind. And if employment ends up following what capital spending is doing, uh, you're not seeing a forehandle on consumption growth again anytime soon. David. These are really important points, and I think, just more broadly globally right now, something people are grappling with is the manufacturing recession and whether it begins or has already started to bleed into services David, are you identifying any spots where

you see that happening already? Well, a couple of things I think that you know you are seeing out of the anecdotal or the diffusion industries. There's no question that service sector activity globally and even in the US is slowing down. It's not contracting. But remember that the service sector, I mean a lot of the service sector is education and health services and not really that typical. Uh. The goods producing sector manufacturing is typical simately, Uh, cyclical services

do service? Um? You know the goods producers. Uh, that they're the leading indicator. Um. But people always talk about, well, don't worry so much about the service sector, it's not contracting. Well, it's very difficult to get services contracting because so much of it has very little correlation with the overall business cycle. Uh. The one thing that has that had did catch fron eye,

by the way. Uh. And I know that we're talking about really a coincidence lagging indicator called last quarters GDP. But I did notice that when you're taking a look at small business employment out of the ADP data, it's been negative two months in a row. And so if you want to drive looking through the front window instead of the rear view mirror, which everybody will talk about the rear view mirror today, which is last quarters GDP. One of the best leading indicators for the economy is

small business employment. Small business is how the flexibility, flexibility to lay off people much quicker than big companies do. And that's why a d P I think is slowing down much faster than non farm payrolls. But to me, if you're asking me, what is the canari in a coal mine? Right now, small business employment, by the way, including the service sector, is flowing down precipitously, and that's

a leading indicator. So this is really important. So I believe in the IDP report this is business is smaller than forty nine employees. Is that right? Do you see that bleeding up into bigger companies. Then it's a great leading indicators. So the answer is yes. You know, the big the big megacap companies, it's hard for them to let people go. I mean they'll package them out, they let them go. But the big companies operate with the lag. The small companies can let you go tomorrow, um, So

they're much more flexible. And take a look historically greatly the indicator small business employment. I actually think that it's the cap X recession that is going to lead the softening in consumer spending. I'm not going to stay consumer spending goes negative, but I would not be superposing the four percent growth and consumer spending this quarter into the future. Captains will lead the consumer, not the other way around. David.

We've really got to spend a little bit more time on this and look forward to having you in the studio quite soon. David Rosenberg. Then let's can Chief Chief Economy you wanting us to react to a g D preprint hit in the honest stice that if I continues ahead of a Federal Reserve decision next week, mobile Sprint deal the least surprising deal to ever possibly get approved by the d o J, which could come as soon as today. Yesterday, we were thinking it would come after

close perhaps or later in the afternoon. Uh. Now it's gotten pushed back joining us. We are so lucky to have Tera La Chapale. She is a Bloomberg opinion columnist. Uh, and she has incredible insights, particularly in this space. And I'm just wondering, first of all, what we're expecting the d o j the Department of Justice deal to look like to enable T Mobile and Sprint to finally complete

the very long awaited marriage. Finally, it's been years of covering this deal, so we'll be very nice to finally get an announcement. What we think the structure of the divestiture deal is going to be is T Mobile will be able to buy Sprint and they will sell off likely Boost Mobile, which is a prepaid service, so sort of a pay as you go phone business that caters to lower income Americans. And they all have also have to sell some spectrum licenses, which are very valuable to

Dish Network. So Dish Network, the satellite TV provider, will likely be acquiring all these assets, and that's what we're expecting. Um it'll be a small number of subscribers that they're taking on, but I think the goal from the DJ's perspective is to lay the groundwork so that there can be this fourth competitor that kind of fills the space that Spurt is going to leave behind. Whether that's how

it ends up, we'll see. I don't know that Dish can actually rise to that occasion, but that at least seems to be the parameters of the deal from what we hear, so I guess that if you look at market reactions to the expectation here, it seems like investors say, Okay, this will be enough to modify the Department of Justice, but it will not be enough to actually curtail the competitive advantage for T mobile and Sprint to get together. Is that your interpretation is exactly if you look at

the reaction. Addish investors, I think are a little bit disappointed by this. I think they were hoping that Dish would a partner with a giant tech company with deep pockets and be maybe even just sell out and sell their spectrum. Since Dish already has some of its own

it's worth billions of dollars. So the fact that they're going to go through this very costly, time consuming process of building their own network and having to try to compete with these three other carriers to Mobile Verizing and a T and T, it's going to be very challenging because Dish is not known nationwide for being a wireless server because they don't do service providers. They don't do that. So it's going to be a big sort of teaching

experience to try to market to the country. Hey, we also sell wireless service, which brings us to a really interesting point that you raised incredibly insightfully in a column that you recently wrote looking at why there is so much focus on breaking up big tech and regulating big tech and there doesn't seem to be any attention right now at the size of the conglomerates in the wireless space.

So what why? I know I'm asking that too. I mean, it's very interesting that the Justice Departments and Trust Division, led by making Dell Raheem, is very focused on Google, Facebook, Amazon, Apple, the power that they have and whether that's harming consumers,

and I think that's a worthy review that they're doing. However, it doesn't really say that they're looking out for consumers If they're going to turn around and approve this T Mobile Sprint deal as structured with these tiny divestitures, I think that this deal could be just as harmful to consumers and that more should have been done too to

make it so that they can't. This can't result in greater pricing power, a change to the industry in which consumers end up paying more money and getting less service, less innovation. Although you could make the argument that if you have a behemoth. If you've got three behemoth now uh that they are able to invest more in the five G infrastructure, they'll have more cash, and they'll be able to provide better service, and they'll continue to compete

with each other. It's possible. I mean, I think you know what T Mobile and Sprint saying it Sprint with such a weak player, but they have this really valuable spectrum. So if T Mobile has access to that, they can kind of build this network faster, the five G sort of future of wireless service. And I think there's some

truth to that. But I also think that T Mobile and Sprint, by having the two of them competing with one another, is what kept prices down the last few years, and that's why the industry has struggled so hard to um have anything in the way of profit growth off of consumers. So I think by putting them together and arguing that dishes somehow going to keep that balance. I don't know that that's completely honest, because I think T Mobile wouldn't do this deal if that were the case.

And just to that point, I'm looking right now, for example, at a T and T shares year to date up more than and you're seeing similar action and Verizon, and so there does raise a question this ends up benefiting the other big guys because there isn't the race to the bottom with a sprinting T mobile. I mean, the biggest indicator of whether this deal is going to hurt consumers and benefit the industry's pricing power is a T

and T and verise and stock prices. I mean they rise every time that there was some sort of signal that this deal will go through, and a time that it looked like the deal might get blocked or was running into interference, that these stock prices would fall. So I think that tells you right there what the industry is expecting from this. What would you say to people who argued that Sprint would ultimately be I don't want to say unsustainable, but certainly a poor competitor in the

long run. Should it have remained independent or should should it remain independent? It's it's weak and getting weaker, and I think that's true. Um Sprint's business is kind of a mess and they have a ton of debt. However, they're backed by massa selling, the Japanese billionaire and soft bank groups. So I think at the end of the day, We're not really, you know, bailing out a company that

was going to go away anytime soon. I think it's just sort of helping him get out of an investment that really wasn't working out so well, and now he's going to own a piece of this combined company that's

going to be on much healthier footing. Although you could make an argument that this race to the bottom was unsustainable for for Sprint, right, I mean T Mobile as well, perhaps, and that they were just winning and they were in a position of power because of the debt profile of sprinting a whole bunch of other sort of structural issues.

But I do have to wonder, you know, to the d o j's defense and to the defense of regulators that are not stepping in and saying, you know, hey, this is gonna be terrible for the consumer, what was the likelihood that this kind of price wark could continue indefinitely at a time when they do need to make so many investments in five G It's true, it probably

couldn't have continued much longer. I mean, Sprint a year ago was offering free service to anyone from Verizon who switched to Sprint, and so I think that tells you you know, how desperate they were. But I still think, you know, we weren't at the point where and the companies themselves aren't making the argument that this is a failing business. So and if you listen to their earnings calls,

I mean, they're still talking optimistically about it. So I think if that's the message they're telling their investors, I mean, regulators have to take that seriously too. And I don't think that this is a case. If T Mobile doesn't buy Sprint, Sprint disappears. If Sprint really got cheap enough, someone else would probably try to buy them. Okay, So then this raises another question. And you sort of talked about perhaps big tech coming in and buying one of

the networks. Is there any talk of big tech getting involved here and trying to offer some sort of competing wireless entity eventually, especially if there are only three big behaves. I mean, right now it's mostly rumor, but I think you know, Dish Network, there's always been rumors swirling around them that they need a partner to build a wireless network, and they are sitting on all this spectrum, so I think there is potential for someone to partner with them.

And do something with the spectrum and turn it into some sort of wireless network. Dishes focused on talking about Internet of things as opposed to sort of consumer wireless service. Um, so there is that possibility, but I and and there's also Charter and Comcast which are reselling wireless service using Verizon's network. But right now, I mean, I think for a while it's just going to be these three main carriers, which big tech company would want to have this sort

of mess on their hands. I mean, I like, on one hand, it's it's incredible terms of the demand and that sort of built in demand. On the other hand, there is a huge capital investment that needs to be made continuously, as well as regulatory pressure because it's sort

of skirting the line with utilities. And there's a lot of just technological issues there too, because five G service is going to require different bands of spectrum which traveled to different distances and need different things in order for the connections to work. So it's very costly. It's it's a very difficult process. UM, Google and Amazon or names that come up whenever Dish's name is in the mix. But again it's hard to tell whether that's coming from

dish or coming from the tech companies themselves. They tend to deny this. So, just to tie this all together, who do you think is the big winner from the likely approval of the Sprint T Mobile deal? Absolutely massive zone of soft Bank, the controlling shareholder of Sprint, because he gets to be bailed out of this situation which otherwise could have gotten really ugly. Yes, because he would have had to put up more capital to keep Sprint going.

And I think that, you know, there's there's not much of an optimistic case around Sprint right now, so I think they're a big winner. And then T Mobile shareholders likely there's gonna be a lot of synergies in this. They'll see their profit margins go up. I mean, there's gonna be a lot of benefits for them. But the industry as a whole, you can tell by their share prices.

Everybody's everybody's a winner, except perhaps, as Tara la Chappell uh suggests, perhaps the consumer might not be Tara la Chappell, Bloomberg calumnist. Thank you that was terrific joining us here. You can always read Bloomberg opinion columns at Bloomberg dot com slash Opinion or on the terminal O P I n go. 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