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This is the Bloomberg Surveillance Podcast. I'm Tom Keene along with Paul Sweeney. Join us each day for insight from the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global
headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen and always I'm Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app r in Timor is definitive at Fidelity with our question look on LinkedIn. It's the best place to see this. The absolute smartest combination of economics and finance in the charts, technical analysis, and it's so good. I'm going to put this up for YouTube. I took a screen grab of my most
important chart of the second quarter. It's of course from mister timmor of Fidelity. E'ine. It's real simple use of cash earnings to twenty five. I got a linear growth and dividends seventy five dollars and I got ninety dollars in share buyback corporations are generating seventy three percent payout on those earnings of two hundred and twenty five dollars. Does that continue? Yeah?
And you know, and this is the reason why the US trades at a premium to most of the rest of the world, because the share buyback culture is somewhat unique. I mean, it happens in other places. But the payout of seventy three percent, which is actually below where it has been over the past decade or so, was closer to ninety percent. But if you think about it from
a DCF you know, discount of cashlow model perspective. If you're a shareholder and you're getting more of the company's earnings return to you in one way or the other, that commands a higher premium, right, And so that's why the US has traded, you know, more more expensive, I guess, but it's well earned. And if the big free cash flow generators continue to generate that cash flow, then I suspect it will continue.
So there's this dovetail with Michael Mobison's work, which what's more important now is the annual payout along the continuum rather than the terminal rate. Insanity we were lectured on in school. Is the actual yearly payout that you describe more important than some phony calculation of terminal value?
Well, you know, you're getting into the ways of the DCF model, which is both so elegant and frustrating at the same time, because there are there are so many variables, right, you have earnings growth, you have to payout, you have the risk free rate, and you have the equity risk premium. And it's elegant because you can explain the market through every variable, including sentiment, which I think the risk premium is a reflection of. But you also can never solve
for four variables at once. That makes it frustrating. So you have to isolate. So the terminal rate versus the next five years growth, I just assume that it's going to be six percent. The terminal rate is the ten year treasury yield, and then I saw for the risk premium because you have to isolate something.
Paul I was in Boston near the state House, a lovely or in seventeenth century state house whatever, the red brick building there, and some guy next to me is going on on DCF. Peter Lynch through a snowball.
At him, So you're in I mean, I know a lot of companies when they come through Boston, they come into the Fidelity offices to meet with you guys. When you're talking about use of cash, how do you and I'm sure a lot of these companies say, hey, what would you like to see dividends or buybacks or what kind of mix? How do you answer that question for these companies?
Well, that's a good question.
I guess it depends. I mean, dividends are sort of, you know, like a sacred commitment, right, so if you're going to pay a dividend, you better not take it away. And buybacks are more variable. Right, If you have the cash flow buy back the share, then the question is do you buy back shares or do you spend it on capex? And actually, it's interesting that the capex as a percent of revenues has been increasing and maybe that's part of the whole AI boom. But that's obviously good
to see. But it comes down to, you know, the productive views of your cash. And if you're generating so much cash that even after satisfying capex, it's just sitting on your barance sheet, well then you might as well return it to shareholders, because that is part of the of math.
How about for our good friends in Cooper Tino, Tim Cook, Apple, you know, they pay just a token dividend. We've seen Meta initiate a token dividend. What do you say to the technology companies when they come through your offices about, okay, thank you for the jillion dollar buy back, But would a three percent dividend yield kill you? I mean, do you have those conversations with the big tech companies.
I think for the growthier companies, I think generally they have paid less individends than for instance, you know a bank or you know a consumer stable. And I think that's just part of the of the structure of different sectors. And so as long as it comes back, you know, again, if the cash is used for productive purpose CAPEX, whatever your R and D, then that's fine. If it's not used, whether it comes back as a dividend or as a buyback, you know, I guess ultimately it doesn't matter too much.
Probably a dividend would command a higher pre because it's less likely to go away, But for growth companies it's I don't think it's generally expected.
You're in a technical question, folks, inside baseball. Here, come with us. It's a global Wall Street question. You're in timmer. The return on invested capital of Nvidia is fifty four percent. The EVA spread, we're not going to go on the details now, is a mind blowing forty two percent. If they migrate to trend, can their stock hold up that?
That is a good question. You know, you get into that super growthy space and you start looking at not just the second derivatives, but the third derivatives, you know, and so that's always a tough question. It depends on, you know, how crowded the space is, what the valuations are.
One thing I'll tell you is that, you know, I've looked at this concept of the nifty to fifty, and of course we're down to the MAC seven, but generally speaking the nifty fifty I study that very carefully, going back to the early seventies, which was the original nifty to fifty, and when you see periods of these big growth companies really dominating, as we did in the early seventies and the late nineties, at the end of the day, those companies traded at a x multiple to the rest
of the market, and today the top fifty are trading only at about a thirty percent multiple, So maybe there's still some room to go because most of their performance has been justified by earnings.
Just just great, you're in Timmor, Thank you so much to Fidelity. We're going to take a measured conversation right now with mister Ives. Dan Ives is Opiniata. He's senior equity pinata at Wedbush Securities. Everybody loves to hate him.
And my problem is if I have a look at you know, if I don't look at a daily charter in every fifteen minutes chart like Scott looks at over at the dusk Star, Dan Eyes, I'm looking at a monthly chart of Apple and it is beyond elegant, bouncing off my long term moving average at one sixty six. It's up sixteen percent in the last x number of days and weeks. First of all, Dan Eyes, why is Apple up sixteen percent?
Because investors are anticipating not just what's gonna happen in WWDC where they're gonna release cook and cup Patina, the AI strategy. But if you look at numbers coming out of you know, our Asia checks and others, you're seeing a stabilization of iPhone demand and I think a renaissance of growth right now on the horizon for Apple.
Okay, I don't want to do a fanboy thing here at Dan Eyes, but I'm absolutely blown away by the resolution from the M four chip over to the fancy iPad. Are they going to cannibalize other Apple products or are they going to stand on their own?
I think it stands on its own. Look, I mean, you've come about us a lot, the chips that they beat in till it's their own game, and I think now you'll have a legit refresh on iPads. But it shows the power of those chips. And the important thing is that those chips too, they're going to be able to ultimately navigate and deploy AI features within the broader Coupertino ecosystem, and that's why most are going to access AI in the future through an Apple device. Hey, Dan, you.
Know, as Tom mentioned this, Apple's up sixteen percent over the last period of time here several days and weeks. What's the call on China these days? How's the market viewing the China? I'm going to call it a risk for Apple. How's the market digesting and discounting it?
Yeah, Paul I think it went from a huge risk to what we've seen, especially at our checks in Taiwan this week, steaveisition to an uptick. So I think we're starting that market's starting to sniff out not just a steaveisition, but an uptick in China. And at that point, I mean, that's that's cook drinking a mimosa, because then you now start to see an upgrade cycle take place with the biggest event we've seen in a decade with AI Common Apple.
All right, so June this developer conference. What should the market expect here? What do you think is going to happen there?
So I think look summer, fearing it will be a hype event, I strongly disagree. I think this is the start of essential Whi's going to be AI To developers, you're gonna it's really the start of a new AI app store from a services perspective. And I think the features that they're gonna build in right, not just the room but open AI that they're ultimately introduced, I think that's a partnership, right, that's gonna be exclusive and important.
One more Apple question. I really want to go financial, but I'm going to stay on the fanboy stuff. Dan I what am I actually gonna do with AI with Apple? If I've got the iPad and the pencil pro and I miss her artsy FARTSI what's AI going to do for me? Where I look like I'm not making Popeye as a comic strip.
Well, first off, I think the big thing, especially with open AI and some of these LM features, Apple is really trying to get you to almost bypass things like Google and some of the traditional search. But I think the biggest thing is just the features that you're gonna see come out on healthcare, on consumer apps, on generative AI. It's all gonna be apps. Developers are going to be building AI, generative AI driven apps on the iOS foundation, and that's and that's the key in the future. It's
all gonna be mostly through Apple device. But that's what Microsoft is fighting this week. They want to be He said that from a consumer perspective.
And now the obligatory in video questions.
Paul Sweeney, So, Dan, I mean Tom Kean's all about AI here? What's he gonna what should he be looking for tomorrow afternoon? When when in video reports.
I think, get get the popcorn ready and get all set. You know your favorite you know, beverage when they were port Because when the Godfather of Ai Jensen and a video report, I think it's gonna be another jaw dropper in terms of the demand that we're seeing. It's not slowing down, and I think we're just starting to see this acceleration. And that's important for the second, third, fourth derivatives within tech, which is why we believe this tech
bull market has significant legs from here. But it all starts with odd Father of Ai Jensen. Tomorrow, I'm expecting another just drop the micro yeah.
I mean he's going on existential on it. So the third and fourth derivative as well, Where does Apple fit into the derivatives? I mean they're not first or second derivative, are they? They're a follow on from all these other people, right.
I think they're second, third driven because when we go my nvideo Microsoft Google service, now that's enterprise, but on the consumer side, the chips and the actual use cases, how are they coming to the consumer? It's meta Google, but most importantly it's Apple. And that's why now this is ready for prime time starting next month at WWC. That's where the unveil starts and eventually the iPhone sixteen, I will have their own AI features built in.
Hey, Dan, who goes to this?
I mean is can top king get a ticket to this?
The King could get a t it anywhere. So he's like Gilms have to exclude him. I mean, he's he's one of those exclusive you know, Monaco. But for the average this is really for developers. Yep, it's for industry folks. That's really the focus of WWBC what we'll be at.
What are you doing with your two hundred and fifty dollars price target? You're an outlier? But seriously, Dan ives some of the parts are earnings momentum as they come off the mat of sixteen percent? Are you ready to adjust that up so we can make some news this morning.
Look to fifty's base case. We I believe AI will add thirty to forty dollars per share to this Apple story over the coming years. And that's why I think four trillion will be what we'll be talking about a year.
Go go first, de rivet And what's it do to Microsoft? Oh?
I mean, Mike, I think Microsoft that they're in there right now in the in the leader seat. From an enterprise perspective, I mean, if the mount Rush of Ai. It's Gentsen there carving that out. Who's next to It's Nadella.
Can you see Mount Rushmore? Jensen Dyan Ives. I mean, it's just it would be too much, Dan Ives, I could just see you on Mount Rushbort, thank you so much. With Webb Bush, you can send your hate mail to mister Is directly, or I get the hate mail too. If you have love notes for Dan and Ives, they go through a Lisa and Tao. Mister Is with Wedbush, he is enthusiastic on America's technology darkening the door of commerce.
A number of years ago, an academic from the Upper East Side of the Council on Foreign Relations, Elizabeth Economy, went down to assist the Governor of Rhode Island with Commerce Ford. Elizabeth Economy joins us, right now, she's free from the clutches of our public service. What was the first day like it it Commerce? Did they put a cork in your mouth and just say be nice? What was the first day like?
I don't think they knew what to expect.
Yeah, exactly.
Honestly, there were only about fifty people working there at the time because it was right in the middle of the pandemic, and the only people that were showing up for work were the secretary is kind of immediate, twenty to thirty people on the fifth floor, So it was like a ghost town. But it was a great, great opportunity, and she's just fantastic.
And just to remind people Elizabeth Economy years ago out of Michigan where the river runs black. It was just in a profoundly changing book on China's pollution right now, an all series of books along the way. I want to go to your foreign affairs blistering essay and without going into the details within the confines of the length of this interview, what should the US do? Are you allowed to say this now? Are you like in a timeout chare for six months.
After leaving no notice? What should we read the restrictions on?
How do we respond to your blistering essay of China's plan?
I think the point that I was really trying to make in the piece was that the United States has done a really good job of responding in the first couple of years of the administration to the immediate challenge that China poses, But now we really need to expand to the global stage and pay attention to how China, through its Belton Road Initiative, through its Global Civilization Initiative, It's security initiative, It's development initiative, all of these things
are designed to transform the international system in ways that are anathetical to the US, and so that necessitates a new strategy, a kind of second tier strategy from the United States, which is much more than simply focusing on our European and our Asian allies, but really expanding our tent to include emerging economies in Latin America and Africa and Southeast Asia and bringing them into an American vision of the world for the twenty first century.
I guess I grew up on Global Wall Street, where globalization was the thing that was my career with China, should we try to engage with China? Should that be our first order business to try to engage with China? Or where should we step back and say, this is almost like I don't know the Soviet Union from back in the day. I mean, how should we engage with Chinese?
So I think, for you know, thirty thirty five years we had ninety percent engagement, ten percent competition. Right now we're basically at ninety percent competition. And ten percent engagement. I think actually, unfortunately, we've got it about right at this point. I think we need to understand that China is not interested in the kind of engagement that we've
you know, pursued for thirty some years. They have their own vision, They want their own norms, their own values, their own interests reflected on the global stage.
Your your book The Third Revolution was in my book of the Summer. You know, it seems ages ago pandemic ago as well. In it, you were really controversial about the power that presidency has in China. Has he solidified his power? Is he impregnable now?
I don't know whether anyone is impregnable. Certainly he's done an amazing job of bringing institutional power into his own hands. What we don't know is, you know, how much his personal power actually radiates through society. What is the real legitimacy of chi jinping among the Chinese people. We have some polls, for example, that show that urban Chinese would really like to have greater freedom of speech, they'd really like,
you know, greater property rights, the right to assemble. I think you can look and see a lot of dissatisfaction in the country if you look beneath the surface. You know, we don't have one hundred and eighty thousand protests on the streets the way we used to because Sheijinping is put in place is incredible repressive apparatus. But that's not to say discontent is not still there the.
Heart of the matter. And folks, I attended to the Consulum for Relations where I'm a member of very important conference by Jina Romando. I've got a Paul as you mentioned, a business globalization structure debating China, and I've got a president of the United States word about four swing states, so he's anti China, and the candidate for the Republican Party, I believe is anti China as well. Are we able
to have a kojin discussion on China now? Are we literally back to Shang Kai shek in the ballet post World War Two?
I think that we're able to have a cojin discussion, But the parameters have shifted so that it's there's a new realization about the real challenge that China presents. I think we don't want to sort of go down the rabbit hole where everything is about competition. We need to do what the Biden administration started out to do, which is to look for areas of common ground and common purpose, to try to find communication channels on the mil to
military to military cooperation. We don't want this relationship to devolve into kinetic conflict. But it's also true that we recognize we can't continue that globalization without any protection for the American economy. You can argue whether we're too far swinging too far in one way. You can argue whether or not we actually have been very clear about what we're doing in terms of our economic strategy on the grounds of national security or economic security or economic competitiveness.
I think we can do a better job there.
I'm running on a time. Can you make this a weekly appointment? You know, Elizabeth, Economy. We've deployed four military bases in a new military effort from the northern Philippines down to somewhere in the vicinity of Indonesia. We've got to build out in Australia, et cetera, et cetera, et cetera. Is the Pentagon going to be our state department to China in the next five years. No.
I think the Commerce Department has been our state department and good thing too, because its secretary is really the star. No, I mean, I think our economic strategy has.
Rich she's still working for the government or not. Did I look at the memo? No?
I think again, we've you know, enacted so many different kinds of new economic policies that have a pretty significant impact on China. I think that has been our first foot forward. But it's also true that if looking at issues like Taiwan or as you're suggesting, the Philippines in the South China, see the military has to.
Be How long is Ted Burns over there, a good friend of the show, Nicholas Burns out of Wellesley and all of his public service as well. Is our State department alone in Beijing?
No, No, I think he's done an amazing job of engaging, frankly with our other ambassadors from our allies and partners, you know. So he's he's got a lot of support, a lot of friends. I think in the earlier days of the pandemic it was extremely difficult, but he's been an amazing ambassador.
At least it wants to know. I mean, do you really think that high school kids now should pick up Mandarin is a third language?
Absolutely?
Absolutely, absolutely, we need the next generation of China scholars and China policymakers. We need people to be informed about this country. You know, it's one point three some billion people of second you know, largest economy, largest military. Why do we not want to be expert.
In everybody on's a new book? What are you doing here? You are you slacking off? Six hours today? Right?
Polarized polity, looking at polarization in China, arguing that it's easily as China, easily as polarized as the United States, and implications for China's future can Alho.
What's your name is? Scarlett Johansson? Is that? How do you pronounce her name?
Joe Hanson?
Joe Hansson?
Did you starring as?
She?
Didn't p anytime soon?
When does this? When does his tone come out?
Let's let's call it two and a half years, two and.
A half years great Elizabeth Economy, do not be a stranger her public service to the nation at commerce now ascons to the consul and foreign relations definitive China. Look for writings. I can't say enough about her first effort for Foreign Affairs magazine. Look for that. It's a blistering essay, a to do list for America with China. You did to look at the front pages around the world a foundation to what we do. You're including our newspaper cent I glanced at at least this is a great lineup
you got today. Where do you start?
Yeah, we're starting. This is an interesting article in the terminal. You can check it out for yourself. Florida being hit by this surge in commercial property insurance bills and because of that it's causing a major issue there. I'll get to that in a second. I want to break down the numbers though. In the five year period ending twenty twenty three, costs surged one hundred and twenty five percent. Last year, premiums so twenty seven percent for the second
year in a row. So because of that, more nursing homes they're starting to close down each year. The cost of senior care is starting to rise. Two things are happening. So you have climate change, you have more you know, hurricanes, stronger hurricanes, and then you have the challenge of caring for an elderly growing population. So you have those things starting to collide together. And now because of that, there's
this issue where are the elderly going to live? Because they all like you know, to go down to Florida for the warmer weather, lower tax Yep, that.
Was years ago. Do they want to go down there now? I don't know, because you know, what I've seen is a couple of good articles. I'll give the Wall Street Journal a shout out on this and the exodus of middle class people from Florida. They're going up to Georgia, North Carolina, you know the low country that is.
Yeah, with Florida being threatened by more powerful hurricanes, commercial property insurance costs last year surged at nearly five times at the national pace. That's that's a problem.
It's it's a and if these more theies retirements and also closing down, I mean.
Florida, they can't take all these people that have been coming down. I would think they'd have an issues with schools or housing or water.
I mean, somebody in the last twenty four hoursand I guys had a whole thing on Coral Gables. Yeah, I mean I look seriously at Coral Gables. About seven years ago. It was really I just didn't want to get out of the triple averaged all cash fire. But the answer is Florida isn't Miami, Florida isn't just Coral Gables and hedge funds and you know all the other fans, you know the life of my it's just you know, there's a whole other floor.
Well, the thing is it's hard to find a play. My mom's in Naples, and when she had to move places from one retirement community to another, it was.
Hard to Like, you're on waiting list. I mean it's it's hard to funking place.
So and with more closing down, I'm just okay, you're sitting in Jersey, you're sitting the show.
Okay.
Next, the highest paid CEOs of twenty twenty three. Okay, this is from the Wall Street Journal. They did an analysis more than four hundred companies from my log iq. Okay, so they found that half of the executives made at least fifteen point seven million. That's a record for this survey. Several making abouts more than fifty million. The highest paid S and P five hundred CEO and twenty twenty three goes to broadcoms Hoc Tan, who made one hundred and
sixty two million dollars. There are certain stipulations, though, we had to stand the job for five years, and broadcomes share price has to reach certain targets after twenty twenty five of October to get that full value. Then he was followed down by Polo Alto Networks, Nikesh Aurora and third Blackstones Stevens.
Every single year he's there, Stevens, is it is it?
Is it appropriate to put equitized risk into compensation studies?
Tom, the scam, the however you want to phrase it. The the structures are basically stock based compensation. It sounds good to shareholders. It's based upon metrics that can be you know, managed, whether it's cash flow free, cash flow earnings, whatever. You can run your business to reach those metrics to achieve hurdles. So those hurdles to achieve your stock based
at risk compensation. And that's what Corporate America and the boards and we and shareholders quite frankly and basically signed onto. And that's kind of where we are.
Stock awards that grow in their compensation packages. I'll tell you this one. You heard it come out. Scarlet scarlet Johannes, huge scarlet Johan. Yes, I think maybe Okay got you on that one. She has lawyered up.
She's fighting backs against open AI for a voice that she says sounds like hers.
So the backstory is voice. In September, she.
Got an offer from open Ai Sam Altman to be the voice of this audio feature for the chat Chept, but.
She decided to pass on it.
But then last week open Ai released these new tools that included this voice called Sky, and she says it sounded just like hers. Altman saying the voice is not hers. It was not intended to sound like her. They had a you know, a voice actor before even approaching her. Open Aye did take down that voice it's called Sky, replace it with another voice called Juniper.
But you see this.
What she believes is her voice.
Yes, but it's the point is the battle that you know, the strikes were behind it too.
You know, AI fighting these deep face a.
Lot Hollywood for the next five years.
Oh my goodness.
True and looking at the Bloomberg Bloomberg reporting here that Johnson has waited into legal issues in Hollywood before. In twenty twenty one, the actress sued Walt Disney, claiming the entertainment company broke its promises to release her latest film, Black Widow only movie theaters when it made available for streaming.
So I haven't said this publicly, but Opening I got in touch with me about eight months ago, and they said, we'll pay you not to use your thoughts.
I was like, theyre going to use your foot I don't care.
No, they said, it's so bad.
Ah, we'll pay you to go away.
Thank you.
Last one Red Lobster.
We told you it was filing for bankruptcy, right, But now everyone is flushing in.
They want to get their last meals.
There, even take home a piece of nostalgia, some of the history from there. That twenty dollars oh you can eat shrimp deal in June.
It really killed him.
But people love the affordable price for seafood that they can get there, and that's why people keep going back. They say they like the nostalgia they had, you know, family parties, birthday parties. And actually Elon Musk did tweet that he was unhappy when he.
Found out that they were filing for bankruptcy. He said, too bad.
I have some fond memories from a long time ago eating at Red Lobster. So people have been trying to buy certain things when those stores close out, like some of the kitchen stuff. They want to buy the Lobster tanks. So they want like a piece of the history because they say it's been there.
They go under because they were given away shrimp.
That's no, no, no, no.
It had a lot more to do with it, think real estate costs and labor costs and so on and so forth. But I mean, and then just people. I think their demographic has been kind of pencil a little bit of the margin.
So it did, but that was an eleven million dollar loss for them.
That's Lisa Mateo, Thank you so much. With our newspapers. This is a Bloomberg Surveillance podcast, bringing you the best and economic finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global headquarters in
New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app.