About this episode
Randy Kroszner, University of Chicago Booth School Professor of Economics, and Jeff Rosenberg, BlackRock Portfolio Manager of the Systematic Multi-Strategy Fund, discuss the softer-than-expected October US jobs report . Gene Munster, Deepwater Asset Management Managing Partner and Anurag Rana, Bloomberg Technology Senior Analyst, recap Apple's sluggish 3Q earnings report . Terry Haines, Pangaea Policy Founder, discusses the rift in Washington over government spending and aid to Israel . Get the Bloomberg Surveillance newsletter, delivered every weekday. Sign up now: https://www.bloomberg.com/account/newsletters/surveillance FULL TRANSCRIPT: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best and economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App. What you need on Jobs Day more Newtonian calculus. We'll do that with Randall Krosner of the Bus School, Chicago, of course, the former Fed governor, one of our great and giant financial economists in America. What's the second derivative of the jobs market look like? Randy? When it moves? Does it move? Ah? And that's the key question exactly what you were talking about. What does this pretend for the trajectory going forward? Certainly we're seeing a slowing pace over the last few months downward revisions. And then the question is will this be nice and smooth or will this pretend something that is going to be As at LISTA mentioned before, nonlinear, very difficult to predict any nonlinear moves and things. But I do think it's consistent with a somewhat softening labor market. I think the FED will certainly be heartened by the wage growth coming down a bit over time. I think this takes the wind of the sales of those who wanted to go further. I think it makes it much more likely that we will just hold where we are for a while. But so far, there's nothing in this to suggest that the FED is going to be eager to cut or be even talking about cutting anytime soon. Do you think, Randy is some people are pointing to manufacturing as a point of weakness, that that is a leading indicator in the way it has been in previous times, just because of how many people were hired during the peak of the pandemic. It is certainly one area that there was a lot of bounce back, because of course people want to things, but now people want services, and so the services part is still extremely important. I wouldn't put too much emphasis on any one particular sector. I think you have to look over overall, and as Mike had said, you know, we're seeing a little bit of slow down broadly, but not enormous amount of slow down. But I do think that is consistent with in somestance where the FED wants to go. They want to see the uneployment rate go up a little bit, not too much. They want to see wage growth come down a little bit, but not too much. And I think it's just going to be tougher to be hiring people going forward. Until just a few months ago, real wages were not growing, they were actually negative. Real wage growth was negative. Now real wage growth is positive, so it gives less of an incentive for firms to hire. Real interest rates are now positive. They had been negative for a very long time. That combination is probably going to lead firms to be less eager to hire, less eager to invest, and I think that's going to be leading to what I think is potentially a hard ish but not hard landing. This is an important jobs report. This November report of the October data just absolutely extraordinary. Randy Krasner, thank you so much, Professor Krasner with the Boost School the University of Chicago. If you're not part of the global Wall Street gang, you've got to understand it's hard to look at the Bloomberg screen and frame it out from where we were two weeks ago, which gets us to canes and when the facts change, I change. Jeffrey Rosenberg studied as Maynard Keynes at Carnegie Mellon. He's a black Rock portfolio manager systematic multi strategy fund for all of us. Jeff Rosenberg, are the facts changing? Great question, Tom. You know, the narrative is changing and the facts are driving that. And so Lisa asked the kind of the key question, You know, how do you rally in front of a slowing labor picture? And that's because it's where we are. Equity markets were weaker while the economy was strengthening, and that was really about the rise in the denominator, in the discount rate and the interest rates. So as you ease off the pressure in terms of the interest rates, there's a little window here where the narrative changes and there's relief because the discount raid is expected to be a bit lower, and you see it in the bond market. But that's about horizon and so the near term horizon narrative will shift, but the longer term horizon about that hardish landing that Randy just mentioned. That'll be for future conversations. Right now, the market's pretty excited about lower discount way, Jeff Rosenberg, people would say, Blackrock is part of that wall of money that's out there. Okay, we got a short cover here, a short cover there, I got futures up eighteen. Rosenberg knows the numbers better than me. Are we underestimating Jeff Rosenberg? How many people here are off sides and need to get in and play? Now? Yeah, you know we talked about this after the FMC. You know, the near term volatility is all about technicals and positioning, and so you're going to have that and you're going to see you're going to see those moves. The longer term positioning is going to be about trajectory and fundamentals. But certainly, you know, after a report that you know pretty much convincingly across the board, as you highlighted earlier, you know, this is a report that helps to support the narrative of slowing in the labor markets, slowing in wage inflation, even though that's a mixed shift probably in the AH number, but across the board, especially with the revisions, you know, it just looks like this is coming in slower, and so that helps to feed the near term narrative that you get to the soft landing. You know, as Randy said, whether it's soft landing or hardish landing or hard landing will remain to be seen. When do you go with groupthink and when do you push back? Right? I mean, when do you go with the crowd if sentiment is shifting and you're seeing people go into risk, if you believe that essentially bad news will be bad news for risk acts. Yeah, you know, it's a lot about kind of what's in the looking at what's in the price, and how much cushion you have against the consensus move and where the asymmetries lie. So I think right now the momentum and the sentiment around soft landing is going to be pretty hard to push back against. But you know, as we see successive waves of data, we got a couple more here in terms of before we get to the December FOMC, there's going to be a little bit of momentum here around the easing off of financial conditions, the easing off of tightening from the FED, and I think that's going to provide a little bit of a tailwind for a short horizon trap. And definitely the momentum tends to overshoot, and there is this feeling that this does set the market up for more fragility heading into a print that could be a big surprise on the downside. Jeff, how much is that sort of the play right now is to lean into the momentum, go at the flow, soft landing. Sure you can celebrate, but the music will stop eventually, and each one of these economics prints are going to have that much more heft and importance in markets. Yeah, and you know, the main issue here is really about long and variable lags. And Tom, I know you hate when every time I say that, but it is where do you see that pressure coming in? Randy talked about the pressure in terms of easing off of hiring because real wages are no longer negative, it's more expensive. You talked about funding costs, and maybe there's a little bit of an opening up in terms of the bond market, but I think you got to remember here, these are much more expensive funding costs. And so if you don't have to issue that debt because you've termed it out, you don't want to issue that debt. And so even though the market may be open, it's at a much higher cost. And that lagged effect of tightening in terms of interest expenses something you know, the market is still going to have to figure out where are the vulnerabilities, and there are vulnerabilities to that impact on Bloomberg Television and radio. Jeffrey Rosenberg with us is Blackrack really timely, and of course we thank him forst fed work as well well. He's going to stay with us at right now, I can't do it to complete data check because Jeff Rosenberg is too important. But Lisa, there's some real nuances here. Futures up nineteen continue to advance down, futures up one thirty nine. Can I get to a VIXA fourteen, I'm not there yet fifteen point two six. As Bramba mentioned, folks a two year yield in thirteen basis points, we continue to see lower yields and a higher prices ten year in his stunning eleven basis points. And just you know, outside the box here, I got weaker dollar, I got euros through one oh seven. I've got yen dynamics, but euro yen. What does the Japanese institutions do this weekend? Off what Jeff Rosenberg says? Because I got euro yin one sixty point zero one. If they're not going to act now, Lisa, when are they going to act. That does raise a good question and Jeff to that point, does the move that we're seeing in the US a sigh of relief open up possible monetary disruption elsewhere hint hind Bank of Japan that could be disruptive on the other side. Yeah, I mean that's a big global story and one we've been talking about for a while waiting for. We got a little bit of it in terms of changing the definition of yield curve control, and there's an expectation that there's going to be more. And there's an incredible amount of fiscal stimulus coming out of Japan that is really going to push the BOJ even further. And so that's been a global impact. It's dampening term premium It's part of the term premium steepening story. You know, the refunding you know, certainly is pushed back on that and positioning you know, a bit off sides for that surprise somewhat surprise refunding. But really the big story there is going to be global term premium steepening and that's I think long term going to come back to the US. But near term this is going to be about softish landing and slowing of the Fed, and the market is going to run with that. We're looking right now at two year yields just tanking. I mean, honestly, this is quite a move fifteen bas points nearly from top to bottom in this trading session as people parse through this, Jeff just want to finish up with the Fed's reaction function, this concept of what it takes for the Federal Reserve to cut rates. Right now, there is base into the markets in real time, a sense that they will be cutting rates in much sooner than they're saying. Do you think that's accurate that the bar to cut rates has somehow come in as a result of just the general feeling and the public and the lack of willingness to tolerate much higher on employment rates. Well, it's tricky, Lisa. I mean, I think the reaction you're getting right now pricing out the kind of probabilities, the limited probabilities of the last hike. Right. So, you know, you go back to Wednesday, and you know you remember the question, and you know you talked about we're not even you know, talking about cutting rate now. Obviously the market is because the market is looking forward here. I think you got to see a lot more development on the inflation side before you get there. And then the other the problem we're going to talk about, I think is the reflexivity. I think you mentioned it is that you know, well, we the FED could do less because the market's doing more. But the more the market does more in terms of using financial conditions, the more then the Fed has to do. So you kind of get yourself chasing your own tail around that story in terms of whether they can cut. So it will come back to does the inflation really fall fast enough to that two percent level that gets real interest rates high enough that gets them concerned that they're too tight where they really need to deliver those cuts, and that I think is still way out into the future. And Lisa, where do you get to show where jeff Rosenberg channels George Soros on reflexivity. I mean, there's nowhere else in the world you can have this much fun. Jeffrey Rosenberg, thank you so much for joining us. That's the way it works, folks. The street only focuses on revenue dynamics, and if they're brave, they go down the income statement and they'll find that and then it's what I call concept concept concept China, worry, worry, worry, yep iPhone worry where iPads omg and thank god. Gen Monster, with all of his work on Apple and technology, says, you know, maybe they're rock solid. Maybe they're running this thing for profit. Gene. I saw a record third quarter gross margin. I saw the persistency of services maintained, and critically, I saw cash generation in the gloom of Apple this morning. The second guessing, is there free cash flow growth going to EBB. No, Tom, I think it's just going to flow and flow higher. And ultimately they showed, as you said, some of the most impressive margins, most impressive gross margins that they've ever printed a mikeed environment where component costs are rising, of labor costs, shipping costs, all of that, and they've been maintaining price that shows operation efficiency. That's what drives free cash flow. And you said it right. One big X factor around free cash flow that we've observed with big tech over the last nine months is they all say we're going to be investing more into AI. Tim Cook talks about that but says he wants to do it responsibly, which means he wants to protect margins and do that that is a unique perspective. John from his house, looking down on the Helix and New Jersey emails in and says, is it a time to buy Apple? If there's all this worry about legitimate things like China, is gene monster saying load the boat. So this is not investment advice, but I do think that this is a time to own Apple. And ultimately is you have to play this picture forward for one, two and five years. And what we've seen in the near term is that the importance of their devices in our lives are central and that shows up and effectively. The guidance I think it's misunderstood is for seven percent growth, up from one percent last quarter. So that's the baseline. The second is just the opportunity that they have to continue to sell that engage base more products. And third is that they have opportunities to go into new markets, whether it be spatial computing or what potentially could come out of automotive. And so I think when you put all this together, this is a unique dynamic and I think that this will power shares higher in the years to come. Paul, you know this. I mean you've lived this where you're like, is it a twelve week quarter, thirteen week quarter of fourteen week quarter. I mean it's like death exactly. Hey, Gene, you know, going into the quarter, the pundits were saying, you know, the primary focus is going to be China. So let's approach that from the perspective of competition. Talk to us about the Huawei phone. How much of a competitor is that. How much is a concern about nationalism weighing on potentially future demand for Apple products. So the first is the Huawei phone that's picked up a lot of traction during the quarter, a lot of speculation this was going to weigh on the China numbers, and China was down two percent year over year, at a similar rate that it was down back in March when before the new Wuahwei phones came out. It was down seven percent December of twenty twenty two, and so it fluctuates as the bottom line, China's up and down, and I don't think that the Huawei phone is having an impact. Apple gained share in China in the September quarter, and Huawei may have gained share too, But Apple is gaining share, and so I think that it is not having an impact on their business. And if you look at their China business, and I look at this on excluding the FX on a constant currency basis, it was up four percent. I'm reluctant to do that because I want to give but it's worth noting that China's doing okay for Apple. Yeah, Paul, Code of the day, Aniograna genius. Apple has eighteen percent one eight eighteen percent of the unit installed base. And yet you just heard g monsters say they're gaining share in the training share. All right, let's go to the other side of the income statement. There a gene on the cost side here. I guess you know, when I look at the operations of Apple, I just don't see any scenarre where the d couple from China. Now, they can, I guess, reduce to some extent their dependency on sourcing and manufacturing in China, but they really can't decouple. So did how do investors, long term investors like you get comfortable with that side of the equation. I don't think you do. And I think that I mentioned everything is good in China. I was talking about on the consumer side. I think on the production manufacturing side, it's a different story. And the story is that Apple needs to get out of China or at least reduce its exposure. Right now, we estimate that about forty to forty five percent of their revenue is manufactured in China. Now it's down from sixty percent a few years ago, so they've been reducing their exposure there. But the bottom line is that I don't think investors until that number gets down to twenty percent, I don't think investors are going to rest easy because this is as a geopolitical element to it and is a wild card when it comes to some of the confidence that investor have in the company's ability to produce products to meet this sensational demand and gene does a company have a strategy or are they articulating any confidence that they can in fact get down to that twenty or twenty five percent exposure they do, it's predominantly India. India's right now about two percent of their production, and they've talked about ramping production there and so it'll go tell a lot of other areas, even like you probably will see something in Mexico in the next five years too. Jane, quickly here services up sixteen percent. It's a persistent vector. Do you have a terminal rate on services or does it just grow out, you know, until Frozen eight comes out for Disney. I mean, you know, does it just go out forever. It's gonna keep going out forever because they have pricing leverage. It's not just in what they've raised the pricing with Apple TV Plus, but they raise pricing with the storage. You get those notifications. They raise it at buck a month. You don't think much about it, but that's a fifteen percent increase. And so I think that this business is generally a ten percent growing business for the foreseeable future, which can put three to five years ten seconds. Gene Monster, what's your terminal some of the parts on Apple right now? Some of the parts some of the parts is two forty And I think that's based on as we think about just ultimately what they can earn in twenty twenty five, Gene Munster. Not investment advice, but that's where we're at. It's not investment advice. But Tucker's got his by order out right now. G Muster, thank you so much. Luke Vencha. Well, let's say the show now. You can always do that with anarog Rana. He is truly expert on the cloud and has a partial interest in an Apple computer as well, Anna Regan, why you to explain to the audience how a tech company runs their company for profit versus running it just at the top line. To me, Apple is a profit cast generating juggernaut. Why is that so odd, so strange? Yeah, I think that goes back to the foundation of the company. It really believes in having high margin products. It does not believe in gaining market share. You know, even after all these years, it has only eighteen percent of the unit market share of smartphones around the world. It can completely change that overnight if they drop the price of the phone, but they will never do that because they believe in gross margins more than anything else. Over time, they will gain enough market share in every market. But this is not something that they do is try to gain market share just for the same It's the journey on a rag. As you know. Before we start talking about lower prices, can we talk about the absence of higher prices? Have they lost pricing power? No? No, I don't think so. The problem over here is people are keeping their phones for a longer period of time. If you are keeping it, let's say for an average three point six years before, you're probably keeping closer to four years. So what that does is it just elongates the time it takes for you to refresh your phones or for that bat at any other product. So I don't think it has nothing to do with the pricing power. The Promax is unbelievably expensive compared to the older models, and it's doing very well. Clearly the revenue mixed growth shift is moving towards services and IRAQ. How does that change your approach to value in this company? Yeah, I mean it has been a true surprise to see that number grow still in double digits. I expected that to be back into the high single digits by now. It has a high gross margin. It has a seventy percent plus gross margin compared to products, which is in the thirties. So over time, when you see the revenue mix shift towards services, you can expect the overall company gross margins to trend up inch, you know, inch by inch growing up, and we have seen that already in the last few years. Anor do you think that analysts are overplaying or underplaying the declines that we saw in China? I think you have to sit down and think what kind of company this is and I think this is really evident, and you know, I've discussed this with Tom and Paul many times, that this is not a company that's going to grow sales in double digits. This is at best, at this point, you know, mid to high single digit company. And I think people are getting used to that fact. Yesterday when they guide it for December quarter, which the estimate was it's going to grow about five percent, they said about flatish sales, and that's when the stock drop. I think people need to come to that point that you know, refresch cycles are going up and it's going to be a time before things are going to grow at that same pace, which then leads to a question of how much growth, how much future growth is baked into the valuation of the company that's seen a thirty seven percent rally. You're todate, Yeah, I think valuation is something that we talk about a lot with investors, and you know, sometimes you have to really ask yourself is this a technology company or this is a consumer stables company, Because if you take the heart of a consumer stables company, you know, something like a Coca Cola or a Costco, then you see things with a very different lens because those companies also are not growing, you know, eight to ten percent top line. Ana, I want to look at something beneath the radar. This week, it's a Friday, and in the world of Microsoft is a different Friday. It's a copilot Friday. What is the importance of this announcement that Microsoft's making where we actually do AI with a modeled marketed program for global corporations. What does co pilot mean to Microsoft? So, copilots is basically an AI tool that goes with your original software package. In the case of Microsoft, it's launched that with their Office Suite, which started setting yesterday. It's about thirty dollars per user per month, and they're hoping that, you know, the serious worker in the office that's probably somewhere in one hundred and fifteen million to two hundred million people around the world that currently use the Office Suite will opt some portion of that will opt for this particular feature to help gain productivity. Copilot can also be used in writing software. So it is just a tool that everybody has. They are the first ones to come out with it at such aggressive face. What's your prediction on this? I mean, come on, you've nailed the cloud. You got a cloud view out three years or five years, which is just absolutely remarkable. What is your prediction on how copilot will will do? I think, and I argue it's going to be very slow and steady because the thirty dollars per user, you know, per month is a very steep price. We think, you know, adoption rate is not going to be more than three to five percent in the first year of coming out, so you know, perhaps at two to three billion dollar upside on that. On the on the software coding side of it, which is getthub co Pilot, we think the adoption rate is going to be very high, you know, close to seventy five percent, because I don't see any developer out there that can afford to right code without this tool right next to them. And Rex, thank you, sir. In Washington, Terry Haynes joins US now founder of pengea policy Terry with great cheer for the exhaustion of our secretary straight. Does Shuttle diplomacy for Blincoln work like Shuttle diplomacy worked for Kissinger? I think it's very different for a couple of reasons, one of one of which is kind of bubbling under here. You know, Blincoln's mission this time, as opposed to the last few times, is designed to try to get to try to convince the Israeli government of some kind of pause or humanitarian something like that. And it calls into question a couple of things. It calls into question the degree to which the United States continues to support the current Israeli government. The Biden aids are running around Washington briefing against net Nyau right now. And Secondly, it calls into question whether or not and to what extent the US still supports the Israel's war aims in Gaza, and that's a concern. All this also complicates the Israel the Israeli aid package, because Congress is not going to pass the Israel package if they don't clearly understand what administration policy is. So we've got a lot of a lot of problems here that complicate Lincoln's mission. Terry, unfair question, but I got to go there. It isn't the zeitgeist end of the weekend as well. Then you were there with Lord Kitchener and Mark Sykes when they divided up the Middle East after World War One. I understand that all of a sudden we're talking about a partition of God, we saw a partition of Vietnam, a partition of Korea. Is that the easy way out here is whatever this word means, A partition of the Gaza strip. Yeah, there's a partition, and you know, it's kind of international administration or all the phrases that go together. These are phrases that go back, as you quite quite rightly point out to post World War One League of Nations mandate style governance, and and they tend to bury the harder realities, which are then the nature of the terrorist organizations, the nature of their funding, and you know what sorts of proxies they are, and they tend to bury, you know, kind of kind of regional responsibility for the problem. And all those are going to have to be dealt with, and you know, we haven't even started to deal with any of those yet. Terry, what do you make about the strife within the Republican Party stemming from Senator Tuberville of Alabama, this idea that he will stall with the affirmation the confirmation of some of the military promotions at a time of expanding conflict overseas well. You know, I'd give you two points about that. One is that it is obviously providing some strife within the military. And at the same time, the Senator says directly, and to my knowledge, has never been countermanded, that he wants to have a dialogue with the Department of Defense about all this stuff and come to some sort of resolution, and that he's not got it. What I think is going to end up happening is this gets resolved somehow in the defense spending legislation that comes up by about the end of the year. One way or another, this is going to get dealt with in the next two months. There was a resolution that passed the House offering support to Israel, but also tying it to cuts to the IRS, which some have suggested would actually cause a bigger deficit because it would reduce tax revenues that the US government gets. Does this progress the issue or actually push it back in terms of the debate, Well, two things. One is that the you know, only in Washington, would the I R S get beyond being rough here, would get eighty billion more dollars and then have it cut by fourteen and have that considered by anybody to be a cut in IRS spending. You know, But there you are Secondly, I think the funding is the help is really is funded is almost beside the point. The bigger problem that we have right now really is this. You know, you ran Admiral Kirby and your lead in Admiral Kirby says that the administration has four priorities and they all need to get dealt with together. Well, these are Biden's priorities. These are Biden's foreign policy. Biden's going to have to get all this stuff done and in a way that funded properly, and right now, whatever else Secretary Blincoln's doing. The apparent change in Biden policy towards Israel is making that more difficult because now Congress doesn't understand exactly what Biden's foreign policy is. Hey, Terry, great to get your input as always, Terry Hanks there of Panchaea policy. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern. I'm Bloomberg dot Com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always I'm the Bloomberg terminal. Thanks for listening. I'm Tom Keen, and this is Bloomberg See omnystudio.com/listener for privacy information.