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Bloomberg Audio Studios Podcasts Radio News this is Bloomberg Business.
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Week Daily reporting from the magazine that helps global leaders stay ahead with insight on the people, companies and trends shaping today's complex economy. Plus global business, finance and tech news as it happens. The Bloomberg businessweek Daily podcast with Carol Massar and Tim Stanvak on Bloomberg Radio.
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C
Back to Netflix where shares down 5 1/2% as we speak, the company forecast revenue for the full year. The guidance met the average analyst estimate. There were some questions though about profitability. The company out with a statement essentially saying that and this is the headline in the this is the way the letter begins, Carol. Operating margin of 28% was below our guidance of 31 and a half percent due to an expense related to an ongoing dispute with Brazilian tax authorities that was not in our forecast. Absent this expense, we would have exceeded our Q325 operating margin forecast. We don't expect this matter to have a material impact on future results.
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B
All right, so let's get to it with our own Bloomberg Intelligence Senior Media Analyst Geeta Ranganathan. She's at by headquarters in Princeton, New Jersey. Take it away. So tell us what we need to know and why is the stock really down? Is it because of that one time charge.
- [02:50]
F
Absolutely, Carol. So operating margin is now the new metric by, you know, how investors kind of look at this company. We've seen just a tremendous, tremendous increase in the way that they have kind of grown their profits, in the way that they've expanded their margins. It was up over 600 basis points last year. We were really expecting them to actually exceed their guidance for both this quarter as well as to take up guidance for the full year. So this kind of really throws cold water and all of those expectations and overall kind of looks really, really underwhelming.
- [03:23]
C
What's the, what's the biggest thing challenging the company right now?
- [03:28]
F
I mean, the biggest thing I think, Tim, over the past few months has really been, you know, the growth of AI and whether that's going to be a headwind or a tailwind for Netflix. I think we've all kind of finally come to the conclusion, at least in the near term, that it's going to be more of a tailwind. We've seen Netflix kind of really lean into AI, whether it's using a good user interface, whether it's improving that or using, you know, AI for, you know, even more, more and better content creation. So I think definitely in the near term, don't expect it to be much of a negative. But then, you know, I think over the longer term that's going to definitely be one of the concerns out there for right now. I think what investors are really looking to and we need guidance, more guidance from Netflix management on this. There really wasn't much spoken about this in the newsletter was, you know, anything related to advertising. They talk about doubling their advertising revenue, but again, there are no concrete metrics. There was update in terms of monthly active users. The last time we got an update from them was in May. We really don't know what the number of subscribers are on the, on the ad tier or even what the revenue is. And I think that will definitely give investors some, you know, cause for concern.
- [04:42]
B
Yeah, they talked about ads, I feel like in the press release. But yeah, it sounds like we need a little bit more concrete. Hey, 30 seconds. Geeta. Warner Brothers discovery. Do you think Netflix should do something and forgive me for just asking for you to be brief.
- [04:58]
F
Yeah, I know this is a little bit of a head scratcher, so I really don't think this is a make or break for them. Carol. Yes, it would be nice to have. Do they absolutely need it? No, not at all. So again, there's a lot they can do with it, especially the studio. Lot and you know all of the ip. But again, I don't think it's do or die.
- [05:14]
B
As always, looking forward to reading your research. That comes on the terminal a bit later today and into tomorrow. Geeta Ranganatham thank you so much. Bloomberg Intelligence Senior Media Analyst with a breakdown and what you need to know about Netflix stock down about 5.6% in the aftermarket.
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C
Stay with us. More from Bloomberg Businessweek Daily Coming up after this.
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C
President Trump's administration is involved in talks for a U.S. company to access one of the world's largest untapped deposits of tungsten. This is a metal used by the Pentagon to make ammunition, projectiles and other weaponry. This crossing the Bloomberg terminal just a little earlier today.
- [08:47]
B
Yeah, it's really interesting, right? We continue to see that rare earths share space move as a result of these headlines coming out from the White House. Keep in mind, as Tim mentioned, the news yesterday, President Trump signing that landmark pact with visiting Australian Prime Minister Anthony Albanese to boost America's access to rare earths and other critical minerals. It's an effort to counter China's tight grip on the supply chains of key metals. Now, the two governments will jointly invest in a swath of mines and processing projects in Australia to boost production of commodities used in advanced technologies, everything from electric vehicles to semiconductors and fighter planes. It goes into a lot of stuff.
- [09:26]
C
Tim, in a story on the Bloomberg, our next guest says, quote, this is the most significant bilateral minerals minerals cooperation we have seen between two major Western countries. Here to explain why is Graceland Baskin. She's director of the Critical Minerals Security Program at the center for Strategic and International Studies. She joins us from the Washington, D.C. bureau of Bloomberg News. Graceland, welcome back to Bloomberg Businessweek Daily. It's always great to have you on the program. I do want to start with the bilateral mineral minerals cooperation that we are seeing between the United States and Australia. Why is all of this happening right now?
- [10:02]
H
It's so great to be back. You know, this is a really big deal. And it's a big deal because this is minerals cooperation that's going not just from conversation. And we've been doing years of talking about minerals to actually putting the resources in to develop really strategic projects. I mean, where we've agreed to commit $1 billion each to be deployed within six months on strategic projects. And this could be Alcoa's landmark gallium refinery. Keep in mind China has cut us off of gallium, really crucial material for semiconductors. And this gallium refinery is going to produce 100 tons a year in Western Australia. That may not sound like a lot, but remember the US only uses about 20 tons of gallium a year. So it's actually really significant to Australia announcing equity in a rare earth project there. But what we've also seen is that the first time that these countries are making a concerted effort to counter China. So you may have seen that both countries have committed to preventing Chinese acquisitions of new projects, both within their own countries but also using diplomatic instruments in other countries. We've seen a commitment to using price support. Price support. So really when you take the summation of all of these different efforts, we're really seeing rubber hit the road with a country that has enormous geological potential. Fossil we're talking about 40 minerals that the US identified as critical. Incredible financial market and deep technical expertise.
- [11:21]
B
Is this all bottom line about putting kind of a hold on China?
- [11:27]
H
This is about countering China from, from a supply and a demand perspective. You know, let's be totally honest, this year was a wake up call for the whole world until now. A lot of the export restrictions on critical minerals are really targeted at us here in the United States. But the multiple rounds of restrictions this year actually hit companies around the world. Like these recent rare earth export restrictions. Australia is still on the other end of them. So what we're really doing is we're uniting with our allies. And again Australia being the one country that has fought beside us in every war since 1918, right. To say, okay, if we work together we can actually start to counter China in a meaningful way.
- [12:04]
B
Very then significant again because it feels like we have gone through a bunch of months where the US is like we don't need you, we're going to do it alone. We're going to build up some stuff, supply chain, so on and so forth. At least this is coming from the administration to do stuff here in the United States. This feels like it's very significant the US saying wait, we actually need to have global partners on this. And this is kind of a big message. Again I'm going to point out to China and really the world at large.
- [12:30]
H
And this is a really important message because I want you to understand the historical relationship of Australian mining. Historically Australian minerals have been flow have gone to China for processing. So it's a highly vertically integrated industry between these two countries. So this was a pretty big disruption. You know, if we roll out restrictions on China, no one really bats an eye. But for Australia, where those minerals go to China, this is a really important realignment with us in breaking from what has been their historical trade relationship as it relates to the mining industry.
- [13:02]
C
So I guess the question that we have is about the US Companies that are a part of this. And we've spoken to quite a few of these. We spoke to US Antimony yesterday, Gary Evans over there of critical mineral, not, not a rare earth per se, but in the same space and with the idea that, you know, they're getting a government contract, not investment from the government, but a government contract to actually buy antimony for Defense Department purposes. But I'm curious about US Companies role and if there is such an opportunity for many different US companies right now to take advantage of this. And look, we have an investing audience. They want to know which are the companies that are best positioned right now to be in a place where they can be the ones that benefit from this increased need for critical minerals.
- [13:52]
H
So one of the big parts of this, a new framework agreement is that they will, we will strategically together identify priority projects and companies. One of the early leaders here is Alcoa. Again, Alcoa is a Philadelphia based company who is now building this gallium refinery through support from the Department of War and it was announced by the US and Australian governments yesterday. Again, I want to take you back to the fact that gallium is a no brainer of a priority for both sides because it was a commodity that China cut us off from earlier this year. So really when we start to look at what are, what are the winners going to be? I mean, rare earths, obviously we're going to see Linus being really important, but broadly speaking for some of these minor metals, which antimony is one of them, we've seen tungsten emerge in the news quite recently. These minor metals are going to be the ones where we're highly vulnerable and where we do not always have the geology to make it work and where Australia often does.
- [14:49]
C
We both have questions, but Carol, you go, you go first.
- [14:52]
B
Well, I want to go back. Forgive me for bouncing around because it's just sometimes, you know, the brain is a little slow and things settle in. But Grace, we. Grace, what I want to ask you is going back to, as you said, a big deal for Australia to do this because they have been so intertwined with China when it comes to Australia exporting large quantities of raw minerals and then China processing. I mean, this has been a very important trading relationship. And so we know US and China has been antagonistic for a while, but to have them do that, that's really significant.
- [15:28]
H
It's extremely significant. But you've been seeing that growing tension for probably the last seven years. Remember that Australia was the first country to ban how? Way back in about 2018, they also passed legislation to prevent foreign interference in their higher education sector. More recently, there was a $1.25 billion Australian loan that was given to build the Iluka refinery for rare earths. One of the T's and C's of that was that offtake had to go to allied countries. But now what this really does now, I mean, is it starts to potentially re architecture supply chains in a meaningful way. Australia, for example, is the biggest lithium producer in the world. They produce about close to 60% of the world's lithium. Over 90% of that actually goes to China for refining. If that didn't happen, China would lose its grip on lithium ion batteries industries. So what this deal really stands to do is re architecture supply chains, not just from mines, but down to the manufactured good.
- [16:29]
C
So if we think about this in the context of the leverage that China could still have, even after the US makes deals such as this and deals with allies, where's that leverage?
- [16:40]
H
The leverage is still there in the short term with rare earths for sure. No doubt.
- [16:43]
G
Right.
- [16:44]
H
Although Australian, like Australia's Linus, was the first company to separate heavy rare earths earlier this year outside of China. But it's going to go beyond that. There was a line in this framework agreement that actually said that the US and Australia will work with other international partners on price support mechanisms. So this conversation is likely to extend beyond these two countries to the G7 later this year to think about how do we scale these partnerships up even more. So really what we're starting to see is an economy of CP scale that we're creating for the minerals and the processing capabilities. I mentioned that Al Capoid deal earlier. That Alcoa deal is also getting Japanese financing. It's actually a tripartite effort. So an example of how this, this bilateral is going to set the stage for what's probably going to be a much bigger play of countries to counter China.
- [17:33]
B
How do we figure out, you know, especially as we see investors, you know, pushing up shares on all of these stories about the relationships, the investments by the US government in various critical mineral companies, how do we figure out which is Investor speculation, you know, kind of chasing a trade. Do you think it's misplaced or is it a bit irrationally exuberant? Or you think these investments, these relationships, this is the build out, it's happening and with good reason because the demand is going to be there.
- [18:07]
H
The broader build out of the sector when it comes to mining being much more strategic, is absolutely, absolutely here to stay. And it's here to stay for a couple of reasons. One of them is we are diversifying away from China. Right. But the second thing we have to remember is that certain of these commodities, I need a lot more in objective terms, I need a lot more copper to electrify, to build data centers, to build defense technologies. So it's also the growing demand. So I'd say the larger macro trend in prioritization is here to stay. And again, remember that the US Australia relationship, it's a continuation. It was being built under the Biden administration as well. But what, you know, the other thing though is, you know, there are going to be fads that come and go when it comes to specific minerals. There's no doubt. Right. Some things are going to hit media attention, certain deals are going to hit media attention and they're going to fall away. Not everything that this government is looking at is going to succeed, but what we are hoping is that the right number of them succeeded seed to create a more resilient supply chain. But there are a lot of coming and going.
- [19:09]
C
Yeah, certainly the relationship with Australia is on our radar right now given the visit of the Prime Minister. But I'm wondering what other countries the US could ally with that would be able to offer some sort of countermeasure to China and its capabilities.
- [19:26]
H
So countries that I'm looking at with interest, Japan and South Korea, particularly because of their midstream and downstream capabilities. I'm looking at the uk There have been, you know, there's been some interesting acquisitions there. Lease, lease common metals by usa Rare earths. That's an interesting one. The EU again, it's an interesting jurisdiction. There's some, there's some minerals, I mean, things like Solvay for their permanent magnets in France. An interesting one again with some conversations happening with the US as well. So there's certain pockets of interesting transactions happening from a global north, obviously from the global South. Brazil is still a very interesting jurisdiction to us because they have the heavy rare earths that can come back and be separated here in the United States.
- [20:08]
B
Everything we need to know. Thank you. Thank you. Dr. Gracelyn Bascorn, Director of the Critical Mineral Security Program at the center for Strategic and International Studies.
- [20:17]
C
Stay with us. More from Bloomberg businessweek Daily Coming up after this.
- [20:26]
E
This is the Bloomberg Business Week Daily Podcast. Listen live each weekday starting at 2pm Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa play Bloomberg 11:30 we.
- [20:44]
B
Wanted to talk about what is going on between the US And Argentina. We did mention that Argentina's peso we could do a fresh record. And bonds gave back most of their gains as U.S. treasury Secretary Scott Bessant's latest boost to the nation proved short lived. The U.S. treasury signed an economic stabilization agreement with the Central bank of Argentina. Again coming from the Treasury Secretary Scott Best, and he put that post out on Tim.
- [21:09]
C
The secretary characterized the Treasury's $20 billion swap line with the crisis prone nation central bank as a quote, economic stabilization deal. That he said the agreement is, quote, a bridge to a better economic future for Argentina, not a bailout. We have a lot of questions, Carol, and so many one voice we wanted to get on the program today.
- [21:27]
B
He has no idea. But we were like, no, we're going to talk to Eric. We need to talk to Eric. Eric Schatzker is who we are talking about. He's Bloomberg New Economy Editorial director. He's covered numerous global financial market cycles and crises. He's interviewed various Latin American leaders, including Venezuelan President Maduro, former Argentinian President Mauricio Macri. Hopefully I'm saying it correctly. I probably am not. He also had the September cover story on Secretary Bessant for Bloomberg businessweek. You are the voice we wanted to talk to. Thank you.
- [21:54]
E
Flatter me.
- [21:55]
B
No, I speak the truth. We speak the truth. Why is this happening now and why Argentina? Why does the US Want to do this?
- [22:02]
E
Well, so there's I think we can unpack this in three ways. One is why is the US Doing this? The second is what exactly have we got here? And the third would be how might it all end?
- [22:16]
D
Perhaps in tears.
- [22:18]
E
I'll take on the why. And this actually goes back to that story you mentioned that I did about Scott Bessant, the Treasury secretary for Bloomberg Businessweek in September. I spoke to the Treasury Secretary back in late July and at the time he told me that one of his overarching goals in office as the secretary of the treasury was to quote, unquote, lock in dollar supremacy. And I asked him, well, how do you do that? And he said, and I didn't appreciate the Significance of it at the time was by facilitating swaps through the Treasury Department, as opposed to the way that swaps have traditionally been facilitated, which is by the Fed from central bank to central bank. Now, there is precedent for this. The Treasury Department did that from Mexico back in the mid-90s during the peso crisis, and it helped, and maybe it'll help Argentina. But it appears that under the Trump administration, the government's focus is on, again, cuts to the why? It's not just about locking in dollar supremacy. It's using the dollar as an economic tool to support countries with which the United States feel it has some kind of ideological kinship or some kind of trading relationship. It's not like Argentina has been one of America's major trading partners. It has not. The amount of bilateral trade that goes on between those two countries is a fraction of what it is with the United States and Mexico, or the United States and Canada, or even the United States and Europe. So in that respect, it's unusual. I think if you think about it, though, in terms of locking in dollar supremacy and using the dollar as an economic tool and a tool of geo strategy, if you will, it begins to make a little more sense.
- [24:05]
C
You said that there are three different elements that we could, we could talk about with this one is how. Another one is how this could end. And I want to.
- [24:13]
E
Well, let's talk about the. What is it that we're actually talking about here? You mentioned that the Treasury Secretary today talked about it as a bridge to a better economic future and, and not a bailout. And not a bailout, but the operative word there is bridge, because bridge means something from here to there. In other words, what's the there? This is a bridge until when, right? Is it a bridge until after Argentina's midterm elections on the 26th of this month, Sunday? Is it? Trump seemed to suggest as much the other day when he said, well, you know, if Milei doesn't win, we'll get rid of the swap line. So that's one possibility. Is it a bridge until Argentina decides to abandon the peso peg, which Stern Egger, the Minister for Deregulation and State Transformation, said was in the cards just last week when I interviewed him here in New York? Is it a. Is it a bridge until the $20 billion runs out, which might happen because Argentina was burning through a billion and a half dollars worth of foreign currency reserves a week, a billion and a half a week before the swap line was put in place? Is it until Argentina's economy can eventually support an exchange rate at this level. It certainly can't right now. Or maybe is it a bridge until, I don't know, President Trump just loses patience or President Milei does something to annoy him.
- [25:37]
B
It's a lot.
- [25:37]
E
Any of those.
- [25:38]
B
It's a lot of questions. It's a lot of, like, possible scenarios. You know, Bloomberg report out yesterday that Jamie Dimon is visiting Argentina this week. Kind of an unprecedented show of support for the government at the mean. At the same time, we've had, I think it's the Wall Street Journal reporting that banks are having a hard time kind of getting around this without some kind of guarantees.
- [25:56]
E
Nobody knows. Nobody knows what Argentina is pledging as collateral. In fact, nobody has seen the agreement to our knowledge.
- [26:04]
B
Right.
- [26:04]
E
The banks themselves, which are playing intermediary roles here, don't know what Argentina has agreed to pledge, you know, so that the United States isn't just on the unlimited losing end of a bad trade. And that is possible here. Right. The big difference between what's going on here and the comparison that everybody wants to make with the trade that broke the bank of England that the treasury secretary was involved in when he worked for George Soros and Stan Druckenmiller back in the early 1990s, the big difference here is that then the UK had nobody backstopping them. Now Argentina has the United States back backstopping it. But as I say, nobody knows until when. Nobody knows if there are any mechanisms that have been put in place to make the U.S. taxpayer, if you will, whole. Should the Treasury Department sustain losses on this trade. I've heard that Argentina's uranium reserves may be involved, that some kind of preferential access to Argentine markets might be involved. Who knows? It's just, it's so, it's like, it's like a ready, aim, fire, you know, or a fire, you know, ready, aim in the sense that the swap line was put in place and then it appears, since no document has surfaced yet, that all of the mechanics behind it are being taken care of after the fact. I don't know. But my point is that if anybody knows, he or she hasn't put up his hand to say, hey, I know.
- [27:34]
B
Yeah.
- [27:35]
C
The treasury secretary, as you mentioned, described this as a bridge to a better economic future for Argentina. Not a bailout. Is the not a bailout part a fair way to describe it, in your view? Is this not a bailout?
- [27:45]
E
I think a bailout is in the eye of the beholder in some respects. It's unquestionably a gift to President Milei ahead of these midterm elections. It isn't working for the time being. Right. The peso weakened today to a fresh low, and Argentine bonds, which had gained earlier on the formal announcement of this agreement, have since given up those gains and I think are posting losses. So it would appear to be a gift in the sense that the peso exchange rate or the peg to the dollar is unsustainable. Milei doesn't want to allow the peso to float freely. He wants to maintain this peg so that Argentine inflation is under control. A critical, critical economic consideration going into the midterms. So even if Argentina if, like, there's no question, if the peso peg were to be abandoned today, it's not like inflation would. Inflation would show up immediately, but it wouldn't show up in official statistics. Excuse me. For some time to come, but Argentines are so conditioned to this.
- [28:50]
B
Right.
- [28:51]
E
They know what would happen.
- [28:53]
B
Again, I want to go back to. And I know we've got a couple more minutes here, but Eric, the US Involvement, and again, it may be a relationship President Trump wants to have with the president of Argentina. But, I mean, Bloomberg editors wrote an opinion piece. Why isn't the IMF coming in here? And the other question we as a group have been trying to figure out, is it also to kind of keep China at bay? Is there that aspect as well?
- [29:17]
E
Argentina also has an existing $18 billion currency swap with China that goes back well before Schwarzenegger was the central bank governor. I think it may go back to 2015 and perhaps even before that. There has been some talk that one of the conditions behind, or at least one of the underlying conditions to this swap with the treasury would be that Argentina somehow winds up that previous swap agreement with the Chinese. Who knows as far as why the IMF isn't involved? I think the easy answer to that question is how many months would it take the IMF to get its act together? This was something that, this was a perceived need on the part of the Argentine government, the Malay government, heading into these critical midterm elections that I'll repeat, are just five days away.
- [30:05]
B
Sunday. Right?
- [30:05]
C
Right. Yeah.
- [30:06]
E
There's no way, there's no conceivable way that the imf, in my mind, given everything that we've observed in our careers and everything we know that precedes that, there's no way that it could have possibly acted with that much haste.
- [30:20]
C
So before we let you go, how could this end? What could it mean for the US if it's a bad trade?
- [30:26]
E
Well, if it's a bad trade.
- [30:27]
F
It could.
- [30:28]
E
I find it hard to believe that the United States would put itself in a position to ultimately lose money. But it may lose money on paper and have to recover that money. Just like somebody who has been left holding the bag on a bad debt by liquidating some kind of Argentine assets or somehow, you know, turning preferential access into Argentine assets or Argentine markets into value over time. That wouldn't look good. And again, it all depends on how long this bridge is. We have seen in the credit markets that you can paper things over for an awfully long time before either things reflate and you're able to cash out at par, or you have to ultimately take some losses. So it's not like that's necessarily going to happen next week. It's not like it's necessarily going to happen next month, next quarter, even next year. But if Milei doesn't succeed, and if the Argentine economy doesn't continue to revive and inflation doesn't remain under control, it's hard to see how the speculative pressure against the peso won't continue. And we may even see, I don't know. We can only speculate here that $20 billion may not end up being enough.
- [31:45]
B
We just got schooled by Eric Schatzker. In a good way. In a good way. Thank you so much, Eric.
- [31:49]
E
A pleasure.
- [31:50]
B
So appreciate it. It's what we needed to know. Bloomberg New Economy Editorial Director Eric Schatzker Stay with us.
- [31:57]
C
More from Bloomberg Businessweek Daily coming up after this.
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You're listening to the Bloomberg Businessweek Daily Podcast. Catch us live weekday afternoons from 2 to 5pm Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app or watch us live on YouTube a little bit higher.
- [34:59]
B
Call it little change on the S and P. Same story for the NASDAQ 100 Dow that we've been talking about hitting a record today up about half a percent. But does anybody really care? Why the Dow? Oh, about the Dow side.
- [35:12]
C
I think people today kind of care about gold and silver.
- [35:14]
B
Well, yeah, which is plunging.
- [35:16]
C
Saw their steepest sell off in years. Investors locking in profits on concern that the recent historic rally in the precious metals had left them overvalued.
- [35:24]
B
Yeah, well, you know, they've had quite a run. So maybe you're just like is that it takes the money off the. I don't know. Let's see what our guest has to say.
- [35:30]
C
Andrew Kryst, co CIO of Crescent Grove Advisors They've got about $5 billion in assets under management. The company based in Milwaukee. He joins us here in our Bloomberg Interactive Broker studio. Welcome back. How are you?
- [35:41]
D
I'm great.
- [35:42]
C
Good to see you. I do want to start with the precious metals and the idea of, like, what Carol said.
- [35:48]
B
Does anybody really care?
- [35:49]
C
Well, you were talking about the Dow, not precious metals.
- [35:51]
B
Oh, yeah, yeah.
- [35:52]
C
When you said that.
- [35:52]
B
That's right. I do. People just. Sorry.
- [35:56]
C
It's okay.
- [35:56]
B
It's, it's, It's Tuesday.
- [35:58]
C
Come to me for more tips on what Carol said.
- [36:02]
B
So, so is it just they've had such a run? Like, why not take some profits a year?
- [36:06]
D
Like, at this point, I think that's it. I mean, it's, it's. It went parabolic, essentially.
- [36:10]
C
Right.
- [36:10]
D
And you've seen an incredible price move over the last several weeks. Even so, yeah, why not sort of unwind that momentum trade somewhat, take some chips off the table. But I think the bigger picture is still intact. This idea of the debasement trade, you know, concern about deficits, concern about USD assets, a rotation from, you know, central banks around the world away from USD into gold. That all still holds true.
- [36:33]
B
No joke, Right? Like it's happening and it continues to happen.
- [36:35]
D
That's right. This looks way more like a technical kind of, you know, just a little bit of a correction.
- [36:40]
C
But something weird happened yesterday and that was that. And it's been happening. You have some of the havens move higher, like gold, for example, but also risk assets move higher on the same day, like the S&P 500, up more than 1% yesterday. What gives?
- [36:56]
D
What gives?
- [36:57]
C
Yeah, that's weird.
- [36:58]
D
It is a little weird, but I think it's the marriage of the debasement trade, if you want to call it that, where you've got a scenario where you've got real concern about the fiscal and monetary backdrop, potentially debasing the US dollar so people then flood into gold as sort of a, I guess, a manifestation of that trade. But then along the same lines, if you've got sort of a reflationary element to fiscal policy, monetary policy, you want assets that benefit from higher nominal growth, which effectively is telling you higher inflation alongside a reasonably good economy, equities are going to stand to benefit from that as well. So I think there's a. Just a general flow into those asset classes that benefit from a more sort of reflationary or debasement type of trade.
- [37:40]
B
But this continues. What could change it? I don't know. A new administration, us getting its fiscal house in Order. Although I don't know, I feel like that ship has sailed or we've been talking about it for a long time, but it does feel like at some point we're going to have to get our house in better fiscal order. But like what changes that?
- [37:59]
D
Yeah, I think the thing we would look at the reckoning comes when the ten year breaks loose on the upside. If you get the bond vigilante ism kind of returning to the markets. But until then, I think if you've got a more dovish Fed and we'll see where, you know, the next Fed chair is, is that comes to fruition next year, perhaps even more dovish. Right. I mean, I think you run the risk then of inflation, which sort of ties into all these themes on anchoring to the upside certainly stuck right now at around 3% on CPI. We'll see what it says on what the report comes out to be on Friday. But if we're stuck at that level and then we're sort of putting stimulus into an economy that's reasonably healthy.
- [38:34]
B
Right.
- [38:34]
D
You know, then yeah, you run the risk of re triggering inflation to the upside and then you get again the bond vigilantism, the term premium building back into the 10 year, pushing back towards 5%. Then you get the cascading effect like we saw in 2022, almost higher bond yields, perhaps lower stocks. And then all this stuff sort of unwinds alongside that. You're the big risk.
- [38:54]
C
You painted a picture of something that's not so great.
- [38:57]
D
I'm not saying that's going to happen because I think the base case for us is that the Fed stays more dovish. The Fed is focused on growth at this point in the labor market as opposed to inflation. So it's going to take some time for inflation to do.
- [39:09]
B
That's a mistake.
- [39:11]
D
We think that the labor market is healthier than the Fed and a lot of people are giving it credit for it. We think it's more of a normalization phase than it is an outright fissure.
- [39:18]
C
What data are you seeing that show that?
- [39:20]
D
Well, I think if you look at continuing claims, for instance, as a percentage of the labor force still, you know, it's ticked up modestly, but it doesn't look overly concerning. If you look at job openings, it's come down significantly off the high, but it's still well above pre pandemic levels.
- [39:33]
B
I'd like to look at continuing claims but we haven't had data on a few, few weeks. Oh, just saying.
- [39:37]
D
The last numbers we got on that looked Reasonably good. But no, you start to paint a picture. Prime age, you know, labor force participation, prime age, employment rate still in the mid threes. There's some reasonably good data points out there to suggest that again, what we're seeing is more of coming off the boil, a normalization of these levels as opposed to an outright sort of break in the labor market.
- [39:57]
B
Why does it feel so lousy for so many?
- [40:00]
D
Well, I think there is a sort of K shaped economy element to where you do have the higher end sort of consumer still spending in a really robust way and supporting retail sales, where I think you're seeing this sort of insidious level of inflation that continues to eat at the lower end of the consumer.
- [40:15]
C
Yeah, it's pretty wild. I mean we every few months talk to people who are executives at private jet firms and for the last couple of years what they've said to us.
- [40:21]
B
Is basically definitely the higher end of the case.
- [40:24]
C
Yeah, but it's business has never been better. Yeah, and there was a new one like a new startup private jet firm announced last week, got some private equity funding. I mean there's like the people who are doing well, are doing very, very well.
- [40:38]
D
Yeah, I think that's, that's continued to be the case. You know, we kind of saw that play itself out post Covid and has just become even more exacerbated, I think over the last several quarters and years now. And I think that sort of continues unabated at this point. But that said, I mean, if you look at median wage growth, if you look at some other numbers that would suggest, you know, sort of just wage growth more broadly, you're still seeing positive real wages. So I think again this goes back to the idea of is the labor market fundamentally broken at this point? We would say no. So if that's the case, we've got a reasonably okay labor market. Let's just say, let's assume that for a second the Fed's cutting, they're adding stimulus to an economy that's okay, reasonably healthy. You know, that to us then suggests that nominal growth trends higher. Inflation probably trends higher alongside that. So that's where all of a sudden you start to say, is the 10 year appropriately priced at 4%? And that's where you get the concern that could play out over the next several quarters about bond yields ticking back up.
- [41:34]
B
I want to go back though to the case shaped economy. And forgive me, I mentioned this before, a sister of mine, like I shared like a podcast and it's this really rich guy, I think he's ever in Europe or something, but says like, I don't want to be this rich guy in a poor economy. Like what are the implications? We can talk about records on Wall street, but what happens when there are a few rich folks in what is a more generally poor economy? That can't be good.
- [41:58]
D
I think there are a lot of political implications that come alongside that sort of populism comes to mind first and foremost. And then at some point is there a day of reckoning as it relates to some sort of incredibly large policy fissure? I guess just some of the implications that would result as a function of a real populist wave taking hold, even more so than we've seen thus far. I think if you come at it from a markets perspective though, as long as we're looking at these aggregate measures, right, as long as the high end is still spending and that's being baked into the aggregate and that's really driving growth in the economy and we're thinking about deploying capital on behalf of clients in the most efficient fashion from a risk adjusted perspective, then it still looks pretty attractive to put money to work in risk assets and that in that environment.
- [42:45]
B
It's an interesting time, no doubt. Come back soon. Great to have you here normally in Milwaukee. Here in our Bloomberg Interactive Broker studio, Andrew Craw. He's co CEO of Crescent Grove Advisors.
- [42:57]
E
This is the Bloomberg businessweek daily podcast available on Apple, Spotify and anywhere else you get. Your podcasts listen live weekday afternoons from 2 to 5pm Eastern on Bloomberg.com, the iHeartRadio app, TuneIn and the Bloomberg Business App. You can also watch us live Every weekday on YouTube and always on the Bloomberg Terminal.
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