Ep.111: The US Banking Crisis Claims Another Victim

Hello and welcome to episode 111 of the Market Maker podcast, where I'm joined with Piers Curran, who I saw just picked up his notepad. Are you trying to intimidate me before we go into the debate here?

Yeah, that's not— no, well, people listening won't see this, but yeah, I've got a stack of— a wedge of note— clear note— notepad ready to go. Just something Everything you say is just so fascinating. Just try and make, you know, get it all back.

So you mean all of those incorrect calls? You like just, um, you know, those bearish Tesla calls? You just like making a note of the date and time when I said it, um, just to remind me in good, good time?

Yeah, we used to joke on the trading floor back in the day, um, we used to identify what we, what we would call reverse indicators.

Oh, come on, don't put me in there with Kramer.

Yeah, it's when someone says something and you know, okay, if that person said something, well, you could be damn sure the opposite's not going to happen.

Yeah, yeah. Well, when my grandma started buying Bitcoin, then I knew that was it. But let's move on. Let's talk about the 3 topics we're going to cover. In this session. So we're going to talk about the regional banking crisis— more victims this week. So we'll dive into that, and that will lead us nicely into talking about the Federal Reserve latest monetary policy meeting we had midweek. And then we'll finish with Apple earnings. They came last night. We're recording this on Friday the 5th of May. So latest episode of the recent banking crisis series. Soon to be on Netflix, I'm sure. Uh, regulators seized and sold First Republic Bank to JP Morgan. Um, that actually marked the second largest bank failure in US history, together with Silicon Valley Bank, Signature Bank, the three banks collectively. So this is a stat I saw, I think it's a good place to start the conversation. So those three, First Republic, Silicon Valley, SVB, Signature Bank collectively held $532 billion in assets. Notably, this amounts to more than the $526 billion adjusted for inflation held by the 25 banks that collapsed in the peak of the 2008 financial crisis. So those three alone.

Yeah, it's—

what to think of that?

It's a bit of a shocking shocking stat. I mean, because, you know, on the one hand, that's a very sensationalist— it's, wow, okay, this means that, you know, the, the one-dimensional reaction is, oh well, that means this banking crisis must be worse and bigger than the one in 2008, which is definitely an incorrect analysis. Um, but it does just go to show these banks that are failing, they're not minnows, you know. We're not, we're not messing about here. These are big, big banks. And yeah, First Republic now getting sold to JP Morgan. Um, yeah, they had like $229 billion here we're talking about. Um, so these are big boys. Um, but yeah, I think what the difference is between today in 2008? Well, there's many differences, but I think more broadly, the kind of banking system is much healthier, much, much, much better capitalized, is sat on a just a tiny fraction of the kind of toxic debt that we were having to deal with back in 2008. So I think broadly the banking system is safe. It's just that you've got a cocktail of factors that have come together that has meant that certain banks in terms of how they're set up have made them particularly vulnerable to this specific set of circumstances that we find ourselves in. The set of circumstances being, number one, well, interest rates have gone up. So we'll talk about the Fed later. But it's, you know, it's no coincidence that PacWest which is the latest bank in the crosshairs, dropped 50% yesterday, their share price did. Yeah, that came, you know, off the heels of the Fed hiking again. So, you know, you could definitely lay a large part of the blame on the Fed's door here for this crisis. They've raised rates rapidly, and, you know, you could go back and say, well, they were late starting to increase interest rates They were, remember, talking about inflation's transitory, don't worry about inflation, we don't need to hike. And of course that was wrong. So the point about that is because they were late, they had to go faster when they started. And so we've had a very sharp, rapid rate hiking cycle, which of course has led to a few issues here. Um, two, two issues particularly, um, with regards to the banks that have failed. Um, number one, it's like on the security side of their balance sheet, and this is where SVB kind of fell over, um, because of the crazy amount of deposit input they had during 2001. Um, they just couldn't lend it out the door, so they bought mortgage-backed securities and, and US government bonds instead. But the issue is when you have a sharp rate hiking cycle, the value of these securities goes down. So we've got a lot of losses on the security side of the balance sheet, which in certain cases like Silicon Valley Bank meant that they could no longer— the losses on the security side of their balance sheet was kind of greater. They couldn't cover that kind of shortfall. And when you start getting depositors withdraw their money, then it all kind of implodes. So Yeah, rates going up, you know, for sure. And particularly like the vulnerability of Silicon Valley Bank was then about, well, who are the depositors, right? So on the liability side of the balance sheet, the depositors— who are these depositors? And of course the banks that are all in the firing line here, you know, some of the commonality between them is the fact that they— that who is depositing money at the bank, and it tends to be let's say venture capital firms, for example, who are linked to the tech sector, which means that the amount of deposits each customer has is very large. And this becomes a problem because the FDIC's deposit insurance scheme, which is designed to prevent bank runs and prevent banks collapsing, their insurance deposit scheme only goes up to $250,000. So depositors are protected up to that amount if the bank fails or not. Okay, um, but of course if you've got a concentration of large depositors who have in their bank account way in excess of $250,000, well then here we look at the uninsured deposits. Okay, and SVB particularly, this is where they fell over. So Silicon Valley Bank they had quite unbelievably 88% of their deposits was uninsured, right? That's an amount of money over and above that $250,000, right? 88%. And of course then if there's panic about the bank and its stability, if you've got money in your account over and above $250,000, well, what are you going to do? You're going to pull it out because what's the point in taking the risk? There's about 1,000 other banks literally And these days, and one of the things that's exacerbated these bank runs, you can just do it online. You know, it takes you, what, 60 seconds, a few clicks of a mouse, and bang, your money's moved from one place to another, right? So obviously you're going to move it. So if your percentage of deposits, if your uninsured percentage of deposits is very high, you're really vulnerable to bank runs. And as soon as the deposits go out of the door, then you're kind of screwed. It's the beginning of the end. So But to give, give some comparison here. So Silicon Valley Bank had 88% of deposits uninsured. First Republic that just got fire-sailed to JP Morgan, they had 48%. What's interesting about PacWest, they only have 29% of uninsured deposits. So actually on the uninsured deposits metric, PacWest aren't looking too bad. But that doesn't mean to say that people don't panic about them. I guess I was reading, I was reading one piece about this and an analyst came up with a bit of a genius analogy. He said that this banking crisis, it's a bit like the weakest gazelle problem. So if you're a lion tracking your herd of gazelles, well then which one you're going to kill one. So right, which one am I going to kill? I'm going to kill the weakest. It doesn't mean that the weakest has a fatal problem, it's just that I'm going to go after that one because it's the easiest. That's the mindset markets are in right now.

Yeah, I was going to ask that. If I— if you're a speculative hunter looking for a quick short, it doesn't take a lot, I'd say, to— in this current atmosphere to promote that type of movement, to make a quick buck from a trading perspective.

And so the short, um, positioning on PacWest— so if you're— I mean, if you think a share price is going to go down, then you can short that stock. Okay, it's a very, you know, it's a classic hedge fund strategy, this. Okay, so you actually— to do it, you've got to borrow the shares from a sell-side service provider like an investment bank. So you borrow the PacWest shares, you then sell them, and then if you're right and the share prices go down, you can then buy back the shares at a cheaper price and then give them back to the lender, right? And so you, you profit from that drop in price. Okay, now because of that process of having to borrow the shares, um, in terms of, you know, what's the activity on the short side of the book. We look at the percentage of the shares under, you know, issuance— what percentage of those are being used to short? Because you've got to borrow them, right? And I think if you go back a month or so, only 1% of PacWest's shares in issuance were being used for shorting. It's now up to 25%. So obviously The, the vultures are circling quite, quite literally. And the thing is, of course, it's a self-fulfilling doom loop. There's a doom spiral because if shareholders start shorting, well then that means they're selling, right? So that drives the price down. Okay, now if you're a depositor and you see the share price of your bank— oops, it's off 10%. All right. Panic. What am I going to do? Well, obviously I'm going to take my money out, definitely my uninsured deposits. That is straight out of there. So then the bank run starts. And of course, then the more you get wind of deposit withdrawal, or the more people come in and short the stock, the more the share price goes down, the more people withdraw their deposits, and this doom cycle. And that's what PacWest are in right now. And I tell you what, if you get into that Vortex, you're dead. I mean, there's no way back. So I think when you look at PacWest's metrics, they're not that bad. They're nothing like Silicon Valley Bank in terms of their exposures to all of this stuff. And yet they're the weakest gazelle.

There you go. I bet you didn't think you were going to hear about gazelles on this episode. But you mentioned there about If you go back to what was the catalyst, the Fed acting perhaps too late when transitory inflation was the belief, and now perhaps continue to hike and keep going down there when they should have already have stopped, perhaps. But isn't there also a supervisory shortfall here that's created this problem? My question being is, why on earth Did SVB and all these other West Coast type banks in bed with the VC? Obviously, if I was running those banks, I would be absolutely creaming it as well, like taking all the profits through 2020, '21. That's my job, right? To maximize profit. But where's the Fed during this? And where's the regulators to ensure that the very high concentration of one-dimensional depositors that we don't land in this. I mean, the people who make— I can't blame Powell for that because the central bank is full of thousands of employees, of which the Monetary Policy Committee is just a subset of like 23 individuals or something. So what about the other 5,000 employees whose job it is to provide supervisory duties for the financial market?

Yeah, it's a complete failure across the board. I mean, I guess on the one hand you could say it takes a good old-fashioned crisis, right, for the magnifying glass to get pivoted towards an area, and then you go, oh, okay, yeah.

So let me talk about the glass half full view of this, which is, given this episode, you've said right at the beginning that even though the amount collectively in assets that's been hit is more than cumulative of 2008, which was a massive market episode, that the market hasn't reacted because of the capital situation, the infrastructure, so on, the monetary response rates or mechanisms that kick in. So does this just make this a good situation so that we can unearth these cockroaches, if you like, that have kind of hidden away you know, show them, expose the market to its issues, they get corrected. I'm not saying— because always, you know, the pursuit of money, ingenuity of humans will always see fit to find very creative ways of maximizing profit. And so regulation will always be— it's like cops and robbers sort of thing. Yeah, they can only be reactive from a regulatory point of view. But 2008 to now has made it more robust. Does this now— again, we'll see some change. That change won't happen quickly. Regulatory change takes— goes at a snail's pace. But then the next episode, when it comes in, whenever, several years, is it again? Is it— is it when, you know, people were talking about JP Morgan was the bank that seemingly the government, the Fed, go to, right? Can you absorb this? But I saw a stat that the regional banking crisis has now had, obviously, significant inflows. You said about taking your money out, get spooked, where do you put it, right? Okay, I'll put it with the biggest bank. But the problem is the biggest bank just gets even bigger and bigger. Yeah, during every episode of, uh, of this situation, and the top 10 now control 65% of all deposits. This being Bank of America, Wells Fargo, and JP Morgan, namely, you know, kind of the top tier ones. But that too big to fail, is that even worth talking here? Or I almost think that people talk about too big to fail in a very negative connotation, but for me it's like, well, no, I think you've misunderstood that phrase. They're too big to fail. There is no risk. They're literally so important now that nothing can harm them.

I think JP Morgan specifically, yeah, they are, they're the kind of the rescuer of choice for the US government, right? We mentioned that, well, actually the biggest bank in history, the biggest US bank failure in history was Washington Mutual in 2008, um, $307 billion worth deposits and Um, that failed. And who bought them? You got it. Jamie Dimon strides in to rescue the situation. So JPMorgan bought Washington Mutual. Now the thing is about the regulator, there is a rule that if you have more than 10% of US deposits, then you're not allowed to buy any other banks. Okay, it's, it's, it's, uh, you know, that, that would mean too great a concentration of deposits with one provider.

Okay, déjà vu.

So JP Morgan literally can't buy other banks unless— and there's a little bit of small print— unless there's a particularly, you know, unusual stressful situation, a crisis scenario 'And then, you know, we can look the other way and forego that regulatory rule in order to, you know, the lesser of the two evils is to save First Republic from collapsing.' And JP Morgan came in with the best terms, the best terms, and they— it was a bit of a bidding war, right? And JP Morgan bid the most. Well, why? Well, because they're in that very unusual situation that literally this is their only chance. To buy another bank, like right now, today. And there's, you know, First Republic are a big, big bank, right? So this was pretty much Jamie Dimon's only chance for the last decade to actually acquire another decent-sized bank. So they outbid the rest. The reason why the FDIC accepted that is because the more they bid— I think they bid, what was it, 10, just over $10 billion in the end— meant that that means the less or the lower the losses are for the FDIC. So I think the FDIC are now looking at a $13 billion potential loss overall on this First Republic Bank saga. Um, that loss would have been much larger if they'd have accepted a lower bid from one of the other banks. So look, JP Morgan increased their market share, and so the well-intended regulations sometimes you know, have to be circumnavigated because there's a bigger crisis at hand. I mean, that's, that's kind of one point, but I think the regulatory failure here isn't allowing JP Morgan to sneak through and acquire someone. The bigger regulatory failure is, is the lack of oversight and stress testing and regulatory framework for the smaller banks. And I think, you know, it takes a crisis, as I said, to highlight the flaws in the system. And we had, we had that big time in 2008, and the system is way stronger. That's why I say that this is definitely not 2008. We're not going to have a global financial crisis here. But, but, you know, clearly it's an iterative process. And, you know, each crisis we, we improve again.

I think one thing that's quite interesting from a data collection point of view So backtesting, looking at history to predict the future. What's interesting now is that you have had this kind of situation with COVID unprecedented, compounded by an energy crisis of the Russian, and then the response of the rapid rate increase. It's almost like we needed that dataset of real information, empirical data of what does a rapid rate rise look like? With a multi-decade high inflationary spike in the modern context. Not looking at, as you remember, when inflation was just picking up, it was like, oh, back in the Second World War. And it's like, well, yeah, that's fine. The world's a lot— you know, that's a comparison, but the market's moved on. And I think actually there's much to be learned in, in various different pockets to help be able to be better equipped to tackle, tackle the future. But look, let's move the debate on. Let's talk a little bit then about the Fed. Um, because as we said, their rate hike cycle, they're not stopping. Well, not yet. They did hike 25. That was very much expected by the market, so no shock at all. But they signaled a possible pause. So the actual kind of quote was that the committee— this was Powell's words— will closely monitor incoming information and assess the implications for monetary policy, omitting a line from his previous statement in March that said the committee anticipates that some additional policy firming may be appropriate. So a pause, all things being equal, a pause is coming. I mean, he said himself that that's a meaningful change and we're no longer saying we anticipate further increases. So it doesn't get more clear than that.

We're at the top. The only way we go higher would be a disaster nightmare where inflation starts to rise again. You don't even want to contemplate what would follow that scenario because the Fed would have— well, they'd have to continue to hike, would they? And then that inflationary uptick again would definitely cause a recession. So you'd have stagflation where you've got interest rates going up and growth going down. Um, that's your kind of worst cocktail. Then you're, then you're talking about big, big, big recessionary problems. Um, so outside of that unlikely scenario, the Fed are at the top now. They, they hiked for the last time in this cycle, so that's not really what's important. Um, and actually markets rallied, so equity markets went up after the statement when released. So the way they do it, as you know, they— Powell— well, the Fed released the statement which announces, right, what are we doing with rates? And there's that, um, there's that document of text that kind of explains their actions. Um, so that dropped at 7 PM UK time, and markets rallied because of that line that was omitted you've just mentioned, which basically means no more hikes, guys, that's it, we're done. Markets, brilliant, excellent, right? Time to rally. But then the press conference starts 30 minutes later, and that's where Powell then gets up onto the— steps onto the mic and talks, you know, basically reads out the statement, but then takes questions from the financial press. And it was kind of during that press conference that he's— he got asked about the future. And of course, markets at the moment are expecting rate cuts by the end of the year. And what happened in financial markets on Wednesday night, they rallied off the statement, then they sold off. They gave back all of that rally as Powell was talking, because basically Powell was saying, don't get excited about rate cuts this year. He was basically saying, we're put— and at the moment, our baseline is we're not cutting rates this year. He thinks that inflation's gonna remain— it's gonna drop slower, at a slower rate than markets want or expect. And therefore it's going to be— it's going to take us longer to be able to start cutting. So that was the disappointing factor, rates to stay at the top for longer. And then Q triggered the next episode of the banking crisis with PacWest share prices dropping 50%. But, but yeah, look, I think the Fed have got it wrong. On the hiking cycle because they started late and then had to go too fast. And personally, I think they've, they've hit the top too late, and I think they'll be too late to start the cutting cycle. I think Powell's just been too late. That'll be the legacy of his tenure as chair of the Fed. Just too late. Sorry, Jerome.

So it got me thinking while you were describing that, that first part of, if I were China, given what you've described, I would call my buddy Vlad and I would say, hey Vlad, how's that, how's that Nord Stream flow looking these days? And, uh, see what he says. But the point being is Wouldn't it be optimal now from that bigger geopolitical risk piece to cause a little bit of further destabilization? China is reopening and at full speed right now. Um, certainly the downturn hasn't been as bad as what was initially feared only several months ago. Russia's just been quite quiet because the Western world's been distracted by this banking crisis, just generally speaking, in mainstream media. Why not bring that back, provoke Russia to re-initiate some activity, whatever shape and form that might be? I don't think really militarily in Ukraine carries such difference right now, but I'm talking the flow of energy. Yeah, re-ignite, um, inflation and drive further than the economic woe of the West, wouldn't now be optimal?

Yeah. From that, why do you think, why do you think there's been an escalation in the Russia-Ukraine war in the last couple of weeks? I mean, uh, what was it, the assassination attempt on Putin in the Kremlin? Apparently. Um, I think that stinks of Russia using that as an excuse to step things up. Um, so I, you know, I do think— I, I think there's a lot to be said in that strategy, that geopolitical chess game. Um, yeah, now's the time to try and get energy prices back up if you want to hurt the West, who are looking vulnerable, um, for sure.

Yeah, I mean, I'm just trying to find—

there's—

there was that photo, wasn't there, of like Xi Jinping doing the all hands in but like the high-five pack with all the, all the other, um, kind of necessary players that makes the West very nervous, like Brazil, Russia, India, right?

The rest.

Yeah, the BRICS. Um, so yeah, just a thought. Yeah, I mean, no, I talked about that worst-case scenario. Yeah, I don't think that that would be impossible, albeit, you know, low probability right now.

Just like, back to the Fed, um, there's a guy, Campbell Harvey, you pointed this out to me on LinkedIn. He's a professor at Duke University. Um, he made a good point here that really the Fed have— I mean, they've cornered themselves. So like the meeting on Wednesday, really there are two choices. They could either raise rates by 25 basis points or not. Okay, and markets were expecting them to raise and they went ahead and raised. But the problem that they've got is it actually— the two choices, neither of them are good. And it's big. They've engineered their own downfall here. Neither are good because, I mean, one argument could be, well, hang on, if rates going up fast is bad, well then stop hiking rates, you know. And yet they've gone and hiked. And you're like, well, why would they do that? The problem is if they didn't hike, then really that would be seen as an admission from their side that this banking crisis is a lot worse than you lot out there are currently thinking. So we've veered off course and done something different to what we've been communicating we would do, which would indicate there's a big problem, right? So they couldn't not hike. So then they go ahead and hike. But of course, hiking's not good either. Rates are too high. So what, you make them even higher? Um, so it's entirely of their own making, this nightmare situation that they find themselves in. But look, look, it's too late. I mean, you can criticize what's happened in the past, you can't change it, right? So it's about, well, what do you do next? And they think they'll get it wrong again. They will take their time You know, and yeah, sure, inflation might be dropping, but look, it's trending down and we're going to have a recession. So, you know, they should get on with cutting, but they won't. And I think that will then lead to, by the way, I'm back to maybe circling back to PacWest at the start. One of the key vulnerabilities around PacWest is they've got an unusually large part of their loan book. I think it's like 80%, I want to say, I have to fact-check that, but 80% of their loan book is to commercial real estate. They're kind of property real estate specialists. So 80% of their loan book is commercial real estate. And what's the next big looming crisis? Well, it's commercial real estate because of the incredibly unusual double whammy of COVID stowing that we don't need to be at the office to work. So companies requiring much less office space, okay, number one, coupled with then a massive interest rate hiking cycle, which, you know, has just meant that property developers and who are funded with debt are now vulnerable to going out of business. And who's gonna, who's gonna— where's that toxic debt going to end up sitting? Well, it's on the bank's balance sheet. And this is what happened in 2010 with a lot of the European— like the Spanish, um, banking crisis back in 2011, 2012. That's what happened. It was a real estate crisis that saddled the banking system with toxic real estate debt, and then they had to get bailed out. The Spanish banking system, the whole of it, got bailed out to the tune of €100 billion by the Eurozone. So I think that's one of the reasons PacWest is currently vulnerable, is because people are looking at the next crisis, the commercial real estate side. And so if rates stay higher for longer, well then that commercial real estate issue is going to be exacerbated, it's going to be all the worse.

So yeah, I've seen a lot of people highlighting the commercial, commercial real estate as a, as a potential next area to cause like the next big event. However, you mentioned there 100 billion in terms of relief in, in Europe. Do you remember the TARP?

Yeah.

So if you're around in markets back in— what, I'm just looking here— 2008.

Yeah.

So right in the midst of the financial crisis. And this idea of—

yeah, sorry, go on.

So this idea about toxic assets, because I guess if you, if you are new to markets or you haven't been in markets for the last 12 years or more, you would think, oh, toxic assets could be the downfall then. But what happened in this scenario is that the situation was so severe of a complete systemic failure of the financial market system, then what this was was a Troubled Asset Relief Program, TARP, um, by the U.S. government to buy toxic assets and equity from financial institutions to strengthen its financial sector. It got passed in Congress straight away because it had to. But the size of that original authorized size was $700 billion.

Yeah.

I mean, we were talking about what the total was, $500 billion, the cumulative of the 2008 situation. So again, I definitely side on this whole when needs must, man does come up with a solution. And so that's not to say it doesn't get very bad in the intermittent period, but the idea of like, you know, I do see some headlines about this commercial real estate issue and they're really putting some serious drama into it that it's going to be the next big thing. And it's like, yeah, it could well be big. But just to stress that point, that yeah, I do think that there are responses that we've seen in the past, and I don't see why that similar thing— toxic debt bad real estate, park it.

So I agree, and that would happen if it was needed. The problem is, I guess, that you just keep kicking the can down the road, right? And how do you solve a debt crisis? With more debt. So that's the cycle we've been in and continue to be in. You know, how do you deal with the COVID crisis? Well, more debt, meaning governments have to step up, borrow money to fund our way out of it. Central banks get the checkbook out and print money like it's going out of fashion. And that's been the cycle, right? But the problem is you kick the can down the road, but when you get to that point down the road where the can is, well, then you have the next episode in the crisis, right? But that episode becomes even more extreme because you didn't really deal with the last one. I think this cycle in the end isn't sustainable and you end up with a depression, right? You say you go back to like the 1930s kind of style stuff. You know, eventually the system is broken and it needs to collapse and kind of start again. Well, perhaps start again, that's a bit dramatic, but You know, there's nothing like a good old-fashioned recession to clear out the weak and the deadwood. You know, all those companies out there that aren't profitable are basically alive because they're just funded by debt. You know, they're zombies and they clog up the system. You need to get rid of that lot, you know. And then all the people that work in those businesses get them out and, right, deploy them in businesses that are growing and that are on the right path and that are successful. So you need this, you need this recycling. And the problem with all of this emergency action is that it hasn't enabled that kind of natural recycling of, of human assets. And so, you know, the problem just gets bigger. So, but Is now the time? You know, COVID, you would say, is certainly one of those unusually monstrous, you know, entirely unpredictable economic crisis scenarios, right? And it might be it takes 5 years for things to play out in terms of the economy actually being impacted by that event. Because for now, We've been steered through it by emergency action.

But yeah, when you come off life support, right, and you've been on it, morphine, for a long time, how does your body hold up then? So yeah, exactly, I get it. So look, let's finish with Apple then. So the, the final of the big tech to report came out last night. Their shares at the moment actually, I think, are pretty flat, um, but they after market last night were up about 2%. Earnings per share beat, their revenues beat— I'm gonna be clear that their revenues beat Street estimates, albeit they were down. Um, in terms of some of the other notable headlines, and one I'm sure you'll dive into, was the iPhone revenue. Pretty clear beat on expectations there, $51.33 billion. Mac revenues were a miss, iPad revenues were a miss. And the service revenue division was also a slight miss. But was this— I mean, the stock actually responded positively, as I said, in the aftermath, and particularly a lot of the emphasis from Tim Cook in the conference call talking about India and the iPhone. So perhaps you could give us a bit more color on that situation.

Yeah, I think so. One of the interesting angles out of all this was then Apple's revenues from the outside of its big revenue-generating regions historically, right? So the US and China and Europe, okay, uh, comfortably the big three in terms of, um, Apple's revenues. The rich economies where consumers can afford to pay— I mean, what are we now, like $1,000 on an iPhone or whatever it is at the moment? But, um, so what I found interesting was that was Tim Cook's kind of emphasis. He really did spend time focusing on other regions outside of these kind of 3 core regions they've been so dependent on. And he actually said that revenues in Asia, excluding China and Japan, was a real bright spot in the quarter, and revenues went up in that region 15.3%, bearing in mind that revenues overall dropped by— what did you say, 2% was it? 2.5%. Okay, but in that re— Asia ex-China and Japan, they're up 15.3%, and now that clocked in at $8.1 billion in total. Okay, so that's actually really starting to build up. To give you an idea, their revenue overall as a business was $94.8 billion. So the— those, those kind of regions are now accounting for nearly 10% of revenue, and it's growing fast, right? And he picked out India, and I'll just mention some of the others briefly. So he picked out Mexico, Um, even though that's clearly not Asia ex-China and Japan, but anyway, uh, Indonesia. So Mexico, Indonesia, Turkey, and the Philippines he picked out as really promising and bright spots. But then he said India is really where we're excited, and that's just based on demographics, right? And it's based on India's economy growing and the middle class and Basically what's happened to China in the last 20 years, we now expect to happen in India in the next 20 years. And that's where the country becomes richer and you get a real bulging out of the middle class. You're, you're going to have literally hundreds and hundreds and hundreds of millions of Indians will come out of poverty and into the middle class in the next decade or two decades. And these people are ripe for wanting to Now they're more wealthy, great. Let's buy products that makes us look like we're more wealthy, and we're going to buy iPhones and all the rest of it, right? So he's very excited by that. And he said India is at a tipping point for Apple. And they've just opened— they've only literally just opened their first store. I think they've got 2 stores in India now. And Cook went over, and he met the prime minister, and you know. Is on a proper schmooze PR campaign, particularly for India.

And they've moved, they've moved some manufacturing there, right, as well? Yeah.

So as part of their kind of, um, supply chain risk, um, de-risking their supply chain, because they're obviously so, you know, what— and one of the things about the iPhone results, you know, more broadly, was that this is, you know, they were good results for the iPhone sales, and this is after the big issues they've had through COVID, and particularly because of how dependent they are on Foxconn for production. And the problem was that Foxconn had an outbreak of COVID back in November, and that analyst thought that that would have a knock-on effect for sales in Q1 of 2023. So that's why analysts had their iPhone sales forecasts down a bit, but they beat them. And so it does show that looks like COVID's behind them. But in the meantime, diversifying their supply chain is an absolute essential, and India's a really core part of that strategy.

I was just thinking, is it diversification of supply chain given the relationship India has with China anyway, and that growing closeness of those two nations. I mean, it definitely makes sense, right, strategically, as you said, given the demographic shifts that you're going to see of affluency and the size of market, then having manufacturing and distribution at a closer location makes a lot of sense. But, but the other thing here, just to give some context to wrap up on that part about India, the iPhone accounted for 11% of secondary smartphone sales in India last year. And that was up from 3% the year prior. So it's gone from 3 to 11 in a year, 12 months. Yeah, it's quite incredible, the speed of change.

That's why Cook's getting very excited.

So what the final thing to say— well, two, two final things to say with Apple. Uh, one was, um, you know, they are the master of the dark arts of forward guidance from a corporate perspective in managing a public listed entity. Because as we said, the— you said the revenue was $94.84 billion. Big figure. It was actually above the general consensus on the street, which was more like just shy of $93. So it was a beat, but it was a beat because they had taken a conscious effort to suppress the analysts who generate these expected values. So that they can leap over these. And obviously it's better to, to come in above street estimates than, than below, because as we said, the revenues were down 2.5% for the period. The company had warned investors to expect a drop of roughly twice that, hence the reason why that's such a great figure and you had that initial positive response. Now, the Apple finance chief, uh, Luca Maestri, I think his name is, he said that the company expects overall revenue in the current quarter to decline about 3%. So actually the current quarter is going to be worse, as in that revenue figure. So it's interesting, they're just continuing to do— I don't think that's surprising, but I think if you're new to digesting these financial statements, you know, you can't just take it at face value. It needs to have some context, um, as to trying to estimate the stock reaction to this information. Um, the other thing finally, of course, The board authorized $90 billion in share repurchases.

Yep, of course they did. So what was it last year and the year before and the year before?

Were we talking about— what was it, Alphabet that did 70, or was it Amazon?

And then Alphabet, $70 billion.

So Apple's just— yeah, let's just go 90.

Yeah, well, Apple are the kings, the kings of the share buyback. There will be no shares in Apple. I, I can't remember, I'll have to dig it out for next week, but there was a study done a few years back and it was about, right, if Apple continue at this pace of share buybacks, then actually they'll have bought back all their shares. I think it was like by the time we get into the early 2030s, they'll literally— they'll be delisted. Because they'll own themselves. They'll have bought back all the stock. There are no shares in issuance. Um, so it's quite crazy. But of course, again, it boosts up their earnings per share because there's less shares. But I had two points on Apple before we wrap.

Yep.

That headline revenue miss— uh, not miss, sorry, drop. Um, Maestri did point out that a lot of that was FX headwinds. They estimate that as much as 5%, the FX headwind accounted for actually a 5.4 percentage point hit to revenue just through FX headwinds. So, you know, on a constant currency basis, revenues were actually up 3%, and they expect these headwinds to continue. The other thing I wanted to just mention was, I mean, yeah, fine, iPhone sales surprisingly decent, not amazing, surprisingly decent. Mac sales disaster. Mac sales were down 31%, but that's more broadly a kind of PC market weakness, you might say. But I want to just point out the services side, um, because like all of these big tech giants, they're kind of diversifying. We talked about Amazon last week diversifying with AWS and that being faster growing, much higher profit margin. Um, well, with Apple, it's the services side, which is the fastest growing, much higher profit margin part of the business. And that's growing really well. Um, that was up 5.5% revenue-wise. So even though the whole group was down 2.5%, that, that part was up 5.5%. Now that's got up to above $20 billion for the first time, so $20.1 billion was the revenue from the services side. Services being music, movies, iCloud storage, App Store, licensing fees. So all of that stuff wrapped up is now more than 20% of the business, and they're forecasting a 17% increase for the quarter ahead. And they've, they said that they've got, yeah, here you go, in terms of users, subscribers across the service, they've got up to 700— sorry, 975 million paid subscribers across their services, which is up 150 million, up on last year. So that services side is nicely, nicely ticking over. And that part of the business, 71% profit margin. 7-1. Compare that to the hardware side, that's got a 36% profit margin. So that's where the action is.

Yep. And just to say, non-farm payrolls has just come out. So just a quick look at the numbers. The headline change in non-farm payrolls, 253,000 above the expected 180,000. The previous 236,000 revised down to 165,000. The average hourly earnings 4.4%, 0.2 above expectations, with the previous revised up 0.1 as well. Stocks dipped, dollar popped, yields have popped higher as well on the initial reaction, albeit stocks have recovered somewhat some several minutes later.

Well, that's an inflationary report. That's the last thing, the last thing we need. It's one of those ironies, isn't it? More jobs created than expected. Bad news.

And on that note, yeah, thanks, Piers. Thanks everyone for listening. If you've gone through to the end, thank you. And don't forget, if you haven't already done so, hit the follow button and the bell icon. You'll get a notification every time a new episode goes out. And yeah, feel free to leave a rating review. Be much appreciated by myself, Piers, the rest of the team. But if you're in the UK, have an amazing long weekend for King Charles's coronation. Charlie, then yeah, you— if you're watching from overseas, you'll probably think we're all a bit weird when you watch the coronation at the weekend. Uh, but yeah, everyone take care and see you next week.

Yeah, have a good weekend.