EP.121: Goldman Profit Plunges & Has The UK Turned The Corner With Inflation?

Hey, hello and welcome back to the Trading Floor episode of the Market Maker podcast, where I'm joined as ever by our co-founder Piers Curran. How's it going, Piers?

Going good, very good stuff.

It's Friday after all.

Well, it's not, is it? It's Friday for you because I noticed, uh, you've got a day off tomorrow, so it's your Friday. All of us not, we've still got Still got another day's work tomorrow.

Yeah, I would say, yeah, you know, I'm gonna go out to a nice restaurant, have some cocktails, do all that stuff in the summer sun. But no, I've got a date. Ah yeah, with Peppa Pig. I'm on a— going on a bus with Peppa Pig, so I'm really like VIPing this up. So, um, Love it. I tell you what, UK inflation, which we're going to talk about on the podcast— yep, Mr. Peppa Pig certainly knows how to drive up prices when there's a captured market of children demanding what they want. So yeah, that's not helping the UK inflation picture right now, the cost of those tickets. But, um, look, let me, let me just quickly give an overview of what we're going to cover. We're going to talk about 3 things. Goldman slumps— new name I'm calling them. Uh, the US investment bank reported its lowest quarterly profit in almost 6 years. Not the biggest surprise, but we'll talk about that in terms of how they've kind of front-run this a little bit. But we'll also talk about the actual breakdown of their numbers in their financial statement. Then we're going to talk about Tesla. Profit margin slipped in the latest quarter. Series of price cuts this year weighed on its earnings. And then Netflix some really amazing numbers. Yeah. And a really negative share price reaction. So how on earth has that happened? We're going to talk a little bit about all those sneaky people out there who— I know you're out there, password sharing, that is. We're gonna, we're gonna find you. Or Netflix is, they've done a crackdown. But we'll explain why that's, uh, had a big impact on their figures, but why the market actually has looked beyond that. And then finally, third thing, gonna talk UK inflation. Has the UK finally caught a bit of a break? Because UK inflation CPI fell to a 15-month low earlier this week, and that has meant that cable has moved back below 130, and also traders have reined in a little bit the aggressiveness of what they see for the next rate hike for the Bank of England. So that's what we're going to talk about. For this episode. So look, let's kick it off. Goldman slumps. So, um, their profits— I mean, it depends which actual line item you take, but profits were down about 60%, let's say. Um, there was a couple things here. The performance, which we can talk about, where we talk about the 3 different divisions that are quite unique to Goldman's because of this restructuring So global banking and markets, platform solutions, wealth and asset management, essentially. So we'll look at some of these things. But then there were write-downs, then there were impairments. There's all manner of sins packed into that report. So yeah, what was your, your initial take here?

Well, actually, I was, I was reading one analyst's sort of take on all of this, and he actually used a really good line. He said this was a bit of a kitchen sink kind of quarter, um, translating meaning that Solomon and, and Goldman's and the board, I, I think what they've done, they've obviously been on a bad run. I mean, let's not beat around the bush here, it's been shocking. We'll delve into some of that in a minute, um, but it, this could be a little bit of a turning point. These, these quarterly numbers are so bad But I think what they've done is, right, let's just throw all of the bad stuff we've got hidden in the cupboard. Let's just throw it all into this report to make it super bad. So it just gets all of this bad stuff out of the way. And then, right, let's move forwards. And then Q3 and Q4 into year end, you know, they've turned the corner. This is, this is their strategy. So yeah, some of the write-downs and the impairments and, well, I guess, look, the numbers are really bad. I mean, as you said, some of these stats are quite shocking. Lowest profit quarter for 6 years. Yeah, you got to go back to 2017. I'm not sure. Well, there was, I think, Q2 of 2020 is kind of in and around that. The chart I'm looking at which is the net income, has— so their net income was $1.1 billion overall, which on the chart I've got is the worst for 6 years apart from Q2 2020, which was the COVID quarter. But so apart from that, which obviously is an exceptional, unique circumstance, so it is the worst for 6 years. Yeah, but look, lowest quarterly profit for many years, you know, costly retreat from consumer banking, you know, industry-wide slowdown. So those kind of factors out of their control and factors in their control that have all contrived to be super negative all at the same time, meaning this is ugly. This is a really ugly set of numbers.

Yeah, it's almost like I feel like we should almost gloss over the numbers, and I really want to jump on that that theme that you're saying, because I think this is going to be a recurring one, which I'll also come back to with Elon Musk and Tesla's earnings. More about this strategy of how do we use these public declaration of our performance, but then how do we utilize the analyst conversations, the investor shareholder meetings, the presentations around that to curate then this image of the future and Yeah, you're absolutely right. I think, you know, looking at all these things, I think packaging them up and coming clean, yeah, that is a, a good strategy. And before this, what they had been doing, I think I read a piece in the FT again, um, last week, and they were talking about Goldman's and their basic management team have been on this, um, pursuit of dialogue with analysts on the street for the last 4 weeks. Yeah, so how this would work if you're not familiar with it— so when you see Goldman Sachs misses estimates, for example, the question is, well, who actually makes these estimates? Where do they actually come from? So all these estimates come from a collection of all of the analysts at other investment banks, independent research firms, and so on. So they'll survey lots of them, they'll generate this, this average expectation, essentially. Now, how do the analysts come up with these expectations? Well, I guess there's two sides of this. You can monitor the company's performance and look at financial statements, try to do definitive calculations, but this is all about stuff that hasn't been declared yet. So what do you do? Well, you have a lot of dialogue and semi-transparency with the firm you're reviewing in order for them to tell you about how things are going. And that shapes then your expectations around your modeling. So if you're Goldman's, this, this campaign started several weeks ago when if I was at Goldman's and I was in that position, I'd be calling all the bank analysts in and I'd be sounding very pessimistic. And actually what you've seen is one of the biggest revisions down of analyst expectations, I think, in any bank corporate release in, in quite a while. So the bar has been significantly managed by Goldman's very astutely in order for them to then throw the kitchen sink and not cause then an absolute breakdown in their share price. I think it's been— I have to say it's been pretty well executed if that were the plan. Yeah. Um, and then as you said, coming out of the other side of this You know, if you, if you just declare everything, well then, well, I know about, you know, when we talk about these write-downs, what was it, half, half a billion on GreenSky, an online lender they acquired in 2021. They recorded half a billion impairment on real estate investments. They also reported, I was having a look at their report just before we came on, a jump in operating expenses. So due to how it accounts for impairments tied to some of its consolidated real estate investments as well as the goodwill, the total impairment number was about a billion. Yeah. So it's kind of like, look, let's just pick it all up, put it in, and let's just come clean. And I think now as an investor, there's like, well, it can't get any worse, so surely it can only get better, is the kind of philosophy I guess they're shooting for.

And this is where Solomon— I mean, this is the line in the sand for him. It has to, has to, has to get better from this moment in time onwards, or he's gone. I think, I mean, really, this is it now for him. The, the stakes could not be higher. But if we delve into it a bit, because we talked a bit about earnings on for banks last week because we had some of the, the big banking giants reporting their earnings, um, last week, but So for Goldman's, right, these big investment banks, they kind of got two, two key kind of, let's call them traditional revenue streams, which is their investment banking revenues. That's all the M&A deals that they're advising on and so on. And then they got the markets side, that's the trading floor, okay? They're, they're two big, you know, parts of their business, okay? And you could say the same for like Morgan Stanley, okay? They've got those two big legs Um, like JP Morgan have got those two big legs. Um, yeah, go on.

A question just for the benefit of everyone. Whenever I see trading— I mean, I'm going to play naive here, I know the answer— but if you could explain, um, why do they always report FICC and equities in trading as two separate parts?

That's just splitting out the asset classes. So I mean, Goldman's will— so, so the trading floor, their job is to first basically facilitate trades for their hedge fund and asset manager clients. And so on that floor, you'll have different divisions, different desks who specialize in different asset classes. And, you know, historically you've had, yeah, the equities division and then the FIT— that's the fixed income and commodities division. Okay. And like, for people like Goldman's, I mean, equities is the big— that's the big one, right? That's their kind of big trading floor, um, money driver. To give you an idea, actually, probably the single only bright spot in this whole report was very specifically the revenue from the equities trading division, which actually went up year on year. So that was up 1% to almost to $3 billion, um, way ahead of the analyst expectations, which was $2.4 billion. So that was like the single single bright spot, right? But if you took the FICC— so the fixed income and commodities section— then that fell 26%. So equities up 1%, FICC down 26%, which actually meant that the equity division on their own took more revenue than the entire FICC division. Um, so FICC took $2.7 billion, which was not only down 26% but also missed analyst expectations at $2.8 billion. So it does look like the one positive spot in the whole thing here is their equity trading division actually really did deliver. But if you take it as a whole, then, you know, their investment bank division, like all of these banks, suffered. The revenues from the investment banking side was down $1.4 billion. Excuse me. And look, most of that is because the macro conditions have meant that deal flow has been down across the board. All banks have suffered. We did mention that JP Morgan's results last week were surprisingly resilient on that front, much more so than the, the other banks. So Goldman's would fit in the other banks category here, where they've seen their revenues drop 20% to $1.4 billion. So Goldman's have underperformed on the IB side relative to certainly JPMorgan. They've even underperformed compared to Morgan Stanley, right? But look, all of these banks, the investment bank division has dropped, the trading flow has dropped. But when you look at like JP Morgan or Morgan Stanley, they've got a third leg to the stool. They've built a third leg to diversify their revenue streams, and it's the third leg that has helped the likes of JP Morgan and Morgan Stanley come through this first half of the year in much better shape than Goldman's. So JP Morgan's third leg, for example, is their lending business. And so they've benefited, you know, they're a huge consumer bank and they've benefited hugely from the Federal Reserve hiking rates. We talked about the net income margin last week, so they've benefited a lot from their loan book generating more revenues as interest rates have gone up. So that's JPMorgan's third leg. Morgan Stanley's third leg is wealth management. And so as Mark— and we talked about BlackRock last week as markets have risen, you know, as stocks have gone up, well then these assets under management have gone up, which means fees from increased asset management— assets under management has gone up. So that's Morgan Stanley's third stool, third leg to the stool. Goldman's third leg, they chose a few years back to go aggressively after the consumer banking part, right? That was their piece. Let's, let's make that our third leg. And they have spectacularly messed it up to the point where they've entirely reversed out of that play at huge cost, which has been marked in this quarter with the write-down of GreenSky, which you mentioned. This was their purchase of an online lender. They bought it in 2021. It's been a disaster and they've chosen this quarter to account for the loss, which is $504 million. They only bought it 18 months ago. I mean, absolutely shocking, right? So that's the problem for Goldman's. Their third leg has snapped and broken. Not only is it supported underperformance elsewhere, it's been the worst performing part of the whole lot. Um, so this is why it's the kitchen sink, and this is why for Solomon, he's out of lives here. And this has to be— this has to be a line drawn, and they have to now get better.

There is one bank that has seen a jump in investment banking, equities, and fixed income revenues who has reported. Who do you reckon that would be? Um, this season, Wells Fargo, maybe Wells Fargo.

Yeah, okay.

I mean, it is a bit, well, a bit cheeky, a bit manipulated because they're coming from a much lower base, right, in these areas.

They've played it well. I mean, they've chosen the— when, when they've chosen that moment where they're not particularly big in those two fields So they've been waiting for a real downturn in the market where then all of the big boys are consolidating, are cutting costs, are laying people off, are slimlining, and they've chosen that moment to just stride out and like commit with some big investment on building out those teams. Yeah.

So yeah, I was looking at their strategy. It was based around investment in technology and talent. That's the way they've gone after this. So it's allowed them to broaden their client franchise and generate more trading flows— technology. And then they've just gone over and gone, right, okay, yep, Jeff Hogan, MS, super senior banker, your co-head now, Global Mergers and Acquisitions, Credit Suisse, right? Yeah, we'll take your team as well here, package them up, So yeah, it's definitely been, um, some fail, some rise during different economic, uh, circumstances. But yeah, super interesting. But let's move, move the show on and let's get on to area number 2. Not unless you had anything else final to say other than Solomon's on the line.

The only final thing that Solomon himself said where he's very much trying to say we've turned the corner Yeah, we've dumped all the bad stuff, we turned the corner. And his comment was talking about investment bank, uh, deal flow, and he just said that it definitely feels better over the course of the last 6 to 8 weeks than it felt earlier in the year.

So, well, you live and die by the sword. Now you've put it out there.

That's right.

All right, well, look, let's talk about Tesla. So their shares were a bit bumpy actually last night. It was hard to kind of watch them because they did dance around a little bit after the closing bell, but they were generally lower. A couple things, um, profit margins slipped in the latest quarter. We've obviously seen quite a few price cuts, that's having a degree of impact, but profitability still held up better than many analysts had actually forecast. And they reiterated the target of selling 1.8 million vehicles this year. But I guess one thing I just wanted to point out is the way this information comes out. So it's kind of like two parts. There's this statement and often then a presentation, but then there's this analyst call that happens when they're explaining, like, let me talk you through what we've just released. And Elon has had a bit of a— he's backtracked a little bit. He was kind of like, let me step away and let them run the show. The share price was tanking, right? Let me just come back in, shore up the ship again. Um, but one of the things that happened on the call with the analysts is the company said that factory downtime could lead to a lower production this quarter, and it looked like that was a comment that was quite key that weighed on the, on the share price. But I know you've talked about margins a few times before, so what are the margins looking like at Tesla at the minute?

Yeah, so gross profit margin is a key metric for, you know, automotive businesses. You know, it's a quite sort of any— well, I guess any manufacturing business, you know, relatively low margin business compared to, say, your SaaS business, which is a software as a service, or, you know, so because that manufacturing bit is super intense and high cost. Um, but Tesla, um, historically have always had— or no, not always— have been able to manufacture themselves into the position where their, their gross profit margin's always been amazing. It's been their jewel in their crown relative to the big automotive players. Okay. Um, however, there's definitely been a conscious strategy, um from Tesla to basically, as we've gone into this cost of living crisis, all right, you know, Teslas have been at a relative premium, right? The price of their cars are relatively high when you're looking at the, you know, their competition. And Musk has gone, well, look, people are struggling here in this cost of living crisis, so let's reduce the price of our cars in order to win market share. Yes, it's going to erode our gross profit margin, but long term, you know, we think this is the right place. So to give you an idea, their gross profit margin dropped to 18.2%. Okay, that's a drop from the Q1 of this year, it was 18.8%. But the better metric is year on year, the same quarter in 2022, their gross profit margin was 26.2%. So it's dropped from 26.2% down to 18.2%. In 12 months, which is a massive drop. But so it's all because of the quite deep price cuts, right, in terms of— so you're making less revenue off the car sale, which of course then, you know, erodes the, the kind of bottom line. Um, so look, we've known all about this though. This isn't a surprise. Um, you know, obviously we've seen, and Musk has been very vocal about cutting prices, so You know, I think that's fine. I think, I think you're right in saying that the reason for— well, hang on, you said that the share price dropped, right? I think it was down like 5% in after-hours trading. But one thing you've got to note is that the share price prior to this earnings report was up 137%.

We don't talk about that on this show, Piers. You know the rules. We don't talk about that.

137% rally.

You had to go there, didn't you?

And actually, I was— well, here's a question for you, Gina. And you— I don't know if you've read this in your kind of reading up about this before the pod, but what, what do you think their revenue growth was for the last 12 months?

I don't actually know, but I'm gonna have a guess that it's a very punchy figure.

So their revenue is $24.9 billion, okay, for the quarter.

That sounds like a lot.

What do you think their growth— what's the growth rate? Year on year?

40%.

Not bad. Get 47%. Now, that is a very rapid growth rate. 47%, especially when you're, you know, you're now up to $25 billion and you're still growing at a 47% growth rate. And that was $500 million above forecasts. Okay, so from the top line point of view, I have to say Musk is delivering. And the one thing we were worried about, if you go back 12 months or maybe even 24 months, certainly the big unknown about Tesla was can they really grow their production so that they become a, a big player? Because you've got the likes of Volkswagen and Toyota They're producing 10 million cars a year, right? And if you go back a couple of years, Tesla were messing about with 500,000 cars. And one of the key barriers to Tesla justifying their valuation was, can they scale it up? Can they go from 500,000 produced per year to 5 million to 10 million over a kind of decade? And Musk set in place some targets, and he's not far off. And this year, despite, yes, They did point to the fact that production might be down a little bit in this quarter, but he— Musk did say they are still on to hit their target to produce 1.8 million cars this year. So you have to say he is on track to this multi-year, um, strategy of ramping up production to properly compete with the big boys.

So Yeah, and to Musk's credit, there's 3 things here that kind of stood out. One was what you just said. So actually, when you put everything together, Tesla said that factory downtime would lead to lower production this quarter. So what has Elon done? He's reiterated and re-emphasized the year target of 1.8. So to, to go over the speed bump, he's saying, right, don't focus on now, focus on the performance over the long term. So he's kind of— that's clever. He's just buying himself a bit more time. The other thing I think is his management of selling this product to the consumer. And how do you manage consumer psyche in a time of stress? I do think he uses Twitter to try and bang that drum, point fingers at politicians and policy, to try and side with the common man. He then comes out and tells analysts that If interest rates rise further this year, Tesla will cut prices again so that financing costs will not be passed on more expensive for our customers. I think that's super clever. And the reason why he knows— he's a clever guy— that interest rates aren't going to go up any further, so he's not going to have to cut them any further.

Genius.

So it's just like, right, what do— what can I say to just because look, not to criticize the general public, but they're not just as informed as a guy as he is. And he knows that, well, the price cuts, we're probably coming to the end of them actually. If we're gonna— if I can tie them to rates and inflation's going down, as we know in the US, well then let's just put it out there and let's make the commitment that I don't actually need to fulfill at this point. So that's, that's a nice touch. And then the third one, he said the company is less focused on margins So this is obviously the big thing that people are looking at in this, in context of price cuts. He said, less focused on margins in the short term than on selling more vehicles. But then he added, the value of our vehicles will soar once Tesla perfects its self-driving software. And the thing I love about something like self-driving software, it's kind of like AI. Yeah, it's like no one really understands it, no one can really quantify it. But if you throw it out there, people just see it as this moonshot thing that's ultra positive. And so again, he's kind of engineering a way of something quite negative, but being quite masterful in tactically kind of turning the dial and pivoting, deflecting the attention to a more positive space. And look, I think he is excellent at that for sure.

Yeah. Like, well, they're gonna spend on that point, He was saying they're going to spend north of a billion over the next year on its new AI training hardware, which is called Dojo. That's the name of it. And this is like in an effort to reach the goal of full autonomy. Right. And I guess you could say two things. Tesla are probably leading the race here. In terms of getting to that proper full, you know, self-driving vehicle scenario. They're probably winning the race because they've got the most data. And AI, as we know, is training, training the AI on the data. And the more data you've got, well, then the better your AI system is going to be. And they've got the data from all of their Teslas, the millions and millions of Teslas that are out on the roads driving about. And they've, they've got they can access all of the data from those cars. Secondly, if they do pull this off, then the great thing about Tesla's model is they can then charge existing car owners to upgrade their software on their vehicle that they've already bought and then charge a subscription for this. Right. So his point here is forget about short-term margins. The real action comes when we smash this AI self-driving thing in the future, and then we can monetize again all of these cars that we've already sold. So don't worry about this short-term price drop. We want to sell as many cars as we possibly can. Then when this software is ready, you know, we can really deliver. So yeah, again, it's quite interesting. Um, but he's been talking the self-drive thing for I don't know how many years, and it's still not here. So obviously we've had the year of AI with ChatGPT leading the way, and everyone's got excited about it. But we have persistently been disappointed on the self-drive vehicle front. So will we continue to get disappointed, or actually is this product gonna arrive anytime soon?

Cool. All right. Well, look, let's talk Netflix. I said at the beginning of the show that a little bit confusing cuz you might have seen a headline run in the newspapers or websites saying that a crackdown on password sharing, which they had said they were gonna do, helped the company add nearly 6 million subscribers. I think it was 5.9 million.

Crazy.

Analysts were expecting just 2. Yeah, this is like blockbuster-sized beat. However, um, their shares dumped. So why was that?

Well, uh, two things. I mean, they— so the share price rallied 8% just in the, the days leading up, like this week was up 8%, and then it sold off 8%. So it did dump, but it only gave back a little bit of a rally. Earlier in the week, and it's up very strongly on the year overall. But basically it dumped because the good news was all in the past and the bad news, which they did deliver, was kind of in the future. So the good news in the past, well, yeah, the, you know, the strategy of cracking down on freeloaders you know, 15 students sharing one account kind of scenario. It's, you have to say they've pulled it off perfectly. There was a risk that the cancel reaction didn't happen. So that was the big fear. And what analysts thought was, look, loads of people are just gonna go, well, we'll just cancel that. We're not gonna buy another subscription, you know, another subscription, we'll just forget about it. And that hasn't happened. So yeah. The subscriber numbers are amazing. But ultimately, well, actually something in the past was bad. Their revenue, this is the slightly weird thing. So new users up 6 million, but then their revenue actually was below expectation, which I don't quite understand.

I did try and have a look because I thought exactly the same as you. I was like, How does that even make sense? And the thing that I saw someone put forward was that the average revenue per new sub came in far below expectations and will eventually send margins sharply lower, is what they were suggesting.

Well, I wonder, because they did— like, the— you basically had two choices. You either signed up $7.99 a month, right, to add another subscription to your account. Or they did then feed in this lower price point option. You could pay $6.99 a month, but that would be an account that would have adverts. I don't know. So maybe a lot of these 6 million signups are on the $6.99 a month. And I guess there, I guess the advertising revenue is to come in the future, right? Rather than at the point of sign-up. Uh, but yeah, I don't know, there's got to be something else going on that I'm, I'm not aware of because it doesn't quite add up that their revenue— I mean, it did increase, right, to $8.2 billion. Um, that's up 3% from a year ago, but analysts had forecasted $8.3 billion. So is that $8.2? Analysts had thought $8.3. Even though analysts, to get to that 8.3 forecast, were assuming only 2 million new subscribers. So, yeah, the other point though about the future, and I think the main reason why, you know, the price tanked a bit afterwards was because their guidance towards revenue growth going further, going into the future, was, was a bit disappointing. So they forecast revenue to climb to $8.5 billion in Q3, which was lower than the $8.7 billion than analysts had expected.

Yeah. All right, well, let's, let's wrap it up with the, with the final segment about the UK. So UK inflation, CPI, Consumer Price Index, fell to 7.9%. That was a bigger than expected drop. It marks the lowest level actually since March 2022. Uh, kind of looking at the, the breakdown of the report, motor fuel made the largest downward contribution to the monthly change. Food prices rose in June, but by less than in the same period of last year. I was kind of looking at that food price number and I was like, oh, it's fallen. And I was like, okay, it's fallen from like 18.5% to 17.3% or something like that. I was like, ouch. We're getting super pumped about inflation. It's so weird, the disconnect between being a market participant and it's like, oh, inflation is falling, it's great. And then you actually think about it from consumer's point of view. Food prices are falling and yet they are up 17.3%. It's just crazy when you actually think about it. Um, yeah, but the core reading, maybe this was the important part, because that was the first decline we've seen in the entire year. The core reading being the rate of price rises that excludes food and fuel, that dropped to 6.9%. And then the services prices— well, perhaps, Piers, you could explain to me, like, the service price component, which is kind of this third leg of your stool that you've been referring to, that people have started to look at when it comes to the UK when they talk about CPI. So rather than just core, looking at services prices, and that, that is actually one of the most key metrics that the Bank of England looks at when looking at all of the data components. That rose by 7.2% in annual terms, but that actually is a, is a slowdown from 7.4% in the prior month. So why services is so important for their decision-making process?

Well, it's kind of— well, firstly, services makes up the largest part of our economy. So actually in the UK, I think it's shifted slightly recently, but you still got more than 80% of GDP is from the services sector. And so that's where most of our money is spent, although Hang on. Yeah, well, yeah, that's true. That's where most of our— I was going to say that a lot of the— some of that manufacturing side, perhaps some of the price points of some of those things are very chunky, like a car would be a good example. Right. That's a super expensive purchase relative to a service. We were just talking about Netflix, $7.99 a month. But when you add it all up, the services sector makes up easily the largest portion of GDP. And that's why it's more important in terms of it impacting on the cost of living and the ability for consumers to, to consume.

So inflation going down, is it just a case of like the market's positioning? And it was kind of— markets were overtly leaning on the hawkish elements we've had of late. Resilient economy, not so deep a downturn in growth, wages are still going up. Was it just that the market was a bit ripe for something like this? Um, because surely inflation was going to come down at some point.

Yeah, but I think we got stuck in this continued trend of bad news on inflation in the UK, because when you go and look at the, the US— I mean, we were talking about, um, the US inflation data, uh, last week, right? And if I was to just Hang on, very quickly, if I go and look at the core inflation reading in the US, which is the most important one, that peaked, that peaked at 6.6% in September 2022. Wow. Right. Now in the UK, it's been rising all year. And the peak was in— well, is it the peak? I don't want to get too ahead of myself yet. But the peak is probably going to be May 2023. So September 2022 for the US, May 2023— we're so, so out of sync, it's incredible. And so every month this year, core inflation has gone up and up and up and up. And so you're just thinking, well, it's just going to continue to diverge and go up. The forecast was actually for it to be 7.1%, so unchanged at the peak And I guess we've been so caught up in this narrative of bad news about the UK that you just expect more. And so I think that's why this was so surprising, because it was the opposite. It was good news and we just haven't had any for a long time. And that's what made it all the more surprising. So core inflation dropped from 7.1% in May to 6.9% in June. We don't— I mean, you can't get too carried away. That is still the second highest reading since this whole inflation problem came around. Um, and it's only one month, right? We're going to need to see several months of declines to really become sure that the corner has been turned and inflation is now trending lower like it is in the US. And fine, the Bank of England won't have to hike as much blah blah blah. But it's the first early sign that maybe the corner has been turned. And you saw that in sterling. I mean, like, looking at the market moves for all of this, I mean, sterling had a huge sell-off off the back of this data yesterday morning. It was announced at 7 AM. Go and have a look at your charts, but sterling crashing back down below the 130 handle against the US dollar. It's trading below the 129 handle now as well. So, um, yeah, sterling's devalued quite sharply, and traders are— it looks like— prepared to— although it's early— are prepared to go, you know what, that could be the corner turned on this inflation nightmare that's been so persistent in the UK compared to the US, for example.

Yeah, I know there's one person who's probably breathing a big sigh of relief, and that's the Prime Minister, Rishi Sunak. He's probably thinking, thank goodness this has happened now. But I think I'm right in saying I read he— I don't know if this is true because I think surely he wouldn't commit to saying this, but he said, I think this must have been up when inflation peaked, that we're going to— it's going to halve by the end of the year. What do you reckon about that as a, as a, as a goal by a year end?

Well, I guess I'll go and— I guess the best way to do it—

yes, as a reference, maybe go and look at the US, right?

So on the— he's talking about headline inflation, I assume, which is more, which is more volatile. So actually, if I was to go and quickly look at the headline inflation chart in the US, so I said it peaked last year, right? So if you take— so it's now at 3% in the US on the headline. It was at 6% in February. So actually the US's inflation reading has halved in 5 months. So I guess he's looking at that chart when he's making that statement and just hoping that on that evidence we should probably expect to see the same ourselves.

Yeah, I guess the difference between Rishi and Bailey is that Rishi can say whatever he likes. It doesn't matter if he's right or wrong. And I guess that's a politician's job, to instill confidence right there and then, in the moment. No one will remember what he said about it really, um, 5 months later. Whereas with the Bank of England, the markets will punish you.

Yeah. Um, so talking to the Bank of England, maybe the final point is that'll be the next really interesting moment, uh, because they've got a monetary policy meeting next week, right? And so, um, well, you might correct me if I'm wrong, I think it's next week. So, um, really this is great relief, okay, lower than expected. But prior to this CPI reading, markets had been pricing for the Bank of England to hike rates by 0.5% at their next meeting, so actually accelerate the rate hiking. Um, now markets are still expecting a hike, but half of that, 0.25%. But it'll be interesting to see what happens and what Bailey and the MPC members think about this inflation reading. And are they prepared to really say, you know what, this is a turning point, you know, we are going to now be less hawkish? So that'll be a really interesting moment. In this saga. And that's, I believe, coming next week. Am I right?

3rd of August. So, okay, today we're recording this on Thursday, but 2 weeks away.

Yeah.

Yeah. It'd be interesting. I actually think that the answer to what you've just proposed is they won't— they'll be uncommitted as ever and will continue to monitor and develop. However, talking of the Elon, talking of all the corporate strategies we've discussed, The way I would do it is then utilize one of the fringe NPC members to drip feed in that we feel quite good about this. Yeah, maybe do it that way. And then just if they're wrong, just say, well, that was a lie.

I think they— I don't, I don't think they'll do that though. I think it's too early. They'd have to be pretty brave to hang their hat on one month's data. Normally they want to see at least 2 months of declines, if not 3 months of declines, before really starting to be confident that actually the corner has been turned.

You know what's actually interesting is that another way or avenue of a central bank being able to communicate and test the market out is, is via sources. I don't think I've ever seen a Bank of England source ever. The Fed do it like clockwork, or the ECB, I should say, do it like clockwork. It's like Christine Lagarde's got a button under her desk when she's delivering the press conference, and she's got the earpiece like Tom Cruise in Mission: Impossible, and it's just like, the euro's tanking, push the button, bang, and she hits it.

And explain, like, for those who don't know, what do you mean by that? A source? A source comment? What do you mean? How does that work?

Yeah, so I guess the best way to think about this is every single word that a central banker says is heavily scrutinized and has the ability to influence market expectations. So when they're crafting these statements or answering questions in a, in a, with the press pack in one of these central bank meetings, they're, they're super cautious. So if we're in a position let's say the Bank of England, like this where you are kind of wanting to, our goal, provide forward guidance, which is give some degree of direction so that markets have confidence. And therefore if a policy statement is made or a maneuver is, is taken, that it's not completely unexpected. So you're kind of changing policy with least disruption to markets as possible.

Yeah.

Now in this Bank of England one we've described, it's quite precarious. It's too early. However, it wouldn't it be nice if I could just drip feed in maybe a little comment just to see how the market would take it in terms of, we don't see this as a sign of inflation slowing. If they said something as definitive as that, well then the pound was just gonna go back again. Or they say, actually we think we turn the corner, which is the opposite end of the spectrum and we get a continuation of the second half of this week's moves. So rather than go on the tape, let's say, on the record, and say something either formal, formal stage, or to a central banker, to a member of the press, or an interview, they typically have the kind of bat phone plugged into Bloomberg and Reuters, for example, or the Wall Street Journal if it's the Fed. And it's a very known relationship in markets that they will utilize. And in the case of the Fed, it's the most clean cut. It's a specific economist at the paper that they will call directly and it'll basically be like a little whisper, you know, if you're old enough, blue horseshoe likes Anacond Steel, which is basically like using a type of language which is quite a giveaway in for what it is that you're thinking. And so then that journalist or Reuters or Bloomberg will run this comment saying sources have said, but everyone knows in markets it's the central bank. It's as good as gold. But what it allows the central bank to do is have ultimate flexibility of deniability. They can just say, we didn't say that.

Yeah.

So we all know they did. So it's kind of like this weird situation, but it's very common. And as I said, during Christine Lagarde's tenure at the ECB, it's been the most frequent. And I think that that's a byproduct of the fact that there were some major question marks over Lagarde when she started about her, I guess, just ability to sit there and govern, govern the European Central Bank, given her political history, some of the things she's been involved in, accused of in the past. Does she have the knowledge to be able to deliver this? She's got the public speaking ability. Yeah. Some might disagree, but can she actually do it? And so I think for her, the best insurance policy was taking out that source kind of hedge. And nearly every time there's a meeting, because the problem is when the language is so nuanced and open to interpretation from the investment community, you see the immediate reaction of your words in the market. Yeah. And so the source comment typically comes out within the hour of Lagarde finishing, and it often— it's more likely to come out when there's been a meaningful move in markets because it's probably been unintentional. There's been a misalignment of what she's been trying to allude to as to how the markets have interpreted it. So what do you do? Can you please run source comment B? Yeah, and if I was Lagarde, I would have given my Bloomberg contacts, um, A, B, C, D, and depending on how markets react, please go out with this, this one. Um, so yeah, it happens a lot, and it's, uh, yeah, it's an interesting kind of process. And I do know— don't tell me how I know this— but these people are paid on the books in terms of for this relationship as well. I've seen—

is that right?

Interesting info in the vaccines of how the cloak-and-dagger world goes on. Quite, it's quite interesting.

Wow. Okay. Paid how much?

I actually know that as well, and it's, it's, uh, yeah, I'm not gonna say because I'll get, I'll get into trouble. Right. Yeah.

All right.

But yeah, this, so this is one of those things I think as a student learning about markets, obviously you would never encounter this as a as a kind of textbook chapter, but this stuff is what moves markets. Yeah, this is the bread and butter of understanding price action, uh, in, in a day-to-day marketplace. So yeah, um, hopefully very interesting. Hopefully it's useful. All right, well look, we'll wrap it up there. Piers, thanks as ever for, for joining me, and yeah, I hope everyone has a fantastic weekend.

Yeah, enjoy Peppa Pig.

I'll try. Thanks, Pez. Yeah.