Ep.122: BIG Tech Earnings & Yield Curve Control Explained?

Hello and welcome back to the trading floor portion of the Market Maker podcast. Just to remind you, if you are new to the channel or even if you just missed the episodes, we do have an entirely dedicated corporate finance related show from Stephen, who is our director of corporate finance here at AmplifyMe. He releases episodes every Wednesday. So if you're thinking about careers or just interested in all things banking, then definitely check that show out. And then of course I'm joined by Piers Curran, our co-founder, on the end of the week wrap-up in global markets. So how's it going, Piers?

It's going well. Good week, busy week. I mean, loads, loads going on. Yeah, super interesting.

Yeah, so just to give you a flavor, there's kind of 3 themes. I mean, trying to just break it down to a couple of key things is quite, quite challenging this week. It was incredibly busy. So big tech earnings, we'll touch on the likes of Meta, Microsoft, Google, or Alphabet. And then there's been lots of major central bank decisions. So we've got the FOMC, i.e., the Fed in the US, the European Central Bank, and the Bank of Japan just fresh off the press this morning from when we're recording this. And then just to pivot slightly, just a quick word that Twitter is now X. So a couple of interesting things that, that we've seen that I thought we could just cover as well. But look, let's kick it off and dive straight in and talk about Meta, whose shares I saw at the close last night up a couple percent, which is unusual in terms of, uh, if you weren't watching their share price but looking at just generally earnings performance. It's been a tough ride the last 12-18 months for Meta. But a positive outcome. So what, what was the deal here?

Yeah, I think that, um, it's kind of— I would say their earnings report and the kind of associated, uh, analysts call and stuff, I guess this is like confirmation, um, in a way that Meta have— they've turned the corner, or they've navigated the turning of the corner quite well. I mean, they've been turning this corner for a while. What I guess what I mean by that, you go back to last year, um, you know, that there's that, that their share price performance was spectacularly shocking, let's describe it. I mean, if you go back to— well, I guess they just in share price alone, right, they peaked September 2021, okay, then it all kind of came crashing down and it peaked at $330— sorry, $378. Okay, but by the time you wound up at the bottom, October, um, 2022, so in the space of basically, basically 12 months, it went from $375 to— to— hang on, let me get the low— $91.

Oh, don't— you're giving me FOMO now.

It dropped 75%. And why? Well, a few reasons. It was like the perfect storm. If you remember back, I remember very vividly, like during that 12-month period where the stock dropped 75%, there was one day in particular that stands out in my mind, which was an earnings release day. I think it was quarter one earnings. I think it was quarter one. Well, I can't remember now. Anyway, it doesn't matter which one. It was the one where Zuckerberg came out on the call And he said, TikTok are destroying us. He basically, it was almost like he'd thrown in the towel. TikTok are just trampling all over our market share. And he was like, it was almost like he was saying, and I don't know what to do about it.

Yeah. And at the same time, he was fully vested in this whole metaverse still, wasn't he?

And the double whammy. Was that not only is their existing business under threat, plus, you know, inflation's up, interest rates are up, so the macro scene was looking a bit dodgy. Of course, most of their revenue is from advertising, so in a macro downturn, not good for advertising revenue. So you had TikTok winning market share, you had the macro, uh, themes looking a little bit dodgy, and then It was his obsessive sort of one-dimensional strategy. It was his Hail Mary. We are going to win the metaverse race. And I think this stems from going back 15 years or so where they missed the whole mobile phone— sorry, smartphone thing. Because Meta, I think they launched as a business early 2000s, right? And then Apple came along. With their iPhone 2007, and they kind of missed that. And I think Zuckerberg regretted it. He tried to do it and cocked it up a bit and anyway, missed that whole piece. Obviously they smashed it on the social media front and were the pioneers there. But I think now he's looking ahead and going, right, the metaverse is the next big thing for the human species, you know, in the next many decades to come. And we are definitely not going to lose that race. We're going to be in pole position. It's just that that's so far away, number one, that no one can see it yet. I mean, investors can't— there's no tangibility or there's no evidence yet that that's definitely going to be the thing and that Facebook are going to be— or Meta are going to be able to generate loads of revenue from it. So it was this moonshot, one-dimensional, obsessive strategy about the metaverse and the billions and billions and billions of dollars that Zuckerberg was investing in trying to win that race, a race that isn't going to generate any revenue for years. So you really had that triple whammy: losing market share, macro scene really bad for their original business, and just spending everything and more on this moonshot idea that won't pay off for ages. So the share price dropped 75%, and I think this is a great thing. I, I think this is a really good example of the function of public markets, because the share price dropped 75%, and that is public markets telling Zuckerberg, you are on the wrong track, your strategy is off course, and forced him to recorrect. So, and really, I'd say trailblazed by Elon Musk who turned up at Twitter and just savagely cut costs and said, you know what, this tech industry, you lot, you don't know what you're doing. You've got way too obese. Your middle management layer is out of control. It's super expensive. They're not generating any revenue. You've just— it's— you've just gone way too far. Watch me, I can cut all of that fat out and I can still operate the business with 25% of the workforce. So Musk really kicked off this trend that then everyone followed, which is, right, cost-cutting mode, let's go. And Zuckerberg got on board properly. And that was the turning point. It was the beginning. It was at least Zuckerberg saying, OK, fair enough. I'm on the wrong track here a little bit. Let's correct course. So he cut 20,000 jobs, cut costs. Um, and so I think what's happened now this year— and by the way, the share price, you kind of missed the boat, but I said it bottomed, actually bottomed at $89. That was on the 31st of October. It's now more than tripled. It's actually nearly— we're nearly quadrupled. It's at $316 now. Okay, so it's not back to the highs from 2021, which was at $375, so still room to go if you think it's going to return back to its all-time high. But the share price has been one of the absolute standout performers of the year, and that's because, A, he's seriously gone about cutting costs. We'll talk about— hang on though, one worrying line in his analyst call just harked back to that obsession with the metaverse. He's still— it's still there with him, but Um, yeah, they've cut costs, and I think more than anything, to be honest, for reasons in a bit out of, out of his control, will tie into US GDP figures that came out this week. But ultimately, the US economy's strong, it's on fire. So that macro concern that advertising revenue would drop, well, that was wrong.

Yeah, and then also the other element you said about TikTok crushing kind of absorbing a big chunk of market share. Monthly active users, they reported across all the apps in their universe. So Instagram, WhatsApp, and the rest of them increased 6%. Yeah, actually. So that's also— that tide has turned as well.

Do you want to know— do you know the figure of what the actual number of active monthly users are for across Meta's suite of products?

I do, and I'd just like to have the listeners think about that question a little bit longer. So just repeat it for us.

What is the— what is Meta's daily— oh, sorry, monthly active user count? How many people on the planet use one of Meta's products at least once a month?

Okay. Gonna give you 5 seconds, people out there listening. 3, 2, 1. What is it, Piers?

You tell me.

3.88 billion.

And to put that into context, that's basically half of the world's population.

It's just mad considering it's so weird when sat here in like, let's say London, the UK, No one uses Facebook. I mean, I don't, I don't even use Facebook or Instagram, so maybe I'm just a weirdo. Yeah, but you use WhatsApp either. But yeah, I do use WhatsApp, this is very true. So yeah, I'm just in one of their tentacles, have sucked me in in WhatsApp, I guess.

Another thing about this earnings report was really quite, um, psychologically notable in a way. So their revenue came in above expectation, $32 billion. Okay, analysts had expected 31, so decent beat, but the key was that it rose 11%, and that was— it meant back to double-digit growth. And when you get these tech stocks with huge share prices, with crazy multiples, well, it's only justifiable if growth is fast, right? And this is— this had been the problem with Meta. Their growth rates had dropped, and then of course the reasons I've just talked about, negative angles coming in from all sides. Now it's like, oh wow, back double-digit upside. Amazing. And then the user growth actually accelerated a little bit. Also, the other important point was their view about the future because their forecast for expected revenue in the next quarter or the quarter we're in right now, right? Q3. They increased the range of their forecasts and their range is now $32 to $34.5 billion, which was well above analysts' expectations. Analysts had expectations of $31 billion. So I guess let's just clarify in simple terms what I've just said. Analysts thought that there wouldn't be any revenue growth for Meta. They thought Q1, $31 billion. They thought Q3— oh, sorry, let me start again. Q2, to the end of June, they thought $31 billion. And they were forecasting for Q3, $31 billion. And yet here's Meta gone, actually, you know what, we've grown in Q2 and we're going to accelerate and grow again in Q3, with then some outliers and some unknowns about how quickly the whole AI space for them might start to actually pay off. What Zuckerberg said on the call was, Um, you know, they've made investments in using AI to improve the personalization of user feeds and then its recommendation systems. And Zuckerberg said that that's clearly paying off. He said, we're now focusing on building AI agents or chatbots to help businesses as well as creators engage with users. They're using generative AI to boost the effectiveness of advertising on their platform, and then also tools to improve productivity internally within Meta. And maybe some of those tools might get spun out as products that they might sell. So this is all about the future. Now, all of that sounds super sexy, and you're hitting all the right buzzwords. Um, but it's like, well, all right, but yeah, is that going to pay off? And like, when is it going to pay off? I mean, that's kind of what analysts want to know, right? It's what shareholders want to know. And actually, Zuckerberg, to be fair, Anthony Cheung did say that actually it's really difficult. He said, and I quote, you know, how quickly potential new AI products might scale. He said it's one of the big unknowns for the business. That's what he said. So he's very transparent about it. And I guess for investors, it's super hard, right? It's so fast. This whole ChatGPT-driven era has happened so quickly. It could be that Meta are sat on something that could very rapidly turn into a big revenue generator. But then it could be that they're not, or it'll take longer. So it's really hard, I think, to make a judgment on that.

So there's, there's two parts of that Meta story, one about the macro environment and therefore the advertising component, which we can talk about with Google and Alphabet. But before that, taking the segue from the AI discussion talking about Microsoft, because Microsoft are actually the worst of the three in terms of their share price reaction to this latest earnings report. So one of the main things here was their annual sales growth moderated to 7%. They reported Q4, so their accounting is a bit different, so they're talking about annual sales growth moderated to 7%. I say that's 7% growth, by the way. But the problem is they've had 5 straight years of increases above 10%, right?

Double digit, right?

Double digit. It's like that symbolic level of growth, I think, particularly after 5 years. Then also the share price is kind of steroid-induced, AI-boosted. Yeah. And so, uh, their revenues actually beat, the EPS beat The problem is, I think, for them specifically, the bar is a little higher, just given the context of the recent few months over the whole, uh, success of being the front runner in AI space. And they had what analysts were calling tepid fourth quarter sales growth. Now, tepid, by the way, is $56.2 billion US, uh, which actually was above street estimates. But the problem is, is that The Street's just so hungry with Microsoft at the moment. I think this was doomed to kind of be one of those short-term price reactions, just given what I've described. I don't actually think it was that bad, to be honest. Um, and then maybe your take though on the whole AI part, because I know that— I think it was earlier this week they released a new enterprise-level package with some of the AI products. And it sounds quite intriguing when you think about the numbers. But again, a lot of this is yet to hit the bottom line, I guess.

Yeah, I think with them, their share price is, as you said, steroid boosted since the whole ChatGPT thing kicked off and Microsoft, right, pole position on that race, owning a part of OpenAI that runs the ChatGPT product. Right. But So just back to the share price. Microsoft share price right now is trading back at all-time highs. So back at those October 2021 all-time highs, Microsoft's back there right now. Facebook— or sorry, Meta— is still 20% off that all-time high. So Meta's got way more catch-up here, whereas Microsoft has been boosted back to those highs already. That's one thing they had. They had another boost. It was a couple of weeks ago, as you say, when they started to talk about their product, their Copilot, which will be that sort of AI, generative AI tools to help you to be bolted on to Microsoft Office or, or Windows or whatever. Right. And they came in at a price point for that product that was higher than expected. Analysts had thought they'd come in at $20 a month. As she said, no, we're going to release it at $30 a month. And it's that point around, well, given the efficiencies that can bring to your business, $30 a month is literally nothing. It's basically free, right? So $20 or $30, in my opinion, will not alter the amount of take-up that they're going to get with that product, right? So because it's come in 50% above analysts' expectations on price, analysts have just had to go, okay, we need to tweak up our revenue growth forecasts here. But, um, so look, that's already baked in to the Microsoft share price going into this earnings report. So the earnings report, I mean, the one standout line for me was just the, um, Microsoft's cloud division. So they're Azure, um, products. It's the growth rate, it's the deceleration of the growth rate there that's the most concerning. If you just park all that sexy AI stuff for a minute, back to their current core business, then yeah, as your growth rate slowed, well, it slowed to 27% growth, right? And you think 27%, wow, great. It's just that the quarter before it was 31%, and last year it was 46% growth rate. So it's still growing really nicely, it's just the trajectory is down. And so that disappointed, that was just a little bit of a deflation in the, you know, enthusiasm around Microsoft, which just dented the share price a little bit. But look, I don't think you shouldn't now expect this to be the top for Microsoft, and, you know, the only way, share price point of view, the only way is now down. I think that's incorrect.

Yeah, and, and the sell side banks would agree with you because I saw Barclays, uh, after the earnings immediately raised their price target to $425.

Oh wow, okay.

What did you say they're trading at the moment?

Currently at $333.

Okay, so they're— Barclays are going—

that's like a 30% uptick.

Yeah, uh, Bank of America, they've upgraded from $340 to $405. Wells Fargo from 380 to 400. JP a little less bullish, 385. Okay, yeah, so yeah, plenty of, plenty of upside, plenty of gas in the tank despite being back at those record highs. So okay, let's talk, um, about Alphabet or Google. And yeah, let's— we got the central bank topic to discuss, so perhaps we can keep this one a little bit more brief because it kind of encapsulates a lot of what you discussed well, just then, Google Cloud and the advertising space. So, so what was the deal with, uh, with Google?

Well, I think very much in line with Meta in the— in terms of, you know, ultimately there's one thing in common that Meta and Google have, which is the mass, mass majority of their revenue is from advertising. And so in the end, there is a— ultimately they're more cyclical. It's very much driven by the macro cycle. And so Google, like Meta, have benefited from the point that the US economy— and you might say globally, well, let's keep it US— the US economy is certainly in a way better position than anybody had expected. And so that's just fed through to much stronger advertising revenues than analysts had been forecasting. Um, and so yeah, revenues were up 7%. For, um, Alphabet at $74.6 billion, which was much higher than the $72.8 billion that analysts had forecasted. Yeah, the main line: resilience in its digital advertising business. Yeah, that basically sums it up.

Yeah, I think, um, a good way of just trying to piece these kind of quite abstract numbers, I guess, together, a way of thinking to just distinguish the differences in businesses and where the revenues are coming. So the Google advertising number was, again, $58.14 billion. The company's quarter revenue was $74.6 billion. Yeah, so if they have a really good advertising period, it really shifts the dial completely for that business. Diversified, yes, to a certain degree. But take Microsoft, for example. So their cloud division was about $24 billion. And their revenues as business for that quarter was just over $50 billion. So you can see then the splits, and it just helps make a little bit more sense of their models, I think.

Did you see that? I, I love these big tech earnings because a number pops up every now and then and you're just like— did you see what their net profit was for the quarter?

Well, Alphabet?

Yeah. No, $18.4 $1 billion in 3 months. Profit, profit. Ah, just mind-blowing. And I guess one thing, another good thing about this quarter was that operating margins rose. And that's because they went through the cost-cutting exercise like the rest of the tech industry did, but Google accounted for all of that cost because it costs a lot of money So the irony is it costs a lot of money to cut costs. It costs a lot of money in the short term. Good example being if you make someone redundant, well then there's redundancy pay packets that are involved with that. So actually to cut costs, often the costs initially go up before then, right? You see the effect more medium term. But Alphabet accounted for most of those costs in Q1. So now we're through that, and in Q2 we're now seeing the benefits with the operating margins improving. Um, but yeah, that, I mean, just that $18.4 billion profit for 3 months of work, it's just quite staggering.

It makes me think that strategically, in terms of, say, trying to acquire talent, because I think for the big boys it's almost like trying to form this absolute extreme talent in these emerging technology kind of areas, and AI being the one at the moment. Like, from a career's perspective, surely you've got to be thinking as a young person, I definitely need to align myself accordingly because the pay scale, you would have thought, for the battle on that talent in that arena of tech, particularly big tech oriented, I mean, that's just going to be like a world on its own, surely, because they've got the capital to be able to spend it and to invest in that way and take those gambles, essentially.

Yeah, they're just cash-generating beasts and they're taking over the planet. You know, that's why the regulators kind of very concerned, but Ultimately, they all own Google shares, so it's all fine. The genie's out of the bottle, really, isn't it? I mean, they're way too late to try and control these beasts in a way, but yeah.

Okay, well, let's, let's pivot and let's just kind of talk central banks for a moment, and we'll kick it off with the US Central Bank, the Federal Reserve, or the Federal Open Market Committee, the decision makers at the Fed. Otherwise known as the FOMC. So they hiked rates by 25 basis points. Rates now in the US at 5.25 to 5.5% federal funds rate. The headline that you see is, oh, rates at 22-year high. You'd think, oh, that's bad. Stocks are loving life again. Uh, not just about what happened in that rate decision, there's some other stuff we'll look at in terms of data points. But I think actually I want to lean on the latter part more than the actual rate decision because I was there covering it actually live with a bunch of, uh, interns at Citi. We were, we were live trading it together as one at the time. And, uh, there's me with them for 7 hours straight building them up. Huge drama. Come on, this is like going through every nuance of how to manage a high volatility event. Yeah, and it was a, it was a snooze fest. And I was like, yeah, he might make a mistake. Hang in there, but it never quite materialized. But we did actually get a decent little kick in the press conference, and to kind of make sense of that part, and then we can dive into the data points from this week, which ultimately I think are more interesting. Powell said the FOMC will be assessing the totality of incoming data as well as the implications for economic activity and inflation. I think the main take-home reason why the market reacted quite dovishly— I— stocks rose Yields fell, dollar fell, so on, was that the next FOMC meeting isn't actually until the 20th of September. Hmm. That's a long way out. And if you look at what's been happening with inflation in America, it's actually the momentum of moving lower. The deceleration momentum is picking up pace. So where inflation is gonna be by September, you would think is going to be much lower. And I think that the market— I think there's two CPI reports to come between now and that date. And I just think then that the market has taken the decision that the hike that they've done, that's it. And it was really interesting listening to Powell actually in the press conference. He was like he had his Tom Cruise MI earpiece in, and he could tell that the market was going up. And he kept trying to say, yeah, but we, we might we might still go further, we might have to still go further to tackle inflation. You're like, no, Jay, we know the deal. And everyone was just buying at that time. So yeah, I think the market's taken it. Market pricing now for the SEP meeting is like 90%, um, in the rates market that they'll just hold at this point. So, so equity markets rallied, but then the very next day you then get a whole batch of data and the headline readings were, this is the first look at how has the US performed. And just to put this in context, you remember the final reading of Q1 GDP? It was a shock because generally GDP comes out over a quarter 3 times. So you get an advanced first reading, preliminary reading, the final reading, and generally the deviation against expectation reduces because it's just a statistical revision as the data gets gathered over that time period. So very rarely does the final reading move markets. And if you remember, it did. I think it came in at 2% against 1.4% at the time. Like, that's a shocking, like, miss against what we initially thought it was going to be in a positive way.

Yeah.

So then Q2 comes out. So we've already got this positive kind of leg up on Q1. Q2 comes in at 2.4%. Analysts were expecting 1.8. And not only that, you start layering in everything else that came alongside it. And I think it was, yeah, really important. Um, the Federal Reserve's— we talked about this many times— their preferred inflation metric, because I think everyone talks about CPI more commonly, but the Fed is a little bit different. It's this core PCE number, personal consumption expenditure. That advanced at a slower than expected rate of 3.8%, i.e., the central bank is wholly focused really on inflation ultimately. And what we're seeing is inflation is, like I said, the momentum to the decline is picking up, growth is picking up. Meanwhile, new orders for US manufactured durable goods jumped nearly 5% month over month. That's the biggest rise since the middle of 2020. Weekly jobless claims declined 7,000 as well. So what does all this mean then for— there was lots of people talking about there's a recession coming. We've had the inversion of the yield curve, still inverted.

Yeah.

Is it coming? Is it not?

From what we're saying, I think the conclusion of all of this is ultimately the chances of a soft landing have now meaningfully increased following the update on the kind of data side that we've had this week. So a soft landing, just to kind of get this straight, that just means that you get— you engineer a slowdown in inflation without creating an economic crash or, or, or a recession. You know, historically, how'd you get inflation down? We dampen demand, but then that means consumption drops, which means you have a recession. Trying to get the balance between reducing inflation and avoiding recession is phenomenally difficult. History tells us. I have to say, it looks like— I mean, I've been a Jay Powell critic for, you know, by and large for a while, with good reason in 2022 because they really cocked that up with the transitory inflation thing. However, I would— it's beginning to look more and more like he is entirely redeeming himself by actually landing, sticking this soft landing. Um, so yeah, it looks like growth is strong and inflation's dropping. It's like the perfect combination, but we'll see. I mean, the thing is, the stronger growth, the, the more it beats expectation, the, the longer the labor market stays strong, well then it might be that this inflation saga kicks back to the upside. So it might be that, yeah, they're going to stop hiking rates, but I do think we're still in for probably high rates for longer without necessarily more hikes. Um, and I will add, if you really want to take the bear camp on this, because obviously you can, and I love the fact that this is all opinion about the future, right? And you can gather all the stats you want, and some people will look at I've got a negative glass half empty angle and, and some the opposite. The glass half empty, there's a guy called Eric Hickman, um, is an analyst at a place called Lantern Capital, but he kind of came through with the point about, well, yeah, these GDP figures are good, they're better than expected, GDP growth is accelerating. But he did point out that Q2 GDP growth in July 2000 came in at 5.2% above analysts' expectation of 3.8%. The recession then hit 8 months later. And he said, it's actually— if you look back at the last two big recessions, 2001 recession and the Great Financial Crisis, then actually what happened was just before the recession, in the late phase of the cycle, we actually saw an acceleration in growth both times. Before then, we hit the recession. So he's pointing towards that kind of pattern and saying, yeah, these GDP numbers are good here, doesn't mean there won't be a recession. I think his argument's looking weaker and weaker. You know, the evidence is pretty overwhelming at the moment. Um, but yeah, it looks like the Fed are sticking this soft landing, which is remarkable.

Yeah, I was just having a quick look because there was, um our friend Mike Wilson, who's the chief US equity strategist at Morgan Stanley, who's been a bear every tick higher of this US equity market, I think, for the last several months. So he definitely didn't pick up Facebook at $89, I could tell you that for sure. Yeah, it's been an expensive year, but he's come out— so there's two, there's two parts to this. So he's come out And he's basically waved the white flag. And credit given where credit's due, he said, you know what, he's put out a research note leading with, I was wrong. However, when you actually start reading it, I just had a quick look. He leads with that, but he very quickly turns back to his usual self. And he starts saying, yeah, but, but, but, but, but it's not quite that clear. There's still a, a bearish case. Now here's one, his justification of holding the bearish case. Um, he said that slowing inflation could hurt US companies' ability to raise prices, which could impact earnings down the road. And then he said the resumption of student loan payments in September is another potential headwind that could hurt earnings as well. Yeah, so there are a couple points, but on the flip side Goldman Sachs, their US equity strategist, um, said that the idea the economy could continue to grow and the interest rates will no longer be putting pressure on valuation multiples is a good thing for stocks. And secondly, corporate earnings season thus far has also reaffirmed confidence for equity investors with a higher frequency of earnings beats than usual and earnings growth over and above expectations. So, yep, enough, enough fodder there to please everyone, I guess. Um, but let's move on because we've still got to talk about the ECB and the BOJ. I think we should largely skip over the ECB, if I may. Yeah, um, just in summary, they hiked. That was very much as expected. Uh, it is the 9th consecutive rate hike. Yes, it is a 23-year high. Yes, it is completely as expected. I guess the one line I'd like to hear from you is that at the moment, nearly every economic indicator in Eurozone is pointing to a very bad future. However, inflation at this point is looking incredibly sticky. Um, it's expected that it could take until 2025 for inflation to fall back to target of 2%, so suggesting that interest rates in the Eurozone will need to stay high for quite, quite a while. Markets are priced right now in terms of the SEP, their next meeting, completely 50/50. Can't make up their minds in terms of is this it or do they need to go more? The rock and a hard place. So where— how did the ECB tackle that?

Yeah, I guess it's very hard. I mean, I'd say that, well, look, they're data dependent now, right? I mean, like the Fed data dependent. What are you going to do at your next meeting? I don't know yet. We'll see, we'll see what the data says. Well, in the Fed's case, it's clear-cut. The data says inflation's on the way down pretty fast and you're not going to need to hike. Um, over in the eurozone, picture's less clear. Yeah, because inflation's— it is coming down, but it's coming down slower. As you said, it's more sticky, but You know, in the end, I mean, the US leads, right? It's the biggest economy on the planet. Um, and I would say in the end, the US is always a great lead indicator. And so, you know, I, I would say that the— if I was at the ECB, I wouldn't be hiking more. But if inflation's above target, you know what the ECB are like. Famously one, you know, one mandate, one single mandate of inflation, and it's just so binary. Oh, inflation's higher than expected. Oh, we need to hike then. It's just that, yeah, I've always been quite frustrated with the ECB's, um, one-dimensional sort of strategy. So they'll probably hike and it'll probably be a mistake, but what do I know?

Well, let's, let's go straight to the BOJ because that's probably the one that's had the biggest market impact. At least in the domestic market. So Japanese yields, the Japanese yen, and it's all centered around, uh, this more unconventional policy tool called yield curve control. So perhaps we could start with that because the Bank of Japan didn't change interest rates, right?

The interest rate— well, did you know, here's a really good one-liner stat. The Japan are the only country in the entire world with negative interest rates. They are still at -0.1%. Where they have been, they've been stuck at -0.1% basically for 30 years. So with Japan, you've got, you've got to go back in history to really understand what's going on now. Japan had their financial crisis in the '90s, 1990s, that is, right? Whereas the rest of the world kind of had a financial crisis 2008, 2009. Um, and we learned a lot from how Japan dealt with their crisis, and how they dealt with it was badly. And right to this day, 30 years on, they're effectively still suffer— they're still in the depression, if you like, that, that crisis back in the '90s created. So there's a bit of longer-term history to get things into context here. So they're at -0.1%. And so when the crisis happened, um, in 2008, 2009, whilst other central banks had plenty of interest rate ammunition— meaning interest rates were high, like in the US they were 5%, so right, they can cut from 5% to zero— that's a lot of ammunition, stimulative policy moves to try and get the economy out of its recession. Right. Japan didn't have that ammunition, so Japan had to go off-piste with regards to their monetary policy. And so they went ahead with, well, several things, but certainly they relied more on QE. So because they didn't have much in the interest rate cutting tank. And so they started to buy a lot of government bonds and so on. And ultimately they ended up inventing this thing. And this is all brand new, like creative monetary policy, right? And that's this yield curve control, YCC. This is effectively them— we talked about inverted yield curves and stuff like that. But effectively what the Bank of Japan said is we are going to control the cost of borrowing right across the duration piece. And we will effectively lock the Japanese 10-year government bond yield. I mean, they've had it at various levels. I think the lowest was 0%, wasn't it? They said, we will not allow the 10-year government bond yields to go above 0%. Then they, in December, they actually increased it. They increased the fix to I think 0.5%, didn't they? Um, so they're just giving a little bit more leeway. And this is just essentially the, the 10-year government bond yield for any country is a great benchmark reference rate. We often talk about the central bank's interest rate. That is a benchmark reference rate for banks to use when they're setting the interest rate on loans they're providing out into the economic system. So when the central bank changes interest rates the transition mechanism, which is basically that then alters the cost of borrowing in the economy. Okay, um, but another great reference point is the 10-year government bond yield. All right, certainly when corporates are issuing bonds and borrowing money through the bond markets, then how much that will cost corporations is very much anchored towards that government's 10-year yield. So the Bank of Japan said, we're going to stop it going up so that we're going to keep corporate borrowing at a super cheap rate. And that's our stimulative initiative to try and get companies borrowing and then investing in their growth. And that will lead to then an increase in consumption, and we'll try and fire up this economy and try and get it back to a sustained growth trajectory, which then leads to inflation. Um, one thing that Japan— you know, the whole world's in an inflation crisis. Japan are like, oh my God, finally! Hallelujah! Finally, we've got some inflation. This is like the best thing that's happened to Japan in 30 years. The inflation crisis is the worst thing to have happened in the developed economies like Europe and the US, but it's literally the best thing that's ever happened in 30 years. So it's all kind of incredibly different over there. Um, but, and one thing with inflation, they did— I was listening to a podcast and the guy, um, the CEO of Man Group was on the podcast, which is like a big, essentially a big hedge fund. Um, but they got offices in Japan and he was saying, yes, like Japan suddenly now it's there's positivity. They're like, maybe we're out of this 30-year hole and rut we've been in. And he said he increased the salaries of his staff in Japan for the first time in a couple of decades, literally. And he said the, the staff were like, what, what, what even is this, a pay rise? You know, most of the workforce had never had a pay rise ever because they've been in a deflation trap. And like, you gave them a pay rise and they're like, what? Oh, you're paying me more?

Why?

Why are you paying me more money? That's not normal. But the point is, now this is— they're trying to start that virtuous cycle, which is, right, pay people more money, right? They can— they spend more, okay? Demand goes up. Inflation goes up, companies make more money because they can increase prices. More profits feeds back into, right, let's raise salaries. And then that virtuous cycle engine fires. And that's what people are hoping. This inflation crisis for the rest of the world actually, weirdly, could be the very single most positive thing to happen in Japan for 30 years and could kickstart this next virtuous cycle.

Yeah, this is actually super interesting. Yeah, we shall see. We'll have to wait another 30 years to see how— all right, just to quickly wrap up then, uh, Elon Musk announced on Sunday night that Twitter is revamping its logo and replacing its blue bird with the simple X. I'm sure you probably would have seen this. It was kind of like a 24-hour snap decision, classic Elon style, send me in your photo snaps and let's change our business to whichever I think's the best. And he followed through on it and it is now X. And so a couple of things, I kind of was looking at this story and I was like, wow, there's obviously a lot of, you know, anything Elon Musk related tends to be quite divisive as a topic to talk about. But I read a couple different things and they were mainly centered around marketing people who were talking about how difficult, how costly, how risky it is to go through this. And there's lots of examples where you've had the necessity to rebrand. So Facebook to Meta. Yeah, you talked about Mark and his kind of switch and sole focus on capturing the front running of the metaverse race. I mean, what better way if you were going to do that and just call your business Meta and just completely go all in? I mean, he obviously got the call wrong, but Facebook still exists is the point. That's through that exercise. And Google rebranded to this parent company Alphabet, but Google is still what people recognize, whereas Twitter is now dead. And I was just reading about it from a cultural perspective as a company. Like when you talk about social media, people like and share, but like and sharing is a, is a commonality that's shared on all platforms. It's not unique to one. Whereas in the Western English vocabulary is tweeting.

Yeah.

Like it is a cultural thing in our society now. So it doesn't exist anymore.

But isn't it so ingrained that can't you still tweet on the X app?

Right. So technically you're still tweeting.

Yeah.

But I'm sure Elon would not want you to say you are tweeting from the X app.

So what, what are you Xing?

You're Xing. But well, he hasn't said that yet, but that's just a side point. The main point here was about this kind of advertising. Piece. And you know why Musk has done it? Yeah, because he has a completely different business strategy. This isn't about tweeting anymore. This is about the Everything app. Yeah, it's about bringing financial services and bringing everything kind of similar to what the Chinese do with a lot of their applications, trying to bring that in. Um, not going to talk about the technological challenges of bringing that into a Western banking system. We'll park that for now. But I was reading, I just came across this paper that Bays University, a university in London, they put out a snap piece. I thought, well, that's quite unusual for an academic institution to come out with a trending topic. Yeah. They basically took a soundbite from all their marketing professors about what they thought. And there's a couple of interesting things that came out of it. One of the main things was the kind of then impulsiveness of this move. It goes against the grain of textbook marketing strategy, which is if you're gonna rebrand, this should be well-crafted, well thought out. Lots of sort of research and science goes behind it before you just do it. So a couple of things here that came of it is the preparation, if you like, of, well, how do you trademark X across international territories as a product? And even the relevant social media handles. I know he is— he basically— I read a story about the guy who owned since 2007. I think he was a painter or graphic designer. He owned X as the handle, And the guy said, well, he knew it was coming. And what X did is they just sent him a message and said, look, we're taking it. You can, you can come to the HQ though. We'll pay for your trip, you know, get a few snaps. And he was kind of like, yeah, okay, whatever, have it. So they've reclaimed that. But how do you reclaim all of the different, you know, you acquire all the different elements that you need to give you an idea from, though, a trademark perspective. So more than 100 tech companies have trademarks for X within, within the specific trademark category that includes online social media networking.

Hmm.

And that's according to the US Patent and Trademark Office. So the key here, though, is a couple of things. So several tech giants, including Meta, Microsoft, Google, They all have and own trademarks with the letter X in the context of tech and internet services. So it all comes down, as law does, to, well, what are the actual finite details? What are the parameters that contain that trademark? Yeah, trademark descriptions from those companies cite different uses for X than what Musk has described is his vision for the site, meaning that there's a good chance the Twitter owner, so Musk, will get a trademark for his new brand and it won't impede on those others. The problem, however, is that receiving a trademark does not prevent other companies from suing you for trademark infringement. So one of the things here is I think technically from a legal standpoint, Musk can get away with this in terms of securing it and its intellectual property. However, That doesn't stop big tech firms. And if I had $18 billion of profit in the bag, like your, like your buddies over at Google, I'd be like, okay, let's, let's have a little play then.

Yeah.

And let's see. And it is, it's really interesting. I mean, one thing you've got to applaud Musk. I mean, he's all in, but you've just explained with Mark, he, he, uh, he got humbled. Will Musk ever get humbled? And will this be a humbling experience? I don't know. The debate is out, right? It could be a revolutionary app. Who knows?

It's the classic Musk playbook, isn't it? I mean, he's very— it's like a dictatorship, isn't it? In that, right, he— when he makes a decision, right, well, let's just do it. You know, there's, there's no So checks and balances. Right, exactly. And look, this is about the least surprising development. I mean, we've been talking about Musk's obsession with X on this podcast a few times, and it goes back to his early days as an entrepreneur. He owns X.com. I just checked it now. I just typed in X.com, and that now auto-forwards to Twitter.com. It does say on his website now, it does say X, right? But it does say, it does still say join Twitter today on the homepage.

I wonder if they've not had time yet.

I wonder, but I wonder if, is Twitter going to stay as one of, one of what will now be many products under the umbrella of X, or is Twitter itself as that social media platform, is that changing to X? I'm actually not quite sure. But yeah, on the trademark thing, that sounds like an absolute minefield and nightmare. What I would say, we have a trademark. I've got a small amount of trademark experience. I'm not quite sure I'd go that far, but we've got a trademark in 3 classes. So you have lots of different classes and each class represents a quite well-defined usage case. So we've got a trademark, we've trademarked the word Amplify in Class 9, Class 36, and Class 41. Okay, just in Europe. And like, for example, Class 9, these class— and there's loads of classes, hundreds, and they're quite well defined. Class 9 is computer programs for simulating financial trading. So that's pretty neat, right? So I imagine that, um, whilst all these big tech firms have got trademarks for X, I'm, I'm sure Musk's lawyers have been on this and said, well, yeah, that's fine, Microsoft have got a trademark here, but that's in that class, and actually we think as your lawyers that our use case is different and wouldn't be in that class, and there wouldn't be an infringement. So, but I'm sure there will be cases where he is going to tread on some toes and it's going to cost some money. Um, yeah, and if you're going up against the big boys, they've got more money.

Um, and what's interesting is that, you know, you talk about advertising at the likes of Google and Meta. I don't hear Musk talking about the uptick in X's slash Twitter's advertising revenues.

It's a good point. Well, yeah, but you don't know because he doesn't have to report his earnings.

But if they were going up, you don't think he'd be telling you about it?

Well, that's a good point.

Yeah. Okay.

And just to be clear, he doesn't have to report his earnings, to be clear, because it's a private company that he owns. So it's only public companies that have to report their earnings. But yeah, you're right, he would be shouting about it, wouldn't he? Oh, and it's not.

Yeah, which means they're going down. All right, on that, thanks, Piers. We'll wrap it up. Um, if you're listening on Spotify, don't forget there is a Q&A function on your Spotify platform. 100%, feel free to leave us a comment or a question. Happy to respond to those. And if you haven't already clicked on the follow and the bell icon to get notified when new episodes come out, please do. Love to have you as part of the community if you're listening for the first time, and I wish everyone a fantastic weekend.

Have a good weekend.

All right, thanks, Piers.