Ep.52: Why Facebook Is The Worst Earnings Report We've Ever Seen!

Okay, hello and welcome back to the Market Maker Podcast. This is episode 52. Quick update on our end of Q1 target on the ratings on Spotify. Piers, we're currently on 141, target is 250, but we're already a third of the way through the quarter, so I'm feeling quite bullish at the moment.

Yep, come on, let's go, guys. We need another boost. February has begun, so let's see if we can lift it to 250. Can we bring forward our— we can revise our forecasts, right?

Well, look, in the spirit of quarterly earnings season—

Exactly.

You are the CFO figure, so you want to get people excited about the stock price, juice up the target.

Yeah, well, although historically analysts tend to revise down their expectations going into earnings season, only for then these companies normally to kind of come out and smash it. Obviously, one company in particular that we're going to spend some time talking about failed spectacularly to do that. But yeah, I'm going to alter our forecast.

But hold on, hold on. Given what you've just said, as your chief market analyst, I would suggest you keep the forecast as it is. Even if you feel incredibly bullish.

That's not it. I'm raising targets, raising targets. So our quarter-end target, I'm raising from 250 to 300. So the market's down. That's a challenge to you, the listeners. Don't let me down here. Um, actually, I'm going to bet you £10. I'm going to put money on the line here.

Come on, £10 is not a serious bet. There's a watermark of 50.

All right, 50— £100 that we hit 300 by the end of March. Okay, do you take the bet?

Well, I mean, I'm— yeah, we smash it. The community is amazing. Of course we hit that target. I think that we should take— if we don't hit that target, we should do some sort of forfeit. Maybe we record this video right, on, uh, and we put it on our YouTube channel at the weekend. So we record, we record this podcast by Zoom, the video goes up on our YouTube channel. If we do not hit 300, right?

Yeah, we've got to do it naked.

What I will do is I will shave my head bald on camera during that podcast on the first week of April. You have it here. So take your £100, forget your £100. I will shave my head. I've got an electric— during the pandemic, it's cut your own hair, right? So I still got it.

DIY style.

DIY style. I will do it live. Well, live recording broadcast. And I kid you not, you can watch it on YouTube if that occurs.

Okay.

Wow.

I mean, I can't top that. You're on your own there.

Maybe I should reverse this. Maybe I should say if we hit 500 by the end of Q1, I will do that. Maybe we have an incentivization. All right, well, look, quick run through then of the week. So what a week. Yeah, I mean, it's just been a crazy beginning of the year, really. So obviously Meta, Facebook shares got absolutely killed post earnings. And we're going to dive into that in a moment. Google brushed off fears that the waning impact of the pandemic lockdowns was going to put an end to the kind of tech boom. But for them, they smashed Wall Street profits and they announced a 20-for-1 stock split, of which we're going to explain a little bit more of what exactly that is and why they would do that, the mechanics behind it. The Bank of England delivered their first back-to-back interest rate increase since 2004. And so, I mean, that was— well, I started my career in markets in 2005, I remember that was when we were on the way to 6% at the time. And before then, obviously the financial crisis hit. But yeah, long time since that had happened and it was a surprise. And we're going to also talk in depth about the BoE and the vote composition, which was really interesting. And then the ECB renewed its pledge to withdraw pandemic stimulus only gradually, despite they are also facing record high inflation. However, forget for the moment the Bank of England. The euro actually saw the biggest move yesterday. A lot of that in part because of Lagarde not really pushing back a great deal against more aggressive tightening pricing in the markets that we're seeing. And always on cue, they dropped source comments immediately after it came out, and the sources suggested that that the central bank, the ECB, is to prepare for a potential March policy recalibration, and that they agree that it's sensible not to exclude a rate hike this year. So for those who are not familiar with all of this, a source comment basically is the non-official voice of the ECB using the avenue of, in this case, Bloomberg to drip feed in so they've got flexibility to alter their communication in the future, but obviously giving some guidance to the market. Away from central banks, Vladimir Putin said he hoped that dialogue will continue. This comes despite Joe Biden ordering deployment of additional 2,000 more troops to bolster NATO's defense in Europe. And then looking ahead, we're recording this Friday morning, so we're, we're ahead of non-farm payrolls, but that is coming out in a few hours' time from this. So probably by the time you listen to this, you might well have known what the number is. But one thing there that could happen today is a negative number. And that would be the first time pretty much since the initial pandemic hit and we saw that massive gyration in jobs. And the reason for that is, is that with payrolls, very simply, it's not a case of the number of jobs created in America, nonfarm jobs from January 1st to January 31st. It takes a reference week. And that reference week is bang on cue the peak of COVID in America. If you look at COVID cases now in the US, they are decelerating rapidly. So whether or not you get a negative number today, quite frankly, I think is a non-issue as far as the Fed and the market is concerned. I say that with a caveat. It depends really how bad. But what the Fed officials will be thinking is that, look, even if it's a negative number, that's not going to detract from our, our kind of path that we're now down. And therefore, unless we see back-to-back soft numbers, nothing's going to change really. So just to put that out there. And then finally, the other big story of the week, of course, Rafael Nadal winning the Australian Open and his 21st Grand Slam, making him the greatest of all time, Piers?

Well, I mean, well, yes, if you've got us— if you— well, I mean, the one thing about Rafa is obviously half of those have come from the French Open, so he's a bit more of, um, well, I, I was a specialist once.

Not one-trick pony.

I was gonna say one-trick pony, and that would have been the outrageous thing to say, but yeah, he's more of a specialist, I guess. So yeah, I mean, phenomenal, phenomenal. I mean, the kind of just the sheer grit and determination and the strength of will at that age, you know, what a guy.

Yeah.

I mean, and your mate, your mate Novak.

I mean, I'm not stressing about Novak. Novak's gonna smash 25, so this is just a little blip on the journey to greatness for the man that everyone hates.

Yeah, but Rafa's good. Rafa's gonna win in Paris, so that'll take him to 22, right?

Okay, yeah, that's fine.

So yeah, Rafa, greatest of all time.

Oh well, I know, I know one person, Sam North, would agree with you. On that, one of our former, former colleagues. But, um, yeah, it's— this is always a massive debate, right? How do you define the greatest of all time? And it's very subjective. People often put other sporting heroes in this, don't they? You know, Muhammad Ali's, uh, you know, political as well as sporting impacts and social impacts.

Well, yeah, just from the— yeah, I mean, I, I'm still a— I'm still a Roger fan. To be honest, in terms of what spectating, I think watching Federer play is just a different level. I think he's the best tennis player of all time. Maybe not the best competitor, you know, that'll be maybe Rafa, um, or, or not the most annoying, that'll be Novak.

All right, well, look, we'll reconvene when Novak, um, surpasses Nadal, which he will in time. So anyway, Meta earnings. So we'll, we'll go straight in at that. And yeah, pretty much, I think, a catastrophe. Their shares at the open yesterday were down at the bottom 26%, which is the largest— I think I saw a graphic, the market cap they lost in one day was like $230 billion or something like that.

Yeah.

I mean, a monster move.

Which actually puts it as the biggest ever stock sell-off in history in one day. The biggest market cap loss in one day, biggest ever in history.

Right. So look, let's break this down because there's a number of elements of which when put together make a very compelling negative case here, I guess, of why the impact was so large. So in terms of the top line figures for the quarter, their revenues were actually a slight beat, $33.67 billion against $33.43 billion. Their EPS was a miss, earnings per share $3.67 against $3.84. The thing that really, I think, caught the initial attention was this daily active and monthly active user figures. So let's just start the conversation there. So their daily active user figure was 1.93 billion and expectations were for 1.95 billion. More worryingly though was not only has this trend plateaued, but if you look at the geographic breakdown of the DAUs, the US massively important, of course, and the rest of the world, so exit Europe and Asia, was declining.

Yeah.

And that's not supposed to happen as far as Facebook are concerned. So initial thoughts there on the active user front, if any.

Yeah, it's massively significant that that number— and look, with these companies, you know, if you're in the business of social media, it's all about your active users. And in the end, this is the— well, I won't go as far as say the first nail in the coffin of Facebook. I mean, Meta— we'll split the two out in a minute— but yeah, from Facebook's point of view, this is— I mean, it's a disaster. And yet not surprising, I wouldn't say, or certainly I'm definitely not surprised. But yeah, because when a company generates— here's the point though. When a company generates almost all of its revenue from advertising, and the advertising revenue channel is through people on your device, on your app, every day. And then all of a sudden, the number of people on your app every day starts to decline. And by the way, this is just the beginning, right, in terms of declines. I mean, I think now, as you say, it's plateaued last year. Now it's begun to decline. I mean, I would expect an acceleration of that decline. And when these trends shift, I mean, that's it. I mean, it's very, very difficult to— to reverse that. I mean, obviously, look, when a CEO comes out, it's quite a remarkable earnings call. I mean, literally one of the— to put this in perspective, I think it's one of the most shocking earnings releases ever. It's certainly in my career, I can't remember an earnings release just quite as sensational. As this. Zuckerberg said, I mean, obviously he's worried, right? TikTok is the thorn in his side. He said that, and I'm directly quoting here, "The thing that is so unique is that TikTok is so big as a competitor already, and also continues to grow at quite a fast rate off a very large base. Even though we're compounding extremely quickly," we also have a competitor that is compounding at a pretty quick rate too. I mean, quite extraordinary for him to come out and basically just say, we're losing, we're losing the race, and we're falling further behind. And almost like hands in the air, got no answer to it.

He needs to, he needs to call up Rafael Nadal, bring him on the board.

Yeah, they, they are 2 sets to love down here, and TikTok have just broken in the third set. I mean, and I think that— so look, there's a few headwinds here, and it's not just the user numbers. I guess, as I've been saying, Facebook has been, in my opinion, like that kind of dinosaur social media app for a while now. And so you're seeing that in the user numbers. Finally coming through. But, you know, so where does Facebook go from here? Well, obviously they've changed their name to Meta, and it's about Meta, and it's about the future of the metaverse, and can they nail that? But I think another big thing about this earnings call wasn't just the whole TikTok thing, but it was also just how much money they're losing trying to fund this mega project. And I mean, so you've got 3 things, I guess, at this core. Maybe we'll drill into each. Obviously, the daily active users. You've then got the issue around revenue and how much they've lost as a result of Apple. They brought out their software privacy changes last year. They lost $10 billion. They're $10 billion worse off, Facebook, because of that change. And then yeah, you've just got the stats on the amount of money they're losing.

I can add two more bearish factors to your case here.

Yeah.

The macroeconomic challenges impacting advertising budgets at the companies who are using your spend or using your product, and then foreign currency headwinds on a year-over-year growth impact. Sure. So that keeps coming.

But that first one, how can Facebook say well, hang on, we had a bad quarter because of macroeconomic headwinds. And yeah, there's this inflation thing, you might have heard of it, and the supply chain issues, and it means our customers don't have enough money or don't have as much money to spend on advertising and blah, blah, blah, blah, blah, blah. And then Google come out and smash it out of the park. How does that add up, right?

So we know what they're trying to do there.

Well, yeah, fine, they're finding excuses It's just that excuse doesn't kind of fly. Although what's really interesting, I think, is just kind of touching on that kind of Google thing. It is maybe the case that what we're seeing is further evidence that the kind of newsfeed social media advertising format is perhaps now dying a death. And of course, Google's advertising format is very, very different, you know, you know, that they— in terms of Google AdWords and, you know, users going on to Google and searching for something, right? They're specifically looking for something, and then Google serves them ads that are related to the thing that they're looking for, right? It's a whole different type of, um, reaching an audience. Obviously, on social media, you're not on social media for ads. You're on social media to whatever, watch videos, and right, and then you're getting served ads alongside. And, you know, do you look at those, do you not? And, and, you know, so I think it's quite interesting that Google's advertising revenue has been nice and solid and beating expectations when this kind of newsfeed social media style advertising, you know, is, is taking a hit.

Yeah, I was just trying to find— you were talking about Google and ways they they create money. So they generated $8.6 billion in Q4 alone from YouTube. Yeah, that was up 25% year on year. That's more than the entire Netflix revenue, right? Just from YouTube. So, um, but yeah, I mean, pivoting back to— before we'll talk about Google, I'm sure, but one of the things to add to what you were discussing was the amount of money they're losing. And obviously The crisis is the pivot to chase the Meta dream, if you like. Reality Labs operating loss was $3.3 billion. The new disclosure of Reality Labs segment's operating loss actually was $10.2 billion for 2021. And analysts were saying that points to at least a 10 percentage point drag on overall operating margin, which most would expect is going to get worse in the near to medium term as they accelerate this. They have to accelerate the spending in that division.

So the whole drive for winning the metaverse race— yeah, here's some stats in terms of revenue. Because things like Reality Labs and Oculus and stuff, they are They are making money, right? They are selling stuff. There is revenue there. So if you look at the revenue side, so in 2019, Facebook— because they've just started splitting out their revenue figures on the kind of Meta side. In 2019, they made $500 million revenue, OK, that part of their business, but had a net loss of $4.5 billion, OK? 2020, they doubled their revenue. So great, the revenue growth rate is great, right? So they made $1.1 billion revenue in 2020, but their net loss went up to $6.6 billion. 2021, doubled revenue again. So in the last 2 years, they're on a doubling revenue run rate, which is great, right? But $2.25 billion revenue, but a $10 billion loss. So as they're doubling revenue, their spend is just exponential. And the point is, it's going to continue to be. I mean, again, quoting directly from Zuckerberg, he said that— he warned in the last quarter that the investment was not going to be profitable for us any time in the near future. And I guess— The bottom line with this whole Meta thing, it's like, doesn't exist. This is something that's going to play out and pay off maybe in a decade's time. So what do we do as investors here? Because their mega engine of revenue is stalling. And what, are we supposed to just go along with their massive punt and huge cost layout to hopefully they might win this race and in 10 or 15 years' time? What, they're going to crack it? I mean—

And to compound the issues that you've mentioned, analysts believe the impact of the iOS overall is a headwind— this is from the CFO— to their business in 2022 to the order of $10 billion.

Right. Yeah.

It just gets worse every turn.

It does. And just in terms of can Facebook Ultimately, the big question is, can they win the meta race? There was further news about how there's a lot of risk around that. I don't know if you saw the news. I think it might have even been last week now where they've— DM, which is their attempt at a cryptocurrency, well, they've given up. They're actually spinning that off and selling it. Their whole effort. It was called Diem Association. It launched in 2019. And basically, it was a collection of 25 different businesses and nonprofit groups. And this was their big drive to create their crypto. And this will be a big part of their metaverse. And yeah, winding it down, selling it off for $200 million, quitting, done. So can Facebook— I keep calling it Facebook— can Meta Should we trust them to win this decade-long race? Well, not on evidence like that. So this is why their stock got absolutely demolished. It's not just because of Facebook and advertising revenue and concerns around Apple's privacy. It's, it's just about this pivot and actually, is it going to work?

Yeah, and we've discussed this in previous episodes about who we favor more so into that degree. So go back and check some of those episodes out, but perhaps I can use a little bit of a hook here to take us into the Amazon discussion, because one of the things that came out with Amazon's numbers— by the way, it was like Facebook down 20%, Amazon up 20%. I mean, they were literally flipping the opposite directions. But interestingly, Amazon for the first time ever disclosed revenue from its advertising business last night.

Yeah.

So using that as a hook then into this, their advertising services grew 32%. Year over year, still a small figure. It's $9.7 billion. For context, Google's pumping out like $60 billion. So it's a minnow in that world. But surely that's another blow to Facebook because Facebook only gets $32.6 billion. So they're half of Google already. And all of a sudden, Amazon's just flown in there with a 32% year-over-year increase.

Yeah. And these are quarterly revenue figures you're talking about here, right? So Google, yeah, $60 billion. Yeah, because they're about $250 billion. But by the way, Google is quite— we'll talk about them later, I guess. But it's quite extraordinary. Google raking $250 billion. The entire planet's advertising revenue across all platforms, all companies across the whole world is $700 billion a year. And Google take $250 billion of that. I mean, their market share is just extraordinary. Anyway, yes, I mean, yeah, Amazon, we talked about how these, the big tech giants and their revenue streams are overlapping and ever more so, and they're competing against one another increasingly and increasingly. And this is a really nice case study on that front with Amazon their revenue— sorry, advertising revenues growing really strongly. And it's just another slap in the face for Zuckerberg. Because if Amazon can deliver a 32% increase on their advertising revenue— Amazon don't do ads, and yet they can pull that off. So yeah, Zuckerberg's just— when a man's down, I mean, he's just getting kicked in the balls by Pretty much everyone.

Well, if you see some of the pictures of Bezos these days, I mean, he is loving life. He looks like Hulk Hogan or something nowadays. But yes, Amazon by the numbers. I mean, check out this revenue figure for the quarter. I mean, we talked, I think, about the monster Apple quarter. How's $137.4 billion in one quarter? And that misses estimates. I mean, these numbers are just getting a bit silly now. There's just, I mean, certainly in our careers, I mean, these numbers we wouldn't even dreamed of 10 years ago. And here we are. I mean, breaking the split down. So revenues were, yeah, $137.4 billion. It was actually just a shy short of estimates. Their AWS revenues, particularly of focus, of course, was $17.8 billion. That actually exceeded expectations, marginally. Uh, their outlook though was pretty weak. And actually, I think this is a good talking point because their shares obviously responded very forcefully to the upside in post-market trade. But their outlook for Q1 revenues was a range, which is quite typical that companies issue a range, $112 to $117 billion. So a market slowdown from the prior quarter, but was lower than estimates on the street of $120.5 Yeah, the numbers were lukewarm.

Yeah.

And yet the stock responded with a 17% pop.

So yeah, firstly, that 17% pop, it, it was 8% down on the day before, then it rallied 17%. So let's just put that into context. It was 8% down because Tech was getting hammered in the aftermath of the Meta disaster earnings the night before. So the NASDAQ was coming off sharply, everything was dumping. So they were down 8% and then rallied 17% from that base. So you can kind of halve that actual rally, I would say. The main reason— well, because yeah, I didn't think the numbers were all that. We'll talk about that if you strip out AWS, which is obviously their golden child. We'll talk about that in a minute. But I think one of the reasons for the lift was their change in price, right? So they're increasing the price of Amazon Prime. And they're increasing it in their key market of the US. And I mean, going back to 2005, when Amazon Prime was first introduced as an offering, this is only the second— oh, sorry, this will be the third price increase in 17 years. So it's quite an unusual—

Yeah. That is why it's such a success. I mean, it's just incredible. It's still at that price point.

Right. Especially like— but this is quite a large jump. So in the US, they're taking it from— they're increasing it by 17%. So it's going to be rather than $119 per year, it's going to go up to $139 per year. And on the one hand, you think, well, it's so cheap anyway that a 17% increase from something that's ridiculously cheap adds 17% and it's slightly less ridiculously cheap. That's one way of looking at it. But another way is like, well, actually 17%, and especially when household budgets are getting strained because of inflation, and we'll talk about energy prices in the UK in a minute. And it's like, well, actually, that $20 extra. I mean, is it— I guess, is it a danger? Some analysts are saying this is a potentially dangerous move because, you know, is it actually gonna— is this a move that the critics are saying it's a move to please the markets at the expense of the consumer? And so it'll be interesting to see how consumers, you know, I guess the problem a consumer has is if you vote with your feet, all right, you know what, Amazon, you're raising the price? No, I'm out. Where are you going to go? What's the rival platform that you're going to go and take your money to? I mean, and this is the thing about monopolies, right? I mean, Amazon have got it all locked up, sewn up. So I mean, I think actually this price increase will get pushed through, no problem at all.

Which is why the stock rallied. I was just fact-checking the number of Prime members in the US to give it, I guess, the numbers context. 148.6 million.

That's half the population.

Right.

That includes kids, right? Right. So I don't know what's the adult population.

$2 increase on the monthly rate.

Yeah.

Over 150 million, 50% of the entire population.

Anthony Cheung: Yeah. Now, that's quite extraordinary, right? But I think— so fine, the stock rallied, they're going to hike the price, and you're right, straight away, that's 17% on the top line, just bang. And will that drop down to 17%? Or will all that money, extra money, just drop straight down onto the bottom line, more profit? And here's the thing that I— I mean, fine, their stock rallied, but I thought their earnings were actually pretty worrying. And when you take out AWS— and I know, I know, you know, well, you can't take out AWS, it's like their star performer. And but let's just take it out, OK? Because Amazon have not had a very good time of it from a cost perspective. They're really suffering. And actually, if you took out AWS, their operating income, well, they'd have lost money. They'd have lost $1.8 billion on the quarter. And that's because you're seeing huge staffing cost increases. They've been hit a lot by COVID. There's been a lot of absences because of COVID Actually, in certain cases on the earnings call, they were talking about how some kind of warehouse labour hours were costing them 2 or 3 times above what it ordinarily would do, having to deal with staff that are missing. And so they've had huge staffing cost increases. They added— I mean, this is crazy, but in Q4 they added 140,000 employees. That's not their entire staff number, that they added that number. Obviously, it's the holiday season, so they're always going to be having a peak of staff, and certainly on the delivery side and on the logistics side, of course, they're going to have a peak in their staff count in that quarter. But nevertheless, it's quite an extraordinary number. And the other thing that massaged their numbers higher was their Rivian stake, which we've talked about this in the past, but they had a pre-tax valuation gain of $11.8 billion. Just because of their Rivian, um, holding.

I mean, how's that, how's that for a trade though? They invested $1.3 billion into Rivian, taking a 22.4% ownership, and they IPO, what, $78? So that's $66.5 billion, then they shoot up to $100.

Yeah, they need to get out of that trade though.

Well, yes, yeah, but, but that's again, like you said though, it's another reason really why I mean, this should be X'd out, right, of really how you should interpret these numbers.

Yeah. And look, forecasts going forward, as you said, forecast lower than expected sales. So their forecasts aren't looking good. I mean, still range $112 to $117 billion, but still, Wall Street was expecting $120 billion, right? So lower than expected forecasts. You've got massive pain on the kind of staffing cost side because of COVID and inflation. So if it wasn't for AWS, and their advertising part, OK, all right, that's doing well. But yeah, it's not just all— I guess we're used with these tech companies, we're used to just— it's just smashing it out of the park on all levels is kind of what we're used to. And that's why these stocks have doubled and tripled and quadrupled in value in recent years. So now that they're not smashing it out of the park on all fronts, it's then, well, okay.

It does actually feel like having this conversation does actually feel like that positioning for Web3 and what the future holds, because actually we're talking about what is quite an archaic model in what Facebook was innovative 15 years ago or so. Yes. And now it's about pivoting to the metaverse. We're talking about Amazon and the actual delivery logistical part of the business. It's kind of a tiring, expensive thing. And it's AWS where the margins are better and the growth is there and so forth. And then we look at Google, it's almost the same thing. It's almost like it's such a strategic, almost like a real important part in history, for these companies, it feels like, as we're making this transition from Web 2 to 3 in the coming years.

But it's Facebook that is the only one whose original business is dying quite rapidly. And it's one, you know, it's all about the Meta and that race, and it's all or nothing. For Facebook, whereas at least Amazon— I mean, fine, their e-commerce platform is not going anywhere. We're not going to stop buying stuff online. Quite the opposite, right? Google's— we're still going to search for stuff.

Well, Google's got— in this basis of looking at it in the cold light of this angle, Google is the best positioned, right?

Yeah.

Because they're already an online— search-based, web-based service. So talking of Google then, or Alphabet, their shares were up around 10% after their Q4 numbers beat revenues. Yeah, not a smash, but a comfortable clearance over the hurdle of 7— $71.9 billion printed at $75.3 on the quarter. EPS beat, cloud revenues beat, Service revenues beat, operating margin up a touch, 29% against 28.8 expected. But I guess the thing that I thought could be quite good to talk about with Google, because not many people might understand the rationale behind it or the mechanics of how it works, is they declared a 20-for-1 stock split. So before I ask you how many Google shares have you bought this week, or whenever this kicks in, Anthony Cheung. Explain a little bit about how this works, this whole stock split, the mechanics of what is a stock split and then why they would have done it.

Right. So, well, okay. Firstly, the mechanics of a stock split, and this is a big one in terms of— so it's 20 for 1, right? Just to give you an idea. I mean, stock splits, they're not They're not that common, but it's not like they never happen. And amongst the tech giants, we kind of keep it just to the tech giants, Apple, Apple tended to do it every sort of 5 years or so. So Apple did a 4-for-1 split in 2020. They did a 7-for-1 split in 2014. 2005, Apple did a 2-for-1. So Apple have actually done 5 stock splits in their life, the latest being in 2024 for one. So Google, I think this is only their second ever one, so they've a lot less frequent, which is why I think they're going for the strategy of less frequent but much bigger when we actually do one. So 20 for 1. The important thing to say, the mechanics of this is it doesn't alter the market cap of the company. So it just means for every 1 share you own, that's now going to be 20 shares. Okay, so therefore the price per share is reduced by 1/20th, but because you've got 20 times more of them, the value of your shares doesn't change. So if the value of the shares in total issuance doesn't change, the market cap doesn't change. Okay, this is purely— the strategy behind this is purely to reduce the value of one share so that it can really be more attainable for a wider pool of investors. So Alphabet's share price has been knocking on the— well, knocking on the door of $3,000 before the split. So to buy one, to get any kind of action, you need $3,000. Now it's going to be 1/20th of I mean, how many people can buy one share for $3,000? Well, a lot, but not your smaller retail guy, right? So reducing this by 1/20 is a strategy to maybe kind of open up an opportunity to be invested in Google to a wider audience. Now, the technicalities are that it doesn't alter the market cap, but historically what we've seen is when people do this, it tends to increase demand for for the reasons I've explained, and if it increases demand, because you've got a wider pool of people that can participate, then that actually tends to lead to upside on the share price. So Apple, for example, their stock split was the summer of 2020, and their share price— after the split, the share price was about $100. I'm going to round it. It was about $100 after their split. You know, it's now 180. But obviously, you know, tech has been going up nice and strongly, but you know, you get my point. Historically, this has been a positive thing in the short to medium term for the share price.

So yeah, and, uh, full disclosure, I was a buyer on the Apple split. Yep. And yeah, I probably will be with Alphabet, but the—

yeah.

This is just educational. This is not investment advice. We must stress before anyone nails us to the post on this. But yeah, you see the rationale. It kind of makes sense. And yeah, I mean, if the pattern is it fuels demand and layering in that fundamentally, I love Alphabet. Well, yeah, it makes sense, right? So yeah.

The trade has been— we were talking about this, I don't know, last year, but rather than taking an outright kind of punt or exposure on any one tech company, the spread trade, basically just take the big 5 and pick your favorite and pick your least favorite and go long your favorite and short your least favorite.

Favorite.

Um, and that's a trade that's— if you get it right, obviously, that's a trade that's gonna pay out pretty handsomely over the medium to long term. I'm talking like put that spread trade on for 5, 10 years. Um, didn't quite think it'd be paying out so well so quickly given what happened to Meta. But yeah, Meta is my least favorite. So yeah, that's worked out.

Okay, cool. Well, look, let's, um, let's conclude with a quick conversation about the Bank of England. Yes, because let me just go over the, the kind of top level what happened. So they hiked interest rates, first back-to-back time they've done that since 2004. That was not a surprise though, everyone was expecting them to do that. However, one of the things that we get which is very unique to the Bank of England is the vote split. Now they were all unanimous in the idea that they wanted rates to go up. The only problem here, or not problem, but very interesting thing that occurred was that the vote split actually to raise rates was 5-4, in which 5 people, so thus the action that was taken, wanted a quarter basis point move, or 25 basis point move. So rates went up that much, but there were 4 others So just by a whisker got outvoted who wanted a 50 basis point move. Now that's pretty unprecedented and certainly hasn't happened since the independence of the Bank of England back in the late '90s, in '97. So I don't know if you know, Piers, but when was the last time they did a 50?

I mean, it was pre, pre the '90s, right? Yeah, this is— I don't know.

I mean, so the idea here then is that there's a significant part of the Monetary Policy Committee who wanted to be more radical. Now, the main rationale here, of course, is this inflation situation here in the UK. Inflation at the end of last year, year-on-year prints at 5.4%. That's even without the fact that households are now preparing for tax hikes in April, the jump in cost of electricity and natural gas. So most analysts are now anticipating inflation in the UK is going to peak at 7%. I think it was the November monetary policy report they issued. I'm not sure if you can remember, Piers, but they said that inflation was going to peak at 5% in November. I think it was. Fast forward to the beginning of February, they've just added 2 more percentage points on that. And so what do you make of this 50 basis points? I mean, that was a big surprise when I heard that, when the announcement came.

Yeah, it was a definite wow, quite a shock sort of moment because it's so unprecedented. I was just looking at— trying to look— it was actually back in the '80s, wasn't it, where we had some pretty extraordinary stuff going on with interest rates. So we definitely had some— I think we even had a 5% increase in rates in one meeting, was in the '70s when we had this inflation crisis. And anyway, so, but yeah, I mean, look, I think that in this era, yeah, unprecedented. I mean, not only first back-to-back hikes, right? So they hiked, but they also hiked in the last meeting. So it's the first back-to-back hike since 2004. They were a whisker off that 50 basis point hike, which would have been unprecedented. I guess the main takeaway here, other than, wow, that's really surprisingly hawkish, is I think it's, for me, even though it's the Bank of England and it's interest rates in the UK, For me, it's actually yet another signal that the global monetary conditions are going to continue to tighten faster than we had expected. And that's been the trend of things for months. We often talk about the Fed and why they're getting more hawkish and why even more hawkish now and even more hawkish. And this is the Bank of England, they're doing the same. And so the Bank of England have just gone another step. On the more hawkish pathway. Further evidence, in my opinion, that they are panicking— and not just the Bank of England, I mean the Fed— they're panicking that they're behind the inflation curve. There's these inflation expectations, as you've just said, keep getting, you know, dramatically revised up, and each time they get revised up, there's more panic. The thing is, at least the Bank of England are actually tightening. I mean, if you're panicking, right? And then they're talking about— they also announced with regards to the money supply side, they also announced that they're going to definitely not reinvest any of the bonds that they own on their balance sheet, these bonds they bought through quantitative easing. It's basically not reinvesting is a mild quantitative tightening. I think in money terms, I think they've got £28 billion worth of bonds that are reaching maturity in the coming months, and they're not going to reinvest that. So essentially, they're reducing the money supply by £28 billion.

And that £28 billion is in context of their £895 billion in holdings.

Right, exactly. So it's a small incremental reduction in the money supply. I think next year, just from not reinvesting, I think next year it's like— I think in the whole of next year it's another $40 billion or something. And then they might sell some of their corporate bonds. So basically, to put it simply, in the next 2 years, they'll reduce the money supply by 10% of their balance sheet. I don't mean 10% of money supply. I mean, 10% of the 800 billion they pumped in, they will take back out in the next 2 years. So the Bank of England are tightening. They're worried that inflation's too high. It's getting out of control. They're actually acting. When you think about the Fed, they're worried as well, but the Fed are still stimulating. They haven't ended their QE program yet.

Right?

Right.

So to make that clear, they're tapering, which means is they're incrementally winding down their active purchasing of bonds. They're still adding to the balance sheet.

Anthony Cheung: Yeah. And even though markets have panicked because the Fed have pivoted to a more hawkish stance really quickly, they're not moving as quick as the Bank of England are. And my point is, the way I read this Bank of England news is that it's a signal the Fed are going to accelerate their hawkishness again. This is why I said, I mean, I don't know, for me, I'm still a little bit worried. I know stocks bounced quite radically last week, or sorry, this week, or the start of this week, I should say. You had really strong rebounds, but I don't think we're out of the woods yet on this whole story around inflation, around interest rates going to have to go up faster, and you know, the negative impact that might have.

And so that almost uncertainty is definitely what's being conveyed on Wall Street at the moment. It's a real division between the bulls and the bears here because the calls at the moment in the short-term direction of travel for equities in the US— I mean, MS, I think, are looking at another 500-point decline from where we're at at the minute, but they're the perma bears. On the other side of the trade is JP Morgan just looking to pile in on every time the market comes off a few ticks. So yeah, I mean, that's what's contributed to one of the most volatile episodes of market activity we've had in the last couple of years in January. This is the exact kind of thinking, I guess.

And look, the buy the dip brigade have always been right, you know. If you go back over the last decade, buy the dip every time, um, and here we are, we've dipped. It's just I'm definitely the least confident about buying the dip than I have been for a decade. Let's put it like that. I'm not saying that this is only the beginning and this thing's going to collapse even more, but I'm just— I don't know, that kind of gut— it's hard to explain— kind of gut feel, I think this time's different. And I think that interest rates are going up fast, and we're not quite sure how fast yet, and we're not quite sure if we are behind the curve on inflation. And even putting rates up fast, maybe that doesn't actually contain this inflation drive. And so, and then it might lead to recessions, I guess, let's put it like that. And when we talk about the UK, and back to this kind of Bank of England thing, it's, God, God, the UK household it's going to get punched in the face from all sides in 2022, because it's not just the cost of borrowing going up, which obviously impacts people's monthly disposable income. If you're on a mortgage rate that's variable, then you're going to be paying more money in interest. And if your credit card bills are going to— if your interest rate on your credit card bills are going to go up, you've got less money to spend.

And then Yeah, then throw in the electricity and gas bills for households going up 54%, as is announced earlier this week, already on top of the 12% increase for 15 million households in Britain from the back end of Q4 of last year, with an anticipated other— another increase on the semi-annual, uh, Ofgem, who's like the regulator, uh, reviewing, and they're probably going to increase the cap again. So you're talking about 100% increase in pretty much 12 months period. Throw in a little hand grenade in Russia and Ukraine, oil prices at $100 almost now. We're tracking now WTI at $92 this morning. Yeah.

And inflation is through the roof, right? So it's not just energy, everything's gone up in price. And I think, right, we've been through— I guess we've enjoyed a post-COVID lockdown sort of rebound and resurgence But I think 2022, reality is going to bite pretty hard. I can't see how the UK avoids a recession when you have interest rates going up quickly, inflation's super, super high, your energy bills are doubling. I mean, that's not a good story. So I think that this time it's a bit different. And whilst buy the dip brigade, you know, their bandwagon rolls on and they're kind of shouting and screaming, it's always buy the dip. I just think I'm just, I'm just way more cautious this time.

Okay, well look, on that cautious note, we'll, um, we'll wrap it up there. So thank you as ever, Piers, for the conversation last hour. Hope everyone found that, um, in some way useful, insightful. And don't forget as well to hit that ratings on Spotify, help us hit that target. And yeah, have a great weekend, have a good week, and we'll catch you for the next episode. Thanks so much, everyone.

Cheers, bye!