 Hello, and welcome to episode 108 of the Market Maker podcast, two things we're going to discuss in today's episode. Elon Musk's Everything app and the latest US Bank earnings. We're recording this on Friday the 14th of April. So they've literally just come out and they're all up. So we'll look to dive into those numbers and understand why that's happened. Before I begin, though, a quick shout out to three people that I've bumped into from the Amplify alumni just this week. You were with me for two of them. Actually, in fact, I think, Pierce, one was Phil. Phil Amon popped in the office. He did our program back in 2018 and is now an electronic equity trader. Equity trader at Cannacord Genuity. Absolutely rocking it. Yeah. And then we bumped into on our way to Bank of America midweek, Delik Oaken, equity specialist now at Bloomberg. I think she was maybe class of 2020. And then then the other day, just yesterday, Oliver Larkham is now a manager of private equity accounts that alpha sites software firms serving the PE community. He grabbed me, colored me aside. I was walking through the city the other day. Yeah, interestingly, the universities, I think I was just having, I don't remember two of them, Royal Holloway and Loughborough. So great to see a bit of a mix up from the usual norm, which is definitely what we're all about. Breaking down barriers. Exactly. So yeah, just a quick one, quick shout out for those three. I'm sure there's many more as well that we come across all the time. But yeah, well done. But let's talk about pains me to say Elon Musk, your favorite favorite topic. Oh yeah. So let me just paint, paint the scene first. So it was at the beginning of the week. I think it was Tuesday. He cryptically hinted that his plans and he tweeted, of course, just X. And while he did not elaborate on that tweet, it came after it was reportedly revealed through court filings that Twitter had merged into a shell company called the X corp. Now, I know you're going to give us a bit of a brief history of time with that because we have discussed this on a previous episode. I think we chat he's targeting. And the other big thing is the ball's already rolling because Twitter has teamed up with the Toro the social trading company. Also, just this week as another kind of step in his everything out direction. So perhaps give us the backstory here. Well, yeah, backstory. Well, I mean, this guy's got it's just got a bit of an obsession. Just for the letter X, which kind of goes back to his early, early, early days as an entrepreneur. So he kind of, yeah, he so X dot com. He co founded co founded this in the dot com bubble. So in early 1999. Musk co founded a company called X dot com. Okay. And part of that was a kind of spin off called zip to which was like an online directory business. And he basically flogged it to compact. And one of zip to was 300 million. He got 12 million dollars out of that deal. Okay, that's how much he walked away with he then plowed all of that. All of it into this X dot com. Okay. And what he envisaged back then was X dot com would be, I mean it was a very pioneering thought at that time it was this would be the one stop shop. Platform for things like financial services consumer banking brokerage services insurance. Okay, all of this stuff. And so. So that was his idea but then a year later. It kind of evolved a basic X dot com. It just went down that payments route and they didn't get a chance to do the other stuff and X dot com got rebranded. You might have heard of them. PayPal. And of course this is where Musk made most of his one is early fortune so he span out PayPal PayPal got sold to eBay for $1.5 billion. This is in 2002 and Musk walked away from that deal with 180 million. So I mean, the guy's got a pretty phenomenal track record, his first gig. And we just go back his first gig zip to he walked away with 12 million. Okay. Two years later, two years, he flogged PayPal and walked away with 180. Okay, then of course, you've got Tesla, then you've got the rest of them space X boring, etc. Okay, and this X dot com thing throughout the next sort of 20 years has always been that. I think he feels like it's the one that got away. You know, it's that original concept and idea he had that he wasn't able to execute for one reason or another, went off in a load of other different tangents. And then we chat obviously got born in China and we chat is essentially was his eye. It was basically what he had envisaged the case this one stop platform and what we chat I mean because it's weird most of us in the West here. You've probably heard of we chat but maybe never have used it, of course in mainland China is the single platform that you live on right it's messaging its voice and video calls it's social media it's payment system it's, it's everything right I think this is where must know is kind of returning back to the idea of fulfilling that dream he had now he bought the URL X dot com he bought it back off PayPal in 2017. Right so six years ago he's already thinking right I would love to kind of fulfill that original idea. At the time he said I'm just buy it there's nothing no more news I'm literally just buying the URL I'm going to use it in the future. Well now it looks like he's using it and when he got forced to buy Twitter for a insanely overpriced value. One of one of his excuses I guess if you like to justify it was well, you know this is now, at least part of the platform that I can now accelerate my sort of objective of creating this one stop shop and he said back in October he said, this will probably save me about three years. I could start this brand new platform from scratch, but buying Twitter probably saves me three years and so he now piggybacks off the existing Twitter platform, which is now shoved into the shell of Facebook's core. And yeah, I guess we shall see right but is his obsession with the letter X is quite. I mean obviously you've got space X. One of the cars is original cars at Tesla he called model X. And did you know that one of his children is called X just too much. That's just silly. I'm going to call him out for that I mean that's just he's just trying to make headlines there on that last one. And that's a person's life we're talking about. Yeah. So you mentioned, you mentioned we chat. Let's have a quick fire round on some numbers for we chat. Okay. Yeah. Number of users. What are we talking daily active here or no just so no actually let's go monthly monthly active users. Well, I think the population of China's like 1.4 1.5 billion right now. Okay, look, so this is Pierce sharing his interview technique now. You obviously got you obviously got a lot of kids in there that won't own phones just yet so I might strip out a few hundred million from that you probably then got the opposite end of the spectrum a lot of oldies that kind of missed the whole smartphone thing so I reckon that leaves you with a core of, let's say 800 million so and then I'd say, there's a really high percentage of those that would use it so I'm going to go I'm going to go 700 million. Okay. Okay, you almost need to double that figure. What? No way. It's over 1.2 billion as of the second quarter of 2021. So I realized my error name. I was just thinking China, but it's not. It's kind of because where else in Asia. It covers most of that Far East region. Yeah. So there's more than I messed up. That's the classic interview. I'm not trapped. You fell into your fire. You didn't you didn't do your market sizing. Okay. So a couple of other stats on the back of that over 83% of internet users in China using were using the app as of 2020. Yeah. So that was three years ago. Yeah. So numbers gone up. I'm sure we chat pay. That element of paying on there has over 900 million monthly active users 900 million. So we are talking three X the size of the entire population. Yeah, the US. Yeah. The moment. Absolutely dominant mobile payment method in China has a market share of over 40%. Yeah. Just phenomenal. Yeah. And no, this is why, you know, Musk, it's, it's almost weird. Well, in one way it's almost weird that there isn't like a dominant kind of single platform. I guess the way the Western tech giants have evolved is they've kind of come from their own one single area of specialism. Let's say Facebook, right. That's the social media. You know, King or was obviously. And then they've always tried to, I guess, have a foray into these other different services and it's never quite, I don't know why but they've never quite pulled it off. So, yeah, we'll see whether Musk has got still got the magic source. So a couple of things then, because before everyone goes out of their mind over this X idea and everything app, I'd just like to highlight a couple things. Well, one of the first things, you know, we were just talking about China there. And I think you're being pretty naive. If not to think that centralizing every person's behavior and activities interactions on one singular platform doesn't serve a very strategic surveillance need of that country and has forward government action monitoring of that data set. So that makes the Chinese situation wholly unique. And so the number one single biggest challenge to achieve what he needs to achieve is government regulation, because we can't even get America and Europe. We can't even get Britain and Europe to agree on even fish. But never mind a multiple different activities that one would do on a platform like they currently can do on WeChat. So this idea of complying with various government regulations across jurisdiction region and a singular global app ain't going to happen, not in the Western current setup and the way things are at the moment. So that's number one. Number two, I've got several for you as quick as I can. It's not like you to be kind of anti muscle. You call your child X, you need, you know, you need to even go in cultural barriers. Yeah. We chat obviously super popular in China caters to the unique cultural social needs of Chinese users. I mean you take a place like Shenzhen life is very different. I can assure you to Paris, for example, like just the, the interconnectivity to technology is just a different level at that point. So, you know, muscle is going to adapt his apps features cater to then if you're going to go across different areas in the West. Well, you know, people in different areas are very different people. So if you're going to service North America you're going to have to have a different type of slightly tweaked that might be relevant for other areas as well. Unless I'm less convinced by this argument. I mean I think ultimately, what do people want they want convenience certainly. Yep. You know, so if you've got a one stop shop I mean obviously the app's got to be a super slick from a kind of user perspective and be. Yeah, it's got to give you, you know, seamless access to everything you want to use on a day to day basis right. I think full stop that's it if you can, if you, if you can give your customer that then they're happy. Yeah, but then something you just said there, the technical the complexity of pulling this off. Yeah, not only is it a high technical feet, it's expensive. You're going to need a huge team, huge resources. He's the man for that obviously. Yeah, yeah. How much is it going to take to achieve something within a reasonable timeline. So this is where I mean he's definitely the man for the like engineering side of that challenge. I was reading. Well, do you see, I don't know why kind of randomly did an interview with the BBC. Yeah, was it last week or maybe even earlier this week now I can't remember but it was just quite interesting to get an update the big kind of fact from that short interview was that the number of staff at Twitter. The head counts now down to 1500. And remember that when he bought it in October, literally only in October right only like just over six months in. They had seven and a half thousand head came, he kind of immediately chopped half of those but and that was big news right but he's obviously been continuing he's then halved it again. So they're down to kind of 1500 and what he's saying is they're actually from a from a net non debt expenditures point of view that we'll talk about the debt in a minute because obviously must use the huge amount of debt to buy Twitter. The debt now has servicing costs, I gotta pay the interest on that and interest rates have obviously gone up right so we'll talk about the debt side if you just ignore the debt costs for a moment. He reckons and he said that in 2023. He used the non debt expenditures from four and a half billion last year to just 1.5 billion this year. So that is, that is an absolute phenomenal cost, possibly the biggest cost cutting exercise by ever. It's a relative size of the business. So that's pretty extraordinary and he said that he hopes to turn positive cash flow in the second quarter, I now right so I think we're kind of maybe coming to the end of phase one of his thing which was right let's. Let's get into the bone. Let's stop hemorrhaging cash and let's see if we can actually operate on a much reduced revenue by the way because revenues have collapsed, because a lot of the advertisers kind of walked off during all of this and so on. That's kind of that's kind of one thing so at least he might be cash flow positive, whether that there's then enough of a war chest to start setting about what you're talking about with regards to that engineering and a mammoth task is a separate thing but I just wanted to give you a final point on that interview. Well, another things I was reading. Now that he's cut the headcount to 1500 he's now at the end of March he rolled out a new stock options scheme for these staff now as part of the stock options schemes you have to value the business, right because there has to be a certain value that's agreed. That kind of underpins the value of those shares when they're being awarded now. Musk apparently submitted evaluation as part of that process at 20 billion. Bear in mind he bought it for 44 billion six months ago, so he's taken more than a 50% haircut, but when you forget musk in his share options if you now just look at the business and it's hard because it's a private business now he owns it. So he doesn't have to report quarterly earnings we've got no idea what exactly has happened to revenues. But if you value so there's no profits right there is loss making business so you can't value Twitter, you know based on their kind of earnings over the last sort of 12 months or whatever so if you value them in a similar way to how snapchat is valued for snap doesn't have any profits either. So snap is valued based on. So the enterprise value of snap is equal to four times its annual revenue. And if you kind of estimate Twitter's annual revenue we think it's about 3 billion, it was 5.5 rough estimates are that it's dropped to 3 billion so if you take Twitter's 3 billion times it by four, which is how snaps valued, then you get to 12 billion. So what that was the true value of Twitter at the moment maybe 12 billion. However, back to the debt thing. They owe 13 billion in debt so it's actually Twitter shares are worth nothing. In fact, they're worth negative on that basis. So, yeah, I mean look it's early days on his turnaround but Oh look you've just done me a favor then. Thanks, Piers. He got he got robbed. That was pure ego. So you've got to pay the cost for ego, fine. Yeah, so it's a mistake, but you can afford it back to the list. Okay, go on. So quick fire three days one so one of the things about the bringing together of all of these different services. Surely there's competition issues circles back up to the regulatory side of things again for a different angle, which is again, kind of a non issue in China. If it's state backed, fine, you just do what you need to do in that sense. The other thing then is user privacy. So we chat has faced criticism over its handling of user data privacy concerns as you can imagine. So developing an app that offers users privacy security and comprehensive features, just adding to that this mountain, then monetization. So you've got to create an app, which offers multiple features and we all love a free app right for free features where the cost doesn't lay with the consumer. But as you've seen since he took over Twitter and his hemorrhaging cash he needs to make money out of this thing. So then comes this fine balance between servicing users needs and wants and trying to actually finance a company at that point and you know there's some other companies he's also CEO of as well. At this point in time which I'm sure he'll pinch from in both financial means and skills and knowledge means then there's established competition. And we chat being the huge one, but there are there are other services out there as well and as other competitions, I mean, not to say that they're heading that way. But you know if you do think of some other platforms that have tried and failed I your meta type names. Yeah, there are other people within this space who've also aren't small. You could also be of a challenge to seeing that come through given the fact that this isn't going to happen tomorrow. But final thing I will say though, is that if he can pull this off, it would be nothing short of remarkable. And I will bow down at the master's feet, know my place and never speak anything ill of this man ever again. I look forward to the day. I'd love, I'd love, I'd pay good money to see that thing is on the competition side, he's got no competition from we chat, you want to know why. Because the West. Yep, would never in a million years allow we chat through the back door. I mean look what's happened to tick tock right so I think that that from the competition point of view that's kind of a non starter and then Facebook you're right and back to the kind of challenge and the massive challenge of trying to pull this off I mean, meta. I mean they said they set up. They tried to do the payments thing didn't they and then yeah ultimately hand it because they couldn't get it right and now obviously Zuckerberg's kind of obsessed with his single objective of dominating that future world. I don't know if it ever arrives called meta the metaverse but but but yeah, look, if anyone can do it. He can, but I'm not sure anyone can do it so yeah I've not got enough time to research for this episode but if I did, what I would do is I'd go back through his human history and I'd find other very prominent people like him who've been real, you know, superstars of their time that pushed the human race forward to the point where inevitably, they go one step too far. Yeah, and it's the classic human story of the ultimate downfall then but anyway let's move on. So let's talk about US banks because we've just had the earnings and of course these are the first earnings which then really unofficially kick off earning season for the first quarter. And perhaps the one to really focus on is JP Morgan because Wall Street hasn't actually opened yet the results have literally just come out in the last hour, and they are up about 6% in pre market activity they blew away street estimates on both earnings and share and revenues but perhaps appears there's some other numbers tucked in there that have boosted the share price. Yeah, so for sure, the numbers, you know, on the on the face of it looks super strong, you know much better than expected. Well, a surprise and yeah well surprisingly positive they're obviously better than expected and the share price move that you know reflects the positive surprise here but yeah when you're delving into it one thing a couple of things that stood out to me, one was average deposits. Because obviously we've had a banking crisis, or at least, you know, if you go one run down from the super big boys of which obviously JP Morgan is one of them, then this banking crisis has been obviously the key kind of focus of quarter one in many ways right. And it was all about deposits and SVB Silicon Valley bank and depositors fleeing. So even with the big guns here, JP Morgan reported that their deposits were down 8% on the quarter. It's hard to know. Obviously whether that's people withdrawing deposits or whether that's just naturally people spending more of their savings. And now that the economy is perhaps turning over in a negative way or not so it's hard to really know why those deposits dropped like that but I think it, it brings up a bigger thing about, you know the risks ahead for the banking system, we thought, were that their net interest income that's how they make money through borrowing money from depositors, so they pay the depositor an interest, and then they lend the money out, normally on a longer term basis a higher interest rate, and then net income margin is looking at the difference between those interest rates what we thought was going to happen this year yes whilst interest rates have gone up. So the central banks have raised rates that means that they can increase the interest rates on those loans that they're giving out so that's great right from a revenue point of view, but from a cost point of view. We were worried that depositors would start to demand a higher interest rate on their current accounts and their savings accounts. Okay, and we thought this would then squeeze margins. And so what the big surprising news for me here and I think the main reason why JP Morgan up 6% is because they raised their net interest income outlook for 2023. So that kind of almost flies in the opposite direction of what we were worried about this year for banks which was their net interest income margins getting squeezed well here's JP Morgan saying, no they're not. They're actually now forecasting that they're going to improve. I think that's kind of the big, the big one here. Jamie Diamond on the call said a couple of things he said the US economy continues to be on generally healthy footings consumers are still spending and have strong balance sheets and businesses are in good shape. Very positive. However, he then said, or he then used the word. However, the storm clouds that we have been monitoring for the past year remain on the horizon, and the banking industry turmoil adds to these risks. So there's a few other ones that I thought were quite interesting. He also said the banking situation is distinct from 2008 as it has involved far fewer financial players and fewer issues that need to be resolved, but financial conditions will likely tighten as lenders become more conservative. I thought, you know, just making clear that that difference and then another one he said was, we still see a rather healthy consumer with excess cash still expects recession, but it may be pushed off a little bit. Yeah, the ones as well. So, but we're interesting thing I saw, because I was tracking it to post out on LinkedIn about this as soon as it dropped. And the way the earnings reports come out is you have a statement, and then you'll have a presentation pack. And then this is where the bank will kind of lay out things a little bit more clearly with graphics and visuals and they have an analyst call conference call and so on. So the first thing I looked at was the statement. And on the statement on most of these banks, it's all very small print, and there's lots of information crammed into a page. They normally have like a little box. And on that box is kind of bullet point breakdowns of the highlight reel. And so it's the highlight reel that's always a quick one you can cast your on and just put pluck out some numbers if you want to be quick at this stuff. But I was looking at, I was going down the highlight reel. And I was getting towards the bottom and then I saw, I saw investment banking revenues up 21%. And I was like, what up 21%. And then it was like, gross investment banking revenues with an asterisk seeing C seven in appendix. And I was like, okay, let's jump down then. How many pages is eight pages and let's go down to the additional note section and includes gross revenues earned by the firm that are subject to revenue sharing arrangements within the CIB unit for products sold to CB clients through the investment bank will take that revenue. Thank you very much. And that will be our investment banking revenue. Thank you. End of show. I saw that I was like, I did I looked at the actual presentation. And I was like, right, let's jump down to so CIB is corporate investment bank is what they call it at JP. And I was like, okay, so where's this IB revenue then. Okay, IB revenues for the division down 24% year on year IB fees down 19%. Okay, so they've basically managed to engineer this top level bullet point where they've just created a 40% flip on the best of gross investment banking revenues. I was like, that is just brilliant. It's just, it's just all smoke and mirrors. Oh yeah. The other one then and we did have Wells Fargo. And again, they were up a couple of interesting things banking revenues up nearly 40%. They're up 7% for Q4 2022 driven by stronger Treasury management that those results reflect in the impact of higher interest rates, lending revenues, all the stuff you described city. Again, up, however, their markets revenues were down about 4%. Their global wealth management reviews were down about nine, nothing really too shocking there. But maybe BlackRock, quick word, they had a 10% decrease in revenue year over year, primarily driven by the impact of significantly lower markets and dollar appreciation. However, they will be pretty happy about that dollar move. If you were looking at it right now, trying to think, I saw someone stat the other day and how many weeks it's gone down now. It's been quite phenomenal. Yeah. And then obviously lower performance fees. So that revenue figure not to be too spooked then. Well, don't forget that most of their revenue is based on fees, which are a percentage of their assets under management. So what's the value of their assets under management? Well, I guess that's determined by two things. It's inflow and outflow. So how many customers are coming in and inflow money into the business for them to manage and how many are going the other way but of course, what's been the dominant influence on that the value of their total assets under management over the last few years has been market moves. Right in 2022 when you see the S&P is down 20%. Well, you know, the value of their assets under management are therefore down, you know, 20%, let's just say, right. So, so to give you some numbers, their assets under management peaked, right, the very end of 2021, which is when the S&P reached its all time high. And then they got north of $10 trillion, right, they were just just above $10 trillion then currently as of quarter one 2023 their assets under management is 9.1 trillion. So, you know, just from back alone, that's that's kind of a 10% drop in assets under management, which is a straight direct through 10% drop in their in their revenue. So, yeah, that's very unsurprising and entirely expected. And so the other banks will presumably follow next week you'll get MS, GS, so on. Yeah, do you think that with those particular banks because we were just talking about like City, Wells Fargo, JP Morgan, different ballgame obviously for the more purest MS and GS. I think that they can get away with the kind of bashing they've had with the lower performance of banking. Do you think that's baked in for those guys who are much more kind of clear cut with their business model. Yeah, I think that's I mean you're going to see that the market side of these banks have done amazingly well, because they generate fees from trade flow and trade flow and volumes have been spiked in quarter one given all the turmoil on the trading crisis and all the rest of it. So their market side road done very well and their IB IBD side would have done very badly and one will offset the other. You know, that's what's going to happen that's what they're going to tell us. I'm what I'm a bit more interested in with these with the bank earnings. It's not the big guns, you know the JP Morgan's. They were almost a flight to safety right during this SVB thing that's why I was a little bit surprised because I know that there was deposit flow from the smaller banks to the, you know the the systemically important banks like JP Morgan so that deposits came out of the smaller ones where people were worried that those banks might fail and they were depositing money with JP Morgan so you know from that they were a net beneficiary from a deposit point of view. But still overall their deposits dropped by 8%. So it's interesting to see all these details come out. But what's going to be way more important isn't these big guys it's going to be the mid tier, the mid tier banks, you know what do their earnings look like what's happened to their deposit outflows, you know, and it's, you know, what's their forecast. You know JP Morgan to come out here, improving 2023 forecasts, are you going to see that for the mid tier banks I very much doubt it. And so that's kind of, you know with regards to the banking crisis which has been the big thing of the year so far. That's what's most important, rather than these big banks earnings. That's a very valid point. And let's let's wrap up then let's have a quick chat on the take a step back on the macro front just generally then we've had some bigger data points this week namely US CPI headline dropped quite substantially but the core actually picked up by 0.1 to 5.6% and we just had retail sales come out. The headline on that month to month was minus 1%, which slightly deeper than the analyst expectation of a drop of 0.4%. But the previous was subject to an upward revision really not too much they are looking on the surface level. Any of this important change change your mind at all on Fed. Well, the feds next meeting it's in May isn't it when in May is it you'll you'll know better than I come on. It should be in May. I'm going to go fourth of May. Okay, May the fourth Star Wars day. It's the third of May. So, I don't know that inflation thing that inflation data which is the key right I think it was mixed enough to really not give us any clear indication either way right because the headline number was down and the core reading was up. Right, it's mixed. So what happens with the Fed I still think that what are the probabilities at the moment what's the Fed funds futures pricing. 77% for 25. Yeah. So I think it was quite critical to get through this data set in the first two weeks of April, and I would say what we've seen probably means yeah I'd say that's probably right I think they will hike unless the earnings that we get in the next two weeks from not just the banks but all the other sectors unless that, unless that reveals something really bad earnings surely. Well, I'm just saying from a ultimately from a recession risk point of view, because it's not just because inflation right well how, how long will inflation stay high. Well that's all about when will the recession begin and how deep will it be. And you know when you listen to Jamie Diamond, you know who's telling us that consumers well what did he say the economy continues to be generally healthy. Right, so that means that inflation is going to stay higher for longer which means the Fed are going to have to hike. But if you get some other companies coming in with their numbers and forecasts, you know maybe on the retail side or I don't know, which indicates that there's weakness in other sectors, maybe then we'll you know alter our expectations but I think it's, as you say I think it's too late. I don't think there's going to any, I don't think there'll be anything significant enough in the next two weeks to stop the Fed hiking. And then is that, is that it? As far as we can see for now. I would, yeah, that's what I would bet on. But, you know, they're data dependent, right, I mean what happens if core inflation continues to rise. Then maybe it won't be the last but yeah, if I was betting I'd say it'll be the last one. Yeah, the market agrees with you at this point. It's whether they cut, it's whether they cut, you know, people have been desperately hoping that they might start cutting rates by the end of the year. And that's much harder to call right because it's just further in the future and there's a lot of moving parts and it's incredibly difficult to forecast but given what's happened with core inflation here where it's ticked back up. I just can't see them being able to cut by the end of this year unless the recession is super bad. In which case, that's just super bad anyway. Yeah, because looking out at market pricing, once we get to the July meeting, the markets then started still starting to price cuts. It's still in the fence between holding at the hiked agreed one in May. And then there's a 40, 40 split there on holding at that rate or cutting by 25. In July. In July. If you're hanging on for a rate cut in July, you're going to get very, very disappointed. There's a trade on there for you, Piers. Okay, trade. As soon as we finish here, I'm, I'm all over that. And on that note, let's wrap it up. So thanks very much. As ever everyone for listening. If you've made it to the end, thanks very much. Don't forget if you haven't already done so please do give us a rating. A review would be amazing really helps get the shout so as many people as possible but Piers thanks very much and have a great weekend everyone. Have a good weekend.