WEBVTT - The 'Liquification' of Private Markets Is Underway 0:00:02.640 --> 0:00:05.320 Welcome to the Bloomberg Penel Podcast. I'm Paul swing you. 0:00:05.360 --> 0:00:07.680 Along with my co host Lisa Brahma Waits. Each day 0:00:07.720 --> 0:00:10.240 we bring you the most noteworthy and useful interviews for 0:00:10.280 --> 0:00:12.520 you and your money. Whether at the grocery store or 0:00:12.560 --> 0:00:15.480 the trading floor. Find a Bloomberg Penl podcast on Apple 0:00:15.520 --> 0:00:17.960 podcast or wherever you listen to podcasts, as well as 0:00:17.960 --> 0:00:22.439 at Bloomberg dot com. There is a question, if you 0:00:22.520 --> 0:00:24.600 have a lot of money at this point in the 0:00:24.600 --> 0:00:26.799 credit cycle and the economic cycle, what do you do 0:00:26.880 --> 0:00:29.040 with it to get returns? What kind of returns are 0:00:29.080 --> 0:00:32.440 you expecting? Joining us now, Christopher Wolf, chief investment officer 0:00:32.440 --> 0:00:35.360 at First Republic Private Wealth Management, which overseas about a 0:00:35.400 --> 0:00:38.600 hundred and forty billion dollars in assets under administration, joining 0:00:38.680 --> 0:00:41.680 us here in our Bloomberg Interactive Broker Studios. So, Christopher, 0:00:41.720 --> 0:00:44.160 I want to start with when you have your wealth management, 0:00:44.280 --> 0:00:48.640 when you have your clients wealthy individuals, they have money, 0:00:49.080 --> 0:00:51.559 where do you start in terms of the returns that 0:00:51.600 --> 0:00:54.560 they should shoot for, in terms of their expectations. So 0:00:54.640 --> 0:00:58.160 that's a great question. I think expectation management often becomes 0:00:58.160 --> 0:00:59.920 the heart of the initial discussion that you have with 0:01:00.040 --> 0:01:02.600 the client um and where we start with them isn't 0:01:02.600 --> 0:01:04.280 all about the numbers, because you often get on the 0:01:04.400 --> 0:01:06.319 lges You're only gonna get two percent in bonds or 0:01:06.319 --> 0:01:08.720 maybe six percent in stocks, and that sounds kind of 0:01:08.720 --> 0:01:10.600 scary for a couple of reasons, which I'll get into, 0:01:10.880 --> 0:01:12.880 But it actually starts with the goals. What's important to 0:01:12.880 --> 0:01:14.840 you and how do you want to get there? And uh, 0:01:14.840 --> 0:01:17.080 that's a different conversation than what can I get for 0:01:17.080 --> 0:01:20.360 a return? Because the second question I just raised, which 0:01:20.360 --> 0:01:22.119 a client when they ask it often means they start 0:01:22.120 --> 0:01:24.240 to chase things. I want to get that return and 0:01:24.280 --> 0:01:26.319 that becomes more important, and well, what's the purpose of 0:01:26.319 --> 0:01:28.559 your money? So I'm gonna leave the purpose out because 0:01:28.560 --> 0:01:31.280 that's individualized for everybody. It then becomes a job of 0:01:31.319 --> 0:01:33.600 a wealth manager or someone else in a professional in 0:01:33.600 --> 0:01:35.120 the business to think about how am I going to 0:01:35.160 --> 0:01:37.480 manage the risks to get from A to B. So 0:01:37.520 --> 0:01:39.800 if A is I have let's say two million dollars 0:01:39.800 --> 0:01:41.520 and I need to have three million and you know, 0:01:41.600 --> 0:01:44.120 seven years to make my goal whatever it is, how 0:01:44.120 --> 0:01:45.520 am I going to get there with the least amount 0:01:45.520 --> 0:01:47.720 of risk possible? Now, the big judgment is what's the 0:01:47.760 --> 0:01:50.840 return number, And kind of simply put our views that 0:01:50.880 --> 0:01:52.240 returns are going to be a lot lower than they 0:01:52.280 --> 0:01:54.720 have been in the past. Past numbers I think is 0:01:54.720 --> 0:01:56.720 everyone knows from famous studies like if It's in and 0:01:56.760 --> 0:01:59.680 the like, or equities are more north of nine, ten eleven, 0:02:00.080 --> 0:02:02.040 depending on what time period you pick. We think it's 0:02:02.040 --> 0:02:05.280 closer to six um. And that's important because two big 0:02:05.320 --> 0:02:08.240 things have changed in our view. One is population growth 0:02:08.280 --> 0:02:10.080 has actually come down quite a bit and is set 0:02:10.080 --> 0:02:12.440 to decline as unless immigration changes a lot in the 0:02:12.520 --> 0:02:15.200 United States. And two is productivity growth looks like it's 0:02:15.200 --> 0:02:17.840 stagnant a bit, so kind of the drivers of economic 0:02:17.880 --> 0:02:19.520 growth over a long period look like they're a lot 0:02:19.560 --> 0:02:22.400 lower number one. Number two is we're maxed out in 0:02:22.440 --> 0:02:24.440 some ways in our view around the margin story. So 0:02:24.440 --> 0:02:26.480 if you're thinking about the premium you get from equities, 0:02:26.520 --> 0:02:29.080 it's still good relative to bonds in a low inflation world. 0:02:29.120 --> 0:02:32.160 But wow, it's not a high nominal number like nine, 0:02:32.280 --> 0:02:34.720 so it's more like six. But here's the good news. 0:02:34.800 --> 0:02:38.520 If inflation is like two, six is still better than two. Right, 0:02:38.880 --> 0:02:42.440 So if if the expectation is coming down for say stocks, 0:02:42.440 --> 0:02:45.200 and bonds. Are you finding that your clients are more 0:02:45.240 --> 0:02:48.280 willing to go out on the risk profile, whether it's 0:02:48.280 --> 0:02:51.720 alternative investments or emerging markets. Are they willing to take 0:02:51.720 --> 0:02:54.680 on more risk that maybe try to chase that return. Yeah, 0:02:54.720 --> 0:02:56.760 we have a slightly different view around that. I think 0:02:57.120 --> 0:02:59.320 a legacy of a lot of the thinking around where 0:02:59.320 --> 0:03:02.160 demographics as destiny and I have to invest where populations 0:03:02.200 --> 0:03:04.519 are growing. Lad most people to just run right into 0:03:04.560 --> 0:03:07.359 emerging markets and I need an allocation or some other 0:03:07.440 --> 0:03:10.520 kind of Patinko machine fill it out, you know approach. 0:03:10.680 --> 0:03:13.079 Our view is that there are some structural changes going 0:03:13.080 --> 0:03:16.640 on in markets that represent meaningful opportunities for clients. Here's 0:03:16.680 --> 0:03:19.000 two big ones, and then it leads to an answer 0:03:19.000 --> 0:03:21.520 to your question. The first is there's a lot less 0:03:21.520 --> 0:03:23.960 public stocks these days. There's about three thousand you can 0:03:23.960 --> 0:03:26.080 really invest in, and maybe two or three hundred that 0:03:26.080 --> 0:03:28.400 clients really recognize. A lot of M and A and 0:03:28.440 --> 0:03:30.880 other things have really brought down the number of opportunities 0:03:30.880 --> 0:03:32.880 in the U S. It's actually gone up outside the US. 0:03:33.240 --> 0:03:35.680 But the second big thing that's changed is you've seen, 0:03:35.720 --> 0:03:38.400 with the cost of money being so low, a collapse 0:03:38.480 --> 0:03:42.160 are really emerging evaluations between public and private markets. So 0:03:42.200 --> 0:03:45.520 if you're public companies dominated by machine trading, a lot 0:03:45.560 --> 0:03:48.440 of private companies well funded now means that those valuation 0:03:48.520 --> 0:03:51.360 multiples are likely to stay close together and until the 0:03:51.680 --> 0:03:54.520 meaning a private company might trade it a similar valuation 0:03:54.600 --> 0:03:57.440 multiple pe or enterprise value to EBA dah. And we 0:03:57.600 --> 0:03:59.800 see that, and a lot of private folks are saying, well, 0:04:00.240 --> 0:04:02.800 this is just super expensive, and we get it. Private 0:04:02.800 --> 0:04:05.240 companies are now more highly rated than they have been 0:04:05.240 --> 0:04:07.720 in the past. But that makes sense. The cost of money, 0:04:07.960 --> 0:04:10.720 the cost of financing these companies is now so low, 0:04:11.040 --> 0:04:13.440 and if there are a fewer public market opportunities, then 0:04:13.480 --> 0:04:15.480 it looks to us like the private set is actually 0:04:15.520 --> 0:04:18.320 kind of very interesting. Here's the big trade. I think 0:04:18.360 --> 0:04:20.560 over the next couple of years there's north of eight 0:04:20.600 --> 0:04:23.560 trillion in our view of refinancings and the credit market 0:04:23.600 --> 0:04:25.919 that's likely to happen. And you can't capture that just 0:04:26.000 --> 0:04:28.360 by buying long fixed income as an example. You've got 0:04:28.360 --> 0:04:30.559 to do something different. You have to be thinking about 0:04:30.560 --> 0:04:32.880 long or short or distress debt or some kind of 0:04:32.920 --> 0:04:36.000 restructuring approach in our view to capture some of those 0:04:36.279 --> 0:04:38.880 refinancings and restructutions that we think are coming. So that's 0:04:38.880 --> 0:04:41.039 a private answer. That's where we go. I guess when 0:04:41.240 --> 0:04:45.080 when we look at the risk part of the pendulum. Though, 0:04:45.200 --> 0:04:48.120 in response to what you're saying about private markets, a 0:04:48.120 --> 0:04:50.640 lot of investors are saying this. In fact, you're seeing 0:04:50.800 --> 0:04:54.760 record amounts of money going into private markets debt and equity, 0:04:54.839 --> 0:04:58.440 and I'm wondering, at what point, uh, this is all 0:04:58.560 --> 0:05:02.440 chasing a return earn and ends up having a sad 0:05:02.560 --> 0:05:06.240 ending in terms of these companies having unsustainable businesses that 0:05:06.279 --> 0:05:09.400 are being kept afloat by a rush of cash seeking 0:05:09.400 --> 0:05:12.599 the promise of higher yields. Uh, and somewhere just to 0:05:12.640 --> 0:05:15.640 sit totally agree that what happens when the cost of 0:05:15.680 --> 0:05:17.640 money is zero is you're gonna have fund things that 0:05:17.680 --> 0:05:19.920 should have never been funded in the first and first place, 0:05:20.200 --> 0:05:23.000 or even yeah, you're gonna keep funding things that should 0:05:23.040 --> 0:05:25.080 stop being funded. Would be kind of one way to 0:05:25.080 --> 0:05:27.680 think about it. I guess our perspective is that, you know, 0:05:27.680 --> 0:05:29.640 the big driver here is interest rates. The cost of 0:05:29.640 --> 0:05:31.960 money is zero, cost of capitals close to zero. It's 0:05:32.080 --> 0:05:34.039 very low space. And if you don't have a lot 0:05:34.080 --> 0:05:38.320 of public market opportunities. The liquefication of the private markets 0:05:38.320 --> 0:05:40.160 as well underway in the United States. It's going to 0:05:40.240 --> 0:05:43.360 be very hard to reverse that our judgment, you're I'm sorry, 0:05:43.400 --> 0:05:46.080 we need like a little ding ding ding. The liquefication 0:05:46.320 --> 0:05:48.960 of private markets. I love it, go on, carry on, 0:05:51.600 --> 0:05:53.320 So I like it. I like that. This is great. 0:05:53.400 --> 0:05:55.719 The rally here is two big things are happening in 0:05:55.800 --> 0:05:57.839 private markets, and our view one is the growth in 0:05:57.960 --> 0:06:01.200 things like secondaries. So secondaries are when a firm comes 0:06:01.200 --> 0:06:03.400 in and buys a limited partnership interest from you. So 0:06:03.400 --> 0:06:05.560 when you buy a private investment, you're often if you're 0:06:05.600 --> 0:06:08.039 qualified and meet all the regulations, you have to buy 0:06:08.040 --> 0:06:11.200 a limited partnership or a limited liability company. You can't 0:06:11.200 --> 0:06:13.799 really trade it. But trading systems are now being built 0:06:13.880 --> 0:06:15.839 up as a lot of firms are looking to do 0:06:16.080 --> 0:06:18.120 with all their extra capital, well maybe I can buy 0:06:18.120 --> 0:06:20.640 an interest from somebody. You can now get a little 0:06:20.640 --> 0:06:22.839 bit more liquidity and private markets than you've had in 0:06:22.839 --> 0:06:24.880 the past. You still pay a price for it, but 0:06:25.240 --> 0:06:28.040 fifteen years ago was almost zero. Now post two thousand 0:06:28.040 --> 0:06:29.800 and eight, there's a lot of excess money looking to 0:06:29.839 --> 0:06:32.400 buy some of these interesting things. I think the second 0:06:32.440 --> 0:06:34.560 big thing that's happened is that we started to see 0:06:34.560 --> 0:06:37.960 a greater concentration of private capital in some of the 0:06:37.960 --> 0:06:40.279 bigger hands. It's much harder, I think for some of 0:06:40.279 --> 0:06:42.839 the smaller shops to to start up. So bigger pools 0:06:42.839 --> 0:06:45.039 a capital often means a lot of liquidity goes with that. 0:06:45.200 --> 0:06:46.880 So our view is that this trend is going to 0:06:46.960 --> 0:06:49.040 continue for a while. And the real barometer here is 0:06:49.080 --> 0:06:51.679 just simple interest rates staying low. On the floor of Chairman, 0:06:51.720 --> 0:06:54.080 Powell said, that's likely to be the case. This trend 0:06:54.120 --> 0:06:56.240 continues for as long as rates stay very low, the 0:06:56.279 --> 0:06:58.640 cost of capital stays very low. In our view, as 0:06:58.640 --> 0:07:01.119 long as the real cost of capital is close to zero, 0:07:01.320 --> 0:07:03.640 it's going to keep funding these private markets. So Chris, 0:07:03.680 --> 0:07:06.120 just about twenty seconds, real quick. You every recession in 0:07:06.160 --> 0:07:08.760 your outlook, we do. We think it's uh, you know, 0:07:08.839 --> 0:07:13.200 decent probability next year, um, but it's not fifty. It's 0:07:13.200 --> 0:07:15.280 not overwhelming. So we're in a place where we think 0:07:15.280 --> 0:07:17.400 the low and slow story is still the central one. 0:07:17.720 --> 0:07:19.520 Just gonna feel really bumpy. It might feel like a 0:07:19.600 --> 0:07:22.000 recession in certain parts of the stock market, for example, 0:07:22.240 --> 0:07:24.480 but bond markets a little over reaction. They're kind of 0:07:24.480 --> 0:07:26.520 telling you the story that it's really slowing down. At 0:07:26.520 --> 0:07:29.440 this point, things like optimism are a little bit lagging indicators. 0:07:29.600 --> 0:07:31.800 Bottom line is we think you can still position well 0:07:31.880 --> 0:07:34.000 for a low and slow environment, low and slow environment. 0:07:34.080 --> 0:07:36.360 Chris Wolf, thanks so much for joining us. Chris as 0:07:36.360 --> 0:07:39.680 a chief investment officer for First Republic Private Wealth Management, 0:07:40.000 --> 0:07:43.200 joining us here in our Bloomberg Interactive Broker studio. So 0:07:43.320 --> 0:07:47.000 that's the liquefication of private markets, that's all I can think. 0:07:47.160 --> 0:07:50.160 It's just great. But honestly, this it's It's true. There 0:07:50.240 --> 0:07:52.280 is an you know, flood of cash it's gone into 0:07:52.280 --> 0:07:55.480 private markets, and people are trying to create more of 0:07:55.520 --> 0:07:58.880 a public overlay for these markets to allow people to 0:07:58.880 --> 0:08:01.520 get in and out with a similar sort of liquidity 0:08:01.760 --> 0:08:05.160 as public markets offer. So at what point what's the 0:08:05.160 --> 0:08:07.320 difference between public and private? I don't know. And we 0:08:07.320 --> 0:08:09.040 will take a look at reworks and take a look 0:08:09.040 --> 0:08:11.960 at we Works. Maybe maybe there is a golf there. 0:08:26.120 --> 0:08:30.320 T MT Tech, Media, telecom. There is a lot going 0:08:30.400 --> 0:08:33.080 on in the TMT space every day, which is why 0:08:33.120 --> 0:08:36.000 we're happy to have John Butler here. John covers telecommunication 0:08:36.080 --> 0:08:38.760 services and equipment for Bloomberg Intelligency joins us here in 0:08:38.760 --> 0:08:41.520 our Bloomberg Interactive Broker studio and John a lot of 0:08:41.520 --> 0:08:43.640 stuff going on in your world. Let's start with a 0:08:43.800 --> 0:08:47.880 T and T. Boy, they have an activist investor in 0:08:47.920 --> 0:08:53.040 their Elliott Management, pushing for change. What is Elliott Management 0:08:53.120 --> 0:08:57.680 really looking for? I think in a word, they're looking 0:08:57.840 --> 0:09:01.640 for divestitures. They're looking for a T and T two 0:09:02.760 --> 0:09:06.840 get more focused. And if you read their letter, they 0:09:06.880 --> 0:09:09.560 talk a lot about how A T and T has 0:09:09.600 --> 0:09:14.800 since they first announced the acquisition, a Time Warner has 0:09:14.960 --> 0:09:20.000 changed strategy multiple times as the market itself has changed. 0:09:20.040 --> 0:09:22.880 In fairness to a T and T. But I think 0:09:22.920 --> 0:09:26.360 Elliott's point is they don't really have a handle on 0:09:26.480 --> 0:09:30.880 what the strategy is with Time Warner yet. And you know, 0:09:31.240 --> 0:09:34.040 and again I'll defend A T and T on this one, 0:09:34.880 --> 0:09:39.080 the linear media market is changing rapidly, and so it's 0:09:39.080 --> 0:09:41.520 hard for them to really skate to where the puck 0:09:41.640 --> 0:09:44.199 is going to be, so to speak, if they don't 0:09:44.200 --> 0:09:46.600 know where it is now. Okay, but even aside from 0:09:46.600 --> 0:09:48.840 A T and T and Time Warner and whether that 0:09:49.080 --> 0:09:51.480 tie up was a good idea or how exactly they're 0:09:51.520 --> 0:09:54.800 controlling that. They're these other businesses to like a home 0:09:54.800 --> 0:09:58.880 security business, which who knew. Then there's direct TV of course, 0:09:59.120 --> 0:10:03.680 the Mexican in wireless operation who knew? Uh? And part 0:10:03.720 --> 0:10:08.560 of its wire line footprints. So basically focus really is 0:10:08.559 --> 0:10:10.880 the issue here, right that Ellie is trying to bring here. 0:10:11.040 --> 0:10:15.640 How do they how are they going to identify which assets? So, 0:10:15.760 --> 0:10:18.400 just to answer your question, A T and T has 0:10:18.440 --> 0:10:22.719 sort of taken a conglomerate approach to the answer of 0:10:22.760 --> 0:10:25.720 what do you do as wireless slows and it has 0:10:25.800 --> 0:10:29.200 been slowing, it's going to continue to slow. It's a 0:10:29.240 --> 0:10:33.600 commodity market. Do you do what Verizon has done, which 0:10:33.679 --> 0:10:36.560 is you lay your bets on the next generation of 0:10:36.640 --> 0:10:39.559 wireless and do that better and try and get some 0:10:39.600 --> 0:10:42.840 profit out of that. Or do you tap an jacent 0:10:43.000 --> 0:10:46.360 market or markets for growth, which is what A T 0:10:46.480 --> 0:10:50.600 and T has chosen to do. Elliott is arguing there's 0:10:50.640 --> 0:10:53.960 some stuff that A T. T has purchased over the 0:10:54.040 --> 0:10:57.839 years that should go like the satellite business, direct TV 0:10:58.920 --> 0:11:03.440 and as you meant in the Mexican wireless operations, which 0:11:03.480 --> 0:11:06.840 frankly I agree with. I never quite understood what the 0:11:06.920 --> 0:11:11.520 rational was there. Other than two create a cross border 0:11:11.600 --> 0:11:16.600 network with an adjacent country. But frankly, I'm not again 0:11:16.679 --> 0:11:20.520 sure if they know what they're doing in Mexico. It's 0:11:20.520 --> 0:11:23.680 a very tough market, and that is a commodity market 0:11:23.760 --> 0:11:28.000 dominated by the low end prepaid business. So I think 0:11:28.000 --> 0:11:31.200 Elliott is looking at it saying, you know, let's think 0:11:31.240 --> 0:11:35.200 about lopping that off and lopping off the satellite business 0:11:35.200 --> 0:11:38.720 in order to become more focused and therefore more profitable. 0:11:38.960 --> 0:11:41.760 So when you look at the media business, they've spent 0:11:41.800 --> 0:11:45.680 over a hundred billion dollars buying a direct TV now 0:11:45.720 --> 0:11:48.199 buying Time Warner. One of the concerns I would have 0:11:48.240 --> 0:11:51.079 if I were a shareholder is, boy, that's really a 0:11:51.160 --> 0:11:54.320 people intensive business. I need some creative people and they're 0:11:54.320 --> 0:11:57.720 really driving the business forward. And what we've observed is 0:11:57.960 --> 0:12:01.920 a defection of a lot of the senior people from Turner, 0:12:02.120 --> 0:12:06.120 from HBO, from the studio. How concerning is that to 0:12:06.520 --> 0:12:09.840 shareholders that you know, really need the content people to 0:12:09.920 --> 0:12:13.400 drive the business. That is a big concern. And um, 0:12:13.480 --> 0:12:17.120 you know, I've watched that defection process you were talking about, 0:12:17.160 --> 0:12:22.160 you know, one after another, um leaving Warner, And so 0:12:22.200 --> 0:12:28.960 the question becomes can telecom people competently run a media business. 0:12:29.120 --> 0:12:31.439 You know, you and I were talking before the segment 0:12:31.480 --> 0:12:35.679 about how different those cultures are. I worked at HBO, 0:12:35.800 --> 0:12:41.280 and I've I've really seen the difference in cultures between companies. 0:12:41.400 --> 0:12:44.440 You know, Telecoms are very utility like it's a high 0:12:44.440 --> 0:12:49.320 fixed cost business. Uh, it's much easier to budget, I think, 0:12:49.559 --> 0:12:53.280 and media is high variable. The microphone goes on and 0:12:53.360 --> 0:12:56.280 he just tones it down completely. We were talking about 0:12:56.280 --> 0:13:00.240 hanging from hanging from the chandeliers at h are a 0:13:00.400 --> 0:13:03.360 kin drop in the cubicles at A T and T. 0:13:04.280 --> 0:13:05.960 But it is interesting right now A T and T 0:13:06.040 --> 0:13:08.200 shares up two point three percent, So clearly there are 0:13:08.240 --> 0:13:12.559 plenty of people who agree with Elliott's sort of push 0:13:12.640 --> 0:13:15.280 here now on one thing before we move on. In 0:13:15.360 --> 0:13:18.400 fairness to A T and T. They have not had 0:13:18.440 --> 0:13:22.640 a lot of time owning time Warner to make changes, 0:13:22.800 --> 0:13:26.720 and there always are management affections in the wake of acquisitions, 0:13:26.760 --> 0:13:29.079 So I think things will settle out from here a bit. 0:13:29.120 --> 0:13:32.319 All right, Well, we now get to Apple releasing phones, 0:13:32.360 --> 0:13:34.199 and we have a minute left, so we're gonna give 0:13:34.200 --> 0:13:36.719 it its due. Should we really care about the new 0:13:36.800 --> 0:13:40.000 launch of the latest edition of the iPhone in this 0:13:40.080 --> 0:13:42.800 manufactured holiday that Apple is so good at. Well, we 0:13:42.840 --> 0:13:44.760 should care in the sense that we're going to get 0:13:44.760 --> 0:13:48.840 a big camera up upgrade, and smartphones really are now 0:13:48.960 --> 0:13:53.800 digital cameras with voice capability. In many ways, everything that 0:13:53.880 --> 0:13:59.120 people are doing on smartphones is video oriented or picture 0:13:59.200 --> 0:14:04.680 oriented's app Chat, Instagram, FaceTime, etcetera. And so I think 0:14:04.679 --> 0:14:08.679 a camera upgrade is important, but it's not a big 0:14:09.440 --> 0:14:13.560 year in terms of a wholesale change in the look 0:14:13.559 --> 0:14:15.760 and feel of the iPhone like we saw with the 0:14:15.800 --> 0:14:19.240 iPhone Tan or the iPhone Sex. Sorry, I was just 0:14:19.280 --> 0:14:21.600 taking a selfie. John Butler, thank you so much for 0:14:21.640 --> 0:14:24.680 being with us. John Butler, senior Telecom Services and Equipment analyst, 0:14:24.840 --> 0:14:27.680 joining us here in our bloombergerta active broker studios. He 0:14:27.760 --> 0:14:32.440 hails from Bloomberg Intelligence. Of course, uh, doing wonderful work there. 0:14:32.480 --> 0:14:34.440 I love that we left a minute talk about the 0:14:34.440 --> 0:14:38.360 new iPhone, which basically you should have because honestly, it 0:14:38.520 --> 0:14:42.240 is really ultimately a camera and cameras are incredibly important, 0:14:42.560 --> 0:14:44.560 but it's not a huge ce change in the way 0:14:44.560 --> 0:15:05.160 that we experience the iPhone. Gold is really hot these days, 0:15:05.200 --> 0:15:06.840 even though I sort of come off. It's high as 0:15:07.160 --> 0:15:09.320 that we saw in the past few weeks. We have 0:15:09.360 --> 0:15:12.120 City Group out today saying that they expect the price 0:15:12.360 --> 0:15:16.120 of one ounce of gold to go to two thousand dollars, 0:15:16.400 --> 0:15:19.200 a record high, up from a little bit more than 0:15:19.400 --> 0:15:23.520 four dollars. Currently joining us now not to talk about 0:15:23.720 --> 0:15:27.160 the price, but to talk about the process of trading gold. 0:15:27.440 --> 0:15:29.520 I'm so clear pleased to say, is Sequila Mears. She's 0:15:29.520 --> 0:15:32.800 senior director of the London Bullion Market Association. She's joining 0:15:32.880 --> 0:15:36.160 us here in our Bloombergada Active Broker Studios. Sequila, let's 0:15:36.160 --> 0:15:40.320 just start with the trading of gold and precious metals. 0:15:40.760 --> 0:15:44.320 How do most investors trade these days? I mean, how 0:15:44.400 --> 0:15:48.360 much are people still trading the physical commodity versus some 0:15:48.480 --> 0:15:53.280 other sort of derivative. Well, thank you for this opportunity 0:15:53.320 --> 0:15:55.720 to talk about the pressures metals market. And actually it's 0:15:55.760 --> 0:15:58.320 quite a time any question, because since November two thou 0:15:59.360 --> 0:16:01.600 the LBMA has been on a journey whereby we've been 0:16:01.600 --> 0:16:04.560 collecting data on a voluntary basis from the banks and 0:16:04.600 --> 0:16:07.640 I actually can tell you the London market currently is 0:16:07.680 --> 0:16:11.720 trading fifteen billion US dollars worth of gold um, which 0:16:11.800 --> 0:16:14.400 just gives you an idea in terms of liquidity and 0:16:14.440 --> 0:16:17.640 how popular this asset class really is. Are you talking 0:16:17.640 --> 0:16:19.800 about that I have a chunk of gold and I 0:16:19.840 --> 0:16:21.640 give it to you and we've traded. Are you talking 0:16:21.680 --> 0:16:24.760 about derivatives or you know, futures contracts? So it's spot, 0:16:25.040 --> 0:16:28.920 it's options, it's uh, And obviously in terms of the 0:16:28.920 --> 0:16:31.480 exchange traded party side, it's it's a variety of products 0:16:31.520 --> 0:16:37.040 making up the gold trading number. Okay, my knowledge of 0:16:37.080 --> 0:16:39.520 gold and trading is limited, but I do know some 0:16:39.680 --> 0:16:42.520 a term called the gold fix, the pricing fix, that 0:16:42.600 --> 0:16:44.880 it's done daily. That's about the extent of it. End. 0:16:44.960 --> 0:16:48.560 But I read here that it's the anniversary of the 0:16:48.560 --> 0:16:52.359 price fixing. So a couple of things. One, congratulations, Uh, 0:16:52.520 --> 0:16:56.600 explain how gold is actually priced, because I don't understand 0:16:56.600 --> 0:16:59.920 is that priced daily by you guys? Are by banks 0:17:00.080 --> 0:17:02.800 or by How's that work? Sure? If I may just 0:17:03.000 --> 0:17:06.280 for to firstly correct the term price fix, it's no 0:17:06.320 --> 0:17:09.520 longer the price fix, while historically that's exactly what it 0:17:09.600 --> 0:17:12.320 was referred to. Since two thousand and fourteen we now 0:17:12.359 --> 0:17:15.000 refer to as a price auction. So it's an auction 0:17:15.359 --> 0:17:21.199 platform and Basically what's changed over the years is enhanced transparency, 0:17:21.480 --> 0:17:25.480 independent governance, and actually giving you an electronic platform to 0:17:25.560 --> 0:17:29.919 allow banks to trade and put in real, live trades. 0:17:30.320 --> 0:17:32.560 So it is an auction process. What you have are 0:17:32.600 --> 0:17:35.080 the bias on one side, sellers on the other side, 0:17:35.560 --> 0:17:38.160 and the intention is for there to be an equilibrium. 0:17:38.240 --> 0:17:41.160 So you try a price every round, and we're at 0:17:41.160 --> 0:17:45.439 to specific a point an equilibrium has been reached between 0:17:45.440 --> 0:17:47.760 the buy side and the cell side, that is the 0:17:47.800 --> 0:17:51.679 price for that day. So as we talk about the 0:17:51.760 --> 0:17:56.159 incredible volume of trading in precious metals right now that 0:17:56.240 --> 0:17:59.600 you've been tracking collecting from banks, there is a question 0:17:59.680 --> 0:18:03.160 of how much money banks have to hold when they 0:18:03.200 --> 0:18:06.920 do trade gold, for example, and right now the standard 0:18:07.040 --> 0:18:09.639 is for them to hold I believe, I believe of 0:18:09.680 --> 0:18:13.359 the capital required to match the total value of the 0:18:14.000 --> 0:18:18.000 amount being executed. Is that correct, That's but it's still 0:18:18.000 --> 0:18:20.840 a very high number because one of the main things 0:18:20.880 --> 0:18:23.760 that the l b m A has been lobbying against 0:18:23.760 --> 0:18:26.480 that it's the wrong number for gold. Gold is a 0:18:26.520 --> 0:18:29.560 liquid asset, as we've just shown and demonstrated through the 0:18:29.640 --> 0:18:32.760 voluntary trade reporting regime, fifteen billion U s dollars is 0:18:32.800 --> 0:18:35.399 a lot, So it is a liquid asset. And because 0:18:35.440 --> 0:18:37.879 it's a liquid asset, there is no need to be 0:18:37.960 --> 0:18:41.120 holding that much capital to back your balance sheet. Well, 0:18:41.119 --> 0:18:43.439 how does that compare in terms of the amount of 0:18:43.480 --> 0:18:46.320 capital the banks are being required to hold for gold 0:18:46.840 --> 0:18:50.679 versus say, instruments that are recognized as being more liquid. So, 0:18:50.840 --> 0:18:54.679 I mean gold has been grouped with commodities generally. So 0:18:54.840 --> 0:18:58.280 what we're trying to explain that gold is, well, it's yes, 0:18:58.280 --> 0:19:00.520 it behaves like a commodity given that there's a real 0:19:00.560 --> 0:19:04.840 tangible but it also behaves like a currency. So actually, 0:19:04.880 --> 0:19:07.320 and we all agree and we all know and understand 0:19:07.359 --> 0:19:10.320 that currency is a liquid asset class. So what we're 0:19:10.320 --> 0:19:13.399 trying to explain to the authorities is gold is a 0:19:13.480 --> 0:19:16.359 unique asset class, specifically because it is a safe haven 0:19:16.680 --> 0:19:19.679 when there is a crisis, when there is issues in 0:19:19.720 --> 0:19:24.360 the terms of the currency prices, gold tends to do well, 0:19:24.440 --> 0:19:27.359 as we are seeing in the recent times. So because 0:19:27.400 --> 0:19:32.359 of that, we believe that is the wrong number. It 0:19:32.400 --> 0:19:36.000 should be zero percent um And actually, if the rules 0:19:36.040 --> 0:19:39.760 go ahead, it could impact that trading and it could 0:19:39.800 --> 0:19:43.560 impact the banks being in the market within the gold space. 0:19:44.000 --> 0:19:47.280 So secular just in thirty seconds. What's the counter argument 0:19:47.320 --> 0:19:51.560 to that? Why are why is the number eight? Well, 0:19:51.640 --> 0:19:53.880 I mean we're still trying to understand that. Um as 0:19:53.880 --> 0:19:56.720 far as we're concerned, what we understand is that the 0:19:56.760 --> 0:19:59.919 authorities saw gold as a commodity put it with the 0:20:00.000 --> 0:20:04.240 comodities because has been allocated. When we try and understand 0:20:04.280 --> 0:20:09.080 and ask the rationale behind, we haven't quite been given 0:20:09.080 --> 0:20:11.199 a clear answer. Is it my guess, is it just 0:20:11.240 --> 0:20:13.920 something around liquidity? Anythink? No, it's it's it's the idea 0:20:14.000 --> 0:20:17.280 that there have traditionally been some serious losses incurred on 0:20:17.359 --> 0:20:20.240 commodity trading desks from time to time, and they're trying 0:20:20.240 --> 0:20:22.479 to make sure that that it doesn't happen, right, I mean, 0:20:22.480 --> 0:20:24.920 that's sort of the idea exactly. And I think from 0:20:24.920 --> 0:20:27.720 our perspective is again to explain that gold isn't just 0:20:27.800 --> 0:20:31.600 your typical commodity, it's a it's a hybrid between a 0:20:31.680 --> 0:20:36.080 commodity and for example, the FX markets Secular MERSA thank 0:20:36.119 --> 0:20:38.440 you so much for joining us. Sequila is executive Board 0:20:38.480 --> 0:20:42.160 Director in General Council for the London Bullion Market Association. 0:20:56.560 --> 0:20:59.760 Well billionaires such as Jeff Bezos, Bill Gates and Warren 0:21:00.000 --> 0:21:03.440 Buffett could have collectively lost hundreds of billions of dollars 0:21:03.480 --> 0:21:07.440 in net worth over decades. Presidential candidate Elizabeth Warren's wealth 0:21:07.480 --> 0:21:09.960 tax had been in effect. To get some of the 0:21:10.000 --> 0:21:12.760 details behind us, we welcome Rich Miller Riches, an economics 0:21:12.800 --> 0:21:16.960 reporter for Bloomberg News. He's down in Bloomberg studio in Washington, 0:21:17.040 --> 0:21:19.600 d C. So Rich, thanks for joining us. What's behind 0:21:19.600 --> 0:21:22.840 the math here? Well, behind the math is is they 0:21:22.880 --> 0:21:25.399 take a look at what seemingly on its face is 0:21:25.400 --> 0:21:28.840