WEBVTT - The Saudis Need To Pick A Fall Guy: CIA Veteran Devine 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg p m L Podcast. I'm Pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Bramowitz. Each day we 0:00:11.600 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg p m L 0:00:20.840 --> 0:00:27.280 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Let's 0:00:27.320 --> 0:00:32.280 turn our focus now to Jamal Kashogi, the Saudi Arabian 0:00:32.280 --> 0:00:37.880 writer journalist who was killed sensibly at the Saudi consulate 0:00:38.360 --> 0:00:41.680 high level Turkish officials so that they have evidence about this. 0:00:41.680 --> 0:00:45.159 This has thrown a lot of diplomatic relations into questions, 0:00:45.200 --> 0:00:48.880 particularly between the US and Saudi Arabia. Saudi Arabia had 0:00:48.920 --> 0:00:52.880 to care is is having to see corporate leaders move 0:00:52.920 --> 0:00:56.000 away from the nation joining us now to try to 0:00:56.040 --> 0:00:59.280 give us some insight into the potential impact of this 0:00:59.360 --> 0:01:02.400 move is Jack Divine, former acting director of the CIA 0:01:02.480 --> 0:01:06.800 and founding partner and president of security firm The Arkan Group. Jack, 0:01:06.959 --> 0:01:10.560 what do you make of this? What's going on here? Well, 0:01:10.640 --> 0:01:13.120 the news is unfolding by the minute. I mean, it 0:01:13.240 --> 0:01:16.080 is one of the more bizarre cases that I can 0:01:16.120 --> 0:01:19.560 remember in terms of diplomacy or in the intelligence world. 0:01:20.319 --> 0:01:23.399 So what's going on is our one of our most 0:01:23.440 --> 0:01:28.479 important allies now has a political crisis on his hands, 0:01:28.520 --> 0:01:33.480 which by extension, draws us into it and everybody and 0:01:33.480 --> 0:01:35.680 and uh, I was just going to say in the 0:01:35.720 --> 0:01:38.039 Middle East, but also in Europe. So it's it's a 0:01:38.080 --> 0:01:41.280 big story that has to be resolved. How could it 0:01:41.319 --> 0:01:45.680 be resolved? Well, the blue book would tell you that 0:01:45.800 --> 0:01:51.080 when you get a crisis like this, um, the the 0:01:51.120 --> 0:01:54.840 focus of it steps aside and a new person is appointed. Okay, 0:01:55.880 --> 0:02:01.760 Unfortunately blue blue books are collecting dust on OCE shelves nowaday, 0:02:01.880 --> 0:02:06.080 But I think the I don't think. Yeah, the way 0:02:06.280 --> 0:02:08.239 the way the game is played, so to speak, whether 0:02:08.280 --> 0:02:11.280 it's diplomacy, military, there are all there are a set 0:02:11.280 --> 0:02:14.359 of principles on pond which each of the people in 0:02:14.440 --> 0:02:17.040 those fields of endeavor operate. Right, So you would say, 0:02:17.040 --> 0:02:20.120 when you get this crisis. For example, when Jack Kennedy 0:02:20.720 --> 0:02:23.840 ran into debate at Pigs and it turned into fiasco, 0:02:23.919 --> 0:02:27.320 he told Alan Donalds, the director of CIA, fiasco, one 0:02:27.320 --> 0:02:30.840 of us has to go, I'm president, You're you're resigning, 0:02:31.320 --> 0:02:35.760 You're fired. So uh, no matter where who's called here, 0:02:35.880 --> 0:02:38.160 somebody has to take a fall on a new person 0:02:38.240 --> 0:02:40.280 comes into it. That's the only way you can move forward. 0:02:41.360 --> 0:02:44.480 Dying every day A slice salami slice at the time 0:02:44.600 --> 0:02:48.320 is a really difficult policy. This. The sooner this thing 0:02:48.400 --> 0:02:52.040 can be said right, the better it is for everybody. Wait, 0:02:52.080 --> 0:02:53.800 hold on a second, said right, because this has been 0:02:53.840 --> 0:02:55.359 sort of the focus of a lot of articles that 0:02:55.400 --> 0:02:57.920 have been written, which is, how can Saudi Arabia and 0:02:57.960 --> 0:03:00.800 the US joined forces this of spin this in the 0:03:00.919 --> 0:03:03.000 right way to be able to continue things as things 0:03:03.000 --> 0:03:06.040 were before, and my characterizing that correctly because that seems 0:03:06.080 --> 0:03:08.040 to be the way that I think I would agree with, 0:03:08.080 --> 0:03:10.000 at least other than the words spin. I don't think 0:03:10.040 --> 0:03:13.040 Spain is viable. In other words, I think the war 0:03:13.080 --> 0:03:16.160 you try and spend it, this is one where you 0:03:16.240 --> 0:03:18.760 have to get as close to the truth as possible. 0:03:18.800 --> 0:03:20.800 And I would hope that you know, we just saw 0:03:20.840 --> 0:03:23.080 that our secretary state was out there in the desert, 0:03:23.160 --> 0:03:26.079 and you know, I think the point is to make 0:03:26.120 --> 0:03:31.080 clear what we think is is known, and that the 0:03:31.120 --> 0:03:34.080 story needs not to wander too far from that. So 0:03:34.200 --> 0:03:37.560 how should the US react if indeed the Saudi Arabian 0:03:37.720 --> 0:03:42.000 leadership led by Mohammed bin Salman, who has been close 0:03:42.160 --> 0:03:45.160 with our leadership here in the US. How should the 0:03:45.200 --> 0:03:48.800 US respond if they did just outright kill a critic 0:03:48.880 --> 0:03:53.080 of their of their administration. I think the burden really 0:03:53.120 --> 0:03:56.320 begins with the Saudis. The Saudis need to decide how 0:03:56.360 --> 0:03:59.120 they are going to respond because we are their most 0:03:59.160 --> 0:04:02.960 important now I and so are all. There are other 0:04:03.080 --> 0:04:08.160 important allies. Um UH need to be in the zone 0:04:08.200 --> 0:04:11.280 where it's comfortable dealing with them. So at this point, 0:04:11.320 --> 0:04:19.479 if the record shows that MBS the Crown Prince is involved, 0:04:19.520 --> 0:04:22.320 than the only way this goes forward if somehow he 0:04:22.360 --> 0:04:25.400 steps aside, which is a really high ask. But I 0:04:25.440 --> 0:04:28.599 think the Saudis have to decide where they're going, and 0:04:28.640 --> 0:04:30.599 I think we have to stay as close to the 0:04:30.680 --> 0:04:33.599 reality as possible. I don't think there's this is not 0:04:33.680 --> 0:04:39.360 a spin opportunity. Floating floating floating ideas is probably one 0:04:39.360 --> 0:04:42.320 thing to see what's viable. But I think it's a 0:04:42.400 --> 0:04:46.719 huge mistake for anybody to try and work between the lines. 0:04:46.760 --> 0:04:50.160 You do not know what everyone else knows, so you 0:04:50.200 --> 0:04:52.000 put out a story. The next day of the story 0:04:52.080 --> 0:04:56.240 is overtaken because there's more information credible information put into it. 0:04:57.640 --> 0:04:59.960 The charts are sitting a lot of information. I suspect 0:05:00.080 --> 0:05:04.560 that we are others people within the Saudi government. You 0:05:04.880 --> 0:05:08.360 this is one that's not going to go away easily, Jack. 0:05:08.400 --> 0:05:12.760 Do you believe that U. S Intelligence assets know what happened? 0:05:15.400 --> 0:05:17.760 I think you know what happened. It covers a lot 0:05:17.800 --> 0:05:21.520 of territory. I would say that because of our relationship 0:05:21.600 --> 0:05:24.360 with a lot of foreign governments, our own collection capabilities, 0:05:24.400 --> 0:05:26.760 I think we'd have a pretty good sense of what happened. 0:05:27.360 --> 0:05:32.040 What literally happened inside the consulate may not be uh 0:05:32.760 --> 0:05:36.320 noable for some time. Do you believe the Turkish government knows? 0:05:38.720 --> 0:05:42.800 They say, Well, they say in the press says that 0:05:42.839 --> 0:05:47.520 they do. Um. My own instinct as opposed to fact, 0:05:47.720 --> 0:05:50.000 is that they probably know a heck of a lot 0:05:50.000 --> 0:05:54.679 more than anybody wish they know. So I'm wondering about 0:05:54.680 --> 0:05:56.720 the arms deal. I believe it's a hundred and ten 0:05:56.760 --> 0:05:59.840 billion dollar arms deal at the US has with Saudi Arabia. 0:05:59.920 --> 0:06:02.880 There have been numerous reports that one reason why President 0:06:02.920 --> 0:06:06.600 Trump was initially reluctant to sort of castigate Mohammed bin 0:06:06.640 --> 0:06:09.960 Salman and the Saudi Arabian government was because he didn't 0:06:09.960 --> 0:06:13.280 want to jeopardize this deal. Do you buy that now? 0:06:13.360 --> 0:06:15.360 I think it's too small of the piece. I mean, 0:06:15.400 --> 0:06:18.000 I think there's the bigger relationship. I mean, we're in 0:06:18.040 --> 0:06:20.599 a you know, and when you look at the Middle East, 0:06:21.160 --> 0:06:23.320 you know, in terms of countering around which is a 0:06:23.400 --> 0:06:26.960 large part of the last several administrations, you have to 0:06:26.960 --> 0:06:29.440 look at Saudi Arabia as a key the key player, 0:06:29.440 --> 0:06:31.880 and this when you look at oil and the oil industry. 0:06:32.320 --> 0:06:35.080 I mean, I think the deal is is an important deal. 0:06:35.120 --> 0:06:36.679 You don't want to see it go up and smoke, 0:06:37.360 --> 0:06:40.920 But there's an awful lot riding on the overall relationship. 0:06:40.960 --> 0:06:44.279 It's in everyone interested to get this thing reset. And 0:06:44.320 --> 0:06:46.720 as I said, I and you know that this place 0:06:46.800 --> 0:06:49.160 out the way it appears to play out, it's going 0:06:49.200 --> 0:06:51.680 to be very hard to reset it without a change 0:06:51.680 --> 0:06:56.800 in in in leadership, which means Mohammed bin Salman stepping 0:06:56.800 --> 0:06:59.440 down or being pushed out of office, out of the leadership. 0:07:00.480 --> 0:07:02.760 That that I mean again, I would come back to 0:07:03.160 --> 0:07:05.760 you know, if I were looking at old formulas on 0:07:05.800 --> 0:07:09.479 how problems are resolved quickly, it's to change personnel and 0:07:09.640 --> 0:07:14.120 the basic relationship stays in fact intact This one is 0:07:14.160 --> 0:07:16.840 a seems to me a great deal more difficult than 0:07:16.920 --> 0:07:20.120 others I've seen in the past, because it's not clear 0:07:20.200 --> 0:07:26.720 to me, uh, how much wait the king has or 0:07:26.800 --> 0:07:29.440 is willing to exert, and how much the person it 0:07:29.520 --> 0:07:32.280 has to step aside is going to be prepared to 0:07:32.320 --> 0:07:35.720 do that. And you know, people's first instinct, as we 0:07:35.760 --> 0:07:39.080 saw in this case, is to try and weather this storm. 0:07:39.200 --> 0:07:42.920 It is not weatherable and particularly if the pace of 0:07:43.160 --> 0:07:48.280 attention stays where it is now. Is there any chance 0:07:49.000 --> 0:07:55.680 that this reflects a power struggle inside of Saudi Arabia, Well, 0:07:55.680 --> 0:07:58.600 clearly this has been a in my I shouldn't say clearly. 0:07:58.640 --> 0:08:01.240 In my view, it's been a path coo. The the 0:08:01.400 --> 0:08:04.119 MBS coming into power is really I think took people 0:08:04.120 --> 0:08:07.960 by surprise. But it's not a singleton. It's uh, it's 0:08:07.960 --> 0:08:11.240 a the predominant faction. But there are a lot of 0:08:11.280 --> 0:08:16.440 losers and um, you know, there are the prospects of 0:08:16.520 --> 0:08:19.160 external forces, in other words, those that have been thrown 0:08:19.200 --> 0:08:24.560 back orchestrating something that would remove MBS is unlikely. Any 0:08:24.640 --> 0:08:28.080 change would have to come from the internal forces. Thank 0:08:28.120 --> 0:08:30.920 you very much for being with us. Jack Divine, former 0:08:30.960 --> 0:08:35.200 acting director of the Central Intelligence Agency, founding partner and 0:08:35.440 --> 0:08:42.440 president of the security firm the Arkin Group. Return on 0:08:42.600 --> 0:08:47.160 equity is up for the revenue trend is good. So 0:08:47.240 --> 0:08:50.920 why is the stock down thirteen and a half percent 0:08:51.120 --> 0:08:54.960 so far this year? I'm talking about Morgan Stanley. And 0:08:55.000 --> 0:08:58.319 here to help us understand the situation is Chris Whalen. 0:08:58.400 --> 0:09:03.520 He is the chairman of Whalen Global Advisors. Chris, why 0:09:03.720 --> 0:09:08.480 is the stock of Morgan Stanley down when the results 0:09:08.480 --> 0:09:13.480 seem so good? Well, the results are not bad. Um, 0:09:13.559 --> 0:09:16.439 there's done a lot of animal spirits in these stocks 0:09:16.480 --> 0:09:20.480 like Morgan Stanley. Now their asset managers, Uh, predominantly they 0:09:20.520 --> 0:09:23.240 have a banking business, of course, um, but they are 0:09:23.280 --> 0:09:26.000 really feed driven. They don't make money on interest rates. 0:09:26.520 --> 0:09:31.160 So Goldman, Morgan Stanley, all the near banks, if you will, um, 0:09:31.480 --> 0:09:33.640 are a function in the market. So if they have 0:09:33.760 --> 0:09:36.320 some big deals that make you know, good money on 0:09:36.360 --> 0:09:39.719 the trading investment banking side, and then the rest is 0:09:39.720 --> 0:09:42.800 pretty much fixed. Um. You have treasury and then you 0:09:42.800 --> 0:09:45.520 have the asset managers who work for a set feet right, 0:09:45.920 --> 0:09:48.720 That's why they like it. It's stable, but it's not exciting. 0:09:48.960 --> 0:09:51.679 So no biggish about City was the best of a 0:09:51.679 --> 0:09:55.880 bunch so far, but really why Yeah, just in terms 0:09:55.880 --> 0:10:00.360 of you know, year over year comparisons of falling credit 0:10:00.440 --> 0:10:03.920 costs in all of the two key factors for the 0:10:03.960 --> 0:10:06.920 last eight nine years have been cost cutting and cheap funding. 0:10:07.760 --> 0:10:10.240 So the question is how do we transition from that 0:10:10.600 --> 0:10:12.840 when the banks, you know, a year from now, their 0:10:12.840 --> 0:10:15.719 funding costs are almost going to be normalized back to 0:10:15.760 --> 0:10:18.920 where they were in two thousand eight, more balanced by 0:10:18.920 --> 0:10:22.079 the way between investors and equity because during the crisis. 0:10:22.240 --> 0:10:26.560 After the crisis, the bank equity holders got the interest 0:10:26.679 --> 0:10:30.240 dollar well through banks and their depositor has got nothing. 0:10:31.040 --> 0:10:33.120 Well well, I mean, that's actually exactly where I wanted 0:10:33.160 --> 0:10:34.800 to go with this, right. I mean, we talk about 0:10:34.840 --> 0:10:38.160 the KNT interest margins, which have been increasing, but the 0:10:38.240 --> 0:10:42.480 gap between what big banks are paying people to put 0:10:42.520 --> 0:10:47.120 their money in their deposit accounts and what the banks 0:10:47.120 --> 0:10:51.480 are earning from the Fed funds overnight rate has widened dramatically. 0:10:51.480 --> 0:10:53.319 I mean, I think it's more than a percentage point 0:10:53.320 --> 0:10:56.240 now on average for the four biggest banks that they're 0:10:56.280 --> 0:11:00.280 basically capturing an extra and extra revenue without doing any thing. 0:11:00.760 --> 0:11:03.160 And at what point will they be forced to pay up. 0:11:03.160 --> 0:11:06.760 Will big banks be forced to offer depositors some additional 0:11:06.880 --> 0:11:09.880 yield to entice deposits? And how much could that hurt 0:11:09.880 --> 0:11:14.200 their earnings? Well, it's already happening. Um, as the FED 0:11:14.240 --> 0:11:17.840 balance she runs off, you eliminated dollar of deposits for 0:11:17.880 --> 0:11:22.440 every dollar in access to reserves. So that's just mechanistic. Um. 0:11:22.559 --> 0:11:25.120 The other thing, remember is that the FED crush funding 0:11:25.160 --> 0:11:29.080 costs in two thousand eleven, I think it was or fourteen. 0:11:29.160 --> 0:11:31.600 It was literally done like ten billion dollars for the 0:11:31.600 --> 0:11:34.600 whole industry for a quarter. So normal is closer to 0:11:34.640 --> 0:11:38.160 a hundred. Right now it's about thirty, and it's increasing 0:11:39.800 --> 0:11:42.839 year over year, so buying you know, a second quarter 0:11:42.880 --> 0:11:46.240 next year, the increase in funding costs will be higher 0:11:46.440 --> 0:11:48.880 than the increase in interest earnings. And that's when you'll 0:11:48.920 --> 0:11:53.040 see him flatten out and go down. Now, Chris, you 0:11:53.080 --> 0:11:56.840 talked about the City Group and they're they're sort of 0:11:56.880 --> 0:11:59.960 a report and saying that that they're better. But I'm 0:12:00.040 --> 0:12:05.280 just trying to understand wouldn't this wouldn't this whole group 0:12:05.360 --> 0:12:10.160 benefit from what you described maybe a low valuation base, 0:12:10.520 --> 0:12:15.040 also cost pressures. You said they're abating they're expanding the 0:12:15.080 --> 0:12:19.760 net interest margin, you've got shared buy back programs and 0:12:19.880 --> 0:12:25.920 better than anticipated EPs growth. Why wouldn't. Yeah, the business 0:12:25.960 --> 0:12:28.320 is okay, but for banks that really run off of 0:12:28.360 --> 0:12:32.719 interest rates, of the advantages eving um. You know, as 0:12:32.760 --> 0:12:36.960 I said before, the last five years, cost cutting, reserve reverses, 0:12:37.280 --> 0:12:39.439 things of that nature really drove Burnning to Then we 0:12:39.480 --> 0:12:42.679 had the tax bill. The text bill structurally increased those 0:12:42.720 --> 0:12:46.000 equity returns you were talking about earlier, So at one 0:12:46.040 --> 0:12:50.360 time adjustment both asset and equity returns after tax obviously, right, 0:12:50.840 --> 0:12:52.720 But if you really want to understand the business, you 0:12:52.720 --> 0:12:55.040 look at the pre tax line, you look at credit 0:12:55.080 --> 0:12:57.200 costs and other factors, and they've all been very low. 0:12:57.520 --> 0:12:59.840 I mean right now, real estate has gone up so 0:13:00.080 --> 0:13:03.560 much PIM that banks are making money on defaults. In 0:13:03.559 --> 0:13:05.800 other words, they get all their money back, they sell 0:13:05.880 --> 0:13:08.520 the defaulted property, and they make money on that. So 0:13:08.520 --> 0:13:12.120 it's like negative um. So there's no credit issue on 0:13:12.120 --> 0:13:14.880 the street today. But to your question, you know, it's 0:13:14.880 --> 0:13:17.520 a function of deal flow. For Marian Stanley and for 0:13:17.600 --> 0:13:21.600 Goldman and the transactional houses. JP has a big component 0:13:21.640 --> 0:13:24.800 of this. But JP also makes money on interest, not 0:13:24.880 --> 0:13:27.559 as much as their peers, by the way, because they're big, 0:13:27.800 --> 0:13:30.360 you know, Marianne with Lake would love to be uh 0:13:30.400 --> 0:13:34.800 you know, no, no, maybe smaller should get much better 0:13:34.840 --> 0:13:38.960 equity returns, you know, more manageable business. So you know, 0:13:39.040 --> 0:13:41.640 to me, the Street is losing their advantage on interest 0:13:42.360 --> 0:13:45.120 that the Fed gave them very quickly. And I think 0:13:45.160 --> 0:13:47.040 people have to pay attention to this because name is 0:13:47.080 --> 0:13:49.400 not going to be expanding next year, it's gonna be 0:13:49.440 --> 0:13:52.720 contracting because the cost of phones has gone up so quickly. 0:13:53.880 --> 0:13:55.920 Chris Whalen, thank you so much for being with us 0:13:55.920 --> 0:13:58.480 and for that perspective. Chris Whalen as chairman of Whalen 0:13:58.520 --> 0:14:02.800 at Global Advisors and some an interesting trend to watch him, 0:14:02.800 --> 0:14:04.960 and one that we've been talking about for a long time, 0:14:05.040 --> 0:14:07.760 which is banks are going to have to start paying 0:14:07.760 --> 0:14:11.440 their depositors more and when they do, will that lead 0:14:11.520 --> 0:14:14.160 to much more disappointing earnings? Although he did his strength 0:14:14.240 --> 0:14:16.680 with deals to Yeah, but also if you're going to 0:14:16.720 --> 0:14:19.720 see higher interest rates, that means that if they are 0:14:19.760 --> 0:14:22.600 really asset gatherers, they're gonna be making more on the 0:14:22.640 --> 0:14:25.600 assets that they gather. It depends which interest rates go up. 0:14:25.640 --> 0:14:27.600 Faster and how I mean if we get the flattening 0:14:27.680 --> 0:14:29.960 yield curve, if they have to pay depositors more. I 0:14:30.000 --> 0:14:32.320 mean Ally Bank actually came out with this front page 0:14:32.360 --> 0:14:34.800 advertisement in the New York Times talking about how the 0:14:34.840 --> 0:14:37.120 biggest bank heist in the world is going on right now. 0:14:37.160 --> 0:14:42.640 But we can talk about that later. Well, I know 0:14:42.760 --> 0:14:47.360 that Paul Sweeney, the US director of Research and senior 0:14:47.400 --> 0:14:51.440 media and Internet analyst for Bloomberg Intelligence, he's got a 0:14:51.480 --> 0:14:54.080 list of things he's going to watch on Netflix. He's 0:14:54.160 --> 0:14:59.840 probably already going to tape Fight World that has already debut. 0:15:00.360 --> 0:15:03.360 Then he's got The Haunting of Hill House as well 0:15:03.400 --> 0:15:08.800 as Marvel's Dare Devil. These are all Netflix only on Netflix. 0:15:08.920 --> 0:15:12.120 I have a whole new feeling towards Paul Sweeney. Now, yeah, 0:15:12.240 --> 0:15:15.280 he's got it all. The reason I bring up these 0:15:15.400 --> 0:15:19.480 only on Netflix productions, Paul is this is where the 0:15:19.520 --> 0:15:22.360 money's going, isn't it. It really is. And uh, you know, 0:15:22.400 --> 0:15:24.400 for the record, I am a big fan of Ozark. 0:15:24.440 --> 0:15:25.960 I'm kind of hooked on that, so I'm binging the 0:15:26.000 --> 0:15:28.560 second season of that. But yeah, they're going to spend 0:15:28.840 --> 0:15:32.880 you know, over eight billion dollars this year in programming. Um, 0:15:32.920 --> 0:15:34.360 you know, most of that, A lot of that is 0:15:34.360 --> 0:15:37.080 original programming, So they're not just licensing movies and TV 0:15:37.160 --> 0:15:40.240 shows from the networks in the studios, they're they're producing 0:15:40.280 --> 0:15:42.120 more and more of their own content and there, and 0:15:42.200 --> 0:15:44.840 they they recognize that from their perspective, that is what 0:15:45.040 --> 0:15:47.480 drives their subscriber growth, that is what their users want, 0:15:47.520 --> 0:15:49.840 and so they're stepping up to spending there. And maybe 0:15:49.880 --> 0:15:52.680 even tonight we'll get an an outlook from the company 0:15:52.680 --> 0:15:56.360 on what they expect to spend next year, and most investors, um, 0:15:56.400 --> 0:15:58.720 you know, expect that number will be even higher than 0:15:58.760 --> 0:16:00.960 what it is this year. So they're by far the 0:16:00.960 --> 0:16:04.800 biggest UH creator of content in Hollywood, the biggest spender 0:16:05.120 --> 0:16:07.200 on content in Hollywood, and that looks to to get 0:16:07.200 --> 0:16:09.400 even bigger going forward. Will this be the year that 0:16:09.720 --> 0:16:12.920 investors start to care about profitability here? You know, I 0:16:13.040 --> 0:16:16.080 don't think so. Um you know, the the it's interesting 0:16:16.120 --> 0:16:19.200 as you segment the company, the more mature US business 0:16:19.280 --> 0:16:21.600 for them already is profitable and and they and they 0:16:21.640 --> 0:16:24.840 showed a pretty good path to profitability there, so we 0:16:24.920 --> 0:16:27.520 know the business or investors know the business can be 0:16:27.560 --> 0:16:31.320 profitable at these expense levels. Uh, internationally, they have not 0:16:31.400 --> 0:16:33.960 turned a profit corner. That's a less mature business. But 0:16:34.000 --> 0:16:37.640 we've seen some markets internationally that have turned profitable. So 0:16:37.880 --> 0:16:39.800 but the big question I think for investors is free 0:16:39.840 --> 0:16:42.520 cash flow. This is a company that has no free 0:16:42.520 --> 0:16:44.560 cash flow and they'll probably lose a couple of three 0:16:44.600 --> 0:16:48.400 billion dollars in free cash flow this year. Um. And 0:16:48.480 --> 0:16:50.720 so the question is how do you fund eight billion 0:16:50.720 --> 0:16:53.240 dollars or even more of programming? And the answer as 0:16:53.280 --> 0:16:55.040 you go to the debt markets and your borrow money 0:16:55.080 --> 0:16:57.000 and um, and that's kind of how they're funding it. 0:16:57.040 --> 0:16:58.880 And so the question is how long can they continue 0:16:58.920 --> 0:17:02.280 to do that? And at increasingly investors are charting starting 0:17:02.280 --> 0:17:04.080 to get uh, you know, a little sensitive to the 0:17:04.119 --> 0:17:06.120 kind of the free cash flow generation of the business. 0:17:06.400 --> 0:17:09.600 They have more than eight billion dollars in debt right right, 0:17:09.680 --> 0:17:11.719 and uh, you know that the debt markets have been 0:17:11.960 --> 0:17:15.320 very open and very receptive to this credit, even though 0:17:15.359 --> 0:17:17.720 there's no profits or cash flow to pay back the debt. 0:17:17.800 --> 0:17:19.880 But you know, I think they look and they see 0:17:19.880 --> 0:17:24.120 that big equity valuation cushion underneath their debt supporting their 0:17:24.160 --> 0:17:25.880 their debt. And you know when you take a look 0:17:25.880 --> 0:17:28.399 at street consensus numbers, UM, this company will not be 0:17:28.440 --> 0:17:32.920 free cash flow till one maybe. Uh so there's still 0:17:33.280 --> 0:17:35.840 ways off from free cash flow, UM, but there is 0:17:35.840 --> 0:17:38.239 a path. So one question that I have is that 0:17:38.320 --> 0:17:40.720 Disney is going to take a lot of its content 0:17:40.960 --> 0:17:43.760 off of Netflix starting at the beginning of next year, 0:17:44.040 --> 0:17:46.919 and they're starting their own streaming service. And I have 0:17:47.040 --> 0:17:50.600 to wonder how big of a competitive concern this is 0:17:50.680 --> 0:17:53.960 for Netflix and how can we really even determine that. Yeah, 0:17:54.400 --> 0:17:57.359 competition is ramping up, no question about it. That you 0:17:57.400 --> 0:18:00.399 mentioned Disney, the big reason that they epped up and 0:18:00.400 --> 0:18:03.080 spend eighty billion dollars to buy Century Fox was to 0:18:03.119 --> 0:18:07.080 get more content UM for their streaming service which they're 0:18:07.119 --> 0:18:09.320 going to launch next year, a T and T, which 0:18:09.359 --> 0:18:12.160 just spent eighty billion dollars buying Time Warner. They announced 0:18:12.240 --> 0:18:13.960 this week that they in fact are getting into the 0:18:14.400 --> 0:18:17.240 director consumer streaming business with some of the Warner Brothers content. 0:18:17.320 --> 0:18:20.880 So competition is absolutely ramping up, UM. And I think 0:18:20.880 --> 0:18:24.520 Netflix clearly recognized this several years ago. UM, and that's 0:18:24.520 --> 0:18:26.639 when they really started to ramp up their original program 0:18:26.760 --> 0:18:29.719 because they knew at some point Hollywood would wisen up 0:18:29.760 --> 0:18:32.040 and they would, you know, start taking back some of 0:18:32.080 --> 0:18:34.399 their content and that Netflix would need to rely on 0:18:34.440 --> 0:18:37.200 more on original programming. And the good news is, um, 0:18:37.240 --> 0:18:39.480 you know, as long as you have a big check book, 0:18:39.480 --> 0:18:42.359 and Netflix has a big checkbook, you can get any writer, 0:18:42.520 --> 0:18:46.560 any talent, any director, uh, any producer to come and 0:18:46.640 --> 0:18:48.439 make content for you, just like they would make it 0:18:48.480 --> 0:18:51.600 for one of the big studios. Paul Sweeney just quickly. 0:18:51.720 --> 0:18:57.520 I understand that Netflix with its understanding of the consumer, 0:18:57.600 --> 0:19:00.200 meaning they know what you watch, they know what are 0:19:00.240 --> 0:19:02.800 interested in. They have able they have been able to 0:19:02.960 --> 0:19:06.880 broaden they're offering. And that's just talking about series. They've 0:19:06.880 --> 0:19:10.560 got the stand up comedy specials, They've got films. They 0:19:10.640 --> 0:19:13.200 know what you want to watch, don't they They do. 0:19:13.480 --> 0:19:15.480 They have a lot of information because they have a 0:19:15.560 --> 0:19:18.720 direct relationship with the consumer. They know what the consumer wants. 0:19:18.760 --> 0:19:22.520 As opposed to a cable network which has a you know, intermediary, 0:19:22.520 --> 0:19:25.879 which is the cable system, the comcast or the satellite provider. Uh, 0:19:26.000 --> 0:19:27.760 they don't own the content, they don't know what their 0:19:27.760 --> 0:19:31.400 consumers really run. Netflix does so originally on the original 0:19:31.440 --> 0:19:34.680 programming the Netflix created in house. They knew that their 0:19:34.840 --> 0:19:39.359 users liked Kevin Spacey. They knew that their users liked 0:19:39.440 --> 0:19:42.399 political dramas, so let's create a political drama with Kevin Spacey, 0:19:42.400 --> 0:19:44.320 as simple as that. And they're they're using that in 0:19:44.359 --> 0:19:46.199 international markets because they're starting to bring up a lot 0:19:46.240 --> 0:19:49.080 of original programming in international markets. Paul Sweeney, thank you 0:19:49.080 --> 0:19:51.520 so much for being with us. Paul Sweeney, us director 0:19:51.520 --> 0:19:54.640 of Research and senior Senior Media and Internet Analyst for 0:19:54.800 --> 0:20:02.199 Bloomberg Intelligence. Fidelity Investment is jumping into the world of 0:20:02.359 --> 0:20:06.960 crypto currency. It is offering to manage digital assets for 0:20:07.040 --> 0:20:11.520 a hedge funds, family offices and trading firms. And here 0:20:11.560 --> 0:20:14.480 to tell us more about this particular aspect of the 0:20:14.480 --> 0:20:18.480 financial industry and fidelities Responses Aaron Brown. He is a 0:20:18.480 --> 0:20:22.160 former managing director and head of Financial market Research at 0:20:22.240 --> 0:20:25.800 a q R Capital Management, and he is the author 0:20:26.200 --> 0:20:30.400 of the book The Poker Face of Wall Street. Aaron Brown, 0:20:30.440 --> 0:20:32.600 It's always a pleasure to hear your views. Tell us 0:20:32.640 --> 0:20:37.240 what do you make of Fidelity offering this digital asset 0:20:37.400 --> 0:20:41.600 management business? Well, thanks for having me, Um. I think 0:20:41.640 --> 0:20:45.680 this is mostly important symbolically, UH, Fidelity has always been 0:20:46.920 --> 0:20:52.720 among similar financial institutions they've been a relative cheerleader for crypto. 0:20:52.960 --> 0:20:55.720 And the fact that they're promising in two thousand nineteen 0:20:55.800 --> 0:20:57.960 that they'll offer custody and trading for some of the 0:20:58.040 --> 0:21:03.800 larger cryptos for some larger investors is uh, sort of 0:21:03.840 --> 0:21:07.480 a you know, it's an affirmation of the legitimacy and 0:21:07.720 --> 0:21:11.720 the faith they have in crypto. It doesn't really add 0:21:11.720 --> 0:21:14.560 a lot. If institutional investors have been dying to pour 0:21:14.720 --> 0:21:17.960 billions and billions of dollars into crypto, They've had many 0:21:18.000 --> 0:21:21.240 opportunities since two thousands seventeen. We had led your ac 0:21:21.840 --> 0:21:25.960 c m E, cbo E offering futures claim based, Gemini 0:21:26.119 --> 0:21:30.159 have offered services. We know Northern Trust is looking at 0:21:30.160 --> 0:21:32.600 probably all the other big custodians are looking at this. 0:21:33.200 --> 0:21:35.560 So I don't think there's a lot of pure news 0:21:35.640 --> 0:21:40.159 here fundamentally, but it's certainly going to uh, you know, 0:21:40.520 --> 0:21:43.920 charge the market and and give a lot of name 0:21:43.960 --> 0:21:46.199 recognition to people who perhaps don't really know what a 0:21:46.240 --> 0:21:50.000 custodian is. But but no the fidelity name well, Aaron, 0:21:50.080 --> 0:21:53.080 I'm struck by sort of the risk that is implied 0:21:53.320 --> 0:21:58.280 by holding something uh that could potentially evaporate and value 0:21:58.280 --> 0:22:01.359 and what is the potential risk that Fidelity would be 0:22:01.400 --> 0:22:04.480 taking on if it really does become a major player 0:22:04.520 --> 0:22:07.680 and if this market continues to expand, well, of course 0:22:07.680 --> 0:22:10.080 they're they're brokeer, so they're holding these for other people, 0:22:10.160 --> 0:22:12.800 and crypto could go to zero. Um UM. I hope 0:22:12.880 --> 0:22:16.320 everyone who knows that before they invest, and then Fidelity 0:22:16.359 --> 0:22:18.440 would be uh, you know, I probably have a lot 0:22:18.440 --> 0:22:22.240 of customer relation issues. Um. But they're offering this to 0:22:22.320 --> 0:22:26.240 institutional investors who presumably know the rules. UM. I would 0:22:26.240 --> 0:22:28.960 say the bigger risks to Fidelity as a company are 0:22:29.119 --> 0:22:31.639 that they get hacked. Now they're planning to put all 0:22:31.640 --> 0:22:33.879 of these assets in cold storage, which is supposed to 0:22:33.880 --> 0:22:36.119 be hacked proof, but you know, you're never quite sure, 0:22:36.320 --> 0:22:39.120