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Speaker 1: This is Bloomberg Business Week. I'm Carol Masser and I'm

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Speaker 1: Jason Kelly. We're here every day bringing you the latest

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Speaker 1: news from the world's of business and finance, plus technology, politics, economics,

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Speaker 1: all harnessing the power of Bloomberg Business Week reporters and editors,

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Speaker 1: on iTunes, SoundCloud, or Bloomberg dot Com. You can also

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Speaker 1: listen to our radio show weekdays at two pm Eastern

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Speaker 1: only on Bloomberg Radio. We're gonna roll around, all right,

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Speaker 1: So let's talk a little Tesla. We do it often.

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Speaker 1: We're also very fortunate that we get to do it

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Speaker 1: pretty often with Dana Hall. She follows the company so closely,

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Speaker 1: and the headline on the story today that she wrote

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Speaker 1: with Gabby Coppola really sums it up. Tesla Capital Raise

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Speaker 1: keeps fourteen billion dollar virtuous circle rolling. It certainly does.

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Speaker 1: And Dana, one of the things that struck me, and

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Speaker 1: you just nail it right there at the top of

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Speaker 1: your story is normally, in this sort of situation, you

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Speaker 1: would look at a company saying, oh, we gotta go

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Speaker 1: get more money. As a little bit of a problem,

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Speaker 1: we're diluting shareholders. That's a little bit of a problem.

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Speaker 1: And yet, and yet this is Tesla. Tesla does not

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Speaker 1: go the way that people normally expect. Help us understand

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Speaker 1: the context here, Yeah, I mean, I think what you're

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Speaker 1: seeing now is that, you know, it's always about the future,

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Speaker 1: right Elon Musk is always selling this vision of the future.

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Speaker 1: And now that they seem to have mastered you know,

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Speaker 1: the past challenges of actually getting the Model three out

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Speaker 1: the door, the share price is really high. You know,

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Speaker 1: the idea of them going out and getting money so

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Speaker 1: that they can do things like build out this plant

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Speaker 1: in Berlin or perhaps another plant in Texas seems more doable.

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Speaker 1: So people are more than willing to kind of fund

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Speaker 1: the vision of the future, and the banks get fees,

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Speaker 1: and you know, everyone sort of wins out. Dan, I'm

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Speaker 1: also wondering if Gene Munster puts this correctly, as you

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Speaker 1: right in your story where you say you know Elong

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Speaker 1: had a shirt investors, he didn't plan to r capital.

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Speaker 1: His backpeddaling is a criticism, but frankly, the state of

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Speaker 1: the balance sheet is a bigger criticism. So perhaps this

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Speaker 1: is scene is a good thing because it could shore

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Speaker 1: up the balance sheet. Yeah, I mean, and some and

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Speaker 1: some analysts like David Whiston and morning Star, they just

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Speaker 1: wish that Tesla would go out and raise like five

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Speaker 1: billion dollars and be done with it, like and just

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Speaker 1: raise a ton of money and then and and be said,

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Speaker 1: instead of having to go back to the market sort

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Speaker 1: of year after year. But it is kind of funny,

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Speaker 1: how you know, just on their earnings called two weeks ago,

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Speaker 1: Musk was asked very specifically, do you have any plans

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Speaker 1: to do a raise? And he's like no, And then

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Speaker 1: you know, two weeks two weeks later, here we are.

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Speaker 1: This is the second time that he's done that. Actually,

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Speaker 1: so you know, people people are a little frustrated that,

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Speaker 1: you know that he says one thing is and then

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Speaker 1: they do the other. But from an investor perspective, having

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Speaker 1: money on hand is always a good thing. And so Dana,

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Speaker 1: you know, this is also a good moment to ask

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Speaker 1: you about sort of the state of Musk. You know,

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Speaker 1: we have a fairly good sense of the state of Tesla.

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Speaker 1: What do you sort of draw conclusion wise from looking

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Speaker 1: at the company right now? Looking at the decision making

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Speaker 1: and especially this amazing run where is sort of Elon's

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Speaker 1: mind as much as anybody can understand it outside of

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Speaker 1: his own head. Well, it's not like I'm talking to,

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Speaker 1: I'm talking against from the guy every day. I don't know,

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Speaker 1: I have not like interacted with him directly recently, but

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Speaker 1: you know, I think that this is a guy whose

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Speaker 1: entire career and much of the kind of mystique in

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Speaker 1: persona around him is built around him proving doubters wrong.

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Speaker 1: And so like the classic example is with SpaceX, they were,

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Speaker 1: you know, for for months they tried to like land

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Speaker 1: this rocket on a drone ship. No one thought they

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Speaker 1: were ever going to be able to pull it off,

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Speaker 1: and now they've not only have they done it several times,

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Speaker 1: but it's kind of become old hat like most you know,

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Speaker 1: we don't even cover the drone ship landings anymore. And

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Speaker 1: with Tesla, like you know, the Model three, everyone questioned

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Speaker 1: what the demand would be like. When they started building

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Speaker 1: the factory in China, there were a lot of skeptics

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Speaker 1: who said that this mud pit would never turn into

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Speaker 1: a factory. And now like here they are like building

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Speaker 1: cars in China, and so I think he feels probably emboldened. Um, certainly. Um.

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Speaker 1: You know, he has a very long kind of time

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Speaker 1: horizon and so people always ding him for being laid

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Speaker 1: on his promises, but he ultimately does tend to deliver

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Speaker 1: on them, Like, maybe not in the time frame that

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Speaker 1: he originally anticipated, but you know, you look around at

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Speaker 1: the at the competitive landscape. You know, no other rocket

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Speaker 1: company is landing rockets quite in the way that SpaceX is.

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Speaker 1: No other automaker is selling electric vehicles and the volumes

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Speaker 1: that Tesla is. And it's like a new decade. They've

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Speaker 1: had two quarters of back to back, back to back profits. Um,

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Speaker 1: you know, they just went out to the market and

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Speaker 1: raised another tree billion. I mean, I think he's feeling

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Speaker 1: pretty good about things right now, Dan, I'm doing my

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Speaker 1: Elon Musk dance right now for our YouTube video, all right, Dan.

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Speaker 1: On a more serious note, Elon Musk and Tesla have

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Speaker 1: been criticized for the lack of investment in R and

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Speaker 1: D and Capex last year, and of course then they've

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Speaker 1: got a big profitability number, but some of the concerns, Now,

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Speaker 1: if you come out with a three and a half

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Speaker 1: billion dollar Capex budget, can you still be profitable on

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Speaker 1: that number. What are you hearing? Well, I think I

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Speaker 1: think that I think it'll be really interesting to see

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Speaker 1: what the first quarter is, which they've sort of hinted

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Speaker 1: at will is likely going to be soft because of

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Speaker 1: seasonality and the and the fallout from the coronavirus. But

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Speaker 1: you know, I mean, that's that's one of the things

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Speaker 1: that Musk has gone back and forth on. They've said

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Speaker 1: they'll be seasonally, they've said that they'll be sustainably profitable,

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Speaker 1: and then they're like, unless we're investing in growth, but

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Speaker 1: they're always investing in growth, So our investors willing to

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Speaker 1: kind of take you know, I mean, I guess the

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Speaker 1: question is what do investors want. Do they want profitability

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Speaker 1: every quarter or do they want the company and really

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Speaker 1: kind of come and dominate. And I think some investors

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Speaker 1: are willing to sacrifice short term profits if it means

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Speaker 1: long term you know, sort of market dominance. All right,

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Speaker 1: Dana Hall, we really appreciate it. Tech reporter looking after

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Speaker 1: all things Tesla, all things that Elon must that is,

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Speaker 1: as we joked yesterday yesterday Taylor like eight full time jobs.

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Speaker 1: All right. She joined us on the phone from San

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Speaker 1: Francisco my whole patient and I know, all right, well,

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Speaker 1: there are a lot of opportunities for songs leading into

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Speaker 1: this segment. It also is a story in a discussion,

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Speaker 1: and it helps solve a little bit of a mystery

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Speaker 1: that's been going on over at Goldman, which is where

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Speaker 1: all these guys going, a lot of big tech guys leaving,

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Speaker 1: and at least one has landed, and he's landed in

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Speaker 1: the marijuana business. Shrina Rajan here with me in New

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Speaker 1: York City finance reporter looking after all things Goldman for

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Speaker 1: us and much more across Wall Street. Uh so, tell

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Speaker 1: us about Mike bum Well, high frequency training experted Goldman

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Speaker 1: is ditching his prestigious partnership role to go and join

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Speaker 1: a company that's going to open a bunch of weed

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Speaker 1: dispensaries across the country. You missed an obvious opportunity to

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Speaker 1: make a high frequency joke, but I'm gonna let that slide.

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Speaker 1: Were you surprised by this move? Oh my god, Taylor,

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Speaker 1: no offense. But I really miss Carol because if she

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Speaker 1: was here, the amount of serious irols people, so many irols,

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Speaker 1: so many irols. I'm I'm I roll Lane Jason just

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Speaker 1: can't see me because I'm not with them in person.

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Speaker 1: Luckily all of our YouTube viewers can see it. I

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Speaker 1: just have to be the poor guest I can I know,

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Speaker 1: I know, you're so nice. No, but do your question, Jason.

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Speaker 1: It's instructive in many ways, right, of course, when people

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Speaker 1: leave firms, why they choose to do it When they

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Speaker 1: do it, there are a variety of different factors, family,

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Speaker 1: lack of interest in the role, new opportunities. But still,

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Speaker 1: when you decided to leave you a perch, as you know,

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Speaker 1: a partner at Goldman Sex their highest title, one of

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Speaker 1: Walt Street's foremost investment banks, and decided to take a

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Speaker 1: different opportunity. In this case they start up in the

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Speaker 1: marijuana space. It just it gives you a sense of

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Speaker 1: where he thinks the all opportunity lies, and perhaps also

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Speaker 1: indicative of the fact that it wasn't entirely fully committed

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Speaker 1: to what he was doing at Goldman because he did

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Speaker 1: have a weighty task. He did win approval and a

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Speaker 1: lot of funds to make a bunch of highers to

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Speaker 1: make a big push to overhaul the electronic trading systems,

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Speaker 1: had to convince senior management a number of other people

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Speaker 1: to be able to get those projects rolling, and for

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Speaker 1: him to be leaving a few months after that. It

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Speaker 1: was a bit of a surprise when we heard about it.

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Speaker 1: And it seems that he's decided to go out there

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Speaker 1: and pair up with some of his ex colleagues from

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Speaker 1: a previous firm to join the startup venture three. I'm

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Speaker 1: curious to get your thoughts about what's going on at

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Speaker 1: Goldman more generally. You originally never really heard a lot

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Speaker 1: of stories about people leaving. It's so hard to get

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Speaker 1: into that. Once you're Derrick Goldman, you are really excited

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Speaker 1: to be there and to work your way up. We've seen, though,

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Speaker 1: a lot of departures recently, especially from the top ranks.

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Speaker 1: Is there a lack of vote of confidence in Goldman

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Speaker 1: or is there just a bigger vote of confidence somewhere else.

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Speaker 1: That's a tough question, Taylor, because and we had this

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Speaker 1: discussion yesterday when we were thinking about all the troubles

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Speaker 1: at government and all the people leaving. When we go

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Speaker 1: back a year ago, the January February of nine, again

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Speaker 1: we saw a lot of departures. We were able to

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Speaker 1: explain away a lot of that saying, hey, whenever there's

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Speaker 1: a new management. In this case, David Solomon took over

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Speaker 1: the role of CEO and chairman from Lloyd Blankfind you

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Speaker 1: expect to change with the Guard. You expect a lot

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Speaker 1: of people aligned with Lloyd or the old Guard to

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Speaker 1: be leaving. And the new guy comes in and installed

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Speaker 1: a lot of his people at various roles, and in

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Speaker 1: an ambitious, competitive place like Goldman, you will see a

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Speaker 1: lot of churn. The difficult part here, the troubling part

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Speaker 1: here is a year later, fifteen months in his tenure,

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Speaker 1: we're still talking about this time of the year and

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Speaker 1: the kind of high profile departures we're seeing, which is

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Speaker 1: which has got a lot of tongues wagging across Wall

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Speaker 1: Street for sure, and the competitors are paying attention. You

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Speaker 1: can be guaranteed about that. And somebody else leaving and

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Speaker 1: and you the other other names that are we included

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Speaker 1: in the story. Couldn't play it higher Bi because I

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Speaker 1: was just so much interested in giving all the details

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Speaker 1: on the marijuana startup. Otherwise Jason would have killed us.

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Speaker 1: But yes, Jeff Winner joined Goldman two years ago after

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Speaker 1: having senior engineering roles in places like Stripe and Uber Silicon,

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Speaker 1: Valley name. He was supposed to build out this big

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Speaker 1: San Francisco office for Goldman uh and he's gone in

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Speaker 1: onto two years and it's it's funny when when when

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Speaker 1: we sort of look back at the old clips and

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Speaker 1: the interviews we did with him at the time of

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Speaker 1: his joining. He talked about how there's still a lot

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Speaker 1: of stuff in us in this place, but the bank

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Speaker 1: is working to get rid of it. He talked about

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Speaker 1: free flowing kombucha. Unfortunately, before he could get a free

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Speaker 1: full of kombucha, he's decided he's had enough. All right, Well,

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Speaker 1: it's a good story. Thank you for being a good sport.

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Speaker 1: As I make all my terrible, terrible marijuana punts here,

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Speaker 1: it's a Friday afternoon, it's been a long week, and

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Speaker 1: you know, it's just too good. It's just too easy.

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Speaker 1: It's sitting right there, Shri Nadaraja and always doing such

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Speaker 1: a great job with the comings and goings at Goldman,

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Speaker 1: Sachs and Codman Arture Partner. Ditching a pursuit of Quantz

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Speaker 1: for a marijuana start up is a really nice story

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Speaker 1: in one of the most read on the Bluebird. And

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Speaker 1: what is it that hasn't done as a puzzle in song. Alright,

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Speaker 1: so when it comes to Valentine's Day gifts, maybe this

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Speaker 1: isn't the one you want, unless you what you're Valentine

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Speaker 1: to be both ignoring you and maybe really really mad

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Speaker 1: at you. It's such a great story. We're talking about

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Speaker 1: stave puzzles, where the torture is the point. Devin Leonard

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Speaker 1: wrote this story quite an assignment he got for Bluebird

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Speaker 1: Business Week. As I joked earlier, Devon, you know, usually

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Speaker 1: you're doing these deep dive investigations you're telling us about

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Speaker 1: like McK mulvaney and Steve mcnuchin and folks like that.

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Speaker 1: But here we are talking to you about puzzles. So

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Speaker 1: why what's going on here? I don't know. This is

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Speaker 1: a really weird one. And I mean, this is a

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Speaker 1: company basically until recently was run by a guy who

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Speaker 1: described himself as its chief tormentor. It's customers they all

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Speaker 1: basically say their addicts, and I mean to these weird games,

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Speaker 1: some of which the company says are are created by

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Speaker 1: you know, a sadist. So I mean, this is not

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Speaker 1: the type of story I do all the time. And

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Speaker 1: I had no idea what I was getting into when

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Speaker 1: Joel Webber, the magazine that are asked me to do it. Yeah, Devin,

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Speaker 1: how did you find this story? I've never even heard.

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Speaker 1: I've never heard of this company. I never I'm not

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Speaker 1: a puzzle guy. Uh and and uh, but Joel kind

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Speaker 1: of is. I mean, I think he that part of

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Speaker 1: it is he knew about this from maybe being Tork

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Speaker 1: cousin or or something. But no, I don't. I just

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Speaker 1: said I just had no idea. It really wasn't. I

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Speaker 1: went up there and I stayed at that place. It's

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Speaker 1: really swanky, uh, you know, Resort Twin Farms, and they

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Speaker 1: had them in all the rooms. I couldn't do mine.

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Speaker 1: My daughter later did in ten minutes. But but but

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Speaker 1: that's when I started to see like, hey, wait a minute.

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Speaker 1: You know, you know, you know the rooms, the sweets

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Speaker 1: I go for, you know, a thousand, two thousand dollars

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Speaker 1: a night, and you know, you know there's something that

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Speaker 1: you know there, there's some there's something going going on here.

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Speaker 1: And then then I went over to the company and

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Speaker 1: basically they took me all around and show me with

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Speaker 1: crazy puzzles. And then they showed me a whole wall

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Speaker 1: and there's Jeff Bezos and Bill Gates and Queen Elizabeth

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Speaker 1: and the Bush family and you know, so basically all

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Speaker 1: these people. Um, I mean, well you have to have

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Speaker 1: money because because the puzzles cost as much as you know,

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Speaker 1: ten ten ten grants. Right. I have to say, like,

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Speaker 1: in reading your story, it feels like, and you just

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Speaker 1: illustrated it pretty well. It's almost like you go down

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Speaker 1: this rabbit hole, right, you know, into into this place

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Speaker 1: where people are sort of obsessive about it. Clearly they

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Speaker 1: appeal to a certain type of person. Tell us about

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Speaker 1: the puzzles themselves. Well, they mean, they're they're they're sort

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Speaker 1: of I guess they're very they're very I guess they're beautiful,

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Speaker 1: I mean a person. But they're designed and ways to

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Speaker 1: to just be be very difficult. They come in boxes

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Speaker 1: and blue boxes, so you don't have a picture of

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Speaker 1: the puzzle in the box and you put it together.

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Speaker 1: They throw in pieces that purposely don't fit. Then they

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Speaker 1: have all these other tricks that that they used to

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Speaker 1: drive people crazy. But then but then you you know,

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Speaker 1: you wind up talking to the people who spend all

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Speaker 1: this money, you know, these things, So that's what they want.

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Speaker 1: They want to kind of be tortured and and you know,

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Speaker 1: they want things to be really hard and they want

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Speaker 1: to be a challenge, and sometimes it drives them crazy.

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Speaker 1: And one guy said he's he curses at his puzzles,

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Speaker 1: but he buys ten a year, sorry, not ten a year,

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Speaker 1: ten at a time. Oh wow, you know, Devin, I'm

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Speaker 1: going on the website right now and there's a puzzle

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Speaker 1: for Valentine's Day that Jason's gonna get me. It's nine

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Speaker 1: hundred and seven dollars. It has this sweetheart little street.

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Speaker 1: It's called sweet Streets, just in time for Valentine's Day.

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Speaker 1: But in your story you talk about a lot of

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Speaker 1: other cool ones, um like these boxes and locks and

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Speaker 1: very non traditional, right, talk to us about some of

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Speaker 1: these crazy puzzles that you mentioned in your story. Well,

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Speaker 1: maybe the best example is, you know, this custom made

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Speaker 1: one that they made for this guy in in Dallas.

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Speaker 1: His name's Hal Brierley. He's a relaters and guy ended

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Speaker 1: up himself. I mean, he's sort of one of the

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Speaker 1: fathers of customer Customer loyally programs. He either designed them

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Speaker 1: or random for the major airlines, for Hurts, for Hilton.

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Speaker 1: But basically he's he's he's a guy. He's he's he's

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Speaker 1: a workaholic and he needs these puzzles sort to get

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Speaker 1: his mind off of an off of work. He's still

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Speaker 1: like seventy four and he's still doing this. So so basically,

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Speaker 1: his uh, his wife and his sister in law been

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Speaker 1: ordering him these custom made puzzles and uh, you know

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Speaker 1: the one he the one he's he's working on he

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Speaker 1: can't finish, just driving him nuts. It's more than a

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Speaker 1: thousand pieces and it's designed you know, it's inspired by

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Speaker 1: these African safari trips. They've all taken two thirds of

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Speaker 1: the pieces are all blue, and basically basically when he

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Speaker 1: doesn't understand, I mean maybe he's figured out. No, I

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Speaker 1: don't think he has. But there's a whole other level

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Speaker 1: to to the puzzle that fits on top of the

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Speaker 1: continent of Africa. It's all water but the but the

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Speaker 1: pieces are almost all the same size. There's no guide.

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Speaker 1: And this is a really smart guy. There's tons and

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Speaker 1: tons of puzzles, but he can't figure it out. And

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Speaker 1: he's I mean, I he basically said, I'm a guy

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Speaker 1: of bills by the hour. I'm sort of calculated how

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Speaker 1: much time they I don't know it's worth it. But

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Speaker 1: I love these things. So, you know, one of the

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Speaker 1: things that occurs to me Devon, and I wonder if

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Speaker 1: this occurred to you as you were working on it.

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Speaker 1: This feels like kind of an analog antidote to a

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Speaker 1: very digital world, right, you know, it's very tactile, and

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Speaker 1: even some of the other things you talk about are

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Speaker 1: experiential and more and more, it does feel like, and

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Speaker 1: you've alluded to this already, this is an escape from

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Speaker 1: being in front of these screens or holding our phones

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Speaker 1: and things like that. People draw a lot of satisfaction

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Speaker 1: out of this. Yeah, and and and and it is

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Speaker 1: sort of amazing that that in this day and age,

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Speaker 1: some little company could you know, prosper by making something

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Speaker 1: that's sort of like I guess now you can buy

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Speaker 1: them online. But they used to Everything used to be

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Speaker 1: you know, done through the male, and so they think

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Speaker 1: they still do something, you know, thank you notes, handwritten

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Speaker 1: thank you notes, and I mean the whole thing is

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Speaker 1: so sort of retro but I think that's for the point.

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Speaker 1: I mean, the one thing for them is the customers

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Speaker 1: are are pretty old. Just about everybody I talked to

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Speaker 1: was their seventies, so I mean, I did see them,

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Speaker 1: among other things. Well, it's Valentine's. They designed these puzzles

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Speaker 1: for people that you know, some person puts it together

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Speaker 1: with their significant another and then as they're finishing it,

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Speaker 1: you know that, you know, they put these pieces and

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Speaker 1: I guess, I guess the person I bought the puzzle

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Speaker 1: gives oh, by the way, I got these pieces, and

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Speaker 1: and it says, will you marry me? And and I

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Speaker 1: guess the one example, the one or two examples they

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Speaker 1: showed me, the answer was no. But no, so so

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Speaker 1: you know, buyer beware. But but but I mean, it's

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Speaker 1: it's uh, it's it's it's like nothing I've I've ever

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Speaker 1: seen before. Absolutely need I need to meet that girl

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Speaker 1: who said no. I think I'm a fan of hers,

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Speaker 1: you know. But on a more serious note, I think,

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Speaker 1: like you, we're alluding to Jason. In this digital world,

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Speaker 1: I remember during Superstorm Sandy, when all of our lights

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Speaker 1: went out, we're all doing puzzles by candle light, right

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Speaker 1: because our mobile devices stopped working. And around Christmas time,

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Speaker 1: when we're all on our phones, it's kind of a

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Speaker 1: nice break to maybe just sit down and do a puzzle.

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Speaker 1: And so I'm really wondering if this is the beginning

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Speaker 1: of a bigger trend where we put some of these

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Speaker 1: mobile devices down and use this as a really way

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Speaker 1: to connect with people again, if you're gonna afford it,

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Speaker 1: If you can afford it, that's absolutely true. Well, uh,

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Speaker 1: this is a really terrific story. It is being consumed

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Speaker 1: pretty madly on the Bloomberg terminal and online. This one's

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Speaker 1: gonna have a long tail. I can guarantee you that

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Speaker 1: Devin Leonard wrote it. He is projects an investigations reporter,

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Speaker 1: a different sort of project, in this case looking into

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Speaker 1: some very tough to solve puzzles. All right, it's one

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Speaker 1: of my favorite stories of the week. Not surprisingly, any

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Speaker 1: Massa wrote it. It's about big mone me on big

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Speaker 1: money Vanguard. We're talking about the mutual fund manager looking

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Speaker 1: after mutual funds, looking after index funds, getting into the

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Speaker 1: business of private equity, sort of dipping its toe a bit,

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Speaker 1: but we think probably we're going to put a leg

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Speaker 1: in it before too long. An easier with me in

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Speaker 1: New York City, tailor raigs in San Francisco. All right,

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Speaker 1: so Annie, tell us what Vanguard's up to. So Vanguard

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Speaker 1: has announced plans for a new private equity fund that

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Speaker 1: at first will only be available to institutions, smaller institutions

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Speaker 1: like endowments and nonprofit foundations, but that it hopes to

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Speaker 1: open up to a broader range of investors as it can,

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Speaker 1: and it's doing this with Harbor Vest Partners managing the

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Speaker 1: fund out of Boston, so Annie. The interesting thing is

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Speaker 1: that Vanguard is known for low cost passive indexing. This

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Speaker 1: is now PE, which you think of as high fees,

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Speaker 1: certainly nowhere near passive investing. How does this fit into

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Speaker 1: Vanguard strategy. It's a great question. As you know, Vanguard

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Speaker 1: is synonymous with this kind of retail facing, ultra low

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Speaker 1: cost index fund ethos that it was really built on.

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Speaker 1: But I mean, it does have an active management arm.

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Speaker 1: It's got over a trillion dollars in active strategies and

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Speaker 1: it sees this PE vehicle as a continuation of that.

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Speaker 1: But that's not to understate that it really is a

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Speaker 1: departure for such a huge indexing giant and index fund

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Speaker 1: giant um so PE. Obviously it's a place with higher fees,

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Speaker 1: longer lock up periods, and just a very different realm

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Speaker 1: of investing than index funds and so tell Us about

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Speaker 1: the experimentation that's happened so far because other big money managers,

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Speaker 1: the big three you know we call Vanguard, you call

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Speaker 1: you helped us understand a few weeks ago, Vanguard, State Street,

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Speaker 1: and black Rock, there's been some experimentation here, right, Yeah,

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Speaker 1: that's right. Vanguard certainly not the only one of those

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Speaker 1: three big fund firms to try and get into PEE.

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Speaker 1: You also saw black Rock two years ago announced its

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Speaker 1: own new private equity style of vehicle called long Term

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Speaker 1: Private Capital that's taking stakes in private companies. And it's

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Speaker 1: another indication now that you see Vanguard doing it as well,

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Speaker 1: that private equity is becoming kind of irresistible to these firms.

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Speaker 1: And you know, fees are something that you cannot ignore um.

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Speaker 1: And also there's more institutional ability to allocate to private equity. UM.

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Speaker 1: You see funds raising record amounts. So it's a piece

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Speaker 1: of the market that they don't want to be left

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Speaker 1: out of for much longer. Andy, I also wonder if

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Speaker 1: this is classic peak pe that a Vanguard is getting in.

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Speaker 1: It's just a sign of my mom, my dad, my grandma,

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Speaker 1: you know, every sort of retail investor wanting a piece

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Speaker 1: of the action. And it is a sign that we

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Speaker 1: were at peak PEE. We should all be running for

427
00:21:59,800 --> 00:22:03,199
Speaker 1: the don't be so dismissive of the rigs. They're very

428
00:22:03,280 --> 00:22:09,159
Speaker 1: sophisticated investors with UM no offense to anyone in your

429
00:22:09,200 --> 00:22:14,040
Speaker 1: family and the investing strategies, Taylor. UM is that some

430
00:22:14,200 --> 00:22:19,280
Speaker 1: people say, some kind of advocates for individual investors have said,

431
00:22:19,960 --> 00:22:22,840
Speaker 1: you know, we haven't This vehicle is not open to

432
00:22:22,920 --> 00:22:25,000
Speaker 1: retail investors yet. And it's important to note that there

433
00:22:25,040 --> 00:22:28,719
Speaker 1: are regulatory restrictions on who can invest in PE right now.

434
00:22:29,200 --> 00:22:32,720
Speaker 1: You see big firms like black Stone and KKR and

435
00:22:32,760 --> 00:22:37,359
Speaker 1: Apollo wanting to angle into a broader audience UM and

436
00:22:37,480 --> 00:22:42,080
Speaker 1: open up their private equity vehicles to more investors. But

437
00:22:42,480 --> 00:22:46,800
Speaker 1: what these UM advocates for individual investors say in some

438
00:22:46,960 --> 00:22:50,440
Speaker 1: cases is, you know, they're not sure that it makes

439
00:22:50,680 --> 00:22:53,760
Speaker 1: sense to change the rules about who can invest in

440
00:22:53,880 --> 00:22:57,560
Speaker 1: P because they're more esoteric. Lock up periods are longer,

441
00:22:58,040 --> 00:23:00,440
Speaker 1: and they say that it might not necess necessarily be

442
00:23:00,480 --> 00:23:02,879
Speaker 1: a good thing for the end investor or, Like the

443
00:23:03,000 --> 00:23:09,280
Speaker 1: less sophisticated Invester Well and as you noted there, Blackstone

444
00:23:09,320 --> 00:23:13,800
Speaker 1: and others Blackstone, Carlo, KKR, they are desperate to get

445
00:23:13,880 --> 00:23:16,199
Speaker 1: to this like holy grail of the retail investor. They

446
00:23:16,240 --> 00:23:19,360
Speaker 1: just see this as this massive pool that they want

447
00:23:19,400 --> 00:23:22,639
Speaker 1: to swim into the to their hearts content. Right, And

448
00:23:22,760 --> 00:23:25,399
Speaker 1: if you think about it, you can't really have pe

449
00:23:25,600 --> 00:23:28,399
Speaker 1: in a four oh one K, for example, But I

450
00:23:28,520 --> 00:23:31,080
Speaker 1: think that they might argue a four oh one K

451
00:23:31,320 --> 00:23:34,800
Speaker 1: is a perfect place for a private equity fund because

452
00:23:35,480 --> 00:23:38,560
Speaker 1: you're not really supposed to touch that money for long

453
00:23:38,640 --> 00:23:42,560
Speaker 1: periods of time, for decades, so it makes perfect sense to,

454
00:23:43,600 --> 00:23:46,080
Speaker 1: you know, put a p style vehicle in there. UM.

455
00:23:46,560 --> 00:23:48,760
Speaker 1: Of course, they have products to sell, so you have

456
00:23:48,880 --> 00:23:51,320
Speaker 1: to keep that in mind as they, you know, make

457
00:23:51,400 --> 00:23:56,359
Speaker 1: their case. UH in Washington, any any sort of thoughts

458
00:23:56,440 --> 00:23:59,440
Speaker 1: on when we would see this type of vehicle be

459
00:23:59,640 --> 00:24:03,840
Speaker 1: open to retail investors. There's no real clarity around that yet.

460
00:24:04,000 --> 00:24:07,280
Speaker 1: But regulators are reassessing whether they should change some of

461
00:24:07,320 --> 00:24:11,159
Speaker 1: the restrictions on private equity investments. So it's a an

462
00:24:11,240 --> 00:24:15,480
Speaker 1: issue that's evolving, and UM Vanguard is UH, I think,

463
00:24:15,640 --> 00:24:18,080
Speaker 1: trying to get ahead of it because I think they

464
00:24:18,119 --> 00:24:20,679
Speaker 1: wouldn't want to be caught flat footed if the regulations

465
00:24:20,720 --> 00:24:25,000
Speaker 1: were to change. UM with their army of advisors that

466
00:24:25,080 --> 00:24:28,680
Speaker 1: could potentially sell those um kinds of vehicles to trying

467
00:24:28,680 --> 00:24:31,480
Speaker 1: to be on the vanguard. All right, Annie massa investing

468
00:24:31,600 --> 00:24:36,920
Speaker 1: reporter for Bloomberg, keeping a very close eye on everything

469
00:24:37,000 --> 00:24:39,520
Speaker 1: that happens in the world, a big money on our

470
00:24:39,640 --> 00:24:51,960
Speaker 1: investing team journal. Yeah, but you let me drive, No, Ann, please,

471
00:24:54,760 --> 00:25:11,440
Speaker 1: I want to drive, drive the questions, the drive to

472
00:25:11,520 --> 00:25:17,320
Speaker 1: the globes community. Thanks well us, Bloomberg Radio. All right,

473
00:25:17,320 --> 00:25:21,080
Speaker 1: it's time for the Drive to the clothes. Let's get

474
00:25:21,119 --> 00:25:24,399
Speaker 1: into it with Rob Crocha. He is senior portfolio manager

475
00:25:24,520 --> 00:25:27,479
Speaker 1: for Risk Parody and Managed Features at Melon, joining us

476
00:25:27,560 --> 00:25:30,480
Speaker 1: on the phone from Boston. Rob, great to have you

477
00:25:30,560 --> 00:25:33,720
Speaker 1: with Taylor Riggs and myself. So what are you seeing

478
00:25:33,760 --> 00:25:36,400
Speaker 1: in this market right now? It feels like we're kind

479
00:25:36,400 --> 00:25:38,920
Speaker 1: of catching our breath here on a Friday after a

480
00:25:39,040 --> 00:25:42,200
Speaker 1: few turbulent weeks and candidly a couple of turbulent Fridays

481
00:25:42,280 --> 00:25:44,679
Speaker 1: where you saw a big sell off going into the weekend.

482
00:25:47,200 --> 00:25:49,399
Speaker 1: It still feels like a risk on market to us.

483
00:25:49,720 --> 00:25:53,400
Speaker 1: Um you know, when we when we saw the response

484
00:25:53,480 --> 00:25:57,000
Speaker 1: of the market to you know, frankly, pretty big macro

485
00:25:57,200 --> 00:26:01,560
Speaker 1: news including coronavirus UM and the market just seems to

486
00:26:01,720 --> 00:26:05,320
Speaker 1: continue to shrug off risk with the idea that monetary

487
00:26:05,400 --> 00:26:09,640
Speaker 1: policy has got our back. Um, it's the market has

488
00:26:09,760 --> 00:26:14,280
Speaker 1: a really positive sentiment here, Rob, I was reading through

489
00:26:14,320 --> 00:26:16,199
Speaker 1: your notes and one thing that I really liked, as

490
00:26:16,240 --> 00:26:19,480
Speaker 1: you're talking about value go along cheap stocks, short expensive ones.

491
00:26:19,720 --> 00:26:22,920
Speaker 1: We were talking in an earlier segment about the rotation

492
00:26:23,080 --> 00:26:26,280
Speaker 1: or really the lack of rotation here between value and growth.

493
00:26:26,440 --> 00:26:30,000
Speaker 1: Are you still preferring value here? You know, as a

494
00:26:30,080 --> 00:26:33,639
Speaker 1: as a quand investor, we try to be empirically driven.

495
00:26:33,800 --> 00:26:35,960
Speaker 1: And the truth is that for a big investor that

496
00:26:36,000 --> 00:26:41,600
Speaker 1: has to deploy significant capital, traditional value it just naively applied,

497
00:26:41,920 --> 00:26:45,560
Speaker 1: has never really worked. So if you break down what's driven,

498
00:26:46,040 --> 00:26:49,720
Speaker 1: you know, from a French factor performance, it was tiny

499
00:26:49,800 --> 00:26:52,959
Speaker 1: stocks and it was actually the short side of tiny stocks.

500
00:26:53,000 --> 00:26:55,720
Speaker 1: So small stocks that have been really beaten down and

501
00:26:55,840 --> 00:26:59,399
Speaker 1: are still expensive, those those are the ones that have

502
00:26:59,560 --> 00:27:02,600
Speaker 1: tended to do very poorly, and being short those has

503
00:27:02,680 --> 00:27:06,560
Speaker 1: been has has been a great booster for value strategies.

504
00:27:06,920 --> 00:27:10,159
Speaker 1: And so if you look at the data that is

505
00:27:10,320 --> 00:27:13,760
Speaker 1: underneath of the original papers on value, they are not

506
00:27:13,920 --> 00:27:17,320
Speaker 1: supportive of just being long a big naive value index

507
00:27:17,400 --> 00:27:21,399
Speaker 1: portfolio never worked, doesn't work now, so talk to us

508
00:27:21,400 --> 00:27:24,360
Speaker 1: about factors. Rob remind us, you know, for our audience

509
00:27:24,440 --> 00:27:28,800
Speaker 1: that's not as familiar what that involves. What basically the

510
00:27:28,960 --> 00:27:32,560
Speaker 1: lens through which you see the market is absolutely when

511
00:27:32,640 --> 00:27:35,640
Speaker 1: we think about the market, we're thinking about it as

512
00:27:35,720 --> 00:27:39,159
Speaker 1: a group of stocks that are weighted by their market

513
00:27:39,240 --> 00:27:43,000
Speaker 1: capitalization relative to each other. So when I think about beta,

514
00:27:43,480 --> 00:27:46,879
Speaker 1: that is just exposure to the market as it exists

515
00:27:46,920 --> 00:27:49,600
Speaker 1: in the market today, I'm buying more stocks that that

516
00:27:49,760 --> 00:27:52,560
Speaker 1: have higher market cabin less of stocks with lower market cap.

517
00:27:53,440 --> 00:27:56,919
Speaker 1: Smart beta or or sort of long only factor exposure

518
00:27:57,400 --> 00:28:00,720
Speaker 1: is where you don't you're still long only, but you've

519
00:28:00,760 --> 00:28:04,280
Speaker 1: got exposure only two stocks with certain characteristics. So you

520
00:28:04,440 --> 00:28:07,800
Speaker 1: let go of that cap waiting methodology and you begin

521
00:28:07,920 --> 00:28:11,639
Speaker 1: to wait based on something the attractiveness of valuations, or

522
00:28:11,680 --> 00:28:14,840
Speaker 1: how well it's done recently, or how defensive it is

523
00:28:14,960 --> 00:28:18,480
Speaker 1: low volatility, it is how the quality of the stocks earnings.

524
00:28:19,119 --> 00:28:22,320
Speaker 1: So those are smart beta portfolios. I'm still long only,

525
00:28:22,680 --> 00:28:24,600
Speaker 1: but I'm long a basket of stocks I think will

526
00:28:24,600 --> 00:28:27,919
Speaker 1: outperform the market because they have good characteristics. And then

527
00:28:28,119 --> 00:28:32,520
Speaker 1: power factors long short are smart beta minus bet at

528
00:28:32,600 --> 00:28:37,760
Speaker 1: just a smart part. Rob curious to see how you

529
00:28:37,880 --> 00:28:41,320
Speaker 1: are factoring in momentum at this point, if at all.

530
00:28:42,440 --> 00:28:45,120
Speaker 1: So we're always factoring in momentum. Momentum is one of

531
00:28:45,200 --> 00:28:49,000
Speaker 1: the factors that works across capsizes, so if you're a

532
00:28:49,080 --> 00:28:51,800
Speaker 1: big investor, you can still take advantage of momentum strategies.

533
00:28:52,040 --> 00:28:54,600
Speaker 1: The other thing about momentum is it's the same language

534
00:28:54,600 --> 00:28:57,640
Speaker 1: across asset classes, So it's very straightforward for me to

535
00:28:57,680 --> 00:29:00,920
Speaker 1: build a portfolio where I'm doing momentum cash equities, I'm

536
00:29:00,960 --> 00:29:04,040
Speaker 1: doing momentum in equity indices, I'm doing momentum in bonds

537
00:29:04,080 --> 00:29:07,959
Speaker 1: and commodities. It's it is a very robust factor, and frankly,

538
00:29:08,040 --> 00:29:10,880
Speaker 1: it's been a much better performing factor than value since

539
00:29:11,200 --> 00:29:17,120
Speaker 1: since it was discovered. Do you have I'm curious to

540
00:29:17,440 --> 00:29:20,800
Speaker 1: dig a little bit more into the momentum question. If

541
00:29:20,840 --> 00:29:24,920
Speaker 1: you've ever seen momentum like this before? You think of

542
00:29:25,000 --> 00:29:29,000
Speaker 1: the massive run up, the length of the bullmarket, and

543
00:29:29,120 --> 00:29:31,680
Speaker 1: the rate at which we have gotten to fresh record

544
00:29:31,760 --> 00:29:34,840
Speaker 1: highs every day. Have you seen this type of momentum before?

545
00:29:34,880 --> 00:29:37,760
Speaker 1: As you take a look at your factor models, we've

546
00:29:37,800 --> 00:29:40,240
Speaker 1: seen we haven't seen this length of a bull market

547
00:29:40,280 --> 00:29:42,600
Speaker 1: in stocks. I mean, I think that that's you know, unequivocal.

548
00:29:42,960 --> 00:29:45,480
Speaker 1: But what we've clearly seen is is runs where you

549
00:29:45,600 --> 00:29:49,200
Speaker 1: have made as much money being long or short based

550
00:29:49,240 --> 00:29:52,760
Speaker 1: on momentum. What's different in this market is that if

551
00:29:52,800 --> 00:29:55,400
Speaker 1: you're if you're if you're talking about trend trend falling,

552
00:29:55,440 --> 00:29:58,440
Speaker 1: which is momentum, but but but with a drifting bias

553
00:29:58,520 --> 00:30:01,400
Speaker 1: to being long and stuff is going well on average um.

554
00:30:02,280 --> 00:30:04,240
Speaker 1: This is not a market that's been permitted to fall.

555
00:30:04,800 --> 00:30:07,600
Speaker 1: So it used to be the case that when sentiment

556
00:30:07,720 --> 00:30:11,040
Speaker 1: got bad, it could get worse and get worse after that,

557
00:30:11,280 --> 00:30:13,720
Speaker 1: and that markets would continue to fall in there would

558
00:30:13,720 --> 00:30:17,160
Speaker 1: this be this building sort of bad sentiment that gets

559
00:30:17,200 --> 00:30:20,760
Speaker 1: worse and worse. That has not happened. Monetary policy has

560
00:30:20,800 --> 00:30:24,320
Speaker 1: got our back um and and anytime the market really

561
00:30:24,480 --> 00:30:28,160
Speaker 1: starts to do very poorly, monetary policy expectations change, treasury

562
00:30:28,280 --> 00:30:31,960
Speaker 1: yields plummet, and the party starts over again. And and

563
00:30:32,160 --> 00:30:34,480
Speaker 1: because of that, that's been hard because a lot of

564
00:30:34,960 --> 00:30:37,000
Speaker 1: as a factor investor, a lot of what we do

565
00:30:37,120 --> 00:30:40,600
Speaker 1: in factor space makes money when saying when sentiment changes

566
00:30:40,680 --> 00:30:42,600
Speaker 1: for the for the worst. That is a big part

567
00:30:42,640 --> 00:30:45,880
Speaker 1: of why factors have been so awful. Lately, so Rob.

568
00:30:46,040 --> 00:30:48,600
Speaker 1: You know, we started the conversation talking about a market

569
00:30:48,720 --> 00:30:52,000
Speaker 1: that has been uh shrugging it off or maybe in

570
00:30:52,160 --> 00:30:55,760
Speaker 1: the words of another tailor, Taylor Swift, shaking it off.

571
00:30:56,800 --> 00:31:00,760
Speaker 1: When you think about the coronavirus I risk, you think

572
00:31:00,840 --> 00:31:04,120
Speaker 1: about how global markets, and certainly the US market has

573
00:31:04,240 --> 00:31:08,640
Speaker 1: continued with a couple notable exceptions to really take it

574
00:31:08,720 --> 00:31:12,640
Speaker 1: in stride. Does that worry you at all? Does that

575
00:31:12,760 --> 00:31:15,360
Speaker 1: sort of go against what you would expect given all

576
00:31:15,720 --> 00:31:19,600
Speaker 1: the factors you talked about? It does a lot of

577
00:31:19,640 --> 00:31:22,760
Speaker 1: stuff worries us because but but as you know, those

578
00:31:22,840 --> 00:31:25,080
Speaker 1: worries are the same thing that cause an investor that

579
00:31:25,200 --> 00:31:28,720
Speaker 1: doesn't have discipline, doesn't have a process to bail out

580
00:31:28,800 --> 00:31:31,320
Speaker 1: before before they they've done as well as they can

581
00:31:31,360 --> 00:31:33,719
Speaker 1: in the market. You know, most of our investors need

582
00:31:33,760 --> 00:31:37,080
Speaker 1: to make seven plus percent return a year on average

583
00:31:37,160 --> 00:31:40,000
Speaker 1: in order to meet their their liabilities. And you can't

584
00:31:40,040 --> 00:31:42,360
Speaker 1: make that kind of return in a high valuation market,

585
00:31:42,480 --> 00:31:45,760
Speaker 1: especially if you're not invested, and so tapping out is

586
00:31:45,800 --> 00:31:49,720
Speaker 1: not an option. So what's left Well, you basically have

587
00:31:49,840 --> 00:31:52,880
Speaker 1: to manage risk very actively. You stay in the market,

588
00:31:53,000 --> 00:31:56,000
Speaker 1: and you monitor for for when the environment changes and

589
00:31:56,120 --> 00:31:59,160
Speaker 1: you adapted very quickly. And that's what we do across

590
00:31:59,240 --> 00:32:02,600
Speaker 1: our platform with all of our adapted strategies. All right.

591
00:32:02,720 --> 00:32:06,640
Speaker 1: Rob croch Is, senior portfolio manager for Risk Parody and

592
00:32:06,880 --> 00:32:09,520
Speaker 1: Managed Future, is talking to us about smart beta factors

593
00:32:09,880 --> 00:32:12,520
Speaker 1: and so much more. He works at Mellon joined us

594
00:32:12,560 --> 00:32:16,640
Speaker 1: on the phone from Boston. Thanks for listening to Bloomberg

595
00:32:16,680 --> 00:32:20,000
Speaker 1: Business Week. You can subscribe to the podcast on iTunes, SoundCloud,

596
00:32:20,080 --> 00:32:22,160
Speaker 1: or Bloomberg dot com. You can also listen to our

597
00:32:22,280 --> 00:32:25,120
Speaker 1: radio show every weekday at two pm Eastern only on

598
00:32:25,200 --> 00:32:26,000
Speaker 1: Bloomberg Radio