Speaker 1: This is Bloomberg Business Week. I'm Carol Masser and I'm
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Speaker 1: So let's talk a little Tesla. We do it often.
Speaker 1: We're also very fortunate that we get to do it
Speaker 1: pretty often with Dana Hall. She follows the company so closely,
Speaker 1: and the headline on the story today that she wrote
Speaker 1: with Gabby Coppola really sums it up. Tesla Capital Raise
Speaker 1: keeps fourteen billion dollar virtuous circle rolling. It certainly does.
Speaker 1: And Dana, one of the things that struck me, and
Speaker 1: you just nail it right there at the top of
Speaker 1: your story is normally, in this sort of situation, you
Speaker 1: would look at a company saying, oh, we gotta go
Speaker 1: get more money. As a little bit of a problem,
Speaker 1: we're diluting shareholders. That's a little bit of a problem.
Speaker 1: And yet, and yet this is Tesla. Tesla does not
Speaker 1: go the way that people normally expect. Help us understand
Speaker 1: the context here, Yeah, I mean, I think what you're
Speaker 1: seeing now is that, you know, it's always about the future,
Speaker 1: right Elon Musk is always selling this vision of the future.
Speaker 1: And now that they seem to have mastered you know,
Speaker 1: the past challenges of actually getting the Model three out
Speaker 1: the door, the share price is really high. You know,
Speaker 1: the idea of them going out and getting money so
Speaker 1: that they can do things like build out this plant
Speaker 1: in Berlin or perhaps another plant in Texas seems more doable.
Speaker 1: So people are more than willing to kind of fund
Speaker 1: the vision of the future, and the banks get fees,
Speaker 1: and you know, everyone sort of wins out. Dan, I'm
Speaker 1: also wondering if Gene Munster puts this correctly, as you
Speaker 1: right in your story where you say you know Elong
Speaker 1: had a shirt investors, he didn't plan to r capital.
Speaker 1: His backpeddaling is a criticism, but frankly, the state of
Speaker 1: the balance sheet is a bigger criticism. So perhaps this
Speaker 1: is scene is a good thing because it could shore
Speaker 1: up the balance sheet. Yeah, I mean, and some and
Speaker 1: some analysts like David Whiston and morning Star, they just
Speaker 1: wish that Tesla would go out and raise like five
Speaker 1: billion dollars and be done with it, like and just
Speaker 1: raise a ton of money and then and and be said,
Speaker 1: instead of having to go back to the market sort
Speaker 1: of year after year. But it is kind of funny,
Speaker 1: how you know, just on their earnings called two weeks ago,
Speaker 1: Musk was asked very specifically, do you have any plans
Speaker 1: to do a raise? And he's like no, And then
Speaker 1: you know, two weeks two weeks later, here we are.
Speaker 1: This is the second time that he's done that. Actually,
Speaker 1: so you know, people people are a little frustrated that,
Speaker 1: you know that he says one thing is and then
Speaker 1: they do the other. But from an investor perspective, having
Speaker 1: money on hand is always a good thing. And so Dana,
Speaker 1: you know, this is also a good moment to ask
Speaker 1: you about sort of the state of Musk. You know,
Speaker 1: we have a fairly good sense of the state of Tesla.
Speaker 1: What do you sort of draw conclusion wise from looking
Speaker 1: at the company right now? Looking at the decision making
Speaker 1: and especially this amazing run where is sort of Elon's
Speaker 1: mind as much as anybody can understand it outside of
Speaker 1: his own head. Well, it's not like I'm talking to,
Speaker 1: I'm talking against from the guy every day. I don't know,
Speaker 1: I have not like interacted with him directly recently, but
Speaker 1: you know, I think that this is a guy whose
Speaker 1: entire career and much of the kind of mystique in
Speaker 1: persona around him is built around him proving doubters wrong.
Speaker 1: And so like the classic example is with SpaceX, they were,
Speaker 1: you know, for for months they tried to like land
Speaker 1: this rocket on a drone ship. No one thought they
Speaker 1: were ever going to be able to pull it off,
Speaker 1: and now they've not only have they done it several times,
Speaker 1: but it's kind of become old hat like most you know,
Speaker 1: we don't even cover the drone ship landings anymore. And
Speaker 1: with Tesla, like you know, the Model three, everyone questioned
Speaker 1: what the demand would be like. When they started building
Speaker 1: the factory in China, there were a lot of skeptics
Speaker 1: who said that this mud pit would never turn into
Speaker 1: a factory. And now like here they are like building
Speaker 1: cars in China, and so I think he feels probably emboldened. Um, certainly. Um.
Speaker 1: You know, he has a very long kind of time
Speaker 1: horizon and so people always ding him for being laid
Speaker 1: on his promises, but he ultimately does tend to deliver
Speaker 1: on them, Like, maybe not in the time frame that
Speaker 1: he originally anticipated, but you know, you look around at
Speaker 1: the at the competitive landscape. You know, no other rocket
Speaker 1: company is landing rockets quite in the way that SpaceX is.
Speaker 1: No other automaker is selling electric vehicles and the volumes
Speaker 1: that Tesla is. And it's like a new decade. They've
Speaker 1: had two quarters of back to back, back to back profits. Um,
Speaker 1: you know, they just went out to the market and
Speaker 1: raised another tree billion. I mean, I think he's feeling
Speaker 1: pretty good about things right now, Dan, I'm doing my
Speaker 1: Elon Musk dance right now for our YouTube video, all right, Dan.
Speaker 1: On a more serious note, Elon Musk and Tesla have
Speaker 1: been criticized for the lack of investment in R and
Speaker 1: D and Capex last year, and of course then they've
Speaker 1: got a big profitability number, but some of the concerns, Now,
Speaker 1: if you come out with a three and a half
Speaker 1: billion dollar Capex budget, can you still be profitable on
Speaker 1: that number. What are you hearing? Well, I think I
Speaker 1: think that I think it'll be really interesting to see
Speaker 1: what the first quarter is, which they've sort of hinted
Speaker 1: at will is likely going to be soft because of
Speaker 1: seasonality and the and the fallout from the coronavirus. But
Speaker 1: you know, I mean, that's that's one of the things
Speaker 1: that Musk has gone back and forth on. They've said
Speaker 1: they'll be seasonally, they've said that they'll be sustainably profitable,
Speaker 1: and then they're like, unless we're investing in growth, but
Speaker 1: they're always investing in growth, So our investors willing to
Speaker 1: kind of take you know, I mean, I guess the
Speaker 1: question is what do investors want. Do they want profitability
Speaker 1: every quarter or do they want the company and really
Speaker 1: kind of come and dominate. And I think some investors
Speaker 1: are willing to sacrifice short term profits if it means
Speaker 1: long term you know, sort of market dominance. All right,
Speaker 1: Dana Hall, we really appreciate it. Tech reporter looking after
Speaker 1: all things Tesla, all things that Elon must that is,
Speaker 1: as we joked yesterday yesterday Taylor like eight full time jobs.
Speaker 1: All right. She joined us on the phone from San
Speaker 1: Francisco my whole patient and I know, all right, well,
Speaker 1: there are a lot of opportunities for songs leading into
Speaker 1: this segment. It also is a story in a discussion,
Speaker 1: and it helps solve a little bit of a mystery
Speaker 1: that's been going on over at Goldman, which is where
Speaker 1: all these guys going, a lot of big tech guys leaving,
Speaker 1: and at least one has landed, and he's landed in
Speaker 1: the marijuana business. Shrina Rajan here with me in New
Speaker 1: York City finance reporter looking after all things Goldman for
Speaker 1: us and much more across Wall Street. Uh so, tell
Speaker 1: us about Mike bum Well, high frequency training experted Goldman
Speaker 1: is ditching his prestigious partnership role to go and join
Speaker 1: a company that's going to open a bunch of weed
Speaker 1: dispensaries across the country. You missed an obvious opportunity to
Speaker 1: make a high frequency joke, but I'm gonna let that slide.
Speaker 1: Were you surprised by this move? Oh my god, Taylor,
Speaker 1: no offense. But I really miss Carol because if she
Speaker 1: was here, the amount of serious irols people, so many irols,
Speaker 1: so many irols. I'm I'm I roll Lane Jason just
Speaker 1: can't see me because I'm not with them in person.
Speaker 1: Luckily all of our YouTube viewers can see it. I
Speaker 1: just have to be the poor guest I can I know,
Speaker 1: I know, you're so nice. No, but do your question, Jason.
Speaker 1: It's instructive in many ways, right, of course, when people
Speaker 1: leave firms, why they choose to do it When they
Speaker 1: do it, there are a variety of different factors, family,
Speaker 1: lack of interest in the role, new opportunities. But still,
Speaker 1: when you decided to leave you a perch, as you know,
Speaker 1: a partner at Goldman Sex their highest title, one of
Speaker 1: Walt Street's foremost investment banks, and decided to take a
Speaker 1: different opportunity. In this case they start up in the
Speaker 1: marijuana space. It just it gives you a sense of
Speaker 1: where he thinks the all opportunity lies, and perhaps also
Speaker 1: indicative of the fact that it wasn't entirely fully committed
Speaker 1: to what he was doing at Goldman because he did
Speaker 1: have a weighty task. He did win approval and a
Speaker 1: lot of funds to make a bunch of highers to
Speaker 1: make a big push to overhaul the electronic trading systems,
Speaker 1: had to convince senior management a number of other people
Speaker 1: to be able to get those projects rolling, and for
Speaker 1: him to be leaving a few months after that. It
Speaker 1: was a bit of a surprise when we heard about it.
Speaker 1: And it seems that he's decided to go out there
Speaker 1: and pair up with some of his ex colleagues from
Speaker 1: a previous firm to join the startup venture three. I'm
Speaker 1: curious to get your thoughts about what's going on at
Speaker 1: Goldman more generally. You originally never really heard a lot
Speaker 1: of stories about people leaving. It's so hard to get
Speaker 1: into that. Once you're Derrick Goldman, you are really excited
Speaker 1: to be there and to work your way up. We've seen, though,
Speaker 1: a lot of departures recently, especially from the top ranks.
Speaker 1: Is there a lack of vote of confidence in Goldman
Speaker 1: or is there just a bigger vote of confidence somewhere else.
Speaker 1: That's a tough question, Taylor, because and we had this
Speaker 1: discussion yesterday when we were thinking about all the troubles
Speaker 1: at government and all the people leaving. When we go
Speaker 1: back a year ago, the January February of nine, again
Speaker 1: we saw a lot of departures. We were able to
Speaker 1: explain away a lot of that saying, hey, whenever there's
Speaker 1: a new management. In this case, David Solomon took over
Speaker 1: the role of CEO and chairman from Lloyd Blankfind you
Speaker 1: expect to change with the Guard. You expect a lot
Speaker 1: of people aligned with Lloyd or the old Guard to
Speaker 1: be leaving. And the new guy comes in and installed
Speaker 1: a lot of his people at various roles, and in
Speaker 1: an ambitious, competitive place like Goldman, you will see a
Speaker 1: lot of churn. The difficult part here, the troubling part
Speaker 1: here is a year later, fifteen months in his tenure,
Speaker 1: we're still talking about this time of the year and
Speaker 1: the kind of high profile departures we're seeing, which is
Speaker 1: which has got a lot of tongues wagging across Wall
Speaker 1: Street for sure, and the competitors are paying attention. You
Speaker 1: can be guaranteed about that. And somebody else leaving and
Speaker 1: and you the other other names that are we included
Speaker 1: in the story. Couldn't play it higher Bi because I
Speaker 1: was just so much interested in giving all the details
Speaker 1: on the marijuana startup. Otherwise Jason would have killed us.
Speaker 1: But yes, Jeff Winner joined Goldman two years ago after
Speaker 1: having senior engineering roles in places like Stripe and Uber Silicon,
Speaker 1: Valley name. He was supposed to build out this big
Speaker 1: San Francisco office for Goldman uh and he's gone in
Speaker 1: onto two years and it's it's funny when when when
Speaker 1: we sort of look back at the old clips and
Speaker 1: the interviews we did with him at the time of
Speaker 1: his joining. He talked about how there's still a lot
Speaker 1: of stuff in us in this place, but the bank
Speaker 1: is working to get rid of it. He talked about
Speaker 1: free flowing kombucha. Unfortunately, before he could get a free
Speaker 1: full of kombucha, he's decided he's had enough. All right, Well,
Speaker 1: it's a good story. Thank you for being a good sport.
Speaker 1: As I make all my terrible, terrible marijuana punts here,
Speaker 1: it's a Friday afternoon, it's been a long week, and
Speaker 1: you know, it's just too good. It's just too easy.
Speaker 1: It's sitting right there, Shri Nadaraja and always doing such
Speaker 1: a great job with the comings and goings at Goldman,
Speaker 1: Sachs and Codman Arture Partner. Ditching a pursuit of Quantz
Speaker 1: for a marijuana start up is a really nice story
Speaker 1: in one of the most read on the Bluebird. And
Speaker 1: what is it that hasn't done as a puzzle in song. Alright,
Speaker 1: so when it comes to Valentine's Day gifts, maybe this
Speaker 1: isn't the one you want, unless you what you're Valentine
Speaker 1: to be both ignoring you and maybe really really mad
Speaker 1: at you. It's such a great story. We're talking about
Speaker 1: stave puzzles, where the torture is the point. Devin Leonard
Speaker 1: wrote this story quite an assignment he got for Bluebird
Speaker 1: Business Week. As I joked earlier, Devon, you know, usually
Speaker 1: you're doing these deep dive investigations you're telling us about
Speaker 1: like McK mulvaney and Steve mcnuchin and folks like that.
Speaker 1: But here we are talking to you about puzzles. So
Speaker 1: why what's going on here? I don't know. This is
Speaker 1: a really weird one. And I mean, this is a
Speaker 1: company basically until recently was run by a guy who
Speaker 1: described himself as its chief tormentor. It's customers they all
Speaker 1: basically say their addicts, and I mean to these weird games,
Speaker 1: some of which the company says are are created by
Speaker 1: you know, a sadist. So I mean, this is not
Speaker 1: the type of story I do all the time. And
Speaker 1: I had no idea what I was getting into when
Speaker 1: Joel Webber, the magazine that are asked me to do it. Yeah, Devin,
Speaker 1: how did you find this story? I've never even heard.
Speaker 1: I've never heard of this company. I never I'm not
Speaker 1: a puzzle guy. Uh and and uh, but Joel kind
Speaker 1: of is. I mean, I think he that part of
Speaker 1: it is he knew about this from maybe being Tork
Speaker 1: cousin or or something. But no, I don't. I just
Speaker 1: said I just had no idea. It really wasn't. I
Speaker 1: went up there and I stayed at that place. It's
Speaker 1: really swanky, uh, you know, Resort Twin Farms, and they
Speaker 1: had them in all the rooms. I couldn't do mine.
Speaker 1: My daughter later did in ten minutes. But but but
Speaker 1: that's when I started to see like, hey, wait a minute.
Speaker 1: You know, you know, you know the rooms, the sweets
Speaker 1: I go for, you know, a thousand, two thousand dollars
Speaker 1: a night, and you know, you know there's something that
Speaker 1: you know there, there's some there's something going going on here.
Speaker 1: And then then I went over to the company and
Speaker 1: basically they took me all around and show me with
Speaker 1: crazy puzzles. And then they showed me a whole wall
Speaker 1: and there's Jeff Bezos and Bill Gates and Queen Elizabeth
Speaker 1: and the Bush family and you know, so basically all
Speaker 1: these people. Um, I mean, well you have to have
Speaker 1: money because because the puzzles cost as much as you know,
Speaker 1: ten ten ten grants. Right. I have to say, like,
Speaker 1: in reading your story, it feels like, and you just
Speaker 1: illustrated it pretty well. It's almost like you go down
Speaker 1: this rabbit hole, right, you know, into into this place
Speaker 1: where people are sort of obsessive about it. Clearly they
Speaker 1: appeal to a certain type of person. Tell us about
Speaker 1: the puzzles themselves. Well, they mean, they're they're they're sort
Speaker 1: of I guess they're very they're very I guess they're beautiful,
Speaker 1: I mean a person. But they're designed and ways to
Speaker 1: to just be be very difficult. They come in boxes
Speaker 1: and blue boxes, so you don't have a picture of
Speaker 1: the puzzle in the box and you put it together.
Speaker 1: They throw in pieces that purposely don't fit. Then they
Speaker 1: have all these other tricks that that they used to
Speaker 1: drive people crazy. But then but then you you know,
Speaker 1: you wind up talking to the people who spend all
Speaker 1: this money, you know, these things, So that's what they want.
Speaker 1: They want to kind of be tortured and and you know,
Speaker 1: they want things to be really hard and they want
Speaker 1: to be a challenge, and sometimes it drives them crazy.
Speaker 1: And one guy said he's he curses at his puzzles,
Speaker 1: but he buys ten a year, sorry, not ten a year,
Speaker 1: ten at a time. Oh wow, you know, Devin, I'm
Speaker 1: going on the website right now and there's a puzzle
Speaker 1: for Valentine's Day that Jason's gonna get me. It's nine
Speaker 1: hundred and seven dollars. It has this sweetheart little street.
Speaker 1: It's called sweet Streets, just in time for Valentine's Day.
Speaker 1: But in your story you talk about a lot of
Speaker 1: other cool ones, um like these boxes and locks and
Speaker 1: very non traditional, right, talk to us about some of
Speaker 1: these crazy puzzles that you mentioned in your story. Well,
Speaker 1: maybe the best example is, you know, this custom made
Speaker 1: one that they made for this guy in in Dallas.
Speaker 1: His name's Hal Brierley. He's a relaters and guy ended
Speaker 1: up himself. I mean, he's sort of one of the
Speaker 1: fathers of customer Customer loyally programs. He either designed them
Speaker 1: or random for the major airlines, for Hurts, for Hilton.
Speaker 1: But basically he's he's he's a guy. He's he's he's
Speaker 1: a workaholic and he needs these puzzles sort to get
Speaker 1: his mind off of an off of work. He's still
Speaker 1: like seventy four and he's still doing this. So so basically,
Speaker 1: his uh, his wife and his sister in law been
Speaker 1: ordering him these custom made puzzles and uh, you know
Speaker 1: the one he the one he's he's working on he
Speaker 1: can't finish, just driving him nuts. It's more than a
Speaker 1: thousand pieces and it's designed you know, it's inspired by
Speaker 1: these African safari trips. They've all taken two thirds of
Speaker 1: the pieces are all blue, and basically basically when he
Speaker 1: doesn't understand, I mean maybe he's figured out. No, I
Speaker 1: don't think he has. But there's a whole other level
Speaker 1: to to the puzzle that fits on top of the
Speaker 1: continent of Africa. It's all water but the but the
Speaker 1: pieces are almost all the same size. There's no guide.
Speaker 1: And this is a really smart guy. There's tons and
Speaker 1: tons of puzzles, but he can't figure it out. And
Speaker 1: he's I mean, I he basically said, I'm a guy
Speaker 1: of bills by the hour. I'm sort of calculated how
Speaker 1: much time they I don't know it's worth it. But
Speaker 1: I love these things. So, you know, one of the
Speaker 1: things that occurs to me Devon, and I wonder if
Speaker 1: this occurred to you as you were working on it.
Speaker 1: This feels like kind of an analog antidote to a
Speaker 1: very digital world, right, you know, it's very tactile, and
Speaker 1: even some of the other things you talk about are
Speaker 1: experiential and more and more, it does feel like, and
Speaker 1: you've alluded to this already, this is an escape from
Speaker 1: being in front of these screens or holding our phones
Speaker 1: and things like that. People draw a lot of satisfaction
Speaker 1: out of this. Yeah, and and and and it is
Speaker 1: sort of amazing that that in this day and age,
Speaker 1: some little company could you know, prosper by making something
Speaker 1: that's sort of like I guess now you can buy
Speaker 1: them online. But they used to Everything used to be
Speaker 1: you know, done through the male, and so they think
Speaker 1: they still do something, you know, thank you notes, handwritten
Speaker 1: thank you notes, and I mean the whole thing is
Speaker 1: so sort of retro but I think that's for the point.
Speaker 1: I mean, the one thing for them is the customers
Speaker 1: are are pretty old. Just about everybody I talked to
Speaker 1: was their seventies, so I mean, I did see them,
Speaker 1: among other things. Well, it's Valentine's. They designed these puzzles
Speaker 1: for people that you know, some person puts it together
Speaker 1: with their significant another and then as they're finishing it,
Speaker 1: you know that, you know, they put these pieces and
Speaker 1: I guess, I guess the person I bought the puzzle
Speaker 1: gives oh, by the way, I got these pieces, and
Speaker 1: and it says, will you marry me? And and I
Speaker 1: guess the one example, the one or two examples they
Speaker 1: showed me, the answer was no. But no, so so
Speaker 1: you know, buyer beware. But but but I mean, it's
Speaker 1: it's uh, it's it's it's like nothing I've I've ever
Speaker 1: seen before. Absolutely need I need to meet that girl
Speaker 1: who said no. I think I'm a fan of hers,
Speaker 1: you know. But on a more serious note, I think,
Speaker 1: like you, we're alluding to Jason. In this digital world,
Speaker 1: I remember during Superstorm Sandy, when all of our lights
Speaker 1: went out, we're all doing puzzles by candle light, right
Speaker 1: because our mobile devices stopped working. And around Christmas time,
Speaker 1: when we're all on our phones, it's kind of a
Speaker 1: nice break to maybe just sit down and do a puzzle.
Speaker 1: And so I'm really wondering if this is the beginning
Speaker 1: of a bigger trend where we put some of these
Speaker 1: mobile devices down and use this as a really way
Speaker 1: to connect with people again, if you're gonna afford it,
Speaker 1: If you can afford it, that's absolutely true. Well, uh,
Speaker 1: this is a really terrific story. It is being consumed
Speaker 1: pretty madly on the Bloomberg terminal and online. This one's
Speaker 1: gonna have a long tail. I can guarantee you that
Speaker 1: Devin Leonard wrote it. He is projects an investigations reporter,
Speaker 1: a different sort of project, in this case looking into
Speaker 1: some very tough to solve puzzles. All right, it's one
Speaker 1: of my favorite stories of the week. Not surprisingly, any
Speaker 1: Massa wrote it. It's about big mone me on big
Speaker 1: money Vanguard. We're talking about the mutual fund manager looking
Speaker 1: after mutual funds, looking after index funds, getting into the
Speaker 1: business of private equity, sort of dipping its toe a bit,
Speaker 1: but we think probably we're going to put a leg
Speaker 1: in it before too long. An easier with me in
Speaker 1: New York City, tailor raigs in San Francisco. All right,
Speaker 1: so Annie, tell us what Vanguard's up to. So Vanguard
Speaker 1: has announced plans for a new private equity fund that
Speaker 1: at first will only be available to institutions, smaller institutions
Speaker 1: like endowments and nonprofit foundations, but that it hopes to
Speaker 1: open up to a broader range of investors as it can,
Speaker 1: and it's doing this with Harbor Vest Partners managing the
Speaker 1: fund out of Boston, so Annie. The interesting thing is
Speaker 1: that Vanguard is known for low cost passive indexing. This
Speaker 1: is now PE, which you think of as high fees,
Speaker 1: certainly nowhere near passive investing. How does this fit into
Speaker 1: Vanguard strategy. It's a great question. As you know, Vanguard
Speaker 1: is synonymous with this kind of retail facing, ultra low
Speaker 1: cost index fund ethos that it was really built on.
Speaker 1: But I mean, it does have an active management arm.
Speaker 1: It's got over a trillion dollars in active strategies and
Speaker 1: it sees this PE vehicle as a continuation of that.
Speaker 1: But that's not to understate that it really is a
Speaker 1: departure for such a huge indexing giant and index fund
Speaker 1: giant um so PE. Obviously it's a place with higher fees,
Speaker 1: longer lock up periods, and just a very different realm
Speaker 1: of investing than index funds and so tell Us about
Speaker 1: the experimentation that's happened so far because other big money managers,
Speaker 1: the big three you know we call Vanguard, you call
Speaker 1: you helped us understand a few weeks ago, Vanguard, State Street,
Speaker 1: and black Rock, there's been some experimentation here, right, Yeah,
Speaker 1: that's right. Vanguard certainly not the only one of those
Speaker 1: three big fund firms to try and get into PEE.
Speaker 1: You also saw black Rock two years ago announced its
Speaker 1: own new private equity style of vehicle called long Term
Speaker 1: Private Capital that's taking stakes in private companies. And it's
Speaker 1: another indication now that you see Vanguard doing it as well,
Speaker 1: that private equity is becoming kind of irresistible to these firms.
Speaker 1: And you know, fees are something that you cannot ignore um.
Speaker 1: And also there's more institutional ability to allocate to private equity. UM.
Speaker 1: You see funds raising record amounts. So it's a piece
Speaker 1: of the market that they don't want to be left
Speaker 1: out of for much longer. Andy, I also wonder if
Speaker 1: this is classic peak pe that a Vanguard is getting in.
Speaker 1: It's just a sign of my mom, my dad, my grandma,
Speaker 1: you know, every sort of retail investor wanting a piece
Speaker 1: of the action. And it is a sign that we
Speaker 1: were at peak PEE. We should all be running for
Speaker 1: the don't be so dismissive of the rigs. They're very
Speaker 1: sophisticated investors with UM no offense to anyone in your
Speaker 1: family and the investing strategies, Taylor. UM is that some
Speaker 1: people say, some kind of advocates for individual investors have said,
Speaker 1: you know, we haven't This vehicle is not open to
Speaker 1: retail investors yet. And it's important to note that there
Speaker 1: are regulatory restrictions on who can invest in PE right now.
Speaker 1: You see big firms like black Stone and KKR and
Speaker 1: Apollo wanting to angle into a broader audience UM and
Speaker 1: open up their private equity vehicles to more investors. But
Speaker 1: what these UM advocates for individual investors say in some
Speaker 1: cases is, you know, they're not sure that it makes
Speaker 1: sense to change the rules about who can invest in
Speaker 1: P because they're more esoteric. Lock up periods are longer,
Speaker 1: and they say that it might not necess necessarily be
Speaker 1: a good thing for the end investor or, Like the
Speaker 1: less sophisticated Invester Well and as you noted there, Blackstone
Speaker 1: and others Blackstone, Carlo, KKR, they are desperate to get
Speaker 1: to this like holy grail of the retail investor. They
Speaker 1: just see this as this massive pool that they want
Speaker 1: to swim into the to their hearts content. Right, And
Speaker 1: if you think about it, you can't really have pe
Speaker 1: in a four oh one K, for example, But I
Speaker 1: think that they might argue a four oh one K
Speaker 1: is a perfect place for a private equity fund because
Speaker 1: you're not really supposed to touch that money for long
Speaker 1: periods of time, for decades, so it makes perfect sense to,
Speaker 1: you know, put a p style vehicle in there. UM.
Speaker 1: Of course, they have products to sell, so you have
Speaker 1: to keep that in mind as they, you know, make
Speaker 1: their case. UH in Washington, any any sort of thoughts
Speaker 1: on when we would see this type of vehicle be
Speaker 1: open to retail investors. There's no real clarity around that yet.
Speaker 1: But regulators are reassessing whether they should change some of
Speaker 1: the restrictions on private equity investments. So it's a an
Speaker 1: issue that's evolving, and UM Vanguard is UH, I think,
Speaker 1: trying to get ahead of it because I think they
Speaker 1: wouldn't want to be caught flat footed if the regulations
Speaker 1: were to change. UM with their army of advisors that
Speaker 1: could potentially sell those um kinds of vehicles to trying
Speaker 1: to be on the vanguard. All right, Annie massa investing
Speaker 1: reporter for Bloomberg, keeping a very close eye on everything
Speaker 1: that happens in the world, a big money on our
Speaker 1: investing team journal. Yeah, but you let me drive, No, Ann, please,
Speaker 1: I want to drive, drive the questions, the drive to
Speaker 1: the globes community. Thanks well us, Bloomberg Radio. All right,
Speaker 1: it's time for the Drive to the clothes. Let's get
Speaker 1: into it with Rob Crocha. He is senior portfolio manager
Speaker 1: for Risk Parody and Managed Features at Melon, joining us
Speaker 1: on the phone from Boston. Rob, great to have you
Speaker 1: with Taylor Riggs and myself. So what are you seeing
Speaker 1: in this market right now? It feels like we're kind
Speaker 1: of catching our breath here on a Friday after a
Speaker 1: few turbulent weeks and candidly a couple of turbulent Fridays
Speaker 1: where you saw a big sell off going into the weekend.
Speaker 1: It still feels like a risk on market to us.
Speaker 1: Um you know, when we when we saw the response
Speaker 1: of the market to you know, frankly, pretty big macro
Speaker 1: news including coronavirus UM and the market just seems to
Speaker 1: continue to shrug off risk with the idea that monetary
Speaker 1: policy has got our back. Um, it's the market has
Speaker 1: a really positive sentiment here, Rob, I was reading through
Speaker 1: your notes and one thing that I really liked, as
Speaker 1: you're talking about value go along cheap stocks, short expensive ones.
Speaker 1: We were talking in an earlier segment about the rotation
Speaker 1: or really the lack of rotation here between value and growth.
Speaker 1: Are you still preferring value here? You know, as a
Speaker 1: as a quand investor, we try to be empirically driven.
Speaker 1: And the truth is that for a big investor that
Speaker 1: has to deploy significant capital, traditional value it just naively applied,
Speaker 1: has never really worked. So if you break down what's driven,
Speaker 1: you know, from a French factor performance, it was tiny
Speaker 1: stocks and it was actually the short side of tiny stocks.
Speaker 1: So small stocks that have been really beaten down and
Speaker 1: are still expensive, those those are the ones that have
Speaker 1: tended to do very poorly, and being short those has
Speaker 1: been has has been a great booster for value strategies.
Speaker 1: And so if you look at the data that is
Speaker 1: underneath of the original papers on value, they are not
Speaker 1: supportive of just being long a big naive value index
Speaker 1: portfolio never worked, doesn't work now, so talk to us
Speaker 1: about factors. Rob remind us, you know, for our audience
Speaker 1: that's not as familiar what that involves. What basically the
Speaker 1: lens through which you see the market is absolutely when
Speaker 1: we think about the market, we're thinking about it as
Speaker 1: a group of stocks that are weighted by their market
Speaker 1: capitalization relative to each other. So when I think about beta,
Speaker 1: that is just exposure to the market as it exists
Speaker 1: in the market today, I'm buying more stocks that that
Speaker 1: have higher market cabin less of stocks with lower market cap.
Speaker 1: Smart beta or or sort of long only factor exposure
Speaker 1: is where you don't you're still long only, but you've
Speaker 1: got exposure only two stocks with certain characteristics. So you
Speaker 1: let go of that cap waiting methodology and you begin
Speaker 1: to wait based on something the attractiveness of valuations, or
Speaker 1: how well it's done recently, or how defensive it is
Speaker 1: low volatility, it is how the quality of the stocks earnings.
Speaker 1: So those are smart beta portfolios. I'm still long only,
Speaker 1: but I'm long a basket of stocks I think will
Speaker 1: outperform the market because they have good characteristics. And then
Speaker 1: power factors long short are smart beta minus bet at
Speaker 1: just a smart part. Rob curious to see how you
Speaker 1: are factoring in momentum at this point, if at all.
Speaker 1: So we're always factoring in momentum. Momentum is one of
Speaker 1: the factors that works across capsizes, so if you're a
Speaker 1: big investor, you can still take advantage of momentum strategies.
Speaker 1: The other thing about momentum is it's the same language
Speaker 1: across asset classes, So it's very straightforward for me to
Speaker 1: build a portfolio where I'm doing momentum cash equities, I'm
Speaker 1: doing momentum in equity indices, I'm doing momentum in bonds
Speaker 1: and commodities. It's it is a very robust factor, and frankly,
Speaker 1: it's been a much better performing factor than value since
Speaker 1: since it was discovered. Do you have I'm curious to
Speaker 1: dig a little bit more into the momentum question. If
Speaker 1: you've ever seen momentum like this before? You think of
Speaker 1: the massive run up, the length of the bullmarket, and
Speaker 1: the rate at which we have gotten to fresh record
Speaker 1: highs every day. Have you seen this type of momentum before?
Speaker 1: As you take a look at your factor models, we've
Speaker 1: seen we haven't seen this length of a bull market
Speaker 1: in stocks. I mean, I think that that's you know, unequivocal.
Speaker 1: But what we've clearly seen is is runs where you
Speaker 1: have made as much money being long or short based
Speaker 1: on momentum. What's different in this market is that if
Speaker 1: you're if you're if you're talking about trend trend falling,
Speaker 1: which is momentum, but but but with a drifting bias
Speaker 1: to being long and stuff is going well on average um.
Speaker 1: This is not a market that's been permitted to fall.
Speaker 1: So it used to be the case that when sentiment
Speaker 1: got bad, it could get worse and get worse after that,
Speaker 1: and that markets would continue to fall in there would
Speaker 1: this be this building sort of bad sentiment that gets
Speaker 1: worse and worse. That has not happened. Monetary policy has
Speaker 1: got our back um and and anytime the market really
Speaker 1: starts to do very poorly, monetary policy expectations change, treasury
Speaker 1: yields plummet, and the party starts over again. And and
Speaker 1: because of that, that's been hard because a lot of
Speaker 1: as a factor investor, a lot of what we do
Speaker 1: in factor space makes money when saying when sentiment changes
Speaker 1: for the for the worst. That is a big part
Speaker 1: of why factors have been so awful. Lately, so Rob.
Speaker 1: You know, we started the conversation talking about a market
Speaker 1: that has been uh shrugging it off or maybe in
Speaker 1: the words of another tailor, Taylor Swift, shaking it off.
Speaker 1: When you think about the coronavirus I risk, you think
Speaker 1: about how global markets, and certainly the US market has
Speaker 1: continued with a couple notable exceptions to really take it
Speaker 1: in stride. Does that worry you at all? Does that
Speaker 1: sort of go against what you would expect given all
Speaker 1: the factors you talked about? It does a lot of
Speaker 1: stuff worries us because but but as you know, those
Speaker 1: worries are the same thing that cause an investor that
Speaker 1: doesn't have discipline, doesn't have a process to bail out
Speaker 1: before before they they've done as well as they can
Speaker 1: in the market. You know, most of our investors need
Speaker 1: to make seven plus percent return a year on average
Speaker 1: in order to meet their their liabilities. And you can't
Speaker 1: make that kind of return in a high valuation market,
Speaker 1: especially if you're not invested, and so tapping out is
Speaker 1: not an option. So what's left Well, you basically have
Speaker 1: to manage risk very actively. You stay in the market,
Speaker 1: and you monitor for for when the environment changes and
Speaker 1: you adapted very quickly. And that's what we do across
Speaker 1: our platform with all of our adapted strategies. All right.
Speaker 1: Rob croch Is, senior portfolio manager for Risk Parody and
Speaker 1: Managed Future, is talking to us about smart beta factors
Speaker 1: and so much more. He works at Mellon joined us
Speaker 1: on the phone from Boston. Thanks for listening to Bloomberg
Speaker 1: Business Week. You can subscribe to the podcast on iTunes, SoundCloud,
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