Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim Fox.
Speaker 1: Along with my co host Lisa Bramowitz. Each day we
Speaker 1: bring you the most important, noteworthy, and useful interviews for
Speaker 1: you and your money, whether you're at the grocery store
Speaker 1: or the trading floor. Find the Bloomberg p m L
Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. There's
Speaker 1: been a question hovering over markets these days, how much
Speaker 1: political upheaval can there be without any real, substantial and
Speaker 1: prolonged reaction from markets. Chuck Lieberman has perhaps some answers.
Speaker 1: He's chief investment officer and managing partner of Adviser's Capital Management,
Speaker 1: which oversees about one point three billion dollars. Also, he
Speaker 1: is a Bloomberg View columnist through the Bloomberg Profits Group. Charles, Chuck,
Speaker 1: thank you so much for joining us. You raised an
Speaker 1: interesting reality check, basically saying that all of this political
Speaker 1: noise only matters so much as it affects underlying growth.
Speaker 1: Can you explain sure? Um, Well, obviously the news is
Speaker 1: full of politics. Um, this stuff happening seemingly almost every day,
Speaker 1: and Washington is obviously dysfunctional. But how that relates to
Speaker 1: the stock market depends on whether or not it UH
Speaker 1: actually affects corporate profits. If companies are doing well, If
Speaker 1: the economy is growing, and the economy is certainly growing,
Speaker 1: and corporate profits are actually doing quite well, then stock
Speaker 1: valuation should rise over time to reflect that rise in profitability. Um. Yes,
Speaker 1: we pay attention to the politics. It certainly captures our attention,
Speaker 1: but it's a side show to the valuation of stocks. Well, Chuck,
Speaker 1: maybe you could talk a little bit more detail about
Speaker 1: corporate profits in light of shared buy backs and the
Speaker 1: ability to discern what is a real profit and what's
Speaker 1: not a real profit. Since company these use gap and
Speaker 1: non gap results, it's it's just increasingly difficult. Well, look,
Speaker 1: there are different ways to measure profits. UM, we have
Speaker 1: a system in the US gap accounting. International companies use
Speaker 1: a different methodology, but our methodology is what it is, UH,
Speaker 1: and over time, what it has shown is that corporate
Speaker 1: profits rise pretty substantially over time. Uh. There were five
Speaker 1: consecutive quarters in which US corporate profits fell and bears
Speaker 1: on the market use that as a justification to argue
Speaker 1: that stocks were overvalued. But at the same time, if
Speaker 1: you actually look at what was going on. All of
Speaker 1: the decline in profits came about because of the energy sector,
Speaker 1: where oil prices dropped from a hundred ten bucks barrel
Speaker 1: to about twenty five. That was a huge decline in
Speaker 1: the profitability of very large companies like Exxon and Chevron
Speaker 1: and others. Uh. Everyone else, however, on average, was actually
Speaker 1: growing profits and their stocks went down to uh. So
Speaker 1: stock valuations look attractive. And and now we have the
Speaker 1: energy sector actually coming back. Oil prices are still volatile,
Speaker 1: but the underlying profitability of companies is doing fine. You know, Chuck,
Speaker 1: I'm struck by the fact that stocks rallied tremendously after
Speaker 1: the November election of President Donald Trump. Uh. And a
Speaker 1: lot of this was because people were baking in the
Speaker 1: expectation of tax cuts for corporations as well as reduced
Speaker 1: regulations that directly was baked into the prices of stock.
Speaker 1: So this is a fundamental change. Have we washed that out?
Speaker 1: And you know, if we haven't, this goes to something
Speaker 1: more than just you know, people's feelings. This is a
Speaker 1: fundamental issue, and it is driven directly by policy. Uh.
Speaker 1: Fair enough, but keep in mind, a number of things
Speaker 1: have all other things have also happened so yes, I
Speaker 1: think the market is hoping that Trump will get some
Speaker 1: tax cuts through. But that's not the only variable involved.
Speaker 1: It's also less regulation. It's also more spending on infrastructure.
Speaker 1: So there are a lot of ways in which policies
Speaker 1: that he advocates could in fact benefit corporate profits in
Speaker 1: the US. Well, hold on a second, how many of
Speaker 1: those policies have to get through in order to justify
Speaker 1: a current value valuations? Well, I think I would argue
Speaker 1: any at this point, people believe that Trump is going
Speaker 1: to get nothing um, and that's one of the reasons
Speaker 1: why stocks having continued to rise. Uh. In the meantime,
Speaker 1: corporate profits have We just had the strongest quarter since
Speaker 1: two thousand and eleven. So corporate profits continue to march on.
Speaker 1: The politics is just a constant show, Chuck, when do
Speaker 1: you sell? Uh? Well, you sell if you start to
Speaker 1: think that the economy is at risks. Uh. Recessions are
Speaker 1: never good for stock valuation. Corporate profits invariably go down.
Speaker 1: You sell if you think that the government is going
Speaker 1: to somehow inhibit corporate profits. Well, when does Chuck Lieberman sell?
Speaker 1: I guess that I mean to be more pointed about it,
Speaker 1: because all right, you know, when you see a decline,
Speaker 1: let's say in stock prices, you can make the argument
Speaker 1: that that's the time to buy, not when they are
Speaker 1: at records. Fair enough, and uh, what we do is
Speaker 1: we continue to watch what they're doing, what the government
Speaker 1: is doing, because it does matter. And when I say
Speaker 1: the government, I don't mean just the administration. I also
Speaker 1: mean the federal Reserve and foreign governments. All of those
Speaker 1: variables matter as long as the economy continues to grow,
Speaker 1: and right now we see no reason why it shouldn't
Speaker 1: continue to grow at a at a solid clip, not
Speaker 1: a rapid clip. And because of leverage in the corporate
Speaker 1: sector as well as how lean they are, I expect
Speaker 1: corporate profits to continue to grow in the in the
Speaker 1: ballpark of per year. As long as that's happening, I
Speaker 1: don't want to sell unless the economy looks like it's
Speaker 1: really at risk. Chuck. One thing that you pointed to
Speaker 1: in your recent column was that there is so much
Speaker 1: cash still out there that has not been invested yet.
Speaker 1: How much cash are you looking at? Where is it?
Speaker 1: Because if I look at mutual funds, for example, particularly
Speaker 1: equity mutual funds, they're pretty heavily invested, there isn't a
Speaker 1: lot of cash there. Well yeah, well that's one of
Speaker 1: the reasons why I was very vague with that statement, Uh,
Speaker 1: because it is difficult to measure. So start off with
Speaker 1: mutual funds, the amount of cash they hold varies over
Speaker 1: time and fun to fund. On average, they look like
Speaker 1: they're a little bit heavy now. But we're not talking
Speaker 1: about a huge amount of three But then when you
Speaker 1: look at the billions that have flowed into both money
Speaker 1: funds and in the CDs and bank accounts, all because
Speaker 1: people are nervous about the market. There are a lot
Speaker 1: of people who pulled out of equities back in two
Speaker 1: thousand and two thousand nine and still haven't gotten in.
Speaker 1: And I'm still reading about people who are hoping that
Speaker 1: the market sells off in order to give them an
Speaker 1: opportunity to get in. So I think there's a lot
Speaker 1: of money on the sidelines. And you can see that
Speaker 1: I think from the aavior of the market. Uh, the
Speaker 1: market really has not been able to sustain any material
Speaker 1: decline of any size for any prood of time in
Speaker 1: the last several years. Um. And in fact, people look
Speaker 1: at that and comment, how that's a negative. I think
Speaker 1: of it as a reflection of a positive which is
Speaker 1: all of that cash sitting on the sidelines by people
Speaker 1: have missed the market. Chuck, They've been quick question for you.
Speaker 1: What was the biggest mistake you've made? Look and you
Speaker 1: look at the market over the last twelve months, over
Speaker 1: the last twelve months. Thanks for throwing me a curveballpin
Speaker 1: um not being more aggressive? Um. I think this market,
Speaker 1: there's so much fear out there and there's so much caution.
Speaker 1: I think this that creates an environment in which people
Speaker 1: are looking for opportunities to get in if they can.
Speaker 1: And I think you have to be aggressive until conditions
Speaker 1: turn less favorable. All right, I'm gonna leave it there,
Speaker 1: Thanks very much, Chuck Lieberman. He is that investment officer
Speaker 1: managing Partner Advisors, a capital management He helps manage more
Speaker 1: than a billion dollars of assets under management. But we
Speaker 1: have a massive trade deficit with Germany. Plus they pay
Speaker 1: they pay far less than they should on NATO and
Speaker 1: the military. This is according to President Donald Trump posting
Speaker 1: this message on Twitter and here to tell us. Morris
Speaker 1: Patrick donohue. He is a government reporter for Bloomberg and
Speaker 1: he joined us from ber Lynn Patrick thanks for being
Speaker 1: with us. Maybe you could just set out for us
Speaker 1: what is the fact and what is the rhetoric when
Speaker 1: it comes to trade between the United States and Germany. Well,
Speaker 1: there's definitely a big trade UH surplus that Germany has,
Speaker 1: not just with the US, but with most European countries.
Speaker 1: It's it's sort of in the euro Zone and so UM.
Speaker 1: And if you look, if you look back at the
Speaker 1: imbalances that were triggered through the creation of the euro
Speaker 1: and the succession the crisis, UH, these are imbalances that
Speaker 1: are sort of built in. UM. It's true that there
Speaker 1: is a pretty staggering surplus. And it's not just Trump
Speaker 1: the U. S administration who who like to talk about this,
Speaker 1: but also the European Commission, UH, the O E C D,
Speaker 1: the I m F have criticized Germany for doing too
Speaker 1: little to address the surplus. Patrick, how new is this conversation?
Speaker 1: I mean, is this something that has been discussed in
Speaker 1: back rooms for years and now we're just seeing it
Speaker 1: in a very different light sort of aired through uh.
Speaker 1: I guess campaign speeches and Twitter. Uh. The trade issue
Speaker 1: is not new. I think even in the Obama administration
Speaker 1: there was plenty of criticism about Germany's deficit, I think
Speaker 1: a surplus sorry UM. With the tru administration, it's taken
Speaker 1: a completely different tack. If you listen to somebody like
Speaker 1: um Trump's top trade advisor, Peter Navarro, uh the way
Speaker 1: he discussed his trade um, he lays blame to Germany
Speaker 1: for most of it and says that Germany's hiding behind
Speaker 1: its membership in the euro to take advantage of its
Speaker 1: position UM, which sounds strange to German ears because it's
Speaker 1: not something you can really undo. Patrick. The automobile industry
Speaker 1: and automobile exports money. If you could just speak about
Speaker 1: the German role there and also about their role in
Speaker 1: manufacturing in the United States. Auto exports are the backbone
Speaker 1: of German of Germany's export economy, it's export might um.
Speaker 1: And when Donald Trump, for example, talks about all of
Speaker 1: the Mercedes and BMW's on history in New York, UM,
Speaker 1: it's true, Americans by a lot of German cars. Americans
Speaker 1: like German cars. But at the same time, a lot
Speaker 1: of those German cars are built in the US, and
Speaker 1: so it's not simply a matter of Americans buying German
Speaker 1: cars that are shipped overseas from Germany. It's more complicated
Speaker 1: than that, You know, Patrick, I'm really struck by what
Speaker 1: Angela Merkel said over the weekend where she said, you know,
Speaker 1: we Europeans cannot rely on the US the way that
Speaker 1: we have. I was struck. Two. I was in the
Speaker 1: beer tent with her. Did not expect her to talk
Speaker 1: about geopolitics at a campaign rally. So you were there,
Speaker 1: What was the response like, What was the mood like
Speaker 1: when she uttered those words? Um, those words were uttered
Speaker 1: at the beginning of a little long sentence that continued
Speaker 1: with this idea that well, we Europeans have to go
Speaker 1: our own way, we have to take our destiny in
Speaker 1: our own hands. That sort of rhetoric coming from America
Speaker 1: was not entirely new. Uh. This reliability comment is rather new,
Speaker 1: and in the context of the the breakdown at the
Speaker 1: G seven summit, when the administrative US administration Trump would
Speaker 1: not commit to remaining in the Paris Climate Accord, it
Speaker 1: took a whole new meaning. And so when you when
Speaker 1: you place the reliability of your closest post World War
Speaker 1: two ally in doubt, then that's a big deal. The
Speaker 1: question here is did she mean to cause such a
Speaker 1: stir was she's delivering this to the German electorate. Um,
Speaker 1: I don't know, we haven't. We have a Twitter response
Speaker 1: from President Trump today. Uh, clearly this is royal things
Speaker 1: across the Atlantic. Patrick. When I look at the exports
Speaker 1: as a percentage of GDP and you look at various countries,
Speaker 1: Germany comes out as a really top of the list.
Speaker 1: Forty more than fort of GDP is accounted for as exports.
Speaker 1: What does Germany do that the other countries in Europe
Speaker 1: or even in the United States, which is just around
Speaker 1: ten percent, don't do well. One thing Germany does it
Speaker 1: manufactures um quality products and exports them, and it has
Speaker 1: done that very well for a long time. On the
Speaker 1: other side, it's a question of what Germany has not done.
Speaker 1: Um An export surplus is you know what Germany exports
Speaker 1: minus what it's what it's not importing. So the criticism
Speaker 1: for Germany, obviously it's impossible to say stop making such
Speaker 1: great cars. It's rather Germany should do more to um
Speaker 1: boost domestic demand domestic spending to raise imports. This has
Speaker 1: been a classic criticism of German policy, and there's a
Speaker 1: back and forth about that. The Germans say they're doing plenty. Um,
Speaker 1: I mean, leave aside Trump, but as I said, the
Speaker 1: European Commission i m F have come down pretty hard
Speaker 1: on Germany for not addressing the issue and creating imbalances
Speaker 1: within the Eurozone and globally. You know, Patrick, I'm struck
Speaker 1: by what you're saying that there are Europeans that agree
Speaker 1: with President Trump at least on with respect to Germans
Speaker 1: role in trade and their trade surplus. That might be
Speaker 1: taking it too far. Okay, Well that was what I
Speaker 1: was going to ask. Is that taking it too far?
Speaker 1: You know, because it really has been created as sort
Speaker 1: of a Trump versus Merkel kind of a kind of
Speaker 1: situation right now. Well, I mean, when you talk about
Speaker 1: trade policy and trade arrangements, things get complicated, as with
Speaker 1: lots of other things. Trump's um view of the problem
Speaker 1: is somewhat crude compared to how, you know, the chief
Speaker 1: economist at the i m F might criticize Germany's UH surplus.
Speaker 1: So that is just to say that when Donald Trump
Speaker 1: or Peter Navarro or somebody else I don't know, Steve
Speaker 1: benn And starts talking about the German exports, it's it's
Speaker 1: not the same thing, but it's all it's there's addressing
Speaker 1: an issue that has been on the table for a while,
Speaker 1: but there's a there's something else going on there. Patrick Donahue,
Speaker 1: thank you so much for joining us. Patrick donahue is
Speaker 1: a Berlin reporter for a Bloomberg News and he comes
Speaker 1: to us from Berlin, Germany, very diplomatically, saying that the
Speaker 1: tone of President Trump's comments perhaps does not jibe in
Speaker 1: any way, shape or form with the Europeans, regardless of
Speaker 1: their views on Germany's policies. A collective ignorance, a mistrust
Speaker 1: of finance today, it's detrimental to our personal and national
Speaker 1: financial security. And here to help us reimagine what the
Speaker 1: finance industry could be is me here Decide. He is
Speaker 1: the Miszooho Financial Group Professor of Finance at the Harvard
Speaker 1: Business School, and he's also a professor of Law at
Speaker 1: Harvard Law School and the author of a new book
Speaker 1: entitled The Wisdom of Finance, Discovering Humanity in the World
Speaker 1: of Risk and Return. Professor Decide, thanks very much for
Speaker 1: being here. It's a pleasure. Thanks for having me. What
Speaker 1: what prompted you to write this book? Well, it got
Speaker 1: started by accident, which I was asked to give a
Speaker 1: talk to graduating students, and I realized that what I
Speaker 1: wanted to do was take finance and both humanize it
Speaker 1: and demystify it. I think finance is broken in some ways,
Speaker 1: and certainly it's perceived as broken, and so I think
Speaker 1: the path forward is first to make it accessible to
Speaker 1: people everywhere. Finance kind of cloaks itself in complexity, and
Speaker 1: we need to demystify it. So the book does that
Speaker 1: by telling stories. And then the second piece is to
Speaker 1: humanize it, which is to tell the stories that make
Speaker 1: people realize that underlying ideas of finance are humanistic, they're
Speaker 1: not crass, and they actually can be used in a
Speaker 1: humanistic way. You know, when you talk about demystifying financial concepts,
Speaker 1: part of the problem is that finance can be complicated.
Speaker 1: It's not just jargon. It's when you're talking about derivative
Speaker 1: concepts and you're talking about, you know, high theory that
Speaker 1: is based on the transfer of money that a lot
Speaker 1: of people just simply don't even understand to begin with.
Speaker 1: How do you go about doing that? Well, So there's
Speaker 1: no doubt that you know, the intricacies of the c
Speaker 1: d O are fairly complex. But the underlying ideas of
Speaker 1: what a derivative instrument, for example, are UM. The way
Speaker 1: I try to explain it is by going back to
Speaker 1: the first person who pioneered the use of options, which
Speaker 1: is Bailey's the father of Greek philosophy. He's the first
Speaker 1: option contract writer. He put down a deposit to rent
Speaker 1: out all of presses, and so you can tell the
Speaker 1: stories that actually undergird a lot of these financial technologies
Speaker 1: UM in a way that makes it a lot more
Speaker 1: easy to understand. Why do you think that finance has
Speaker 1: such a bad reputation, Well, I think partly because it's
Speaker 1: well learned, and I think there's been problems, and I
Speaker 1: think there are areas where finance has become somewhat extractive
Speaker 1: rather than value creating. But the larger point is that
Speaker 1: people are looking for something to blame today. They're upset
Speaker 1: with their economic prospects, and finance is an easy and
Speaker 1: um attractive target to them. And as a consequence, we
Speaker 1: have a profession which has gotten demonized, which has really
Speaker 1: bad consequences. It's bad because people within the profession actually
Speaker 1: don't have as much to aspire to. So in the book,
Speaker 1: I wanted to say, look the underlying ideas are actually
Speaker 1: quite noble. We should make finance aspirational, as opposed to
Speaker 1: defining it downward and expecting less and less. I wonder
Speaker 1: if you could tell us what does Jane Austen have
Speaker 1: to with risk management? Well, it turns out everything. So
Speaker 1: in the second chapter on risk management, I try to
Speaker 1: use Anthony Trollop and Jane Austin Pride and Prejudice to
Speaker 1: talk about risk management because underneath most of those novels
Speaker 1: is the problem of a young woman in the marriage
Speaker 1: market who has to manage risks. Right, So if you
Speaker 1: think about Mr Collins's proposal to Lizzie, he's playing off
Speaker 1: her risk aversion. It's one of the worst proposals ever. Basically,
Speaker 1: you know, you're not that attractive, you're not that rich.
Speaker 1: You better take my bid before you kind of become
Speaker 1: too old and she has to kind of gamble by
Speaker 1: waiting for Mr Darcy. And the really interesting part about
Speaker 1: that risk managing problem. In Phineas Finn by Anthony Trollop,
Speaker 1: the character Violet Effingham actually divines both diversification and options.
Speaker 1: She doesn't call it that, but she uses it. So
Speaker 1: she says, for example, you know she's bemoaning the lack
Speaker 1: of being able to unable to pick among suitors, and
Speaker 1: she says, you know, if one, I could marry ten,
Speaker 1: which is the way of saying diversification. And then she
Speaker 1: finally says, um, you know what I'm gonna do. She's
Speaker 1: not a fan of romantic love. She basically says, I'm
Speaker 1: just gonna sort. I'm going to pile up a few
Speaker 1: different possibilities, and then when I'm ready, I'm going to
Speaker 1: get married, which is kind of acquiring a portfolio of
Speaker 1: options and then exercising one when you're ready. So she
Speaker 1: actually got risk management in a deep way before you know,
Speaker 1: we had the equations to prove it. Mayor, you teach
Speaker 1: finance at Harvard, and I imagine that you have seen
Speaker 1: many students and you've seen, uh, perhaps a change in
Speaker 1: them and and concern, especially since the two thousand and
Speaker 1: eight financial crisis, about the reputation that finance has had.
Speaker 1: Can you explain, Yeah, No, I think it's been um,
Speaker 1: you know, really problematic. So finance has become less and
Speaker 1: less viewed as an aspirational profession. Recently, I was speaking
Speaker 1: to about forty or fifty of them, and I asked
Speaker 1: them how many of them were going into finance. A
Speaker 1: whole bunch raised their hand, and I said, how many
Speaker 1: of you expect to be in finance in ten years?
Speaker 1: And the number was a quarter of that, which is
Speaker 1: a way of saying they kind of did it for now,
Speaker 1: but they don't feel it's part of their identity. In
Speaker 1: other words, are doing it for the money so they
Speaker 1: can go on and do it they really believe And no,
Speaker 1: I think if they're doing it because they like it
Speaker 1: and then are ashamed of it because it's looked at
Speaker 1: in a way, that is problematic. UM, and that's terrible. Why,
Speaker 1: because you know, finance is hugely important to the economy.
Speaker 1: If we don't get finance right, we've seen what happens,
Speaker 1: and so we want really good people going into it,
Speaker 1: who who aspire to be doing great things. And so
Speaker 1: what the book says is actually finance is central. If
Speaker 1: you think about the two big solutions to the world's
Speaker 1: problems today in finance, one is regulation and the second
Speaker 1: is outrage, you know, just occupy. I think both of
Speaker 1: those are unproductive. UM. Outrage isn't going anywhere, and regulation,
Speaker 1: we know has counterproductive consequences. So the idea in the
Speaker 1: book is to say, let's really just get back to
Speaker 1: the nobility of the ideas, because if we get back
Speaker 1: to the nobility of the idea, is that, in the
Speaker 1: long run, is the way people start behaving better? Is
Speaker 1: the nobility Uh, your referenced nobility of ideas? Does that
Speaker 1: include personal accountability? Because it's one thing if you're playing
Speaker 1: with other people's money, and it's another one you're playing
Speaker 1: with your own reputation and your own money. Absolutely, So
Speaker 1: there are several times in the book where I use
Speaker 1: the ideas of for example, leverage UM to talk about
Speaker 1: reputation and to talk about personal accountability. So leverage is
Speaker 1: a good example. UM. Of course, I use a variety
Speaker 1: ways to talk about it, but one of them is
Speaker 1: The Merchant of Venice, you know, which is just a
Speaker 1: way of saying people think that's a play about debt,
Speaker 1: there's a debt contract between Antonio and and Shylock. And
Speaker 1: the answer, of course is if you look at the text,
Speaker 1: it's actually about commitments, right, It's all about commitments between people.
Speaker 1: That's what most scholars think that play is about. So
Speaker 1: I try to use that to kind of say that's
Speaker 1: what leverages it's a commitment and leverages fantastic. People in
Speaker 1: finance know that you get to do things you have
Speaker 1: no right to do. That's why people in financial get
Speaker 1: to create money. You get to create money. And the
Speaker 1: same thing is true, um if you think about it
Speaker 1: in a variety of other ways. So the great quote
Speaker 1: from Jefferson is that you know, your reputation is the
Speaker 1: most important lever because people will allow you to do
Speaker 1: things you have no right to do, and protecting that
Speaker 1: reputation and behaving in that way is really really critical.
Speaker 1: So you started out by saying that finance used to
Speaker 1: be thought of as a noble profession. But I can
Speaker 1: think of a lot of times during history where finance
Speaker 1: or debt was considered somewhat dirty and people wanted to
Speaker 1: have it somewhat removed from themselves. What's the golden era
Speaker 1: that you would like to see some kind of resurrection
Speaker 1: of Well, you know, that's a great question. I think
Speaker 1: there's always been problematic because debt has always been problematic,
Speaker 1: but that was born of real ignorance, right, you know,
Speaker 1: money is barren? How can you do these things? Um?
Speaker 1: And also sometimes anti Semitism was associate with that as well. Um, so,
Speaker 1: I don't know if there really has been a golden era.
Speaker 1: What I'm trying to just suggest is let's get back
Speaker 1: to the ideas, because we are so far removed from them.
Speaker 1: And this is why the practice of finance has got
Speaker 1: to wake up. They can't just say, you know, I'm
Speaker 1: doing God's work and I'm great. You've got to be
Speaker 1: able to say, we have problems, but we can actually
Speaker 1: do something really important, and we can get back to
Speaker 1: things that are actually really value creating. Ma Here, Decai,
Speaker 1: thank you so much for joining us. But here Desai
Speaker 1: is Missouho Financial Group, Professor of Finance at Harvard Business
Speaker 1: School as well as a professor of law at Harvard
Speaker 1: Law School, and he joins us here in our Bloomberg
Speaker 1: eleven three oh studios. You just wrote a new book,
Speaker 1: The Wisdom of Finance, Discovering Humanity in the World of
Speaker 1: Risk and Return, really fascinating. Up until now, Intel has
Speaker 1: really been the only game in town when it comes
Speaker 1: to computer chips. It's in a league of its own.
Speaker 1: It has dominated the industry. But suddenly it finds itself
Speaker 1: fending off competition, a non stream of us and is
Speaker 1: here with us. He is the senior semiconductor and hardware
Speaker 1: analyst for Bloomberg Intelligence, and he comes to us in
Speaker 1: our Bloomberg eleven three studios in New York City, and
Speaker 1: then you know, I'm struck by, uh, sort of the
Speaker 1: idea that somebody who is so so in the in
Speaker 1: the lead all of a sudden finding that that someone
Speaker 1: else is catching up to them. Can you explain how
Speaker 1: this is sort of the situation with Intel right now? Sure?
Speaker 1: I mean m D has lagged from both the performance
Speaker 1: perspective and the market share perspective over time in the
Speaker 1: CPU business, in the in the computer projects being advanced
Speaker 1: micro devices, and that's the new competitor that's kind of
Speaker 1: coming up for the newly dominant competitor. It's coming on right.
Speaker 1: M D does go through some cycles. It's been around
Speaker 1: in the business for a long time, but it's market share,
Speaker 1: both on the PC side as well as in the
Speaker 1: server chip side, has wayne pretty substantially. And over the
Speaker 1: last two years, m D has sort of reinvented itself,
Speaker 1: refocused itself, um cleaned up its act both literally from
Speaker 1: a product perspective as well as from a financial perspective.
Speaker 1: And at its Handalyst Day launched several chips over there.
Speaker 1: In the first part of the year, they launched their
Speaker 1: desktop chips uh and they will be launching UM notebook
Speaker 1: chips and server chips now. The interesting thing is that
Speaker 1: these chips are built off of a new architecture are
Speaker 1: meant to UM compete with Intel all the way from
Speaker 1: the low end to the high end. Historically, m D
Speaker 1: has been pretty competitive at the lower end of the
Speaker 1: product spectrum, so low end notebooks, low end desktops, low
Speaker 1: end servers. It has had a product that has been
Speaker 1: competitive with Intel predominantly on price with a performance match.
Speaker 1: Right now it's coming out with products that are suddenly
Speaker 1: performance competitive, right and they still retain their price edge,
Speaker 1: which is priced lower than Intel. So Intel finds itself
Speaker 1: in an unusual position of having to either seed UM
Speaker 1: price dominance UM or um We'll give up some share. Now,
Speaker 1: if you're a customer of Intel, you're going to definitely
Speaker 1: use this as a bargaining chip to try and lower
Speaker 1: the price for Intel's chips, for sure. But you're you're
Speaker 1: going to be looking at m D chips more closely.
Speaker 1: Now that's the product starg am D versus Intel. What's
Speaker 1: been happening with the PC market is the PC market
Speaker 1: doesn't suck as badly as it did before, so well said,
Speaker 1: Well said down, thank you. So it is um low
Speaker 1: single digit decline. So we could have a year potentially
Speaker 1: in the minus two plus two percent range, and we
Speaker 1: could have this sort of um less badness continue for
Speaker 1: for an extended period of time. So PCs are going
Speaker 1: to be an okay place to be and in that
Speaker 1: unit volume environment. One of the things one of the
Speaker 1: segments that has emerged is the gaming market. The gaming
Speaker 1: market is a particular breed of devices that sell for
Speaker 1: anywhere between two thousand and five thousand dollars per PC.
Speaker 1: I thought you were going to say a different breed
Speaker 1: of customer because they're willing to pay this kind of money. Absolutely,
Speaker 1: and these are you talk about these with the same
Speaker 1: sort of reverence that you talk about with autos. You
Speaker 1: sort of use liquid cooled, you use air cooled. You
Speaker 1: use um high end CPUs from Mentel and now or
Speaker 1: m D and I almost looked like cockpits of of
Speaker 1: advanced fighter jets. Now, I mean gaming paraphernale that has
Speaker 1: emerged is much greater than just the steering wheel for
Speaker 1: let's say Xbox and you know driving you certainly wan't
Speaker 1: Hemmy or two that drives your engine for sure. Well,
Speaker 1: so this means that if you want to play games
Speaker 1: like Galactic Civilizations or you want to play Halo, right,
Speaker 1: I just want to point out him. I somehow do
Speaker 1: not think that this is like at a personal knowledge
Speaker 1: that you're I have a feeling you looked out some
Speaker 1: of the popular games. Actually, actually, I have to have
Speaker 1: to say that I come from the generation that's put
Speaker 1: quarters into video game machines, so I've kind of lived
Speaker 1: with this. You need a lot of quarters for this
Speaker 1: kind of system. This is where I wanted to go
Speaker 1: with this, which is that what kind of price point
Speaker 1: are we talking about? I mean, we're talking about the
Speaker 1: recent Intel chips that have been launched vary in range
Speaker 1: between the thirteen for the CPU alone at the at
Speaker 1: the high end two thous dollars just for the CPS
Speaker 1: for the CPU, and at the low end could range
Speaker 1: between the three ninety nine Torice points. So these are
Speaker 1: very very high end chips meant to do a few
Speaker 1: things really really well. Now you're not you're not convincing
Speaker 1: Lisa though, by the way, just to go out and
Speaker 1: spend you know, five grand on a computer. Here. Look,
Speaker 1: I look, I'm the mom of two boys, right, so
Speaker 1: if one of them came to me and said, Mommy, mommy,
Speaker 1: can I have some pocket change so I can buy
Speaker 1: a two thousand dollar cpu? I would laugh at them, right, So,
Speaker 1: I mean, I'm just thinking, who is the customer here?
Speaker 1: These are high end gamers in China is a particularly
Speaker 1: interesting country in so far as from a gaming experience
Speaker 1: part of the world that they've there's a lot of
Speaker 1: gamers there um. And also the e gaming has helped
Speaker 1: drive this gaming phenomenon where e sports where you watch
Speaker 1: other people compete and go to arenas and you actually
Speaker 1: watch other people play video games there. There there is
Speaker 1: a substantial demographic out there, and this is part of
Speaker 1: the reason why the PC market there's also a divergence
Speaker 1: between a small divergence between PC revenues and PC units.
Speaker 1: The units may still be in the minus two to
Speaker 1: plus two percent range, but the revenues could be slightly
Speaker 1: better if the gaming segment does well. All right, so
Speaker 1: just quickly, Intel going into this market, they're going to
Speaker 1: make a big splash, is just gonna work for them,
Speaker 1: help the stock. This is going to be this. This
Speaker 1: is in part a defensive strategy against m D. They
Speaker 1: want to show that we are the best game in
Speaker 1: town at the high end and at the low end
Speaker 1: um and they want to relegate a m D as
Speaker 1: much as possible to the lower end, where's where it's
Speaker 1: always been. All Right, well, thank you very You know.
Speaker 1: I want to know maybe Brian Crecentage, the chief executive officer,
Speaker 1: maybe he's a PC gamer and that's why they're also
Speaker 1: interested in this. Thanks for listening to the Bloomberg P
Speaker 1: and L podcast. You can subscribe and listen to interviews
Speaker 1: at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
Speaker 1: I'm Pim Fox. I'm on Twitter at pim Fox. I'm
Speaker 1: on Twitter at Lisa Abramo. It's one before the podcast.
Speaker 1: You can always catch us worldwide on Bloomberg radioh