WEBVTT - Politics Are Sideshow to Stock Valuations, Lieberman Says 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg p m L Podcast. I'm Pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Bramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg p m L 0:00:20.840 --> 0:00:32.720 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. There's 0:00:32.720 --> 0:00:35.880 been a question hovering over markets these days, how much 0:00:36.080 --> 0:00:40.640 political upheaval can there be without any real, substantial and 0:00:40.680 --> 0:00:44.879 prolonged reaction from markets. Chuck Lieberman has perhaps some answers. 0:00:44.880 --> 0:00:48.600 He's chief investment officer and managing partner of Adviser's Capital Management, 0:00:48.600 --> 0:00:51.120 which oversees about one point three billion dollars. Also, he 0:00:51.240 --> 0:00:56.560 is a Bloomberg View columnist through the Bloomberg Profits Group. Charles, Chuck, 0:00:56.720 --> 0:00:58.720 thank you so much for joining us. You raised an 0:00:58.760 --> 0:01:02.800 interesting reality check, basically saying that all of this political 0:01:02.840 --> 0:01:07.560 noise only matters so much as it affects underlying growth. 0:01:07.800 --> 0:01:11.840 Can you explain sure? Um, Well, obviously the news is 0:01:11.880 --> 0:01:16.760 full of politics. Um, this stuff happening seemingly almost every day, 0:01:17.120 --> 0:01:21.800 and Washington is obviously dysfunctional. But how that relates to 0:01:21.840 --> 0:01:24.479 the stock market depends on whether or not it UH 0:01:24.720 --> 0:01:28.160 actually affects corporate profits. If companies are doing well, If 0:01:28.160 --> 0:01:31.119 the economy is growing, and the economy is certainly growing, 0:01:31.120 --> 0:01:34.800 and corporate profits are actually doing quite well, then stock 0:01:34.920 --> 0:01:40.200 valuation should rise over time to reflect that rise in profitability. Um. Yes, 0:01:40.680 --> 0:01:44.759 we pay attention to the politics. It certainly captures our attention, 0:01:45.200 --> 0:01:49.080 but it's a side show to the valuation of stocks. Well, Chuck, 0:01:49.120 --> 0:01:51.279 maybe you could talk a little bit more detail about 0:01:51.320 --> 0:01:55.360 corporate profits in light of shared buy backs and the 0:01:55.400 --> 0:01:58.560 ability to discern what is a real profit and what's 0:01:58.600 --> 0:02:00.920 not a real profit. Since company these use gap and 0:02:00.960 --> 0:02:06.200 non gap results, it's it's just increasingly difficult. Well, look, 0:02:06.240 --> 0:02:09.360 there are different ways to measure profits. UM, we have 0:02:09.760 --> 0:02:14.440 a system in the US gap accounting. International companies use 0:02:14.480 --> 0:02:19.359 a different methodology, but our methodology is what it is, UH, 0:02:19.400 --> 0:02:21.840 and over time, what it has shown is that corporate 0:02:21.840 --> 0:02:25.360 profits rise pretty substantially over time. Uh. There were five 0:02:25.400 --> 0:02:30.240 consecutive quarters in which US corporate profits fell and bears 0:02:30.280 --> 0:02:33.400 on the market use that as a justification to argue 0:02:33.760 --> 0:02:36.920 that stocks were overvalued. But at the same time, if 0:02:36.960 --> 0:02:39.560 you actually look at what was going on. All of 0:02:39.600 --> 0:02:43.320 the decline in profits came about because of the energy sector, 0:02:43.360 --> 0:02:46.080 where oil prices dropped from a hundred ten bucks barrel 0:02:46.120 --> 0:02:49.359 to about twenty five. That was a huge decline in 0:02:49.400 --> 0:02:53.320 the profitability of very large companies like Exxon and Chevron 0:02:53.400 --> 0:02:57.400 and others. Uh. Everyone else, however, on average, was actually 0:02:57.440 --> 0:03:01.080 growing profits and their stocks went down to uh. So 0:03:01.520 --> 0:03:04.680 stock valuations look attractive. And and now we have the 0:03:04.760 --> 0:03:08.440 energy sector actually coming back. Oil prices are still volatile, 0:03:08.840 --> 0:03:12.800 but the underlying profitability of companies is doing fine. You know, Chuck, 0:03:12.840 --> 0:03:16.920 I'm struck by the fact that stocks rallied tremendously after 0:03:17.280 --> 0:03:21.240 the November election of President Donald Trump. Uh. And a 0:03:21.240 --> 0:03:23.280 lot of this was because people were baking in the 0:03:23.320 --> 0:03:27.280 expectation of tax cuts for corporations as well as reduced 0:03:27.280 --> 0:03:31.480 regulations that directly was baked into the prices of stock. 0:03:31.560 --> 0:03:35.080 So this is a fundamental change. Have we washed that out? 0:03:35.240 --> 0:03:38.000 And you know, if we haven't, this goes to something 0:03:38.080 --> 0:03:41.120 more than just you know, people's feelings. This is a 0:03:41.160 --> 0:03:45.000 fundamental issue, and it is driven directly by policy. Uh. 0:03:45.040 --> 0:03:48.040 Fair enough, but keep in mind, a number of things 0:03:48.040 --> 0:03:51.360 have all other things have also happened so yes, I 0:03:51.400 --> 0:03:54.920 think the market is hoping that Trump will get some 0:03:55.000 --> 0:03:58.520 tax cuts through. But that's not the only variable involved. 0:03:58.560 --> 0:04:02.760 It's also less regulation. It's also more spending on infrastructure. 0:04:02.840 --> 0:04:05.800 So there are a lot of ways in which policies 0:04:05.880 --> 0:04:09.280 that he advocates could in fact benefit corporate profits in 0:04:09.320 --> 0:04:11.160 the US. Well, hold on a second, how many of 0:04:11.200 --> 0:04:14.320 those policies have to get through in order to justify 0:04:14.320 --> 0:04:18.200 a current value valuations? Well, I think I would argue 0:04:18.279 --> 0:04:21.880 any at this point, people believe that Trump is going 0:04:21.920 --> 0:04:24.920 to get nothing um, and that's one of the reasons 0:04:24.920 --> 0:04:27.760 why stocks having continued to rise. Uh. In the meantime, 0:04:27.800 --> 0:04:31.599 corporate profits have We just had the strongest quarter since 0:04:31.600 --> 0:04:35.640 two thousand and eleven. So corporate profits continue to march on. 0:04:36.200 --> 0:04:39.560 The politics is just a constant show, Chuck, when do 0:04:39.640 --> 0:04:43.599 you sell? Uh? Well, you sell if you start to 0:04:43.640 --> 0:04:47.280 think that the economy is at risks. Uh. Recessions are 0:04:47.400 --> 0:04:50.799 never good for stock valuation. Corporate profits invariably go down. 0:04:51.720 --> 0:04:54.880 You sell if you think that the government is going 0:04:54.920 --> 0:04:59.120 to somehow inhibit corporate profits. Well, when does Chuck Lieberman sell? 0:04:59.279 --> 0:05:01.680 I guess that I mean to be more pointed about it, 0:05:01.720 --> 0:05:04.640 because all right, you know, when you see a decline, 0:05:04.720 --> 0:05:06.840 let's say in stock prices, you can make the argument 0:05:06.839 --> 0:05:08.880 that that's the time to buy, not when they are 0:05:08.960 --> 0:05:12.719 at records. Fair enough, and uh, what we do is 0:05:12.760 --> 0:05:15.279 we continue to watch what they're doing, what the government 0:05:15.360 --> 0:05:18.080 is doing, because it does matter. And when I say 0:05:18.120 --> 0:05:20.480 the government, I don't mean just the administration. I also 0:05:20.480 --> 0:05:23.400 mean the federal Reserve and foreign governments. All of those 0:05:23.440 --> 0:05:26.880 variables matter as long as the economy continues to grow, 0:05:27.279 --> 0:05:30.560 and right now we see no reason why it shouldn't 0:05:30.600 --> 0:05:33.440 continue to grow at a at a solid clip, not 0:05:33.560 --> 0:05:37.440 a rapid clip. And because of leverage in the corporate 0:05:37.440 --> 0:05:40.760 sector as well as how lean they are, I expect 0:05:40.760 --> 0:05:43.359 corporate profits to continue to grow in the in the 0:05:43.400 --> 0:05:47.479 ballpark of per year. As long as that's happening, I 0:05:47.480 --> 0:05:51.080 don't want to sell unless the economy looks like it's 0:05:51.120 --> 0:05:53.680 really at risk. Chuck. One thing that you pointed to 0:05:53.800 --> 0:05:56.159 in your recent column was that there is so much 0:05:56.240 --> 0:05:59.960 cash still out there that has not been invested yet. 0:06:00.080 --> 0:06:03.080 How much cash are you looking at? Where is it? 0:06:03.160 --> 0:06:05.719 Because if I look at mutual funds, for example, particularly 0:06:05.760 --> 0:06:09.200 equity mutual funds, they're pretty heavily invested, there isn't a 0:06:09.200 --> 0:06:12.560 lot of cash there. Well yeah, well that's one of 0:06:12.600 --> 0:06:15.960 the reasons why I was very vague with that statement, Uh, 0:06:16.040 --> 0:06:18.719 because it is difficult to measure. So start off with 0:06:18.800 --> 0:06:21.680 mutual funds, the amount of cash they hold varies over 0:06:21.760 --> 0:06:24.839 time and fun to fund. On average, they look like 0:06:24.880 --> 0:06:27.400 they're a little bit heavy now. But we're not talking 0:06:27.400 --> 0:06:30.760 about a huge amount of three But then when you 0:06:30.800 --> 0:06:34.599 look at the billions that have flowed into both money 0:06:34.600 --> 0:06:38.239 funds and in the CDs and bank accounts, all because 0:06:38.279 --> 0:06:40.920 people are nervous about the market. There are a lot 0:06:41.000 --> 0:06:44.160 of people who pulled out of equities back in two 0:06:44.160 --> 0:06:47.720 thousand and two thousand nine and still haven't gotten in. 0:06:48.080 --> 0:06:51.080 And I'm still reading about people who are hoping that 0:06:51.160 --> 0:06:53.919 the market sells off in order to give them an 0:06:53.960 --> 0:06:56.440 opportunity to get in. So I think there's a lot 0:06:56.480 --> 0:06:59.000 of money on the sidelines. And you can see that 0:06:59.080 --> 0:07:01.640 I think from the aavior of the market. Uh, the 0:07:01.680 --> 0:07:04.960 market really has not been able to sustain any material 0:07:05.040 --> 0:07:08.279 decline of any size for any prood of time in 0:07:08.279 --> 0:07:12.120 the last several years. Um. And in fact, people look 0:07:12.160 --> 0:07:15.320 at that and comment, how that's a negative. I think 0:07:15.360 --> 0:07:17.720 of it as a reflection of a positive which is 0:07:17.800 --> 0:07:20.000 all of that cash sitting on the sidelines by people 0:07:20.040 --> 0:07:22.840 have missed the market. Chuck, They've been quick question for you. 0:07:22.960 --> 0:07:25.160 What was the biggest mistake you've made? Look and you 0:07:25.160 --> 0:07:29.119 look at the market over the last twelve months, over 0:07:29.160 --> 0:07:33.520 the last twelve months. Thanks for throwing me a curveballpin 0:07:34.280 --> 0:07:40.239 um not being more aggressive? Um. I think this market, 0:07:40.480 --> 0:07:44.120 there's so much fear out there and there's so much caution. 0:07:45.000 --> 0:07:48.800 I think this that creates an environment in which people 0:07:48.880 --> 0:07:51.760 are looking for opportunities to get in if they can. 0:07:52.280 --> 0:07:55.920 And I think you have to be aggressive until conditions 0:07:55.920 --> 0:07:58.240 turn less favorable. All right, I'm gonna leave it there, 0:07:58.320 --> 0:08:00.800 Thanks very much, Chuck Lieberman. He is that investment officer 0:08:00.920 --> 0:08:06.280 managing Partner Advisors, a capital management He helps manage more 0:08:06.320 --> 0:08:21.440 than a billion dollars of assets under management. But we 0:08:21.520 --> 0:08:24.320 have a massive trade deficit with Germany. Plus they pay 0:08:24.560 --> 0:08:27.320 they pay far less than they should on NATO and 0:08:27.440 --> 0:08:31.520 the military. This is according to President Donald Trump posting 0:08:31.560 --> 0:08:34.079 this message on Twitter and here to tell us. Morris 0:08:34.120 --> 0:08:37.240 Patrick donohue. He is a government reporter for Bloomberg and 0:08:37.280 --> 0:08:40.000 he joined us from ber Lynn Patrick thanks for being 0:08:40.080 --> 0:08:42.559 with us. Maybe you could just set out for us 0:08:42.760 --> 0:08:46.240 what is the fact and what is the rhetoric when 0:08:46.280 --> 0:08:49.959 it comes to trade between the United States and Germany. Well, 0:08:50.000 --> 0:08:53.400 there's definitely a big trade UH surplus that Germany has, 0:08:54.280 --> 0:08:58.360 not just with the US, but with most European countries. 0:08:58.400 --> 0:09:02.800 It's it's sort of in the euro Zone and so UM. 0:09:02.880 --> 0:09:04.480 And if you look, if you look back at the 0:09:04.520 --> 0:09:07.280 imbalances that were triggered through the creation of the euro 0:09:07.480 --> 0:09:10.719 and the succession the crisis, UH, these are imbalances that 0:09:10.760 --> 0:09:15.120 are sort of built in. UM. It's true that there 0:09:15.280 --> 0:09:20.640 is a pretty staggering surplus. And it's not just Trump 0:09:20.679 --> 0:09:22.720 the U. S administration who who like to talk about this, 0:09:22.720 --> 0:09:26.600 but also the European Commission, UH, the O E C D, 0:09:26.760 --> 0:09:29.960 the I m F have criticized Germany for doing too 0:09:29.960 --> 0:09:34.199 little to address the surplus. Patrick, how new is this conversation? 0:09:34.320 --> 0:09:36.600 I mean, is this something that has been discussed in 0:09:36.760 --> 0:09:40.320 back rooms for years and now we're just seeing it 0:09:40.320 --> 0:09:43.839 in a very different light sort of aired through uh. 0:09:44.800 --> 0:09:49.880 I guess campaign speeches and Twitter. Uh. The trade issue 0:09:49.920 --> 0:09:53.000 is not new. I think even in the Obama administration 0:09:53.000 --> 0:09:57.079 there was plenty of criticism about Germany's deficit, I think 0:09:57.480 --> 0:10:01.400 a surplus sorry UM. With the tru administration, it's taken 0:10:01.400 --> 0:10:04.080 a completely different tack. If you listen to somebody like 0:10:04.840 --> 0:10:08.960 um Trump's top trade advisor, Peter Navarro, uh the way 0:10:08.960 --> 0:10:14.520 he discussed his trade um, he lays blame to Germany 0:10:14.520 --> 0:10:17.079 for most of it and says that Germany's hiding behind 0:10:17.080 --> 0:10:20.839 its membership in the euro to take advantage of its 0:10:20.880 --> 0:10:24.920 position UM, which sounds strange to German ears because it's 0:10:24.920 --> 0:10:29.400 not something you can really undo. Patrick. The automobile industry 0:10:29.480 --> 0:10:32.120 and automobile exports money. If you could just speak about 0:10:32.160 --> 0:10:34.679 the German role there and also about their role in 0:10:34.760 --> 0:10:39.280 manufacturing in the United States. Auto exports are the backbone 0:10:39.280 --> 0:10:44.480 of German of Germany's export economy, it's export might um. 0:10:44.520 --> 0:10:46.680 And when Donald Trump, for example, talks about all of 0:10:46.800 --> 0:10:50.319 the Mercedes and BMW's on history in New York, UM, 0:10:50.360 --> 0:10:53.439 it's true, Americans by a lot of German cars. Americans 0:10:53.480 --> 0:10:55.840 like German cars. But at the same time, a lot 0:10:55.880 --> 0:10:58.280 of those German cars are built in the US, and 0:10:58.360 --> 0:11:02.040 so it's not simply a matter of Americans buying German 0:11:02.080 --> 0:11:05.800 cars that are shipped overseas from Germany. It's more complicated 0:11:05.800 --> 0:11:09.360 than that, You know, Patrick, I'm really struck by what 0:11:09.480 --> 0:11:12.520 Angela Merkel said over the weekend where she said, you know, 0:11:12.880 --> 0:11:16.400 we Europeans cannot rely on the US the way that 0:11:16.440 --> 0:11:18.160 we have. I was struck. Two. I was in the 0:11:18.160 --> 0:11:20.559 beer tent with her. Did not expect her to talk 0:11:20.600 --> 0:11:23.960 about geopolitics at a campaign rally. So you were there, 0:11:23.960 --> 0:11:26.240 What was the response like, What was the mood like 0:11:26.360 --> 0:11:30.560 when she uttered those words? Um, those words were uttered 0:11:30.600 --> 0:11:33.160 at the beginning of a little long sentence that continued 0:11:33.200 --> 0:11:35.160 with this idea that well, we Europeans have to go 0:11:35.200 --> 0:11:37.320 our own way, we have to take our destiny in 0:11:37.360 --> 0:11:41.120 our own hands. That sort of rhetoric coming from America 0:11:41.200 --> 0:11:46.400 was not entirely new. Uh. This reliability comment is rather new, 0:11:46.720 --> 0:11:50.200 and in the context of the the breakdown at the 0:11:50.240 --> 0:11:55.120 G seven summit, when the administrative US administration Trump would 0:11:55.120 --> 0:11:59.240 not commit to remaining in the Paris Climate Accord, it 0:11:59.280 --> 0:12:01.880 took a whole new meaning. And so when you when 0:12:01.880 --> 0:12:06.480 you place the reliability of your closest post World War 0:12:06.559 --> 0:12:10.760 two ally in doubt, then that's a big deal. The 0:12:10.840 --> 0:12:14.920 question here is did she mean to cause such a 0:12:14.960 --> 0:12:22.280 stir was she's delivering this to the German electorate. Um, 0:12:22.360 --> 0:12:25.480 I don't know, we haven't. We have a Twitter response 0:12:25.520 --> 0:12:30.920 from President Trump today. Uh, clearly this is royal things 0:12:30.960 --> 0:12:34.439 across the Atlantic. Patrick. When I look at the exports 0:12:34.440 --> 0:12:37.400 as a percentage of GDP and you look at various countries, 0:12:37.400 --> 0:12:39.840 Germany comes out as a really top of the list. 0:12:40.040 --> 0:12:45.240 Forty more than fort of GDP is accounted for as exports. 0:12:45.280 --> 0:12:48.520 What does Germany do that the other countries in Europe 0:12:48.600 --> 0:12:50.439 or even in the United States, which is just around 0:12:50.480 --> 0:12:54.320 ten percent, don't do well. One thing Germany does it 0:12:54.760 --> 0:12:59.640 manufactures um quality products and exports them, and it has 0:12:59.679 --> 0:13:02.160 done that very well for a long time. On the 0:13:02.160 --> 0:13:05.520 other side, it's a question of what Germany has not done. 0:13:05.880 --> 0:13:11.240 Um An export surplus is you know what Germany exports 0:13:11.240 --> 0:13:14.600 minus what it's what it's not importing. So the criticism 0:13:14.640 --> 0:13:18.400 for Germany, obviously it's impossible to say stop making such 0:13:18.440 --> 0:13:23.440 great cars. It's rather Germany should do more to um 0:13:23.600 --> 0:13:28.840 boost domestic demand domestic spending to raise imports. This has 0:13:28.880 --> 0:13:32.520 been a classic criticism of German policy, and there's a 0:13:32.520 --> 0:13:37.599 back and forth about that. The Germans say they're doing plenty. Um, 0:13:37.640 --> 0:13:39.760 I mean, leave aside Trump, but as I said, the 0:13:39.760 --> 0:13:42.480 European Commission i m F have come down pretty hard 0:13:42.480 --> 0:13:46.640 on Germany for not addressing the issue and creating imbalances 0:13:46.679 --> 0:13:49.720 within the Eurozone and globally. You know, Patrick, I'm struck 0:13:49.760 --> 0:13:52.600 by what you're saying that there are Europeans that agree 0:13:52.600 --> 0:13:56.559 with President Trump at least on with respect to Germans 0:13:57.000 --> 0:14:01.000 role in trade and their trade surplus. That might be 0:14:01.040 --> 0:14:02.560 taking it too far. Okay, Well that was what I 0:14:02.600 --> 0:14:04.400 was going to ask. Is that taking it too far? 0:14:04.840 --> 0:14:07.040 You know, because it really has been created as sort 0:14:07.040 --> 0:14:10.400 of a Trump versus Merkel kind of a kind of 0:14:10.400 --> 0:14:12.800 situation right now. Well, I mean, when you talk about 0:14:13.240 --> 0:14:17.000 trade policy and trade arrangements, things get complicated, as with 0:14:17.080 --> 0:14:23.480 lots of other things. Trump's um view of the problem 0:14:23.680 --> 0:14:27.560 is somewhat crude compared to how, you know, the chief 0:14:27.560 --> 0:14:31.440 economist at the i m F might criticize Germany's UH surplus. 0:14:31.640 --> 0:14:35.240 So that is just to say that when Donald Trump 0:14:35.360 --> 0:14:37.280 or Peter Navarro or somebody else I don't know, Steve 0:14:37.280 --> 0:14:40.840 benn And starts talking about the German exports, it's it's 0:14:40.880 --> 0:14:45.360 not the same thing, but it's all it's there's addressing 0:14:45.960 --> 0:14:48.520 an issue that has been on the table for a while, 0:14:48.880 --> 0:14:52.800 but there's a there's something else going on there. Patrick Donahue, 0:14:52.880 --> 0:14:54.600 thank you so much for joining us. Patrick donahue is 0:14:54.640 --> 0:14:57.040 a Berlin reporter for a Bloomberg News and he comes 0:14:57.080 --> 0:15:01.160 to us from Berlin, Germany, very diplomatically, saying that the 0:15:01.200 --> 0:15:03.920 tone of President Trump's comments perhaps does not jibe in 0:15:03.960 --> 0:15:06.160 any way, shape or form with the Europeans, regardless of 0:15:06.160 --> 0:15:22.480 their views on Germany's policies. A collective ignorance, a mistrust 0:15:22.560 --> 0:15:26.000 of finance today, it's detrimental to our personal and national 0:15:26.080 --> 0:15:29.120 financial security. And here to help us reimagine what the 0:15:29.160 --> 0:15:32.920 finance industry could be is me here Decide. He is 0:15:32.960 --> 0:15:36.680 the Miszooho Financial Group Professor of Finance at the Harvard 0:15:36.680 --> 0:15:39.000 Business School, and he's also a professor of Law at 0:15:39.120 --> 0:15:41.440 Harvard Law School and the author of a new book 0:15:41.560 --> 0:15:45.520 entitled The Wisdom of Finance, Discovering Humanity in the World 0:15:45.600 --> 0:15:48.920 of Risk and Return. Professor Decide, thanks very much for 0:15:48.960 --> 0:15:51.160 being here. It's a pleasure. Thanks for having me. What 0:15:51.160 --> 0:15:54.800 what prompted you to write this book? Well, it got 0:15:54.840 --> 0:15:56.840 started by accident, which I was asked to give a 0:15:56.880 --> 0:16:00.400 talk to graduating students, and I realized that what I 0:16:00.400 --> 0:16:03.240 wanted to do was take finance and both humanize it 0:16:03.320 --> 0:16:06.120 and demystify it. I think finance is broken in some ways, 0:16:06.120 --> 0:16:08.160 and certainly it's perceived as broken, and so I think 0:16:08.200 --> 0:16:10.600 the path forward is first to make it accessible to 0:16:10.760 --> 0:16:14.440 people everywhere. Finance kind of cloaks itself in complexity, and 0:16:14.480 --> 0:16:16.280 we need to demystify it. So the book does that 0:16:16.360 --> 0:16:18.760 by telling stories. And then the second piece is to 0:16:18.840 --> 0:16:21.200 humanize it, which is to tell the stories that make 0:16:21.240 --> 0:16:24.680 people realize that underlying ideas of finance are humanistic, they're 0:16:24.680 --> 0:16:27.000 not crass, and they actually can be used in a 0:16:27.120 --> 0:16:32.320 humanistic way. You know, when you talk about demystifying financial concepts, 0:16:32.400 --> 0:16:36.400 part of the problem is that finance can be complicated. 0:16:36.440 --> 0:16:39.880 It's not just jargon. It's when you're talking about derivative 0:16:39.920 --> 0:16:43.120 concepts and you're talking about, you know, high theory that 0:16:43.320 --> 0:16:45.680 is based on the transfer of money that a lot 0:16:45.680 --> 0:16:47.640 of people just simply don't even understand to begin with. 0:16:48.200 --> 0:16:50.320 How do you go about doing that? Well, So there's 0:16:50.320 --> 0:16:52.600 no doubt that you know, the intricacies of the c 0:16:52.680 --> 0:16:55.680 d O are fairly complex. But the underlying ideas of 0:16:55.680 --> 0:16:58.480 what a derivative instrument, for example, are UM. The way 0:16:58.520 --> 0:17:00.120 I try to explain it is by going back to 0:17:00.160 --> 0:17:02.360 the first person who pioneered the use of options, which 0:17:02.400 --> 0:17:05.080 is Bailey's the father of Greek philosophy. He's the first 0:17:05.080 --> 0:17:08.120 option contract writer. He put down a deposit to rent 0:17:08.119 --> 0:17:10.399 out all of presses, and so you can tell the 0:17:10.480 --> 0:17:13.640 stories that actually undergird a lot of these financial technologies 0:17:14.000 --> 0:17:15.800 UM in a way that makes it a lot more 0:17:15.840 --> 0:17:18.560 easy to understand. Why do you think that finance has 0:17:18.600 --> 0:17:21.320 such a bad reputation, Well, I think partly because it's 0:17:21.400 --> 0:17:23.199 well learned, and I think there's been problems, and I 0:17:23.240 --> 0:17:26.119 think there are areas where finance has become somewhat extractive 0:17:26.240 --> 0:17:29.120 rather than value creating. But the larger point is that 0:17:29.200 --> 0:17:32.560 people are looking for something to blame today. They're upset 0:17:32.600 --> 0:17:35.000 with their economic prospects, and finance is an easy and 0:17:35.359 --> 0:17:38.480 um attractive target to them. And as a consequence, we 0:17:38.600 --> 0:17:41.600 have a profession which has gotten demonized, which has really 0:17:41.640 --> 0:17:45.639 bad consequences. It's bad because people within the profession actually 0:17:45.640 --> 0:17:47.640 don't have as much to aspire to. So in the book, 0:17:47.680 --> 0:17:50.240 I wanted to say, look the underlying ideas are actually 0:17:50.320 --> 0:17:53.520 quite noble. We should make finance aspirational, as opposed to 0:17:53.520 --> 0:17:57.160 defining it downward and expecting less and less. I wonder 0:17:57.200 --> 0:17:59.639 if you could tell us what does Jane Austen have 0:17:59.760 --> 0:18:02.640 to with risk management? Well, it turns out everything. So 0:18:03.040 --> 0:18:05.399 in the second chapter on risk management, I try to 0:18:06.080 --> 0:18:08.879 use Anthony Trollop and Jane Austin Pride and Prejudice to 0:18:08.920 --> 0:18:12.040 talk about risk management because underneath most of those novels 0:18:12.200 --> 0:18:14.520 is the problem of a young woman in the marriage 0:18:14.560 --> 0:18:17.200 market who has to manage risks. Right, So if you 0:18:17.240 --> 0:18:20.760 think about Mr Collins's proposal to Lizzie, he's playing off 0:18:20.800 --> 0:18:23.760 her risk aversion. It's one of the worst proposals ever. Basically, 0:18:24.160 --> 0:18:26.120 you know, you're not that attractive, you're not that rich. 0:18:26.160 --> 0:18:28.760 You better take my bid before you kind of become 0:18:28.800 --> 0:18:31.200 too old and she has to kind of gamble by 0:18:31.200 --> 0:18:34.280 waiting for Mr Darcy. And the really interesting part about 0:18:34.280 --> 0:18:37.320 that risk managing problem. In Phineas Finn by Anthony Trollop, 0:18:38.000 --> 0:18:42.200 the character Violet Effingham actually divines both diversification and options. 0:18:42.359 --> 0:18:44.840 She doesn't call it that, but she uses it. So 0:18:44.920 --> 0:18:47.240 she says, for example, you know she's bemoaning the lack 0:18:47.280 --> 0:18:50.320 of being able to unable to pick among suitors, and 0:18:50.359 --> 0:18:52.120 she says, you know, if one, I could marry ten, 0:18:52.520 --> 0:18:54.919 which is the way of saying diversification. And then she 0:18:54.960 --> 0:18:57.480 finally says, um, you know what I'm gonna do. She's 0:18:57.520 --> 0:18:59.840 not a fan of romantic love. She basically says, I'm 0:18:59.880 --> 0:19:02.200 just gonna sort. I'm going to pile up a few 0:19:02.240 --> 0:19:04.840 different possibilities, and then when I'm ready, I'm going to 0:19:04.920 --> 0:19:07.879 get married, which is kind of acquiring a portfolio of 0:19:07.920 --> 0:19:10.840 options and then exercising one when you're ready. So she 0:19:10.880 --> 0:19:13.520 actually got risk management in a deep way before you know, 0:19:13.560 --> 0:19:16.879 we had the equations to prove it. Mayor, you teach 0:19:17.080 --> 0:19:20.600 finance at Harvard, and I imagine that you have seen 0:19:20.760 --> 0:19:23.879 many students and you've seen, uh, perhaps a change in 0:19:23.920 --> 0:19:27.000 them and and concern, especially since the two thousand and 0:19:27.040 --> 0:19:31.000 eight financial crisis, about the reputation that finance has had. 0:19:31.119 --> 0:19:34.280 Can you explain, Yeah, No, I think it's been um, 0:19:34.320 --> 0:19:36.560 you know, really problematic. So finance has become less and 0:19:36.680 --> 0:19:40.520 less viewed as an aspirational profession. Recently, I was speaking 0:19:40.560 --> 0:19:42.880 to about forty or fifty of them, and I asked 0:19:42.920 --> 0:19:44.520 them how many of them were going into finance. A 0:19:44.520 --> 0:19:46.560 whole bunch raised their hand, and I said, how many 0:19:46.600 --> 0:19:48.280 of you expect to be in finance in ten years? 0:19:48.359 --> 0:19:50.359 And the number was a quarter of that, which is 0:19:50.359 --> 0:19:52.760 a way of saying they kind of did it for now, 0:19:52.800 --> 0:19:55.080 but they don't feel it's part of their identity. In 0:19:55.119 --> 0:19:56.520 other words, are doing it for the money so they 0:19:56.520 --> 0:19:57.960 can go on and do it they really believe And no, 0:19:58.080 --> 0:19:59.679 I think if they're doing it because they like it 0:19:59.720 --> 0:20:02.040 and then are ashamed of it because it's looked at 0:20:02.119 --> 0:20:05.640 in a way, that is problematic. UM, and that's terrible. Why, 0:20:05.720 --> 0:20:08.440 because you know, finance is hugely important to the economy. 0:20:08.480 --> 0:20:10.840 If we don't get finance right, we've seen what happens, 0:20:11.200 --> 0:20:13.119 and so we want really good people going into it, 0:20:13.200 --> 0:20:15.840 who who aspire to be doing great things. And so 0:20:15.880 --> 0:20:18.480 what the book says is actually finance is central. If 0:20:18.520 --> 0:20:21.639 you think about the two big solutions to the world's 0:20:21.640 --> 0:20:24.679 problems today in finance, one is regulation and the second 0:20:24.720 --> 0:20:27.919 is outrage, you know, just occupy. I think both of 0:20:27.920 --> 0:20:31.960 those are unproductive. UM. Outrage isn't going anywhere, and regulation, 0:20:32.000 --> 0:20:35.760 we know has counterproductive consequences. So the idea in the 0:20:35.800 --> 0:20:37.639 book is to say, let's really just get back to 0:20:37.680 --> 0:20:39.520 the nobility of the ideas, because if we get back 0:20:39.560 --> 0:20:41.639 to the nobility of the idea, is that, in the 0:20:41.720 --> 0:20:45.240 long run, is the way people start behaving better? Is 0:20:45.240 --> 0:20:48.679 the nobility Uh, your referenced nobility of ideas? Does that 0:20:48.720 --> 0:20:52.800 include personal accountability? Because it's one thing if you're playing 0:20:52.800 --> 0:20:55.560 with other people's money, and it's another one you're playing 0:20:55.560 --> 0:20:58.280 with your own reputation and your own money. Absolutely, So 0:20:58.320 --> 0:21:00.239 there are several times in the book where I use 0:21:00.320 --> 0:21:03.800 the ideas of for example, leverage UM to talk about 0:21:03.840 --> 0:21:06.760 reputation and to talk about personal accountability. So leverage is 0:21:06.760 --> 0:21:09.880 a good example. UM. Of course, I use a variety 0:21:09.880 --> 0:21:11.480 ways to talk about it, but one of them is 0:21:11.520 --> 0:21:13.159 The Merchant of Venice, you know, which is just a 0:21:13.160 --> 0:21:15.520 way of saying people think that's a play about debt, 0:21:15.880 --> 0:21:19.159 there's a debt contract between Antonio and and Shylock. And 0:21:19.160 --> 0:21:20.840 the answer, of course is if you look at the text, 0:21:20.880 --> 0:21:24.240 it's actually about commitments, right, It's all about commitments between people. 0:21:24.560 --> 0:21:26.679 That's what most scholars think that play is about. So 0:21:26.720 --> 0:21:28.720 I try to use that to kind of say that's 0:21:28.720 --> 0:21:32.159 what leverages it's a commitment and leverages fantastic. People in 0:21:32.160 --> 0:21:34.080 finance know that you get to do things you have 0:21:34.119 --> 0:21:36.200 no right to do. That's why people in financial get 0:21:36.200 --> 0:21:38.240 to create money. You get to create money. And the 0:21:38.320 --> 0:21:40.760 same thing is true, um if you think about it 0:21:40.800 --> 0:21:42.639 in a variety of other ways. So the great quote 0:21:42.640 --> 0:21:46.480 from Jefferson is that you know, your reputation is the 0:21:46.520 --> 0:21:48.760 most important lever because people will allow you to do 0:21:48.840 --> 0:21:50.960 things you have no right to do, and protecting that 0:21:51.000 --> 0:21:53.520 reputation and behaving in that way is really really critical. 0:21:53.680 --> 0:21:56.679 So you started out by saying that finance used to 0:21:56.680 --> 0:21:59.399 be thought of as a noble profession. But I can 0:21:59.440 --> 0:22:02.560 think of a lot of times during history where finance 0:22:02.680 --> 0:22:05.119 or debt was considered somewhat dirty and people wanted to 0:22:05.160 --> 0:22:07.840 have it somewhat removed from themselves. What's the golden era 0:22:07.960 --> 0:22:11.119 that you would like to see some kind of resurrection 0:22:11.200 --> 0:22:13.360 of Well, you know, that's a great question. I think 0:22:13.359 --> 0:22:16.480 there's always been problematic because debt has always been problematic, 0:22:16.640 --> 0:22:18.760 but that was born of real ignorance, right, you know, 0:22:18.800 --> 0:22:21.680