WEBVTT - The Long Bond Is in The Danger Zone, Loomis' Dan Fuss Says 0:00:04.760 --> 0:00:08.080 Welcome to the Bloomberg P and L Podcast. I'm Pim Fox. 0:00:08.119 --> 0:00:11.200 Along with my co host Lisa Abramowitz. Each day we 0:00:11.280 --> 0:00:14.480 bring you the most important, noteworthy, and useful interviews for 0:00:14.520 --> 0:00:16.560 you and your money, whether you at the grocery store 0:00:16.800 --> 0:00:19.960 or the trading floor. Find the Bloomberg P L Podcast 0:00:20.000 --> 0:00:28.920 on iTunes, SoundCloud and at Bloomberg dot com. I want 0:00:28.920 --> 0:00:31.680 to bring in Dan Fuss. I am so excited to 0:00:31.960 --> 0:00:34.000 uh to speak with him. He has vice chairman of 0:00:34.040 --> 0:00:38.400 Blooma's sales, very respected bond manager over the years who 0:00:38.440 --> 0:00:40.720 has made a lot of right calls. I am so 0:00:40.800 --> 0:00:43.479 pleased to have you here. Dan. I want to start 0:00:43.680 --> 0:00:49.199 with longer dated US government bonds because duration levels have 0:00:49.320 --> 0:00:52.520 reached the highest on record. Rates are going back down 0:00:52.560 --> 0:00:54.800 near the record loads. You're seeing people pile into the 0:00:54.840 --> 0:00:59.160 longer dated debt. You have Jeffrey Gunlock coming out and 0:00:59.240 --> 0:01:02.280 saying it's the word first possible set up versus history. 0:01:02.560 --> 0:01:06.240 Do you agree, Well, my history doesn't go all that 0:01:06.400 --> 0:01:10.880 far back. It goes I'm not meaning to imply that 0:01:10.920 --> 0:01:14.560 you can. I'm just you know, from your perspective, do 0:01:14.560 --> 0:01:16.160 you think that the long bond is poised for a 0:01:16.200 --> 0:01:21.679 big fall, a big fall. Note. What I do think, however, 0:01:22.440 --> 0:01:25.520 is I think interest rates are on an upward track. 0:01:26.120 --> 0:01:31.400 Right now. The Fed is raising short race and that 0:01:31.640 --> 0:01:36.600 gradually does feed out the yield curve. Now, if they 0:01:36.640 --> 0:01:41.000 do this for a long time, eventually, based on history, 0:01:41.640 --> 0:01:44.360 the long end of the curves sort of bends over. 0:01:44.400 --> 0:01:47.560 In other words, long yields will be lower than the 0:01:47.680 --> 0:01:51.680 ten year, etcetera. So when the yield curve bends, it 0:01:51.840 --> 0:01:54.800 normally bends at the long year long end, and the 0:01:54.920 --> 0:01:57.920 fields keep going up, then at least the way it 0:01:58.040 --> 0:02:02.040 used to be back way back, uh to peak on 0:02:02.880 --> 0:02:06.840 polls in But something else is going on, uh, And 0:02:06.920 --> 0:02:12.359 we do have money flows into the country from elsewhere, 0:02:12.760 --> 0:02:15.960 and we also have something else I don't understand. I 0:02:16.040 --> 0:02:19.200 understand part of it, the liability matching at the long 0:02:19.360 --> 0:02:21.799 end for the corporate to find benefit plans. I mean, 0:02:21.840 --> 0:02:25.680 we're that's important business for us, and so the money 0:02:25.880 --> 0:02:30.040 is coming in. UM now that's easing off a bit. 0:02:30.120 --> 0:02:33.920 But when stocks were really up there, it made sense 0:02:33.960 --> 0:02:37.200 to go say Salsa SMP five undered and go out 0:02:37.320 --> 0:02:40.760 and buy long investment grade corporates. If you can't get 0:02:40.840 --> 0:02:43.920 what you want, you buy the long treasury and then 0:02:44.280 --> 0:02:46.520 you hope to swap. Just to be clear, this is 0:02:46.639 --> 0:02:49.160 pension plans in particular. They're looking to lock in their 0:02:49.200 --> 0:02:52.680 gains so that they can provide there. Well, what they're 0:02:52.760 --> 0:02:57.400 doing this is most nearly all on the corporate side. Uh. 0:02:57.600 --> 0:03:01.560 What they're doing is their liability man matching. In other words, 0:03:01.600 --> 0:03:05.520 the here's their liability and that's that's a double digit 0:03:05.639 --> 0:03:08.200 number in terms of duration, and so let's buy some 0:03:08.320 --> 0:03:13.040 long corporates against that and then get this volatility off 0:03:13.080 --> 0:03:16.679 our income statement and off our balance sheet. Dan, I 0:03:16.680 --> 0:03:19.120 wonder if you could speak to the issue of liquidity 0:03:19.200 --> 0:03:23.239 in bond markets and what this means specifically for hedge 0:03:23.240 --> 0:03:28.600 funds that focus on fixed income. Okay, uh, let me 0:03:28.880 --> 0:03:32.320 find the short way to do this. The liquidity in 0:03:32.480 --> 0:03:37.520 the most of the fixed income market is good. It's 0:03:37.560 --> 0:03:41.839 actually a little better than it was the last time 0:03:41.880 --> 0:03:46.480 I was here, visiting all the way from treasuries on 0:03:46.600 --> 0:03:50.680 down through investment grade corputs. Once you get to high yield, however, 0:03:51.280 --> 0:03:54.800 it starts to shift a little bit, and the liquidity 0:03:54.840 --> 0:03:57.600 in high yield and the lower edge of investment grade 0:03:57.600 --> 0:04:02.040 also is there for the on the run issues as 0:04:02.080 --> 0:04:07.120 you get off the run. Then liquidity uh is a 0:04:07.320 --> 0:04:12.120 sometime thing in the high yield area and once in 0:04:12.240 --> 0:04:16.720 a while in the lower edge of investment grade, so 0:04:16.800 --> 0:04:21.080 you can't count on it above that you can normally 0:04:21.320 --> 0:04:26.520 count on. And one thing that used to worry me 0:04:26.640 --> 0:04:30.800 a lot, uh, well, the e T s. I worry 0:04:30.800 --> 0:04:34.120 far less about them now in the investment grade on up. 0:04:34.480 --> 0:04:37.400 I think they're actually a good thing for liquidity most 0:04:37.960 --> 0:04:41.680 not all, but most of the time. But but with 0:04:41.680 --> 0:04:44.120 respect to high yield perhaps, uh, it's a it's a 0:04:44.120 --> 0:04:46.960 little bit of a diceer prospect. Its start hearing from you, 0:04:46.960 --> 0:04:49.160 you know, I want to just go back you were saying, 0:04:49.360 --> 0:04:52.600 you know, you seem pretty sanguine about longer term bonds, 0:04:52.640 --> 0:04:54.520 just based on the fact that pensions that have been 0:04:54.520 --> 0:04:56.440 going into them and locking in those yields, as well 0:04:56.480 --> 0:04:59.120 as the yield curved dynamic as the FED tightens the 0:04:59.120 --> 0:05:03.080 short end. But you know, there are a lot of 0:05:03.080 --> 0:05:05.320 other areas that people are worried about. People have been 0:05:05.320 --> 0:05:07.799 piling into a emerging market step, people have been piling 0:05:07.800 --> 0:05:09.400 into high yield it. Do you think there are any 0:05:09.480 --> 0:05:12.400 dangerous spots right now that you personally are avoiding in 0:05:12.480 --> 0:05:21.840 debt markets. Yes, but uh, well the long end uh 0:05:21.920 --> 0:05:25.479 over the last couple of years. Uh, it's been pretty 0:05:25.480 --> 0:05:29.200 well publicized. We we are average maturity and the Loomis 0:05:29.200 --> 0:05:32.240 Sales bond Fund, the biggest of the funds, used to 0:05:32.320 --> 0:05:38.280 run around thirteen years. Not the average maturity, not the duration, 0:05:38.560 --> 0:05:42.839 the average maturity UM, and now it's about six. It 0:05:42.960 --> 0:05:45.760 was six and a half and then quite recently brought 0:05:45.839 --> 0:05:49.640 down to about six. Uh. That's that's a huge difference, 0:05:50.000 --> 0:05:52.640 that's uh. And that's because I think the trend of 0:05:52.720 --> 0:05:59.560 rates is up and longer term even yes, I don't 0:05:59.600 --> 0:06:04.520 expect the yield curve to invert for quite a while. 0:06:05.480 --> 0:06:08.520 Now you say, well, in that case, Dan, how come 0:06:09.800 --> 0:06:12.200 Uh you know long end prices are going up at 0:06:12.240 --> 0:06:15.159 the moment. Yes, that's true, they are. Have you contrasted 0:06:15.200 --> 0:06:20.520 with a year ago? Oh? Good point? Okay, Uh, same 0:06:20.640 --> 0:06:23.000 all the way out the curve. The curve has definitely 0:06:23.080 --> 0:06:28.200 flattened in treasuries, and spreads of everything else against treasuries 0:06:28.279 --> 0:06:32.280 have been narrowing. So you see what's going on. Well, 0:06:32.880 --> 0:06:36.919 more buyers and sellers whatever you want to call it, um, 0:06:36.920 --> 0:06:42.240 but it's not the way to bet. I think the 0:06:42.440 --> 0:06:47.599 Fed governors and regional bank presence in their speeches have 0:06:47.800 --> 0:06:52.120 made it very clear data dependent rates are going up 0:06:52.160 --> 0:06:55.159 at least two times more this year and maybe three 0:06:55.440 --> 0:06:58.239 And in twenty seconds. Do you think that the longer 0:06:58.320 --> 0:07:00.160 end is going to suffer as the Fed unwind its 0:07:00.160 --> 0:07:06.799 balance sheet? Yes, okay, that was sort of got fifteen 0:07:06.880 --> 0:07:11.080 seconds left. If you'd like to elaborate, well, I mean 0:07:11.480 --> 0:07:15.120 it will actually be felt more in the intermediate area. 0:07:15.880 --> 0:07:18.520 All right, Thanks very much. Dan Fuss is always great 0:07:18.520 --> 0:07:20.360 to have you with us. He is the vice chairman 0:07:20.400 --> 0:07:23.680 of Loomis Sales. They're based in Boston, of course, home 0:07:23.680 --> 0:07:27.080 to Bloomberg twelve, and he is one of the managers 0:07:27.160 --> 0:07:31.360 of the Loomis Sales bond Fund. They've got fourteen billion 0:07:31.560 --> 0:07:48.280 dollars in assets. We wish Matt Tucker a happy birthday, 0:07:48.320 --> 0:07:51.120 not for himself but for his fund. He is head 0:07:51.120 --> 0:07:54.960 of North American Fixed Income I share strategy at black Rock, 0:07:55.160 --> 0:07:58.520 and he helped found the suite of fixed income ETFs 0:07:58.600 --> 0:08:03.560 that have dominated headlines and dominated bond market trading for years. 0:08:03.720 --> 0:08:06.720 We want to talk specifically about the tenure anniversary of 0:08:06.880 --> 0:08:09.080 h y G. This is the biggest high old bond 0:08:09.160 --> 0:08:12.960 et F out there with almost nineteen billion dollars of assets. Matt, 0:08:12.960 --> 0:08:15.200 we are so glad that you are with us. I 0:08:15.240 --> 0:08:18.200 want to start with being the black shape of the 0:08:18.200 --> 0:08:21.680 fund management complex for so long, so many people picked 0:08:21.760 --> 0:08:24.400 on h y G as sort of harbinger of doom 0:08:24.640 --> 0:08:27.640 in bond markets, that it was going to destroy things, 0:08:27.640 --> 0:08:29.760 that people were going to withdraw money all at once. 0:08:30.360 --> 0:08:32.800 Have those dark clouds lifted? Do you feel like much 0:08:32.800 --> 0:08:37.520 more embraced by fund managers and investors alike. Now, well, 0:08:37.520 --> 0:08:39.640 thanks for having me this morning. So you know, if 0:08:39.640 --> 0:08:41.200 I think about the history of h y G and 0:08:41.280 --> 0:08:44.640 kind of how it's really matured over the years, I 0:08:44.679 --> 0:08:46.679 do think there's been a shift. I think initially people 0:08:46.720 --> 0:08:48.959 saw it as just an index fund in the high 0:08:48.960 --> 0:08:51.600 old market, and there are questions about how the fund 0:08:51.600 --> 0:08:54.400 would react in different stressed markets, what happened when investors 0:08:54.480 --> 0:08:56.480 might rush in or rush out of the fund. But 0:08:56.480 --> 0:08:59.000 I think we've seen so many different crises since the 0:08:59.040 --> 0:09:00.920 fund was launched ten years ago, and so many different 0:09:00.920 --> 0:09:02.839 stress events in the market. You've got a lot of 0:09:02.840 --> 0:09:04.320 really good data now you can look at and say, well, 0:09:04.360 --> 0:09:05.600 what did what did the fund next to do? What 0:09:05.679 --> 0:09:08.320 is HyG actually done in his markets. I think people 0:09:08.360 --> 0:09:10.360 realize that, you know, what actually performs kind of as 0:09:10.360 --> 0:09:13.600 you expect. You know, it trades like the high old market. Um. 0:09:13.679 --> 0:09:16.800 So it's used increasingly by a lot of institutions who 0:09:16.880 --> 0:09:18.880 might not have reached for it, you know, even five 0:09:18.960 --> 0:09:21.960 years ago. It's not becoming a pretty core part of 0:09:22.000 --> 0:09:25.280 a lot of institutional HIRLED portfolios just because it's another 0:09:25.280 --> 0:09:27.040 way to invest in the market, another way to get 0:09:27.040 --> 0:09:30.040 access to liquidity. Let's talk a little bit about some 0:09:30.080 --> 0:09:33.240 of the characteristics of h y G. The I shares 0:09:33.320 --> 0:09:36.520 eybox high old corporate bond e t F and I 0:09:36.520 --> 0:09:38.439 wonder if you could start with this idea that the 0:09:39.240 --> 0:09:43.679 over the counter to an exchange traded fund. Yeah, I 0:09:43.720 --> 0:09:45.880 think a lot of ways this is the core innovation 0:09:45.960 --> 0:09:48.400 behind bond ETFs in general, and it's something that I 0:09:48.440 --> 0:09:50.760 think people lose sight of when they look at just 0:09:50.880 --> 0:09:52.880 e t f s broadly and look at equity t s. 0:09:52.920 --> 0:09:54.839 You know, the equity tp was a very interesting idea. 0:09:54.920 --> 0:09:56.840 You took a bunch of securities, a bunch of stocks 0:09:57.160 --> 0:09:58.920 which trade on the exchange, and you stuff them and 0:09:58.960 --> 0:10:00.360 do this thing called an e t F, which is 0:10:00.400 --> 0:10:03.120 also on the exchange. UM. That is important a lot 0:10:03.120 --> 0:10:05.040 of benefits to it. But I think the fixed income 0:10:05.080 --> 0:10:07.760 ETF was really transformative because you took this over the 0:10:07.800 --> 0:10:10.200 counter bond market, which is very hard for a lot 0:10:10.240 --> 0:10:14.040 of investors to see, hard to invest in, challenges with information, 0:10:14.040 --> 0:10:17.360 transparent liquidity, and you put it onto the exchange. We're 0:10:17.440 --> 0:10:20.560 successible and visible to everybody. And I really think that 0:10:20.600 --> 0:10:23.240 as a transformative change. I mean, you now can see 0:10:23.679 --> 0:10:26.760 a portfolio of high old bonds trading tick by ticks 0:10:26.760 --> 0:10:29.079 throughout the day UM, which is a pretty crazy concept 0:10:29.120 --> 0:10:31.280 when you think about it relative to the rest of 0:10:31.280 --> 0:10:33.360 the high old bond market, where it's really hard to 0:10:33.400 --> 0:10:36.040 get information about transactions that are actually taking place. And 0:10:36.200 --> 0:10:39.000 h y G certainly was innovative and has been rewarded 0:10:39.040 --> 0:10:41.760 for that as UH it has become really a note 0:10:41.800 --> 0:10:44.720 of activity unto itself within the high old market and 0:10:44.720 --> 0:10:46.880 really dominated a lot of the trading. I want to 0:10:46.960 --> 0:10:48.840 want to ask you though about some of the choices 0:10:48.880 --> 0:10:51.240 that black Rock didn't make, that I Shares didn't make, 0:10:51.240 --> 0:10:54.200 in particular leveraged loans, because we have seen, uh, you know, 0:10:54.200 --> 0:10:56.760 with throughout the fixed income space, we've seen a proliferation 0:10:57.040 --> 0:10:59.400 of e t f s, and we have seen some 0:10:59.520 --> 0:11:01.720 try to get into the leverage loan space and including 0:11:01.760 --> 0:11:05.199 invest Goo with their Power Shows Power Shares Senior Loan portfolio. 0:11:05.480 --> 0:11:08.199 It's a nine point two billion dollar fund. There clearly 0:11:08.280 --> 0:11:10.200 is a lot of demand. Why has black Rock not 0:11:10.280 --> 0:11:12.920 created a fund like this? Well, you know we have, 0:11:13.000 --> 0:11:14.760 you know, but at products on the market, you you've 0:11:14.800 --> 0:11:16.760 got funds give you access to a lot of different 0:11:16.760 --> 0:11:18.960 segments to the market. We just didn't feel like it 0:11:19.000 --> 0:11:21.640 was prudent to launch a loan e t f UM. 0:11:21.679 --> 0:11:23.960 You know, black Rock has a big loan mutual fund 0:11:23.960 --> 0:11:26.599 business that we run UM and I think that the 0:11:26.640 --> 0:11:29.000 real question we asked ourselves as well. You know, if 0:11:29.040 --> 0:11:31.439 you haven't asked a class like loans that really it's 0:11:31.440 --> 0:11:34.120 not really there's already even securities, right, loans are basically 0:11:34.320 --> 0:11:37.720 you know, actual bank loans. Those things cannot be in kinded, 0:11:37.960 --> 0:11:40.120 meaning that let's see, everyone wants to leave a fund. 0:11:40.400 --> 0:11:42.480 Everyone wants to go and leave h y G tomorrow. 0:11:42.640 --> 0:11:45.080 HyG can actually in kind of all its securities out 0:11:45.360 --> 0:11:48.079 give them back to investors. There's no liquidity risk that's 0:11:48.120 --> 0:11:51.720 worn by the fund that is not presented to investors. Um, 0:11:51.800 --> 0:11:53.560 that's not the same thing in that market like loans, 0:11:53.640 --> 0:11:55.599 where you may not be able to actually liquid it 0:11:55.640 --> 0:11:57.200 all your security. So we just kind of looked at 0:11:57.200 --> 0:11:58.280 it and said, you know what, there may be some 0:11:58.400 --> 0:12:01.079 risks and some stressed markets that a lone ETF could present, 0:12:01.600 --> 0:12:03.319 and we didn't feel like that was consistent with how 0:12:03.320 --> 0:12:06.760 we think about our platform. Are you concerned about the 0:12:06.840 --> 0:12:11.360 increase in proposals for active ETFs and non transparent et 0:12:11.559 --> 0:12:15.240 fs and the potential for this innovative, very simple model 0:12:15.480 --> 0:12:19.120 of creating redeem and taking something and putting it in 0:12:19.120 --> 0:12:22.320 in something that's transparent and able to trade daily like 0:12:22.400 --> 0:12:25.880 a stock. Do you think that that this new kind 0:12:25.880 --> 0:12:29.600 of element to the market could end up changing the 0:12:29.640 --> 0:12:33.280 image of ETFs, which has so far been been fairly pristine. Well, 0:12:33.360 --> 0:12:35.800 I do think we're seeing an evolution in e t 0:12:35.960 --> 0:12:37.600 F and kind of what E t F means. Um, 0:12:37.800 --> 0:12:40.200 you know, for a long time, E t F meant 0:12:40.640 --> 0:12:43.320 index fund right in and meant index fund that had 0:12:43.360 --> 0:12:46.160 generally made a fund that had this in kind creation redemption, 0:12:46.600 --> 0:12:48.599 And to your point, pretty much every et F on 0:12:48.640 --> 0:12:51.280 the market fit that description. But we've already seen over 0:12:51.320 --> 0:12:53.520 the years, A lot of variants come in on this, 0:12:53.720 --> 0:12:56.400 you know, whether it's you know, funds that use commodities 0:12:56.400 --> 0:12:59.439 as opposed to securities, whether it's funds that employed leverage 0:12:59.440 --> 0:13:02.080 in some way, funds that are actively managed. I think 0:13:02.120 --> 0:13:03.600 what needs to happen is the market needs to get 0:13:03.600 --> 0:13:06.679 more sophisticated about subdividing the e t F as a 0:13:06.760 --> 0:13:09.440 class and thinking about different types of funds. So maybe 0:13:09.480 --> 0:13:11.439 not everything is an e t F. There are things 0:13:11.480 --> 0:13:13.719 out there that we should describe as an active et 0:13:13.920 --> 0:13:16.880 F or as some other use some other term to 0:13:16.960 --> 0:13:19.640 help really specify the type of exposure it gives an 0:13:19.679 --> 0:13:22.839 investor and the risks it presents the investor. Man, I 0:13:22.880 --> 0:13:25.199 wonder if you could speak about the use of h 0:13:25.360 --> 0:13:27.840 y G or indeed other e t s, but specifically 0:13:28.040 --> 0:13:32.359 h y G for hedging for portfolios for long managers 0:13:32.480 --> 0:13:37.000 or short managers who want a liquid instrument, whether it 0:13:37.120 --> 0:13:40.599 be the option or the actual underlying in order to 0:13:40.800 --> 0:13:44.440 hedge or in some way mitigate the risk in their portfolios. Yeah, 0:13:44.480 --> 0:13:46.839 this is I think been a really popular usage. We've 0:13:46.880 --> 0:13:49.480 seen in a growing usage of h YG in particular 0:13:49.600 --> 0:13:52.120 as a high y old hedging instrument. I think if 0:13:52.160 --> 0:13:54.040 you look at an investors, say in the equity market, 0:13:54.200 --> 0:13:56.640 they're very cupful with the idea that there are liquid 0:13:56.720 --> 0:14:00.319 futures markets that allow them to get exposure to, you know, 0:14:00.440 --> 0:14:03.360 whatever segment of the equity market they want, right doesn't 0:14:03.360 --> 0:14:05.319 exist in fixed income. Right in fixed income, if you 0:14:05.360 --> 0:14:07.840 want to think about hedging instruments, you've got treasury futures 0:14:07.880 --> 0:14:11.120 which don't really track HILED very well. You've got credit 0:14:11.160 --> 0:14:13.360 to fault swap in dissees which have their own basis 0:14:13.520 --> 0:14:17.480 or performance difference first to HILD cash market. So HG 0:14:17.600 --> 0:14:20.120 has really filled avoid and allowing people to go out 0:14:20.160 --> 0:14:22.960 and trade an instrument which actually has a return that 0:14:23.080 --> 0:14:25.840 resembles the HILED cash market, and you can buy it 0:14:25.920 --> 0:14:27.840 and go along the a t F. And we've seen 0:14:27.920 --> 0:14:30.280 that you can also borrow it and sell it short 0:14:30.520 --> 0:14:32.320 much like you would do a stock you know, borrow 0:14:32.440 --> 0:14:35.480 and short sale um. And there's even an increasing options 0:14:35.560 --> 0:14:37.280 market on h y G, so you can think aboue 0:14:37.280 --> 0:14:39.880 different options strategies to be used as hedging. So I 0:14:40.200 --> 0:14:43.000 think this has actually provided a use case that investors 0:14:43.080 --> 0:14:45.080 needed for a long time and just didn't really have 0:14:45.520 --> 0:14:47.640 a product for So how big. Do you think the 0:14:47.960 --> 0:14:51.120 high led E t F complex can grow too? I said, 0:14:51.120 --> 0:14:54.280 set of management. Lie, you know, it's really difficult to forecast. 0:14:54.360 --> 0:14:56.600 I think we're running right around forty billion right now 0:14:56.680 --> 0:15:00.680 in terms of US listed hildts, just across different flavors, 0:15:00.720 --> 0:15:03.720 different cuts to the market. Um, could that get bigger? 0:15:03.800 --> 0:15:05.920 I think it could, But you know, you know it's 0:15:05.920 --> 0:15:08.400 so can h y g B Instead of nineteen billion 0:15:08.560 --> 0:15:10.240 it is about now? Okay, it could be twenty or 0:15:10.320 --> 0:15:13.360 thirty I think definitely. Um. But I think we're actually 0:15:13.400 --> 0:15:16.000 going to see grow more rapidly is the trading volume 0:15:16.040 --> 0:15:17.560 on the e t F. And we've actually seen this 0:15:17.640 --> 0:15:20.160 through time. Is that as the fund has grown and 0:15:20.240 --> 0:15:23.120 more investors have used it as a hedging as liquidity vehicle, 0:15:23.560 --> 0:15:25.760 the fun turnover has been increasing. I think it's the 0:15:25.800 --> 0:15:28.520 turn we're going to see really grow. The assets will grow, 0:15:28.720 --> 0:15:30.920 but I think it's really the volume and adoption by 0:15:30.960 --> 0:15:33.560 investors which is going to really be the big driver 0:15:33.640 --> 0:15:36.520 going forward. Thanks very much, Matt Tucker's head of North 0:15:36.560 --> 0:15:40.120 American fixed Income. I shares a strategy team for black Rock, 0:15:40.440 --> 0:15:56.360 helping to manage more than seventeen billion dollars. Let's turn 0:15:56.360 --> 0:16:00.200 our attention now to Apple and a legal back all 0:16:00.280 --> 0:16:02.800 that Apple faces from Qualcom, and here to kind of 0:16:02.920 --> 0:16:06.840 give us the details is Shira Oviday, our technology columnist 0:16:06.840 --> 0:16:10.239 Bloomberg gad Fly, which of course is our fast commentary 0:16:10.320 --> 0:16:14.400 section of Bloomberg. You can follow Shira on Twitter at 0:16:14.600 --> 0:16:18.520 Shira Oviday. So Shara tell us about Qualcom claiming that 0:16:18.840 --> 0:16:23.360 Apple has made threats and has lied to regulators. What 0:16:23.440 --> 0:16:26.720 are they making threats and lying to regulators about? Yeah, 0:16:26.800 --> 0:16:29.040 this is pretty pretty juicy stuff. So let me just 0:16:29.160 --> 0:16:31.920 turn the clock back to January that Apple basically kicked 0:16:31.960 --> 0:16:35.720 off this litigation basically saying that Qualcom, which makes very 0:16:35.840 --> 0:16:39.880 essential technology for basically every smartphone, every phone sold in 0:16:39.920 --> 0:16:46.760 the world, Apple basically said that Qualcom is unfairly abusing 0:16:47.040 --> 0:16:53.240 it's its market power to overcharge customers, including Apple, for 0:16:53.440 --> 0:16:56.720 use of its wireless technology. Every phone that's sold or 0:16:56.800 --> 0:17:00.120 most phones that sold, Qualcom gets a cut of the 0:17:00.400 --> 0:17:03.760 sale price of that phone, regardless of whether the phone 0:17:03.880 --> 0:17:07.600 is using Qualcoms computer ships or not. And Apple basically said, 0:17:07.640 --> 0:17:11.639 you know, the way that Qualcom charges for its patented 0:17:11.680 --> 0:17:16.439 technology is unfair. And Qualcom overnight basically said that Apple 0:17:16.560 --> 0:17:21.320 this litigation from Apple is bogus and that Apple kind 0:17:21.359 --> 0:17:26.080 of misled regulators UM who are also looking into the 0:17:26.200 --> 0:17:29.680 same issue and how Qualcom charges for its computer chips 0:17:29.720 --> 0:17:32.760 and technology. So stock traders seemed to have voted on 0:17:32.920 --> 0:17:36.440 who they agree with because Qualcom shares are down more 0:17:36.480 --> 0:17:39.879 than twelve percent since this litigation was first kicked off, 0:17:40.040 --> 0:17:43.359 or as Apple is not down twelve percent. So is 0:17:43.440 --> 0:17:45.680 that is that an accurate portrayal or a trader sort 0:17:45.720 --> 0:17:49.760 of overlooking something? I think it's it's less about which 0:17:49.840 --> 0:17:52.720 company might win if this litigation can go to trial, 0:17:52.840 --> 0:17:56.360 and more about the risks for each company, So Qualcom. 0:17:56.440 --> 0:17:58.720 I mean, look if it Qualcom loses this case of 0:17:58.760 --> 0:18:00.840 the case goes to trial and qual Come loses, you 0:18:00.920 --> 0:18:04.600 can see a scenario where Qualcoms essential business model is 0:18:05.359 --> 0:18:08.399 at risk. And so that's what you've seen in the 0:18:08.480 --> 0:18:11.280 share place people to pay for intellectual problem correct, Getting 0:18:11.320 --> 0:18:14.600 people to pay for intellectual property, which is UH generates 0:18:14.640 --> 0:18:18.360 the majority of Qualcoms profit. And so that's what you've 0:18:18.359 --> 0:18:21.160 seen in the stock price reaction. Is just this risk 0:18:21.560 --> 0:18:25.119 two Qualcoms business model and UH, if Apple loses, the 0:18:25.240 --> 0:18:28.160 risk is is lower. Can I just say um. There 0:18:28.240 --> 0:18:33.320 was a story about Apple's initial litigation where uh Apple's 0:18:33.359 --> 0:18:36.200 CEO Tim Cook said that the situation was analogous to 0:18:36.320 --> 0:18:39.600 someone buying a sofa and then charging that customer a 0:18:39.680 --> 0:18:41.960 different price depending on the price of the house that 0:18:42.080 --> 0:18:45.600 it goes into. Is that a valid argument, I don't know. 0:18:45.760 --> 0:18:49.640 I mean, Apple is not the only person to pick 0:18:49.840 --> 0:18:54.680 on this particular business approach by Qualcom of charging a 0:18:54.840 --> 0:18:59.359 patent royalty based on the total cost of a phone 0:18:59.560 --> 0:19:03.520 rather than a component cost. Right, So, I'm sure there's 0:19:03.560 --> 0:19:06.040 gonna be lots of scathing analogies back and forth about 0:19:06.119 --> 0:19:10.280 sofas or whatever other living room furniture there might be. Look, 0:19:10.480 --> 0:19:13.840 this is a business dispute. Putting aside all kinds of 0:19:13.920 --> 0:19:18.199 high minded analogies, This is a business dispute. Um. Qualcom 0:19:18.320 --> 0:19:21.200 has a business model that it wants to protect. Apple's 0:19:22.040 --> 0:19:25.120 revenue and profit margins are under pressure like they never 0:19:25.240 --> 0:19:28.480 have been before, and it's trying to reduce the costs 0:19:28.560 --> 0:19:31.440 that it pays for components of iPhones that can make 0:19:31.480 --> 0:19:35.040 more money. Business dispute. I wanted to just pick up 0:19:35.080 --> 0:19:39.080 on that theme because the backdrop to this is there 0:19:39.119 --> 0:19:44.520 are companies which depend on Apple orders for the significant 0:19:44.560 --> 0:19:46.680 portion of their business. I'm thinking today about the drop 0:19:46.760 --> 0:19:49.560 and this shares a Dialogue Semiconductor in Germany down about 0:19:49.560 --> 0:19:52.720 fourteen and a half percent because there's a rumor or 0:19:52.800 --> 0:19:54.800 there's a thought that maybe Apple is going to go 0:19:54.880 --> 0:19:57.400 out and create their own ships, which they have done 0:19:57.680 --> 0:20:01.879 in the past. Does that really kind of cast a 0:20:01.920 --> 0:20:04.880 shadow over all the set of Apple decides they're gonna 0:20:04.880 --> 0:20:07.600 make their own chip, then you know, Qualcom can do 0:20:07.640 --> 0:20:10.320 whatever it wants with that Snapdragon. Yeah. I mean, look, 0:20:10.359 --> 0:20:14.199 there's a whole cottage industry of of suppliers to Apple 0:20:14.359 --> 0:20:18.119 and other smartphone makers that are highly dependent on Apple 0:20:18.200 --> 0:20:20.240 for business, right, And that's what you see when you 0:20:20.320 --> 0:20:22.840 have these relatively small companies or even a big company 0:20:22.920 --> 0:20:26.280 like fox Con, even the specter of losing business from 0:20:26.320 --> 0:20:28.720 Apple sends the share price down. The same thing happened 0:20:28.760 --> 0:20:31.880 to Qualcom um Apple and its latest model of iPhone 0:20:32.320 --> 0:20:37.399 used chips from Intel, qualcom competitor in some handful of 0:20:37.720 --> 0:20:41.399 of UM phones, and that was something when when that 0:20:41.480 --> 0:20:44.600 first got announced. That's sent down Qualcom's share price. Now 0:20:44.680 --> 0:20:48.359 Qualcom is not a tiny uh component maker like Dialogue, 0:20:48.800 --> 0:20:52.960 but look you it is. It is dependent on Apple 0:20:53.119 --> 0:20:59.040 for business. So does Qualcom have any leverage here? Does 0:20:59.080 --> 0:21:03.239 it have leverage? I I mean because basically there are 0:21:03.440 --> 0:21:05.760 other like Intel. Apple could just go to Intel to 0:21:05.840 --> 0:21:09.159 make the parts. Yeah. Or Apple could just say, look, 0:21:09.160 --> 0:21:11.399 we're gonna leave you unless we unless you allow us 0:21:11.440 --> 0:21:16.119 to pay so much less for for your parts. Qualcoms 0:21:16.720 --> 0:21:20.240 mobile technology and chips are pretty essential. I don't know 0:21:20.560 --> 0:21:24.240 to what extent um Apple would be able to completely 0:21:24.320 --> 0:21:27.760 shift away from Qualcom if it came to that. I 0:21:27.920 --> 0:21:31.040 think Qualcom does have leverage just because of the power 0:21:31.680 --> 0:21:34.960 of its technology and how essential it is in in 0:21:35.080 --> 0:21:40.400 mobile phones. Qualcom has been the target of other regulators, 0:21:40.800 --> 0:21:44.640 notably in South Korea. Tell us what happened there? Yeah, 0:21:44.640 --> 0:21:46.520 I mean, this is again, this is not an unusual 0:21:46.600 --> 0:21:49.919 fight that in South Korea, in China, in the US 0:21:50.040 --> 0:21:53.000 with the Federal Trade Commission, the regulars are looking into 0:21:53.200 --> 0:21:56.800 have been looking into similar issues that Apple is alleging, right, 0:21:56.840 --> 0:22:01.120 which is again Qualcom kind of abusing it's uh, it's 0:22:01.200 --> 0:22:05.120 market power to use its intellectual property to get customers 0:22:05.200 --> 0:22:09.240 to pay more um. And you know the question about 0:22:10.040 --> 0:22:12.439 places like South Korea and in China too, is are 0:22:12.480 --> 0:22:16.520 the regulators kind of carrying water for local UH companies. Right, 0:22:16.600 --> 0:22:18.840 So Samsung is obviously one of the largest and most 0:22:18.840 --> 0:22:21.920 powerful companies in South Korea, and so the question is, 0:22:21.960 --> 0:22:25.600 did regulators kind of go after Qualcoms business model to 0:22:26.119 --> 0:22:29.639 help Samsung? Just to give us a sense of how 0:22:29.720 --> 0:22:32.480 much money is its stake? How much money is its steake? 0:22:33.440 --> 0:22:35.879