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Speaker 2: Maybe we should talk about the voice thing. I mean,
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Speaker 2: I'm pretty sure I had the flu last week. I
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Speaker 1: Yeah, we didn't get any email saying that I sounded
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Speaker 2: taking some helium and getting you up to my level.
Speaker 1: Right, that's interest? Should I do the open.
Speaker 3: Yes, in a full.
Speaker 1: Set up, certainly not.
Speaker 3: And I didn't like that at all.
Speaker 1: No, that was terrible. Yeah out, Hello and welcome to
Speaker 1: The Money Stuff Podcast, your weekly podcast where we talk
Speaker 1: about stuff related to money. I'm Matt Levin and I
Speaker 1: write The Money Stuff Colin for Bloomberg Opinion.
Speaker 2: And I'm Katie Greifeld, a reporter for Bloomberg News and
Speaker 2: an anchor for Bloomberg Television.
Speaker 1: What are we talking about today, Katie?
Speaker 2: We're going to talk about a hostile takeover. Sure, we're
Speaker 2: going to talk about exorbitant pass through fees, and then
Speaker 2: we're going to talk about an interesting humble thought experiment.
Speaker 1: Do we ever talk about anything else?
Speaker 2: All?
Speaker 3: Right?
Speaker 2: Open Ai the Girlies are Fighting is a tweet that
Speaker 2: I saw on this situation, which I thought it was funny.
Speaker 1: I saw a tweet that was like Sam Alton versus
Speaker 1: Elon Musk is like Kendrick versus Drake if both of
Speaker 1: them were Drake.
Speaker 3: Yes, that's so funny.
Speaker 2: No one's performing at the super Bowl here, No one's
Speaker 2: wont a Grammy.
Speaker 1: Yeah, so Elon muss wants to do a hostile takeover
Speaker 1: of Open Ai, which I wrote something like, there's probably
Speaker 1: never been a ninety seven billion dollar hostile takeover of
Speaker 1: a nonprofit before, and people are like, well, at hospitals,
Speaker 1: like there are some like unsolicited bids for nonprofit hospitals, right,
Speaker 1: Like the model for this arguably is like a lot
Speaker 1: of hospitals are nonprofits. They do a lot of for
Speaker 1: profit conversions, and so there is some like kind of
Speaker 1: law and practice around how you convert from a nonprofit
Speaker 1: to a for profit. But this is still pretty weird, right, So, like, yeah,
Speaker 1: open Ai is trying to convert from a nonprofit to
Speaker 1: a for profit. To do that, they need to pay
Speaker 1: out the nonprofit for its control of the business. Their
Speaker 1: plan to do that is to give it, you know,
Speaker 1: a chunk of the shares of the new business or
Speaker 1: the newly for profit business. And Elon Musk came into
Speaker 1: great problems by saying, I'll give you ninety seven billion
Speaker 1: dollars in cash for it, which is more than you'd
Speaker 1: get from the for profit business, and so you should
Speaker 1: sell it to me to preserve fair value, which is
Speaker 1: like everyone sort of assumes it's not a serious bid.
Speaker 3: Yeah, that's a.
Speaker 1: Way to make life more difficult for open Ai.
Speaker 2: I also assume that, yeah, so two points there, one
Speaker 2: being if you only read headlines, which is how a
Speaker 2: lot of people consume news. This was probably pretty confusing
Speaker 2: because the bid ninety seven point four billion dollars. You know,
Speaker 2: I think a few weeks before that, we got some
Speaker 2: headline from the Wall Street Journal that open aies and
Speaker 2: talks to raise forty billion dollars at a three hundred
Speaker 2: and forty billion dollar valuation. The nuance being that they're
Speaker 2: bidding for the nonprofit which owns a steak.
Speaker 3: In the form, they're not even.
Speaker 1: Really bidding for the nonprofit. It's a fun thing to
Speaker 1: say that he's trying to take over the nonprofit, but
Speaker 1: actually he's bidding for the steak. Yeah, the nonprofit has
Speaker 1: like a set of rights o the for profit business,
Speaker 1: and he wants to buy that from them for ninety
Speaker 1: seven billion dollars. The alternative is they would sell that
Speaker 1: set of rights to the for profit business in exchange
Speaker 1: for some stock in the for profit business, which, like
Speaker 1: the numbers I've seen people say, like the nonprofit would
Speaker 1: get like twenty five percent of the business, which you know,
Speaker 1: at a three hundred million dollar valuation, is worth seventy
Speaker 1: five billion dollars. Ninety seven billion is more than seventy
Speaker 1: five billion. I think you could argue that at twenty
Speaker 1: five percents they can open Aiye is in the long
Speaker 1: run worth more than ninety seven billion. But you know,
Speaker 1: Musk is saying you got to get at least as much. Yeah,
Speaker 1: but right, he's not offering to take over the whole
Speaker 1: thing for ninety seven billion, which is less than the
Speaker 1: current market mark on it. Except he sort of is
Speaker 1: right because like, right now, the nonprofit controls the thing,
Speaker 1: the business, right, the nonprofit has final say over it.
Speaker 1: And so the people putting in money at a three
Speaker 1: hundred million dollar valuation, the nonprofit board doesn't technically owe
Speaker 1: them an shary duties. They're fundraising documents used to say
Speaker 1: it would be good to consider your investment in the
Speaker 1: form of a donation. Right, So it's like people are
Speaker 1: sort of making assumptions about the future path of the business,
Speaker 1: and the assumptions they're making are like, you know, sam
Speaker 1: Aldman is like a money making guy, and like they
Speaker 1: know they need to raise a lot of money, and
Speaker 1: so they will do the right thing for shareholders. And
Speaker 1: so it's worth a three hundred billion dollar valuation. But
Speaker 1: in theory of Elon Musk bought the control rights from the
Speaker 1: nonprofit What does that do to the non controlling investors
Speaker 1: who have weird cat profit interests in the company. I
Speaker 1: don't know. I think he gets like more than twenty
Speaker 1: five percent of the company for his ninety seven billion dollars. Like,
Speaker 1: I think he gets control over the company for his
Speaker 1: ninety seven billion dollars. And that control for him a
Speaker 1: guy who runs a competing AI company and runs a
Speaker 1: bunch of other companies and runs the US government, that
Speaker 1: control is pretty valuable to him in a way that
Speaker 1: it's not to the nonprofit board. So if they said
Speaker 1: yes to him, if they're like, sure, Elon, here's our stake,
Speaker 1: it would be a huge bargain for him.
Speaker 2: Yeah, well that's what I was wondering. So your position,
Speaker 2: it sounds like is that Muskus trolling?
Speaker 1: Well, he doesn't think they're going to say yes. And like,
Speaker 1: you know, the other thing I wrote is like, like
Speaker 1: ninety seven billion does a lot of money, right, Like, yeah,
Speaker 1: if they were like, sure, Elon, here you go, Like
Speaker 1: he could raise ninety seven billion dollars to do it,
Speaker 1: because it's a good deal. But it's not like he
Speaker 1: has ninety seven billion dollars committed, Right, that's true, it's
Speaker 1: a lot of money.
Speaker 3: That is a lot of money.
Speaker 2: But I mean if we go down into hypothetical lands
Speaker 2: and the board did take this seriously and they did say, yes,
Speaker 2: what does that look like?
Speaker 1: I don't know. It's a great question because it's not
Speaker 1: like they own forty percent of the company. It's not
Speaker 1: like they own ten percent, but they have like a
Speaker 1: super voting shares. Right. What they have is like there
Speaker 1: is this weird quasi for profit subsidiary of the nonprofit
Speaker 1: and it has sold stuff to investors, and that stuff
Speaker 1: is like this like waterfall of profit interests. Every investor
Speaker 1: has like a different deal. It's like not really shares,
Speaker 1: it's profit interests and they're capped. So like even knowing
Speaker 1: what percentage of the company the nonprofit owns and could
Speaker 1: transfer to Elon Musk is like it's kind of uncertain,
Speaker 1: right that you can like build a model that converts
Speaker 1: these waterflows of cash flows into like some percentage of
Speaker 1: the equity. But it's like a little debatable. And then
Speaker 1: the other thing that it has is like it has
Speaker 1: the board the nonprofit gets to make decisions for the company,
Speaker 1: and like says explicitly to investors, like, we don't make
Speaker 1: these decisions out of a fiduciary duty to investors. We
Speaker 1: make these decisions for the benefit of mankind. The nonprofit
Speaker 1: controls the company. But it's not just like share RedZone
Speaker 1: controlling paramount right. It's not like a person with super
Speaker 1: voting shares. It's like a nonprofit with a social mission
Speaker 1: controls the company. So if Elon Musk buys that, does
Speaker 1: he get to just control the company however he wants,
Speaker 1: or does he like take over the social mission. And
Speaker 1: I think in his offer letter he's like, we will
Speaker 1: continue the social mission. I don't know. Yeah, So I
Speaker 1: think it's really unclear what he would buy, right, But
Speaker 1: like there is some package of rights that the nonprofit
Speaker 1: open ai is hoping to give up to the for
Speaker 1: profit open Ai in exchange for stock, and he's just saying,
Speaker 1: whatever that package of right says, I'll buy it for cash. Yeah, Like,
Speaker 1: if you take that seriously, that package of rights is
Speaker 1: really valuable and like arguably more valuable in the hands
Speaker 1: of the world's rich is person that it is in
Speaker 1: the hands of fate nonprofit looking out for the benefit
Speaker 1: of humanity.
Speaker 2: Well, if you ask Sam Altman, which Bloomberg TV did.
Speaker 2: They got an interview with him on the sidelines of
Speaker 2: this AI summit in Paris. Sam Altman says that, I mean,
Speaker 2: he's not taking this seriously. Obviously, he had some hostile
Speaker 2: words about Elon Musk. Did you see this, Yeah, it
Speaker 2: was really personal. I mean, he said, of course he
Speaker 2: thinks Elon Musk is just trying to slow us down own.
Speaker 2: He's obviously a competitor. I wish you would just compete
Speaker 2: by building a better product, et cetera.
Speaker 1: But he also said, probably his whole life is from
Speaker 1: a position of insecurity. I feel for the guy. I
Speaker 1: don't think he's like a happy person that I do
Speaker 1: feel for him.
Speaker 2: I mean, this gets back to the girlies we're fighting,
Speaker 2: and I don't know, it's pretty personal. It's also playing
Speaker 2: out in court and filings obviously, right.
Speaker 1: Because mess is also suing Yes to make them be
Speaker 1: more nonprofit and like this is all in the context
Speaker 1: of like he owns a for profit AI from right,
Speaker 1: so one assumes he's not going to buy open AI, right,
Speaker 1: not that he doesn't want to, just that they're not
Speaker 1: going to.
Speaker 2: I feel like it even goes deeper than that though,
Speaker 2: Like this comes back to the blood feud of him
Speaker 2: and Altman founded open ai together.
Speaker 3: Blah blah blah.
Speaker 1: Right, I know I agree with you and with Sam
Speaker 1: Altman that this is all largely about petty personal vindictiveness
Speaker 1: on a ground scale. But it's also like open ai
Speaker 1: is probably the leading you know l M company.
Speaker 2: Yeah, I don't think that's controversial.
Speaker 1: Xai is has gros somewhere in the pack.
Speaker 3: Yeah.
Speaker 1: Open Ai has made it very clear that it's doing
Speaker 1: this conversion because it needs to raise like forty billion dollars, right, Yeah,
Speaker 1: it's so expensive to run company and to scale it
Speaker 1: and to raise that much money. They think they need
Speaker 1: to offer investors normal stock and not I think they
Speaker 1: use the word structural bespokeness, which is a great word, bespokeness.
Speaker 1: And so they need to be a for profit to
Speaker 1: raise the amount of money that they need to raise
Speaker 1: to continue to be competitive. And this might stop them,
Speaker 1: yeah right, And if it stops them, then like yeah,
Speaker 1: it's an opening for XII, right, And so how would
Speaker 1: this stop them? Like Elon Musk offered to drop his
Speaker 1: bid if they agreed to stay a nonprofit. So that's
Speaker 1: like one way to stop them, right if they just
Speaker 1: agree to stay a nonprofit. But even if they say
Speaker 1: no to him, you can't quite ignore him. They have
Speaker 1: to at least sort of wave in the direction of no. Actually,
Speaker 1: we're getting more value for the nonprofit from open Ai,
Speaker 1: like internally than we would from Elon Musk. And I
Speaker 1: think most people think that means essentially, the nonprofit needs
Speaker 1: to get a bigger steak in the for profit company
Speaker 1: than it was planning, right it was planning like let's
Speaker 1: say twenty five percent. It needs to get a stake
Speaker 1: that I can credibly say is worth more than one
Speaker 1: hundred million dollars, right, Yeah, And that just makes it
Speaker 1: a little bit harder to raise money, right because you're
Speaker 1: giving more of the steak to the more of the
Speaker 1: company to the nonprofit. You're cutting back the shares of
Speaker 1: like Microsoft and soft Bank and everyone else, And so
Speaker 1: it just makes it harder for them to raise money
Speaker 1: and creates uncertainty and you know, puts them in a
Speaker 1: little bit worse competitive position to raise a lot of
Speaker 1: money and kind of stay out of XII.
Speaker 2: Yeah, which is interesting in the context of Stargate or whatever,
Speaker 2: that this very ugly public fuse paying out and makes
Speaker 2: things a little bit more challenging for open AI.
Speaker 1: But we'll see, right, I mean, one thing I've written
Speaker 1: is like, just from the outside, it seems to be
Speaker 1: pretty easy for Open Ahead orra is money. They've got,
Speaker 1: you know, yeah, like the sexiest product in the sexiest
Speaker 1: industry in the world. They've got Sam Alban, who is
Speaker 1: an incredible salesman. They've got a lot of advantages. And
Speaker 1: you know, there's a lot of this money from soft Bank,
Speaker 1: who is not like notorious for driving a hard bargain. Right,
Speaker 1: it's weird to be like this bid from Elon Musk
Speaker 1: is going to prevent them from raising the money they
Speaker 1: need to scale. Like I don't know, man, Like it's
Speaker 1: open an eye. They'll be fine, but I.
Speaker 2: Don't Yeah, all right, they'll be fine. Let's just put
Speaker 2: a pin in it for now.
Speaker 3: Let's talk about.
Speaker 2: Pass through fees at multi strategy hedge funds do that.
Speaker 2: This is a great Bloomberg big take that went out
Speaker 2: this week. Reading it, it really feels like rage bait.
Speaker 1: Well it is, right, I mean, like it quits a
Speaker 1: guy saying pastors are wild. You're paying for everything, including
Speaker 1: the copy.
Speaker 3: Of paper beautiful.
Speaker 1: And it's true that traditionally the way you think of
Speaker 1: hedge funds is like investors put in money, the hedgehun
Speaker 1: invests the money for them. The hedge fund charges them
Speaker 1: two percent of the money and twenty percent of the profits. Right, Like,
Speaker 1: those are the stereotypical numbers and the stuff that the
Speaker 1: hedge fund keeps. The two and twenty pays for its managers' salaries,
Speaker 1: their bonuses, right, their photocopier paper, their lunches, you know,
Speaker 1: and whatever. Like, the expenses are covered by the fees, right,
Speaker 1: And the multi strategy model, the modern big multi strategy
Speaker 1: model is just not that at all. Right, The modern
Speaker 1: multi strategy model is, you give us money, we use
Speaker 1: the money to do investing. We also use the money
Speaker 1: to pay all of the expenses, and what's left over
Speaker 1: you get some of what we get some of it, right,
Speaker 1: Which is like, as I wrote this week, it's exactly
Speaker 1: the same model as a company generally, or like an
Speaker 1: investment bank in particular. Right, like an investment bank, the
Speaker 1: shareholders pay for the photocopier paper. Right, All of the
Speaker 1: expenses of the investment bank are taken out before net income,
Speaker 1: and then the sharelders get some of the net income
Speaker 1: and like the rest of it goes to the bonuses, or
Speaker 1: rather the sharelders get the net income after the expenses
Speaker 1: and the bonuses to the employees. And that's how like
Speaker 1: companies work. It's how investment banks work. I'm modern like
Speaker 1: corporate investment banks work. And the multi strategy model is that, right,
Speaker 1: It's like the investors are capital providers. We pay for
Speaker 1: all of our expenses out of the investors' money. Yeah,
Speaker 1: and the investor you get someone what's left over, right, Yeah,
Speaker 1: And that is a model that these firms can sell
Speaker 1: to investors. But if you're just like outside of it,
Speaker 1: you're like what they're paying for photocopiers, Like it's very annoying.
Speaker 2: Like I am not in LP to a multi strategy
Speaker 2: hedge fund, but I mean, reading this story, I hear
Speaker 2: the parallels that you're making with an investment bank. But
Speaker 2: I have to imagine that maybe I'm wrong. I probably
Speaker 2: am that if I'm in LP a potential LP to
Speaker 2: a multi strategy hedge fund, I'm thinking about I am
Speaker 2: giving my money to a hedge fund for returns. I'm
Speaker 2: not investing in an investment bank model. I'm just coming
Speaker 2: at this. It's you know, what is my money going
Speaker 2: to return?
Speaker 1: Yeah, and like their pitch to you is we return
Speaker 1: more than our cost of capital through the cycle. Their
Speaker 1: pitch to you is like we can give you a
Speaker 1: pretty stable high teens return on your money. And that's
Speaker 1: what you're getting. And you're not getting like eighty percent
Speaker 1: of the money we make. That's an irrelevant metric. What
Speaker 1: you're getting is like a sort of expected high teens
Speaker 1: return and like we'll pay for the photocopiers out of
Speaker 1: your money.
Speaker 3: It's actually low teens.
Speaker 1: Yeah, there's this, there's a lot of like a lot
Speaker 1: of you know, I'm used to the investment banking world
Speaker 1: where there's like a thing called the target return on
Speaker 1: equity and you're not supposed to get to the target
Speaker 1: return on it's just like a number that's in the
Speaker 1: present pitch.
Speaker 3: Yeah, I don't know.
Speaker 2: This goes back to a broader question that we talk
Speaker 2: about this all the time on the television show that
Speaker 2: I have open interest, but why would you ever give
Speaker 2: money to a hedge fund?
Speaker 3: I understand the pitch diversification.
Speaker 2: You're supposed to get starty returns of about twelve percent
Speaker 2: with few downswings, but I mean at the S and
Speaker 2: P five hundred, you can pay three basis points for
Speaker 2: the S and P five hundred. Over the last decade,
Speaker 2: you've got an annualized return of thirteen percent with three
Speaker 2: down years. And I mean thinking about these multi strategy
Speaker 2: hedgehoe fees that make two and twenty look cheap, it
Speaker 2: just reinforces that notion.
Speaker 1: You get pretty high returns with lower volatility and with
Speaker 1: no correlation to the broad market.
Speaker 3: Yeah, the return You're a.
Speaker 1: Giant endowment, right, and like you have a lot of
Speaker 1: money in the S and P and you want some
Speaker 1: uncorrelatedponse that you know it doesn't pay like treasure rights
Speaker 1: pays like two or three times treasures. It's a pitch
Speaker 1: that works to a lot of like sophisticated endowments, and
Speaker 1: like this is the like the multi strategy pitch is
Speaker 1: the one that works, which is like, we give you
Speaker 1: very low volatility, pretty high returns, no correlation to the
Speaker 1: S and P. It's diversifying your investments. It's allowing you
Speaker 1: to put more money into the SMP essentially because you
Speaker 1: have like this, yeah, this diversified.
Speaker 2: It's a pitch that I know it works, but I
Speaker 2: don't really understand why it works. And I go back
Speaker 2: to ETF so I'm sorry, where you have this race
Speaker 2: to the bottom and fees, this race to the bottom
Speaker 2: doesn't seem to exist in the hedge fund world. And
Speaker 2: there is a recent example, I think it's the University
Speaker 2: of Connecticut Endowment that just said, actually, we're doing away
Speaker 2: with hedge funds. We're gonna put all of our money
Speaker 2: in buffer ETFs, which guarantee safety.
Speaker 3: Yeah, exactly how much capacity is there in buffer IDFs?
Speaker 1: I get? How much capacity is there in hedgehunds. No.
Speaker 1: I mean, like if you put all of your money
Speaker 1: into equities and there's like a big draw down in equities,
Speaker 1: you have like a really bad year and you can't
Speaker 1: spend on your programs. You know, if you're an endowment
Speaker 1: and if you put some of your money into like
Speaker 1: it's like a diversification, it's like steady returns. It's like
Speaker 1: you don't start from it thinking about the fees, right,
Speaker 1: You start from it thinking about like do they provide
Speaker 1: steady returns after fees? And if the answer is yes,
Speaker 1: then like the fees are none of your business. It's
Speaker 1: like investing in Goldman. Right, it's like, you know, if
Speaker 1: the equity returns a lot, then like it doesn't matter
Speaker 1: that people are getting bonuses, right, Yeah, And like much
Speaker 1: as with a public company, the job is to earn
Speaker 1: the cost of capital over some medium period of time.
Speaker 1: And so like the Big Take article starts with bally
Speaker 1: Asthny charging a lot of money in like a relatively
Speaker 1: down year, right, And bally Asni's like, well, you know,
Speaker 1: it's an anomalist down year, and usually we return our
Speaker 1: cost of capital, but like we have this one down year,
Speaker 1: and you like point to it and it's like, yes,
Speaker 1: in a down year, it is embarrassing to pay tens
Speaker 1: of millions of dollars to your traders because like they
Speaker 1: didn't make money for the investors. But it's like that's
Speaker 1: not the right way to look at it. The right
Speaker 1: way to look at it. It's like you're investing in a
Speaker 1: business over the long term, and the business they to
Speaker 1: pay money for traders.
Speaker 3: Yeah.
Speaker 2: I guess I just don't find it compelling. But you
Speaker 2: know what, I'm not in charge of an endowment. I'm
Speaker 2: sure if I was, perhaps I would have a different perspective.
Speaker 1: The great like sort of you know, hedge fund pitch
Speaker 1: of like twenty years ago is like I will take
Speaker 1: your money. M hmm, I will make one hundred percent trains,
Speaker 1: I'll take thirty percent of the right, Like there's like
Speaker 1: this the sort of swing for the fence's hedgehund model,
Speaker 1: where like yeah, you could like make big back.
Speaker 3: And which I do find compelling.
Speaker 1: Yeah, right, I think I think is like much more
Speaker 1: intuitively compelling, right, yeah. And the multi strat model is
Speaker 1: like you're not like, oh, I put all my money
Speaker 1: onto like Fanny May, Right. They put all my money
Speaker 1: into like a series of like short term bets on
Speaker 1: that are like essentially like liquidity provision and arbitrage trades,
Speaker 1: and I can't really tell you about any of them,
Speaker 1: and they're not that exciting, and they're on for one
Speaker 1: day and they're all uncorrelated and hedged to you know,
Speaker 1: a variety of factors, and so it's just like, I mean,
Speaker 1: the thing I think about is like they like high
Speaker 1: frequency trading model, where like your job is to make
Speaker 1: money every day, and it's a little bit like the
Speaker 1: job of these firms. It is not literally to make
Speaker 1: money every day, but it's to like be very neutral
Speaker 1: to market factors and to just sort of make steady
Speaker 1: returns doing fairly safe but highly levered trades, and like
Speaker 1: that's the thing they're pitching. And I think that resonates
Speaker 1: with a lot of like yeah people in that it
Speaker 1: seems real and sustainable in a way that like I'm
Speaker 1: going to put all the money on Fanny May is
Speaker 1: not if you're just like taking big swings, like you're
Speaker 1: gonna miss and then like you know, you'll lose money,
Speaker 1: Whereas like these guys are like, we're incredibly conscious of
Speaker 1: risk and we try to be very neutral to a
Speaker 1: lot of factors, so that we're just giving you pure alpha,
Speaker 1: which is in some sense like alpha here beans something
Speaker 1: like getting paid for providing a service, right, And it's
Speaker 1: like we're doing something for the market and we're getting
Speaker 1: paid for it. Yeah, And that's more reliable than like
Speaker 1: a model of like we're going to make bets on
Speaker 1: stocks and hope those bets work out whether or not
Speaker 1: an individual pot is quants. Like it's a very quantity
Speaker 1: like sort of model of thinking about the world, which
Speaker 1: is like making individual bets on stocks has like a
Speaker 1: pretty high probability of going wrong, and so you're making
Speaker 1: a lot of diversified bets with like a little bit
Speaker 1: of edge on each one, right, and like you tell
Speaker 1: that model to an institutional allocator of like, yes, this
Speaker 1: makes sense. This like feels plausible and sustainable. Whereas when
Speaker 1: you come in and you're like, I'm just really good
Speaker 1: at picking stocks, it seems bad.
Speaker 3: Yeah, I don't know. I mean I hear what you're saying.
Speaker 2: I still am surprised that there isn't feed pressure here.
Speaker 2: It just feels like in every part of the asset
Speaker 2: management industry there is fee pressure, and that feed pressure
Speaker 2: doesn't apply to these multi strate hedge funds.
Speaker 1: Well, I think there's a reason that's not as pastors,
Speaker 1: right because if you're like, we're gonna charge seven and seventy,
Speaker 1: be like, yeah, it would be bad, right. But if
Speaker 1: you're like, look, the going rate for a portfolio manager
Speaker 1: is fifty million dollars, what do you want us to
Speaker 1: not hire a portfolio manager? Like, you know, like the
Speaker 1: pass of the fifty million dollars.
Speaker 3: Got him in the wrong business. Seriously, letter writer Jesus Christ.
Speaker 2: So, in clicking around in preparation for this conversation, did
Speaker 2: you see Ken Griffin? I know you did like a
Speaker 2: month or two ago, saying that he thinks the boom
Speaker 2: in multi strategy hedge funds is over.
Speaker 1: I do think that if you run a multi strategy
Speaker 1: hedge fund, the pricing pressure that you feel is probably
Speaker 1: bore about hiring portfolio managers, that it is about your healties. Yeah,
Speaker 1: And so for him to be like, oh r, it's over, yeah,
Speaker 1: is a way to drive down the prices of portolio
Speaker 1: managers more than it is to like signal to healthy
Speaker 1: so he doesn't need their money, or like he's like, yeah,
Speaker 1: the boom is not really over for him. The other
Speaker 1: signal you're sending is the boom is over for potential competitors,
Speaker 1: right yeah, which might be true, right, But I don't
Speaker 1: think that, like Ken Griffin is worried about being poor
Speaker 1: in a year.
Speaker 3: No, I don't think so. Though. Apparently, according to Goldman.
Speaker 2: Assets managed by multi strats did drop slightly in twenty
Speaker 2: twenty four, which was the first to client since twenty sixteen.
Speaker 2: So I don't know, we'll see. Let's talk about this
Speaker 2: humble thought experiment that was put on by Double Line.
Speaker 2: I wrote about it. It's pretty interesting. It's a paper
Speaker 2: that was released this month. They basically sized up Microsoft
Speaker 2: as an issuer versus the US government as an issuer
Speaker 2: of debt. They didn't reach a conclusion. They wanted to
Speaker 2: leave it up to the reader, but it seemed like
Speaker 2: they were leaning towards Microsoft.
Speaker 1: It's a strange thought experiment, yeah, because they basically like,
Speaker 1: look at Microsoft's capacity to service that's debt based on
Speaker 1: its cash flows, and they compare it to the US
Speaker 1: government's capacity to service it's that based on its stock
Speaker 1: of debt and cash flows. Yeah, and it's like, Wow,
Speaker 1: the US government takes in less than it spends and
Speaker 1: Microsoft takes in more than it spends, and yeah, Microsoft
Speaker 1: is a better credit. Okay. Like I have a lot
Speaker 1: of sympathy for their conclusion. Right, they are doing this analysis,
Speaker 1: I would think things like Microsoft is run by professionals
Speaker 1: who one believe that they should repay their debt and
Speaker 1: to want continued access to capital markets, and also has
Speaker 1: a lot of cash flow, right, and so when their
Speaker 1: debt comes due, they will pay it.
Speaker 3: They certainly well.
Speaker 1: Barring some sort of tele risk catastrophe. The US government
Speaker 1: is not, for instances, run by a president who is
Speaker 1: who has boasted about his use of bankruptcy I heard
Speaker 1: about this the other day. This is wild, Like people
Speaker 1: can get him to say anything. And he was talking
Speaker 1: about like Elon Musk going through the payment system and irregularities, right,
Speaker 1: like the treasury. No one says what the irregularities are,
Speaker 1: but oh, this fraud. Right, And so Donald Trump said,
Speaker 1: there could be a problem.
Speaker 2: You've been reading about that with treasuries, and that could
Speaker 2: be an interesting problem because it could be that a lot.
Speaker 1: Of those things don't count.
Speaker 2: In other words, that some of that stuff that we're.
Speaker 1: Finding is very fraudulent. Therefore, maybe we have less debt
Speaker 1: than we thought of. Think of that, therefore, maybe we
Speaker 1: have less debt than we thought of.
Speaker 3: That was amazing that landed like during the super Bowl.
Speaker 1: So like some treasuries may not count. Who knows which
Speaker 1: treasuries don't count? Who knows why? Like there might be
Speaker 1: from fraud. Right, maybe your treasuries were fraud. Yeah. I
Speaker 1: don't place a high probability on that happening. But like
Speaker 1: you know, the guys go around, some treasures don't count.
Speaker 1: Microsoft doesn't say that.
Speaker 2: No, no, Microsoft would not say that. And what was
Speaker 2: interesting about Trump saying that over the weekends was, first
Speaker 2: of all, it took a little bit. There was a
Speaker 2: lag between when he said that and when someone from
Speaker 2: the administration clarified that he wasn't talking about treasury bonds
Speaker 2: or whatever it was. But there wasn't there wasn't a
Speaker 2: reaction in the treasury market, which I don't know, maybe
Speaker 2: points to maybe Trump losing some of his juice here
Speaker 2: that he could suggest that maybe we wouldn't count some
Speaker 2: of the treasuries in the market just totally looked past it.
Speaker 1: I'm not saying that the US government is no longer
Speaker 1: interested in paints. I just say, like you look at
Speaker 1: the measurement of Microsoft, you think the management.
Speaker 2: So it sounds like you would end up even though
Speaker 2: maybe you're looking at different factors in your own analysis.
Speaker 3: Very different factors, but you end up in kind of
Speaker 3: the same.
Speaker 1: Oh yeah, yeah, I mean not investment it was. I mean,
Speaker 1: I appreciate the thought expert.
Speaker 3: I should note that double line.
Speaker 2: This truly is a thought experiment because they don't own
Speaker 2: Microsoft debt. The reason being that there's just better value
Speaker 2: to be found elsewhere. Obviously because Microsoft trades.
Speaker 1: Treasure that they have.
Speaker 3: It's a good question too.
Speaker 2: I don't know, but Microsoft, I mean, you look at
Speaker 2: their thirty year debt, and it trades very similarly to
Speaker 2: treasures like forty.
Speaker 1: One basic points of a treasures, which is like a
Speaker 1: meaningful premium if you think it's safer, No, it's I mean,
Speaker 1: it's them compared to highal bonds, but it's a lot
Speaker 1: compared to Yeah, you think it should be negative, right,
Speaker 1: if you think it should, it's a good trid.
Speaker 2: I mean, they do point out that if you do,
Speaker 2: you know, end up on the side of Microsoft debt
Speaker 2: is safer, then there's some income opportunity there, but they're
Speaker 2: personally not exploiting that their analysis though. Just to put
Speaker 2: some numbers behind what we've been talking about. So Microsoft
Speaker 2: can pay its annual interest expenses more than fifty times over,
Speaker 2: it is expected to generate nearly forty eight billion dollars
Speaker 2: of free cash flow in fiscal twenty twenty five. It
Speaker 2: also has a higher rate from the credit agencies than
Speaker 2: the US government, which is pretty funny. Whereas you compare
Speaker 2: that to the US government, our country's receipts to interest
Speaker 2: expense has declined to five point two times as is
Speaker 2: twenty twenty three. Also, we've run a deficit since two
Speaker 2: thousand and two. So those are some of the factors
Speaker 2: that went into what double Line is looking at.
Speaker 1: I mean, first of all, the traditional analysis is the
Speaker 1: US government can always pay back.
Speaker 2: It's that because the full faith and credit, because it.
Speaker 1: Can print money. Yeah, so in the worst case, the
Speaker 1: US government prints money and inflates away the debt, and
Speaker 1: that's just as bad for Microsoft's that as it is
Speaker 1: for US government as reading. Like you know, there's like
Speaker 1: a traditional theory of the sovereign ceiling where like people
Speaker 1: use that more for like emerging market spuds, where it's
Speaker 1: like the idea is that you can't have a better
Speaker 1: credit rating or a lower yield for a corporate in
Speaker 1: an emerging market then for the sovereign because like it's
Speaker 1: not clear why, but it's like, you know, there's some
Speaker 1: theory that like you know, first of all, like the
Speaker 1: economic conditions that affect the sovereign would affect the corporate
Speaker 1: as well. And secondly, like a catastrophe for the sovereign,
Speaker 1: is the sovereign going to like seize the assets of
Speaker 1: the corporate? You know, Like, so it have the sovereign ceiling,
Speaker 1: but it's like a sort of soft ceiling, and there's
Speaker 1: like history of ratings agencies occasionally rating corporates in Argentina
Speaker 1: higher than this. Yeah, Microsoft can't print dollers, but I'm
Speaker 1: pretty close. And I think that like, if I were
Speaker 1: trying to like think about like my credit risk as
Speaker 1: a credit of the US government, I would worry a
Speaker 1: lot more about like government shutdowns, that ceiling bridges, elon musk,
Speaker 1: deleting the database, you know, like all that stuff. Then
Speaker 1: I would about like cash flow, yeah, because like cash
Speaker 1: flow can be solved by printing currency, right, but like
Speaker 1: all that other stuff, like you you might get like
Speaker 1: you know, delay on your payments, right. Yeah, So I
Speaker 1: think that stuff is like idiosying credit to the current
Speaker 1: US government and wouldn't apply to like the highest rated
Speaker 1: corporates in the US.
Speaker 3: Yeah.
Speaker 2: And I mean we're talking about forty nine basis points
Speaker 2: in terms of the spread in.
Speaker 1: Keep saying that small, That seems big. That seems like so.
Speaker 2: You're saying, I don't, I don't know, maybe you should
Speaker 2: go buy some This isn't investment advice, as Matt said,
Speaker 2: but I mean, in em it's not unheard of to
Speaker 2: see corporates trade through the sovereign, which is cool. Also,
Speaker 2: I got some interesting feedback on this one. A terminal
Speaker 2: client wrote in, and I liked this email a lot.
Speaker 2: Not talking about em but this person said I'd certainly
Speaker 2: rather own Loreal bonds than French bonds, which I found amusing.
Speaker 2: So there's other examples you could use.
Speaker 1: But yeah, there's like, you know, like the big companies
Speaker 1: are sort of multinational and like arguably have less exposure
Speaker 1: to some of the conditions in their countries than the
Speaker 1: sovereign does.
Speaker 2: Yeah, so I asked Bloomberg Intelligence about this, and I
Speaker 2: thought this was a fun stat as well. Microsoft has
Speaker 2: a zero point zero six percent five year cumulative default risk,
Speaker 2: which is pretty stinking close to the US government's risks
Speaker 2: free alternative. So microsofts, I don't know, I don't know
Speaker 2: what that number. I think that they just have a
Speaker 2: really low chance of defaulting.
Speaker 1: Sorry, zero point zero six.
Speaker 3: Percent, Yeah, cumulative. What do you think is the chance
Speaker 3: of Microsoft the US.
Speaker 1: Government missing a payment on it's debt in the next
Speaker 1: four years?
Speaker 3: Maybe zero?
Speaker 1: Is it bigger than zero point zero six percent?
Speaker 2: I was going to answer zero point zero six percent, Okay, yeah, what's.
Speaker 3: Your what I mean?
Speaker 1: Zero point zero eight percent?
Speaker 3: Okay, there you go. Then you could have written this paper.
Speaker 1: Exactly programming note. We're taking next week off.
Speaker 3: I'll see you in two weeks.
Speaker 1: And that was the Money Stuff Podcast.
Speaker 3: I'm Matt Livia and I'm Katie Greifeld.
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