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Speaker 2: So here's the story of the day. First of all, John,
Speaker 2: I know you're the AI expert here at the Sloomberg Radio.
Speaker 2: But some nice news out of here. Some dude we
Speaker 2: got at Bloomberg News. He's out in California's somewhere, Mark Armern.
Speaker 2: He's pretty good on this Apple thing, which is a
Speaker 2: pretty good career move for him. And he just creates
Speaker 2: a story. You put Apple in a story with Google.
Speaker 2: This is an alphabet free zone. Apple and Google in
Speaker 2: a story that's gonna be big news. That's a lot
Speaker 2: of market characture, that's a lot of market app. Then
Speaker 2: you throw in AI. Then you got something. Then you
Speaker 2: get something that's called a green bee, which I think
Speaker 2: is good for if you're one of those reporter geeks. Right, absolutely, okay,
Speaker 2: very good, Tom Jow Speaking of reporter geeks, he joins
Speaker 2: us here. He heads up all of our technology news
Speaker 2: coverage at Bloomberg News. Huge, huge job. He's got a
Speaker 2: great team of reporters working for him.
Speaker 3: I time my visit well exactly, I time my visit
Speaker 3: around Mark German scoop Mark.
Speaker 2: German scoops Tom. What do you make of this reporting
Speaker 2: coming out of mister German here about Apple, about Alphabet
Speaker 2: and about AI. What do you think is happening here?
Speaker 3: This is Apple recognizing that it needs to weave artificial
Speaker 3: intelligence more deeply, more intelligently into its products, into the iPhone.
Speaker 3: It already has this really long standing, deep, very lucrative
Speaker 3: relationship with Google in terms of putting Google's search, making
Speaker 3: it very paramount on the iPhone. This is let's take
Speaker 3: it to the next step. Let's take this relationship further
Speaker 3: and let's weave your generative AI tools into what we
Speaker 3: have on the iPhone and make it better and make
Speaker 3: it smarter. Let's leverage this relationship. Also, it's important to
Speaker 3: note that Apple is seen as a laggard when it
Speaker 3: comes to artificial intelligence. Everyone's got something big. Every big
Speaker 3: tech company has a big AI story. Apple is seen
Speaker 3: as a laggard in that.
Speaker 4: And this is an admission in some way that AI
Speaker 4: Apple can't do it by themselves.
Speaker 3: That's right, You don't get why.
Speaker 4: Would the stock be higher.
Speaker 3: You don't get to build this from scratch. I think
Speaker 3: there's a few things that work here. One is regulators
Speaker 3: are already looking at the relationship between Apple and Google.
Speaker 3: They don't like aspects of it. DJ is looking.
Speaker 2: Hard at that.
Speaker 3: The FDC is already looking at the relationship between Microsoft
Speaker 3: and open AI. The concern is there's innovation happening in
Speaker 3: artificial intelligence, and if you have combinations between the biggest
Speaker 3: players in tech, the most powerful players in tech, is
Speaker 3: that going to thwart innovation? And is it going to
Speaker 3: thwart competition?
Speaker 2: So how do we think the regulators might look at
Speaker 2: something like this.
Speaker 3: I think they need to figure out whether the talks
Speaker 3: are going to come to fruition first and foremost. We're
Speaker 3: definitely sending out feelers throughout the Bloomberg organization to figure
Speaker 3: out to figure out what the next step is and
Speaker 3: to assess what the argument would be for and against.
Speaker 3: If you're a regulator, but if you're ready to think
Speaker 3: about it, if you're at the DJ, if you're at
Speaker 3: the FTC, do you want to see more concentration, more
Speaker 3: collaboration between the two most powerful companies in the world,
Speaker 3: or do you want to say to them, Apple, go
Speaker 3: and build your own.
Speaker 4: How long does this relationship last? If Apple finds a
Speaker 4: better partner, could they drop Google like a hot rock.
Speaker 3: We know, as we reported, Apple held talks with Open Ai.
Speaker 3: We also know that the talks that are existing now
Speaker 3: are the ones between Apple and Google. Could you kind
Speaker 3: of rekindle something? Could you start something up with somebody else?
Speaker 3: I think the sky's the limit here. Apple needs something big.
Speaker 3: They need something new. They need the app. The iPhone
Speaker 3: has been around, as we all know, since two thousand
Speaker 3: and seven. They need a big new thing. They need
Speaker 3: that next big thing. Remember they were working on a car.
Speaker 3: As Bloomberg told you a couple of months ago. That
Speaker 3: project is actually it's just been a few weeks. That
Speaker 3: project is now being put being being being killed. They're
Speaker 3: going to redeploy some of those people into AI initiatives.
Speaker 3: But they need that next big thing, and weaving AI
Speaker 3: into your iPhone could be one of them.
Speaker 2: So Apple also has a developer conference. I believe in June.
Speaker 2: Tom and a lot of folks think that maybe that's
Speaker 2: the time Tim Coast can get up on stage and
Speaker 2: say here's our AI play. Is that is this part
Speaker 2: of it? Is this It seems like, as John was suggesting,
Speaker 2: this is kind of admission, we don't have that big
Speaker 2: a wow moment for you. How are you thinking about that?
Speaker 3: It takes a lot of time, It takes a lot
Speaker 3: of people. It takes a lot of resources to build
Speaker 3: these large language models upon which generative AI tools are based. Right,
Speaker 3: open ai was not created yesterday. You know, they've made
Speaker 3: a big splash in the last year, but that was
Speaker 3: years in the making. Microsoft's relationship with open ai works
Speaker 3: to their advantage. Google has been working on its own
Speaker 3: generative AI technology for many, many years. That was not
Speaker 3: top priority for Apple for all this time. They've been
Speaker 3: working on the phone, They've been working on the watch,
Speaker 3: they've been working on the car, They've been working all
Speaker 3: these things that we use and are very lucrative for
Speaker 3: them and are making them one of the biggest and
Speaker 3: most valuable companies.
Speaker 5: In the world.
Speaker 3: But this was not the biggest area of concentration for them,
Speaker 3: at least not as much as other companies. It takes time.
Speaker 3: My sense is you can you can, even if you
Speaker 3: haven't nailed down all of your details on a relationship
Speaker 3: what like this, you can still use your developer conference
Speaker 3: to drop hints, to say, here's what's coming down the pike.
Speaker 3: Here's a taste of it, even if it's not completely
Speaker 3: They like to have stuff that's pretty baked before they
Speaker 3: start talking about it publicly. So I don't think they're
Speaker 3: gonna jump the gun here, but it would be nice
Speaker 3: to have this in your back pocket to at least
Speaker 3: drop some hints.
Speaker 4: Okay, so what does it do to my iPhone? And
Speaker 4: do I now have to go out and buy a
Speaker 4: new model iPhone? What does it do for sales? And
Speaker 4: you know, what's the practical impact for an iPhone user?
Speaker 3: Look, we're already using our phones for virtually everything throughout
Speaker 3: the day. These are like, it's the one thing that
Speaker 3: you would take if you're running out of the house
Speaker 3: with the fire right you know, it would be things
Speaker 3: like creating images, writing essays, the things that we are
Speaker 3: already using tools like open AI for. Could you more
Speaker 3: easily incorporate those into your iPhone so that you don't
Speaker 3: have to fire up the laptop, so that you don't
Speaker 3: have to delve into a different app. Could you weave
Speaker 3: this into the tools that you already have right on
Speaker 3: your phone It's.
Speaker 4: Not like five G like everybody told me I had
Speaker 4: to upgrade my phone to go to five G. I
Speaker 4: don't even notice it. It's like, I don't know what
Speaker 4: this is different.
Speaker 2: All right, Tom Giles, thanks so much for joining us.
Speaker 2: Tom's based in San Francisco. We got him in your
Speaker 2: four weeks. We pulled him into the studio here, Tom Giles,
Speaker 2: Bloomberg News, Senior executive editor for Global Technology. There we go.
Speaker 2: He's got a whole bunch of great technology reporters on
Speaker 2: his team, and they're doing some good stuff.
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Speaker 2: Let's talk fixed income, shall we Let's go from skiing
Speaker 2: to the bond market. Ur J Gallow he could do that.
Speaker 2: Senior portfolio manager for fixed and fixing. It's Federated Hermes
Speaker 2: joining us via zoom here. Hey, you know RJ. Since
Speaker 2: the last time we spoke to you, yields are moving higher.
Speaker 2: Here I guess the market's kind of losing its enthusiasm
Speaker 2: for I guess aggressive rate cutting. What do you make
Speaker 2: of this market?
Speaker 6: Well, it's good to see you again on YouTube. I
Speaker 6: would say that the market ended twenty twenty three, which
Speaker 6: seems quite a while ago, but it wasn't that long
Speaker 6: ago when the markets were priced for almost seven eases
Speaker 6: in the calendar twenty twenty four, and the markets had
Speaker 6: just gotten way ahead of themselves. There was excessive confidence
Speaker 6: at the time that the dubvish tone of the December
Speaker 6: FMC meeting opened the door for the following argument. Inflation
Speaker 6: will continue to fall. Therefore, the Fed must ease nominal
Speaker 6: rate targets so that real rates, real policy rates don't
Speaker 6: inadvertently or undesirably rise. For that to work, you needed
Speaker 6: inflation to continue to fall, and that just hasn't happened.
Speaker 6: The inflation data has been sticky or buoyant at well
Speaker 6: above target levels. The economic data, both jobs and growth
Speaker 6: data have been pretty good. Not as good maybe as
Speaker 6: some prior quarters that were stronger, but still nowhere near
Speaker 6: probably a sufficient slowdown to get the Fed to be
Speaker 6: concerned that we're heading towards harder landing.
Speaker 7: Or something.
Speaker 6: So since the data didn't cooperate with the argument that
Speaker 6: the FED had to ease to prevent real rates from rising,
Speaker 6: the Fed didn't have to ease, and that came out
Speaker 6: of the markets.
Speaker 7: Now we've got a.
Speaker 6: Little less than three eases priced in cumulatively up until
Speaker 6: the December twenty twenty four meeting, very consistent with the
Speaker 6: Fed's dots, just in time for the dots to maybe change.
Speaker 4: Okay, what you got to explain to the dummies out there,
Speaker 4: including me, the real rate? Just how significant that is
Speaker 4: in terms of doing some or all of the heavy lift.
Speaker 7: It's a good question, you know, real rate.
Speaker 6: Simply take a nominal yield or a nominal rate target,
Speaker 6: use the upper end of the FED funds rage right
Speaker 6: now at five point fifty, and subtract off, you know,
Speaker 6: a four percent inflation rate, you've got a one point
Speaker 6: five percent real rate. If you subtract off a three percent,
Speaker 6: you've got a two point five percent real rate. If
Speaker 6: inflation keeps going down to two and you don't move
Speaker 6: your five point fifty upper end of your FED funds target,
Speaker 6: you know, the Fed now has a three would end
Speaker 6: up having in that scenario a three and a half
Speaker 6: percent real FED funds rate, that's historically pretty hot. That's
Speaker 6: the kind of constrictive or restrictive policy that could precipitate
Speaker 6: a real economic downturn, a recession that the FED doesn't want.
Speaker 7: But again, they don't need to move. If inflation itself
Speaker 7: is stuck.
Speaker 6: In the threes, you know, generally, looking whether at the
Speaker 6: CPI or the or the PC deflator, then the Fed
Speaker 6: might not need to be in such a rush to
Speaker 6: reduce rates to prevent that real rate from rising. Secondly,
Speaker 6: I think it's important to note that, you know, the
Speaker 6: Fed doesn't really know where the equilibrium Fed funds rate
Speaker 6: is the long term dot, and of course we're going
Speaker 6: to get updates on the dots this week.
Speaker 7: Is it two and a half percent?
Speaker 6: The market if you look at so for futures out
Speaker 6: three to five years, the market seems to think that
Speaker 6: the that the long run equilibrium FED funds rate is
Speaker 6: more like three and a half or three seven maybe.
Speaker 6: So the Fed isn't going to ease based upon a
Speaker 6: model if the data is still strong, labor markets tight,
Speaker 6: and inflation not falling rapidly.
Speaker 2: All right, So r J, given that kind of background, top,
Speaker 2: how are you positioning your portfolio, what are you telling
Speaker 2: your your teams to really look for sure?
Speaker 6: Sure, so first of all, looking at sort of the
Speaker 6: different lever levers than an active manager, which is what
Speaker 6: we are can can do in a fixing income portfolio.
Speaker 6: On duration, you know, once the market started to get
Speaker 6: sort of disabused of the notion that we were going
Speaker 6: to get seven eases, you know, we waited and took
Speaker 6: a tactical long at times, we've gone back to neutral.
Speaker 6: We went back to neutral before the most recent selloff.
Speaker 6: We took a little bit of profits on what we
Speaker 6: had as a very you know, temporary long position.
Speaker 7: So that's worked.
Speaker 6: We're at neutral now heading into the f MC meeting,
Speaker 6: we're apt to stay there. I think the Fed there
Speaker 6: is some risk that the Fed will move the dots
Speaker 6: up a little bit. Abgail was mentioning that could be
Speaker 6: a challenge for risk assets. We think that could be
Speaker 6: a challenge for rates to get a little lifts to
Speaker 6: the rates market. So that's on the duration front. On
Speaker 6: other levers that we can push and pull and fixed income.
Speaker 6: When it comes to credit sector allocation, we're overweight mortgages.
Speaker 6: We think they still look cheap we'd like the extra
Speaker 6: carrier given us. We're much more cautious and underweight high
Speaker 6: yield corporates. We think that the spreads are very tight there,
Speaker 6: compensation for the risk isn't so great. The fault risk
Speaker 6: still rising incrementally. That's not to say that we're underweight
Speaker 6: high because we think a recessions coming. It's really a
Speaker 6: question of valuation and compensation for risk at the current levels.
Speaker 7: We're a little more.
Speaker 6: Constructive on ig Yes, we're a little underweight, but not
Speaker 6: as much so, and we've added to emerging markets. I
Speaker 6: think it's true that the market's base case of a
Speaker 6: soft landing has become more compelling. If the FED walks
Speaker 6: back tightening easing expectations aggressively, then I think that could
Speaker 6: be a challenge for risk assets and it would start
Speaker 6: to raise questions about whether or not the Fed can
Speaker 6: ease into that soft lanning. What we think the Fed
Speaker 6: is going to continue to signal easing just less than
Speaker 6: they have been, and it's quite possible that they might
Speaker 6: be considered the long run dot right now with the
Speaker 6: way the markets are priced, that might be an opportunity
Speaker 6: for them to walk through that door and maybe move
Speaker 6: it from two to fifty median, maybe a little.
Speaker 7: Higher two seventy five or something like that.
Speaker 6: So we're watching that more of an academic exercise maybe,
Speaker 6: but that affects expectations in the market.
Speaker 4: Why has the last mile been so difficult to get
Speaker 4: to the target?
Speaker 6: I think the inflation problem which was so challenging, which
Speaker 6: caused the FED to completely abandon the transitory argument and
Speaker 6: get very aggressive, historically aggressive in the pace of tightening.
Speaker 6: That inflation was born of a surge in aggregate demand
Speaker 6: amid numerous supply problems, supply shocks, supply chain kinks, inadequate
Speaker 6: labor supply.
Speaker 7: So when demand rose for many things coming.
Speaker 6: Out of the pandemic, especially services, travel and things like that,
Speaker 6: and we had such constrained supply, including labor supply, the
Speaker 6: only answer in any normal economic model is price must
Speaker 6: rise to invite entry, to get people back to work,
Speaker 6: to get firms to work out the kinks. So that
Speaker 6: supply response is the first order aspect of the improvement
Speaker 6: that brought the inflation down that has been addressed.
Speaker 7: Now.
Speaker 6: I think we're in a world where inflation expectations are
Speaker 6: relatively well contained and benign, and that's because the Fed
Speaker 6: acted as aggressively as they did.
Speaker 7: Had they not done so, inflation expectations might have release searched.
Speaker 6: This last mile of getting inflation back to target is tougher.
Speaker 6: It's we have a better functioning economy, we have a
Speaker 6: tight labor market. Sort of more traditional non dislocation models
Speaker 6: of economics would suggest that maybe the economy does need
Speaker 6: to slow down in order to get inflation to continue
Speaker 6: to fall. The argument that the first mile was successful
Speaker 6: on supply is very true, but the last mile might
Speaker 6: require more of a slowdown, and that suggests the FED
Speaker 6: might not ease as aggressively as once thought.
Speaker 2: Ye all right, r J. Great stuff. Has always really
Speaker 2: appreciate getting some of your time, r J. Gallow He's
Speaker 2: a senior portfolio manager Federator Hermes. Joining us via.
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Speaker 2: John, I know you're not on TikTok.
Speaker 4: Can you just imagine, like the intersection of John Tucker
Speaker 4: and TikTok? What a disaster. That would be stop laughing, Lisa.
Speaker 2: Are you aware that there is this thing called TikTok.
Speaker 4: Yeah, Charlie Pellett in the office shows it to me
Speaker 4: all the time, so it's great, look you want videos
Speaker 4: of I'm like, this is the stupidest thing I've ever seen.
Speaker 2: But the big issue here for a lot of folks
Speaker 2: is the ownership of TikTok owned my Byte Dance, which
Speaker 2: has Chinese ownership. So now there's a whole thing about
Speaker 2: do you want these TikTok company and Byte Dance having
Speaker 2: so much consumer information for Americans? And that's kind of
Speaker 2: the big issue here. So Matt Sheltenhelm he joins us.
Speaker 2: He's a mediate litigation analyst, so he kind of does
Speaker 2: all the legal side for all this stuff in the
Speaker 2: media telecommunication space. He's a Bloomberg intelligence. He spaced down
Speaker 2: in Washington, DC. Where else? Hey, Matt, give us the
Speaker 2: latest on what's coming out of Washington, either from a
Speaker 2: regulatory standpoint or maybe some movements up from Congress about
Speaker 2: either forcing Bite Dance to cease operations here or you know,
Speaker 2: maybe force the Chinese to sell it. Where are we?
Speaker 8: Yeah, Paul, So some surprising momentum here on this issue.
Speaker 8: This first came up about a year ago in March
Speaker 8: when you when you'll remember, Congress had had a big
Speaker 8: hearing with with TikTok. CEO showed Chew. It was really
Speaker 8: a tough hearing, and I think a lot of people
Speaker 8: thought it might lead to some drastic action sooner rather
Speaker 8: than later. And then everything slowed down. But then sort
Speaker 8: of out of nowhere, about ten days ago, the House
Speaker 8: introduced a new bill, then quickly passed that bill out
Speaker 8: of committee, and then passed it through the on the
Speaker 8: whole House floor by a huge bipartisan majority. And basically
Speaker 8: what this bill would do, if it were to clear
Speaker 8: Congress and President Biden were to sign it, and if
Speaker 8: it were to get through the courts, is to say
Speaker 8: that unless Byteedance divest TikTok to a less sensitive owner,
Speaker 8: that the application couldn't be be hosted by Internet hosts
Speaker 8: in the United States, it couldn't be on app stores
Speaker 8: in the United States, and there would be significant financial
Speaker 8: penalties not for TikTok, but for those companies that would
Speaker 8: host it or that would include it in its app
Speaker 8: store if they were to ignore the legislation.
Speaker 4: Well, we'll put on your Congress watching half for a moment.
Speaker 4: What's the hold up in the Senate? What's the objection there?
Speaker 8: Yeah, So, I mean it's amazing to see the bipartisan
Speaker 8: support this has. You don't see legislation move three hundred
Speaker 8: and fifty two to sixty five like we saw last
Speaker 8: week in the House. You've seen on both sides say
Speaker 8: they want this. You've seen Chuck Schumer in the past,
Speaker 8: the Senate majority leader, say he likes the idea of
Speaker 8: requiring a change in ownership of TikTok. So that's exactly
Speaker 8: the question now. I think the hold up, though, is, Look,
Speaker 8: this is an election year, and even though you've seen
Speaker 8: President Biden say, look, get it. You know, if it
Speaker 8: comes to my desk, I'll sign it, he also has
Speaker 8: one hundred and fifty million Americans using this app, many
Speaker 8: of them young people, at a time when you have
Speaker 8: an election coming in November, when every vote matters, in
Speaker 8: particular young people to President Biden. So I think this
Speaker 8: legislation has a chance. I only give it a thirty
Speaker 8: percent chance though this year, and that's exactly because of
Speaker 8: the political risks of November. At a time when President
Speaker 8: Biden doesn't want to risk a potential backlash from those
Speaker 8: young voters. The Senate is controlled by Democrats. Senator Chuck
Speaker 8: Schumer is the majority leader. He decides how quickly this moves,
Speaker 8: and I think the looming election is a reason to
Speaker 8: move slowly. But after that, after this election is out
Speaker 8: of the way, I'd be a little more nervous if
Speaker 8: I were TikTok.
Speaker 2: So do we have any clear sense of what TikTok
Speaker 2: and Byte dance, how they're approaching this at this point,
Speaker 2: like what would they presumably do?
Speaker 8: Yeah, so that's a great question. I think we've seen
Speaker 8: indications from from China that it would not be willing
Speaker 8: to support a divestiture. Now that could be could be
Speaker 8: posturing on that end, but I think there's the possibility
Speaker 8: that if the US passes this legislation that requires a
Speaker 8: divestiture or else there's an effective ban, there's a real
Speaker 8: possibility that China wouldn't allow any sort of divestiture like
Speaker 8: that to happen. So you're inevitably in the result of
Speaker 8: of a band. Of course, you're also in courts as
Speaker 8: soon as Congress passes this, and you saw Montana pass
Speaker 8: the TikTok ban last year it got tripped up in court.
Speaker 8: You saw President Trump before he was against this, he
Speaker 8: actually signed a band of TikTok that was tripped up
Speaker 8: in the courts. So once this passes, you still have
Speaker 8: a tough court challenge coming. And so TikTok's first line
Speaker 8: of defense is going to be to see over this
Speaker 8: all right.
Speaker 4: So if this ultimately goes to the courts, You've got
Speaker 4: to explain to me, what's the legitimate national security threat
Speaker 4: of me going posting pictures of myself or a video
Speaker 4: of myself, you know, redoing my bathroom or Lisa putting
Speaker 4: on her mas scare.
Speaker 8: That's exactly the question the courts are going to be asking.
Speaker 8: And one of the curious things about when the House
Speaker 8: voted on this in committee by that fifty to zero vote,
Speaker 8: is that they went into closed second law.
Speaker 2: Some audio, Matt Shuttingham, we lost some audio, young man.
Speaker 2: This is when one of the first things I did
Speaker 2: with Matt, we were seeing clients six seven, eight years ago,
Speaker 2: we found out he had no cash in his pocket
Speaker 2: and say, why do you have no how do you
Speaker 2: walk in you live? You're up in DC, says nobody
Speaker 2: carries cash?
Speaker 5: What?
Speaker 2: Yeah, everything's on your phone. I'm like, so you don't
Speaker 2: have it was just crazy. That's when I first kind
Speaker 2: of came into this. The kids don't have cash anymore
Speaker 2: so so anyway, so that's kind of my ment shutting
Speaker 2: holm story. But again, this is a big thing for
Speaker 2: TikTok because.
Speaker 4: Oh he didn't go away. Oh is either so your
Speaker 4: I think your earpiece cut out. Oh you're being hacked
Speaker 4: by the Chinese apparently. But Matt pickup, you were talking
Speaker 4: about the I was asking about what in God's name
Speaker 4: is the national security threat that's posed here that the
Speaker 4: courts are ultimately going to have to look out and
Speaker 4: determin We've got about a minute.
Speaker 8: Left, absolutely so. So the House went into closed session
Speaker 8: in committee you when it talked about this, so so
Speaker 8: they kind of they were secret on the concerns that
Speaker 8: motivated this. But then after they had that closed session,
Speaker 8: all of a sudden it was fifty to zero voting
Speaker 8: and support. So we don't exactly know. I think the
Speaker 8: concern is that if this data is you know, not
Speaker 8: just you looking at your you know, cat videos or
Speaker 8: whatever it is, but you know, one hundred and fifty
Speaker 8: million Americans everything that they are looking at all of
Speaker 8: this flow of data going to China's let's China take
Speaker 8: a look at it. There's also a concern on the
Speaker 8: propaganda side that if China can impact sort of the
Speaker 8: flow of videos, can they start to shape thinking, and
Speaker 8: in particular in young people. So there's two sides of
Speaker 8: the concern here, looking at the data about how we're
Speaker 8: using it, and also influencing thought potentially by you know,
Speaker 8: framing messages, by using an algorithm to promote certain ideas.
Speaker 4: I know I'd like to shape the thought of young
Speaker 4: people at this point, especially that time is pan the
Speaker 4: youngsters in my house.
Speaker 2: So Matt, following off on my story, how much cash
Speaker 2: do you have in your pocket? Today?
Speaker 8: Oh? Man, I see, I'm not walking around New York today.
Speaker 8: You taught me when I'm there, I'll be ready today.
Speaker 8: I'm still I still just got my credit He's.
Speaker 2: Got the credit cards and the phone. So that's how
Speaker 2: I do good. All right, Matt, thanks so much on this.
Speaker 2: Matt is our go to guy and all this litigation
Speaker 2: stuff about anything on the media entertainment front, and there's
Speaker 2: a lot of litigation out there, and Matt's the attorney
Speaker 2: that follows that. For Bloomberg Intelligence. He's based down in Washington, DC,
Speaker 2: and investors really value his research on some of these big,
Speaker 2: big issues, and TikTok is a big, big issue.
Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
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Speaker 2: Another way to play. I'm still going to broadcome sucks up.
Speaker 2: You know, it's doubled in the last year. I mean,
Speaker 2: that's another way. Maybe next guests can shit some late
Speaker 2: on that. Michael Cogino joined US president and portfolio manager.
Speaker 2: The firm is a permanent portfolio family of funds, joining
Speaker 2: us from San Francisco via zoom This West Coast things. People.
Speaker 2: They know what's going on out there and with the technology.
Speaker 2: All right, Michael, give us your view here. You've been
Speaker 2: doing this for a while. What do you think when
Speaker 2: you see a company like in Vidia and the growth
Speaker 2: is its experience and the stock price performance. What is
Speaker 2: an old pro like you think about that?
Speaker 5: Yeah, good morning guys.
Speaker 9: Well you know, it's funny you mentioned in Video and
Speaker 9: Broadcom because we own both, and look, I think there's
Speaker 9: a reason investors are coming to these companies, you know,
Speaker 9: the Magnificent seven four, whatever you want to call them.
Speaker 9: Profit growth is there, revenue growth is there. Outlooks are strong,
Speaker 9: There's a lot of demand in these places. And so
Speaker 9: in an environment where there's some uncertainty with the broader
Speaker 9: equity market, it makes sense that investors are going to
Speaker 9: gravitate towards companies that are showing results Facebook, I mean,
Speaker 9: you know whatever, And so what that has resulted in
Speaker 9: is a little bit of upward concentration, obviously, and it
Speaker 9: really is named specific as to valuation. I mean, some
Speaker 9: would argue in Vidio certainly is not cheap, it's above
Speaker 9: a market multiple. Same thing with Broadcom. But in the
Speaker 9: tech world, you know, given the growth rates, given the
Speaker 9: execution on the growth rates, they're not that unreasonable. Maybe
Speaker 9: a little expensive, but in tech, you know, you're looking
Speaker 9: to grow into a multiple overtimes. So it really depends
Speaker 9: on the investor and how much they're willing to pay.
Speaker 4: All right, to stretch a metaphor in terms of your
Speaker 4: investment philosophy, you're driving a car in the winter, you
Speaker 4: put snow tires on. If you're in the rain, maybe
Speaker 4: rain tires. You're more of an all weather kind of guy,
Speaker 4: aren't you.
Speaker 9: Yes, yep, that would describe us. We're very diverse. I
Speaker 9: mean we run for strategies and equ strategy and two
Speaker 9: fixed income strategies, but we're most well known for our
Speaker 9: all weather multi asset permanent portfolio, which is a big
Speaker 9: diversification play. It assumes the investor can't predict the future accurately.
Speaker 9: It wants exposure in a number of areas so that
Speaker 9: the investor doesn't have to predict the future, and so
Speaker 9: we invest in not only US and non US equities
Speaker 9: in a variety of sectors, but also commodities, real estate,
Speaker 9: precious metals, and like I said, fixed income US and
Speaker 9: non US.
Speaker 2: So, Michael, given that broad exposure to different asset classes,
Speaker 2: what's kind of your allocation these days in that fund
Speaker 2: in terms of the various asset classes, and maybe how
Speaker 2: has that changed over time?
Speaker 9: Well, we have target weights in six broad categories twenty
Speaker 9: percent gold, five percent gold, and silver twenty percent five
Speaker 9: percent silver. Two equity sleeves, a hard asset sleeve with
Speaker 9: natural resources, commodities, energy, et cetera, fifteen percent, growth stocks
Speaker 9: fifteen percent, thirty five percent, and what we call dollar assets,
Speaker 9: which is investment grade debt, treasuries, agencies, other high quality debt,
Speaker 9: and ten percent in Swiss frank assets typically the currency
Speaker 9: or the bond.
Speaker 5: As a non US play.
Speaker 9: We are currently and we stay fairly close to those targets,
Speaker 9: but we're never right on them.
Speaker 5: It's not an indexing methodology.
Speaker 9: We're currently overweight gold by a couple of percentage points,
Speaker 9: We're overweight equities by several percentage points, probably a little
Speaker 9: bit underweight fixed income, and in a nutshell, that's and
Speaker 9: precious metals. I mentioned gold, Yeah, silver, we're probably right
Speaker 9: around target weighting.
Speaker 4: How much of that is downside protection.
Speaker 5: Depends on your perspective.
Speaker 9: I mean, some would argue that the precious metals, probably
Speaker 9: the Swiss currency and Swiss government bonds, maybe some equity
Speaker 9: names would be considered defensive.
Speaker 5: So from our perspective, we look at it.
Speaker 9: More as a broader, comprehensive, comprehensive definition of wealth. So
Speaker 9: you know, the average investor their four O one K,
Speaker 9: maybe they got a brokerage account. Their residents maybe a
Speaker 9: second residence. But what we're trying to do is give
Speaker 9: exposure beyond that commercial real estate and a variety of sectors,
Speaker 9: for example, commodities, industrial metals, energy, precious metals. In that way,
Speaker 9: the definition of wealth is broader, and we believe that
Speaker 9: the investor is kind of under exposed in a broad
Speaker 9: definition of wealth if they don't have exposure to some
Speaker 9: of these asset classes, because they all do impact the
Speaker 9: financial and economic system and thereby asset prices. So, you know,
Speaker 9: we would argue that this sort of comprehensive diversification is
Speaker 9: a great addition to somebody's already existing typical you know,
Speaker 9: definitions of wealth.
Speaker 2: So what's the biggest driver of your portfolio? What are
Speaker 2: you looking at the most? Is it defed and what
Speaker 2: they're going to do over the next uh cover several
Speaker 2: cycles or what else kind of impacts your portfolio?
Speaker 5: Well, it varies from time to time, but right now,
Speaker 5: certainly it's the FED.
Speaker 9: You know, I think the consensus is they're done, if
Speaker 9: not close to done. The big question seems to be
Speaker 9: when will they start cutting by how much? Or even
Speaker 9: you know, with the data recently in the last couple
Speaker 9: of months, here will they cut at all, and I
Speaker 9: think there's smart people on all sides of that debate.
Speaker 5: We would sort of take the position that.
Speaker 9: We're not going to try to predict the outcome, but
Speaker 9: we're going to have investments in a variety of areas
Speaker 9: so that regardless of what happens, we've got some winners
Speaker 9: and maybe mitigating losses. So my own opinion on this
Speaker 9: is that, you know, the the economy is growing, we're
Speaker 9: not in a recession. We may have a soft landing
Speaker 9: or no landing, or we may be inching to some
Speaker 9: sort of slow down. We just can't tell. The growth
Speaker 9: numbers at the moment, and the low unemployment with consumer
Speaker 9: spending allow the FED to be cautious and they don't
Speaker 9: have to start cutting rates right away, and we could
Speaker 9: exist in a higher for longer environment and still grow.
Speaker 9: Go back to the nineteen eighties, you know, when inflation
Speaker 9: was coming down from really high levels, we still had
Speaker 9: a period where the inflation rate was mid single digits
Speaker 9: coming down, and the economy still grew during a large
Speaker 9: part of that decade.
Speaker 5: So it is possible now.
Speaker 9: Circumstances are different nowadays, and the rates now from a
Speaker 9: perception standpoint, are a lot, how higher relative to what
Speaker 9: we lived with in the last twenty years, so you
Speaker 9: got to.
Speaker 5: Take that into consideration.
Speaker 9: But the current economic factors are allowing the FED to
Speaker 9: probably watchful weight. Obviously growth employment is a big factor
Speaker 9: we're looking at, because if that falls over, I think
Speaker 9: you do move very quickly towards a slow down. You've
Speaker 9: got the presidential progressional elections coming up, We've got geoptical
Speaker 9: uncertainties in several areas around the globe. So we are
Speaker 9: looking at a lot of issues and there are a
Speaker 9: lot of questions that need to be answered which argue
Speaker 9: for a diversified approach.
Speaker 2: All right, Michael, thank you so much for joining us.
Speaker 2: We really appreciated. Michael Cogino, President, portfolio manager of the
Speaker 2: Permanent Folio family of funds.
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Speaker 2: NYCB New York Community Bank down another seven and a
Speaker 2: half percent today, down sixty five percent year to date.
Speaker 2: Is it an NYCB problem or do we have some
Speaker 2: more systemic problems for some of the regional banks. For
Speaker 2: that return to Herman Chen. He covers all the regional
Speaker 2: banks for Bloomberg Intelligence. Let's start first, Herman with any
Speaker 2: jointions here in our studio. NYCB, what's the news today
Speaker 2: pushing the stock down?
Speaker 10: Yeah, so NYCB caught and analyst down grade earlier this
Speaker 10: morning excited ongoing credit issues with potential losses in regulated
Speaker 10: and apartment commercial real estate really hampering the earnings power.
Speaker 2: For the bank.
Speaker 4: So let's get back to the forty thousand foot view.
Speaker 4: The smaller banks like New York Community Bank in trouble
Speaker 4: because of real estate, whether it be commercial or other
Speaker 4: types of housing. Explain how that all works. They lend
Speaker 4: out money to a building a commercial real estate, and
Speaker 4: you know it looks like they don't have tenants anymore,
Speaker 4: so they the loan doesn't get paid back or what. Yeah,
Speaker 4: that's right, Talk to me like I'm your German Shepherds.
Speaker 2: So there's two issues you can look at that.
Speaker 10: Look at all these Class B and C type office
Speaker 10: buildings here in New York City has a good example
Speaker 10: where the work from home phenomenon has left a.
Speaker 2: Lot of them has not.
Speaker 10: Brought a lot of cash flow in for these owners
Speaker 10: of these properties, right because there some tenants are leaving.
Speaker 10: There's retail space that's leaving, so that's exacerbated some of
Speaker 10: the issues with cash flows for these borrowers as they
Speaker 10: refinance over the next few years. And you've seen that
Speaker 10: already where higher interest rates and the lower cash flows
Speaker 10: is a bit of a double whammy for them. So
Speaker 10: it's harder to refinance and they don't have a lot
Speaker 10: of cash coming in, so it's difficult to repay these loans.
Speaker 4: And it can in some circumstances they just walk away
Speaker 4: from the building.
Speaker 10: There's some circumstances that we've seen, like larger property owners
Speaker 10: like Brookfield and Blackstone have walked away from buildings that
Speaker 10: just aren't tenable anymore. If they didn't walk away, there
Speaker 10: would be more losses going forward. So they make a
Speaker 10: calculation and say we're giving the keys back because it's
Speaker 10: better for us economically to do that rare than supporting
Speaker 10: this building that has wee cash flows.
Speaker 2: So I'm looking at this spider s and p Regional
Speaker 2: Banking ETF. It's off one percent today, off nine percent
Speaker 2: year to date, but up thirteen percent from a trailing
Speaker 2: twelve month basis, they did kind of come off the
Speaker 2: very very bottom. I guess is NYCB. It sounds to
Speaker 2: me it's specific to NYCB okay right now. But on
Speaker 2: the flip side, I also understand from smart people like
Speaker 2: you that if there to the extent there is commercial
Speaker 2: real estate exposure, it is primarily with small and mid
Speaker 2: sized lenders as opposed to JP Morgan's or the Bank
Speaker 2: of Americas of the world. That's right, Okay.
Speaker 10: So there's two issues that we have pointed to in
Speaker 10: our research, the actual office and commercial real estate exposures
Speaker 10: for the largest banks like JP Morgan, and you can
Speaker 10: throw in the largest regional banks like a US Bank, PNC, Trust,
Speaker 10: Fifth Third.
Speaker 2: Et cetera.
Speaker 10: There their exposure to commercial real city is much smaller
Speaker 10: compared to smaller regionals and community banks, and growth in
Speaker 10: commercial real estate since the pandemic has been largely focused
Speaker 10: on the smaller banks, and for the largest US banks
Speaker 10: it's grown about two or three percent since the pandemic,
Speaker 10: whereas it's upwards of twenty percent for a lot of
Speaker 10: the smaller banks. So the concentration risk is more focused
Speaker 10: on the smaller banks and you've seen that the uptail nicely.
Speaker 10: If you compare the performance of the BKX, which is
Speaker 10: the index for the largest banks, versus the KRE, which
Speaker 10: is the index for the regional banks as a whole,
Speaker 10: there's been a divergence over the past year today.
Speaker 4: So as the situation gets worse, do the regulators who
Speaker 4: oversee the banks, do they increase the regulation, therefore making
Speaker 4: the situations spiral even further.
Speaker 10: What you've seen some tougher regulations, at least proposals come
Speaker 10: out since the SVB first Republic signature failures last March,
Speaker 10: and that's still going through, you know, the sausage making
Speaker 10: process at the Federal Reserve, and there's been pushed back
Speaker 10: by the largest banks because they think the regulations.
Speaker 2: Are too onerous.
Speaker 10: So there and Palace talked about saying that as it's
Speaker 10: currently proposed and may not pass, muster for the Fed,
Speaker 10: so there's not one hundred percent buy in from the
Speaker 10: top of the Fed. So that means that there could
Speaker 10: potentially be some watering down of those regulations.
Speaker 2: So if I'm an analyst, is it fairly easy for
Speaker 2: me to look at a bank and say how much
Speaker 2: commercial real estate or how much maybe office real estate exposure.
Speaker 2: It has visibly everybody else and I can mark that
Speaker 2: stock down or up accordingly though we are Are we
Speaker 2: already there?
Speaker 5: Yeah?
Speaker 8: We are.
Speaker 10: I think we've seen that in the trading action since
Speaker 10: NYCB reported their fourth quarter results that really surprised the
Speaker 10: street that the industry has been pretty resilient, and I
Speaker 10: think everybody has started to realize that not every office
Speaker 10: and not every apartments lender is the same, and so
Speaker 10: there's been more discerning trading for a lot of these
Speaker 10: regional banks, which is good because last March it was
Speaker 10: all regional banks are going to fail, and now we're
Speaker 10: not in that sort of scenario any longer.
Speaker 4: Unless we heard it was Steve Minution to the rescue
Speaker 4: with the billion dollars from other investors. Right, where's that stand?
Speaker 4: And is a billion dollars that not for?
Speaker 10: Yeah, that's that's the ultimate question, right. So the billion
Speaker 10: dollars injection capital injection really and stilled a bit more
Speaker 10: confidence of the bank. It brings their capital ratios back
Speaker 10: to peer levels after the loss in the fourth quarter.
Speaker 10: It gives them some room to build up their bad
Speaker 10: debt reserves for future loan losses in their apartment lending business.
Speaker 7: But is it enough.
Speaker 10: It's still up in the air. The downgrades sort from
Speaker 10: an analyst today pointed to there's going to be credit losses,
Speaker 10: and there's there's a lot of uncertainty with their earnings
Speaker 10: because there's going to be higher expenses. Their margin is
Speaker 10: going to be compressed over the next several quarters, and
Speaker 10: they're not going to grow their loan portfolio, they're actually
Speaker 10: shrinking it. So lots still lots of questions and really
Speaker 10: it will depend on where interest rates go and how
Speaker 10: their credit quality holds up, and not a lot of
Speaker 10: answers at this point.
Speaker 2: So for the quality smaller regional sized banks are, is
Speaker 2: there smart buying in those things at the moment, longer
Speaker 2: term buying or just that trade off the bottom or.
Speaker 10: Yeah, I think you've seen some stability for a lot
Speaker 10: of the banks, the smaller ones that still have room
Speaker 10: to perform and outperform with credit qualities is going to
Speaker 10: be the keynot the bank. Investors aren't really focused on
Speaker 10: growing the balance sheet at this point. It's more do
Speaker 10: you show stable credit performance not a lot of charge offs,
Speaker 10: and banks that have historically had strong credit on the
Speaker 10: that front, like a Western Alliance, M and T Regions,
Speaker 10: et cetera. Those banks seem to be better positioned for
Speaker 10: the current bathroom.
Speaker 4: How many people do we know who are looking for
Speaker 4: housing in New York and can't find it and you
Speaker 4: look across the street, Oh there's a vacant building. Well,
Speaker 4: there's a vacant building, whether.
Speaker 7: There's something not good.
Speaker 4: You know, it does not compute.
Speaker 2: I know, can you convert retail space and office space
Speaker 2: into residential And what the experts tell me is for
Speaker 2: some of it you can, But.
Speaker 4: I mean you just think about every apartment would need
Speaker 4: its own plumbing. In a commercial building, maybe there's like
Speaker 4: one or two bathrooms on each floor.
Speaker 2: So I don't know, I don't know, but that's an infrastructure.
Speaker 2: It's a lot tougher, all right, Herman Chan, thank you
Speaker 2: so much. We appreciate it. Hermit Change. He covers all
Speaker 2: the regional banks force for Bloomberg Intelligence NYCB getting a
Speaker 2: downgrade from Raymond James today that stocks off seven percent,
Speaker 2: adding to the woes there NYCB.
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