1 00:00:00,080 --> 00:00:13,040 Speaker 1: Ye, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane 2 00:00:13,480 --> 00:00:16,960 Speaker 1: jay Ley. We bring you insight from the best in economics, finance, 3 00:00:17,040 --> 00:00:23,480 Speaker 1: investment and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 4 00:00:23,640 --> 00:00:33,919 Speaker 1: Bloomberg dot Com and of course on the Bloomberg. Let 5 00:00:33,960 --> 00:00:36,239 Speaker 1: us begin our market coverage again. Jane Folly to join 6 00:00:36,320 --> 00:00:38,960 Speaker 1: us on our next art. Tony Dwyer with a style 7 00:00:39,000 --> 00:00:42,760 Speaker 1: but right now from Edinburgh, Jerry Fowlers with Aberdeen with 8 00:00:42,840 --> 00:00:46,920 Speaker 1: a distinguished career in derivative analysis, which is the nuances 9 00:00:47,040 --> 00:00:50,400 Speaker 1: of the asset markets. Uh, Jerry, wonderful to have you 10 00:00:50,479 --> 00:00:53,599 Speaker 1: with us today. What is the distinction you see from 11 00:00:53,640 --> 00:00:57,680 Speaker 1: the derivative markets is they explain what's going on in 12 00:00:57,720 --> 00:01:02,880 Speaker 1: the core equity market. Well, I don't think in this 13 00:01:02,920 --> 00:01:05,400 Speaker 1: particular case, like in examples in the past, like two 14 00:01:05,440 --> 00:01:08,039 Speaker 1: thousand and six, the drivetis markets are having a huge impact. 15 00:01:08,360 --> 00:01:10,560 Speaker 1: You know, they're probably are days when there's a significant 16 00:01:10,560 --> 00:01:14,880 Speaker 1: amount of gamma selling with the volatility so elevated. But 17 00:01:15,040 --> 00:01:18,120 Speaker 1: this is much more of an interest rate type environment. 18 00:01:18,280 --> 00:01:20,840 Speaker 1: You know. What we're thinking has been driving this is 19 00:01:21,040 --> 00:01:23,959 Speaker 1: a myriad of geopolitical factors, whether it's China weakness or 20 00:01:23,959 --> 00:01:27,920 Speaker 1: Italian crisis. But really I think the key driver that's 21 00:01:27,920 --> 00:01:30,880 Speaker 1: most important at the moment is the Libel rate, because 22 00:01:30,920 --> 00:01:33,200 Speaker 1: even though the fame has hyked four times this year, 23 00:01:33,800 --> 00:01:36,160 Speaker 1: the Libel rate has actually been flat for six months 24 00:01:36,160 --> 00:01:38,160 Speaker 1: and now it started rising again, and so the world 25 00:01:38,240 --> 00:01:40,520 Speaker 1: is adjusted to a risk free rate that is going up. 26 00:01:40,600 --> 00:01:43,000 Speaker 1: I'm so glad you bring this up. Are Michael McKee 27 00:01:43,040 --> 00:01:45,440 Speaker 1: pointed it out to me yesterday, Jerry, Jerry, the how 28 00:01:45,520 --> 00:01:48,520 Speaker 1: of the CFA Society for the United Kingdom. That's pretty 29 00:01:48,520 --> 00:01:52,920 Speaker 1: smart for our audience. It's less gifted explain the importance 30 00:01:53,080 --> 00:01:59,920 Speaker 1: of library in its statement of liquidity. To pros Well, 31 00:02:00,120 --> 00:02:03,640 Speaker 1: libral is one measure of liquidity. There are others like 32 00:02:03,680 --> 00:02:06,880 Speaker 1: cross currency basis. But the reason library is so important 33 00:02:06,920 --> 00:02:09,480 Speaker 1: is because it's it is really what drives all loan 34 00:02:09,600 --> 00:02:11,440 Speaker 1: rates around the world. And so we could be talking 35 00:02:11,480 --> 00:02:14,280 Speaker 1: about leveed loan rates which are based off libel. You 36 00:02:14,280 --> 00:02:16,480 Speaker 1: could be talking about all swaps which are based off 37 00:02:16,520 --> 00:02:19,280 Speaker 1: libel payments. So the Fed funds rate is only a 38 00:02:19,280 --> 00:02:22,600 Speaker 1: guide to where markets will price, but actually libor can 39 00:02:22,639 --> 00:02:25,200 Speaker 1: have a spread. And the reason library is so important 40 00:02:25,200 --> 00:02:28,000 Speaker 1: in particular is because it's the global risk free rate. 41 00:02:28,280 --> 00:02:32,280 Speaker 1: It's set by London inter banks, and while there is 42 00:02:32,320 --> 00:02:34,880 Speaker 1: going to be a transition to new systems in the future, 43 00:02:35,480 --> 00:02:38,799 Speaker 1: essentially it is the price at which dollars are priced 44 00:02:39,240 --> 00:02:41,520 Speaker 1: outside of the US. So at the beginning of the year, 45 00:02:41,520 --> 00:02:44,200 Speaker 1: with lots of dollar repatriation, the price of dollars outside 46 00:02:44,200 --> 00:02:45,600 Speaker 1: the US had to go up, so you had a 47 00:02:45,639 --> 00:02:48,280 Speaker 1: Libel spike versus the FED funds rates or o I 48 00:02:48,520 --> 00:02:52,480 Speaker 1: s and what that meant was you essentially got two 49 00:02:52,480 --> 00:02:54,519 Speaker 1: interest rate hikes in that first quarter, whereas the Fed 50 00:02:54,560 --> 00:02:57,280 Speaker 1: only did one. But since we've had effectively no rate 51 00:02:57,360 --> 00:03:00,960 Speaker 1: hikes from the US that have actually mattered to markets 52 00:03:00,960 --> 00:03:03,119 Speaker 1: for six months, which has been a nice reprieve from 53 00:03:03,160 --> 00:03:05,400 Speaker 1: you know, what has been volatile year. What we're seeing 54 00:03:05,440 --> 00:03:07,280 Speaker 1: now is those rate hikes from the Fed and that 55 00:03:07,360 --> 00:03:11,040 Speaker 1: trajectory being priced into global interest rate markets again and 56 00:03:11,080 --> 00:03:13,560 Speaker 1: the markets having to adjust to this new yield environment. 57 00:03:13,560 --> 00:03:16,560 Speaker 1: And this title liquidity a cross currency basis is another 58 00:03:16,560 --> 00:03:19,400 Speaker 1: thing that matters in the fourth quarter because global banks 59 00:03:19,440 --> 00:03:22,280 Speaker 1: need dollar liquidity over year end. So the combination of 60 00:03:22,400 --> 00:03:25,119 Speaker 1: rising libel and cross currency basis is putting a floor 61 00:03:25,200 --> 00:03:29,120 Speaker 1: under the dollar. Jerry is near in London, great to 62 00:03:29,160 --> 00:03:32,600 Speaker 1: see you, and Edinburgh takes my breath away as always 63 00:03:32,720 --> 00:03:36,960 Speaker 1: on this beautiful day over there. If this torrid, torrid 64 00:03:37,000 --> 00:03:40,200 Speaker 1: October that we've seen for global equities, the worst in 65 00:03:40,240 --> 00:03:43,920 Speaker 1: almost six years, is down to the world adjusting to 66 00:03:43,920 --> 00:03:48,160 Speaker 1: the risk free rate going up, tightening liquidity, why is 67 00:03:48,200 --> 00:03:51,720 Speaker 1: it that you're still pro risk because this is a 68 00:03:51,760 --> 00:03:56,320 Speaker 1: new paradigm that we're having to get used to. Yes, 69 00:03:56,360 --> 00:03:58,680 Speaker 1: we're pro risk because even though we do see a 70 00:03:58,680 --> 00:04:01,640 Speaker 1: cyclical slowdown coming, US growth is rolling over the rest 71 00:04:01,640 --> 00:04:03,640 Speaker 1: of the world has already been weak most of the year. 72 00:04:03,960 --> 00:04:06,480 Speaker 1: We do see it as only a slowdown that generally 73 00:04:06,520 --> 00:04:10,280 Speaker 1: market prices have already factored in. Non US asset prices, 74 00:04:10,560 --> 00:04:14,960 Speaker 1: particularly equities, are far cheaper than US equity valuations, particularly 75 00:04:15,080 --> 00:04:17,960 Speaker 1: versus their own domestic bond markets and so and also 76 00:04:18,200 --> 00:04:22,320 Speaker 1: especially recently, our shorter term technical indicators are suggesting markets 77 00:04:22,320 --> 00:04:25,280 Speaker 1: are really quite heavily oversold, So there is opportunity to 78 00:04:25,320 --> 00:04:28,799 Speaker 1: be taking tactical risk. And in addition to that, Libel 79 00:04:29,000 --> 00:04:32,520 Speaker 1: will matter for the overall level of yields across markets, 80 00:04:32,560 --> 00:04:35,800 Speaker 1: but it will only cause a problem and genuine financial 81 00:04:35,880 --> 00:04:39,240 Speaker 1: stress when it when it is high enough to impact credit. 82 00:04:40,120 --> 00:04:42,799 Speaker 1: Now you've I heard Tom talking about the high yield market, 83 00:04:42,839 --> 00:04:46,200 Speaker 1: which has started to see credit spread expansion that is 84 00:04:46,240 --> 00:04:49,840 Speaker 1: beyond the investment grade spread expansion. But the one I'd 85 00:04:49,880 --> 00:04:52,520 Speaker 1: really point to is the leveled loan index because Yelling 86 00:04:52,560 --> 00:04:54,279 Speaker 1: has been talking about it. We've been looking at it 87 00:04:54,320 --> 00:04:56,960 Speaker 1: for a good part of the last six months. But 88 00:04:57,040 --> 00:04:59,680 Speaker 1: there is quite a lot of froth and weakening of 89 00:04:59,720 --> 00:05:01,960 Speaker 1: covered in the leavened loan market, which is now very, 90 00:05:02,040 --> 00:05:05,279 Speaker 1: very large. And what I'm watching carefully for is when 91 00:05:05,279 --> 00:05:08,320 Speaker 1: those leaveed loan yields spike away from live or because 92 00:05:08,320 --> 00:05:10,880 Speaker 1: then you're comparing apples with apples without getting into duration, 93 00:05:11,200 --> 00:05:13,920 Speaker 1: and you're just seeing whether there is genuine loan stress 94 00:05:13,920 --> 00:05:16,040 Speaker 1: in the economy, and at the moment that's not the case, 95 00:05:16,800 --> 00:05:18,880 Speaker 1: in which case we think that essentially there will be 96 00:05:19,000 --> 00:05:22,440 Speaker 1: enough economic momentum to sustain to learning's growth. All right, 97 00:05:22,520 --> 00:05:25,760 Speaker 1: So leaveed loans not causing you too much concern yet, Jerry, 98 00:05:25,800 --> 00:05:27,640 Speaker 1: But let me ask you this question. We've been asking 99 00:05:27,640 --> 00:05:29,880 Speaker 1: our guests all morning, and you'll have a great view 100 00:05:29,920 --> 00:05:34,800 Speaker 1: on it with your multi asset view. What scares you 101 00:05:34,960 --> 00:05:37,680 Speaker 1: most in markets at the moment, good question for Halloween, 102 00:05:40,400 --> 00:05:43,440 Speaker 1: A good question in the very short term. We are 103 00:05:43,480 --> 00:05:47,080 Speaker 1: most concerned about the continued escalation of trade and trade 104 00:05:47,080 --> 00:05:49,520 Speaker 1: wars with China, but it actually goes beyond the concern 105 00:05:49,560 --> 00:05:52,120 Speaker 1: about trade and more the strategic confrontation. So I know, 106 00:05:52,200 --> 00:05:53,919 Speaker 1: we've we've all been analyzing that to death, and a 107 00:05:53,960 --> 00:05:55,840 Speaker 1: decent amount of that is in the price, particularly for 108 00:05:55,920 --> 00:05:59,080 Speaker 1: Chinese assets. In the medium term. It is the Fed 109 00:05:59,200 --> 00:06:02,479 Speaker 1: ray hiking part. Because even as the world adjusts to 110 00:06:02,600 --> 00:06:04,760 Speaker 1: this new level of interest rate and the tightening of 111 00:06:04,839 --> 00:06:07,479 Speaker 1: dollar liquidity and the level of the dollar and the 112 00:06:07,520 --> 00:06:09,679 Speaker 1: weakening of growth, all of which we think the market 113 00:06:09,720 --> 00:06:12,120 Speaker 1: has done a pretty good job of. At the moment, 114 00:06:12,320 --> 00:06:15,320 Speaker 1: the FED funds futures are not pricing the rate hiking 115 00:06:15,360 --> 00:06:18,039 Speaker 1: path that the Fed are promising to deliver, and so 116 00:06:18,240 --> 00:06:20,719 Speaker 1: someone will need to be right. Either the Fed will 117 00:06:20,760 --> 00:06:24,840 Speaker 1: need to pause to allow you know, the credit cycle 118 00:06:24,960 --> 00:06:29,279 Speaker 1: to um to smoothly flow through without creating an enormous 119 00:06:29,279 --> 00:06:31,760 Speaker 1: amount of stress or that, or they'll overdo it. We're 120 00:06:31,760 --> 00:06:33,880 Speaker 1: going to get credit stress and we'll have a credit 121 00:06:33,920 --> 00:06:35,840 Speaker 1: we know, what I might call a credit recession. So 122 00:06:35,960 --> 00:06:38,400 Speaker 1: it's that that's the problem I would see potentially on 123 00:06:38,440 --> 00:06:40,160 Speaker 1: a six or twelve month horizon if the Fed does 124 00:06:40,240 --> 00:06:42,400 Speaker 1: keep hiking rates every quarter. Jerry, thank you so much, 125 00:06:42,480 --> 00:06:45,160 Speaker 1: Jerry Fowler. Where it's everything brilliant. Their own library will 126 00:06:45,160 --> 00:06:47,680 Speaker 1: try to get that out on our podcast as well 127 00:06:48,240 --> 00:07:06,040 Speaker 1: to they with us from Rubble Bank in London. Jane Folly, 128 00:07:06,560 --> 00:07:10,040 Speaker 1: there's some headlines out of China which I think are 129 00:07:10,560 --> 00:07:13,800 Speaker 1: really really important. Now here's one just separate President. She 130 00:07:13,960 --> 00:07:20,240 Speaker 1: stresses importance of AI development, artificial intelligence development. But earlier, 131 00:07:20,360 --> 00:07:24,160 Speaker 1: Jane Folly, we really began to see the kind of 132 00:07:24,280 --> 00:07:27,360 Speaker 1: economic talk out of the polit bureau. I'm searching for 133 00:07:27,360 --> 00:07:30,040 Speaker 1: those headlines right now. But an hour and a half ago, 134 00:07:30,680 --> 00:07:33,880 Speaker 1: China just simply came out and said economic growth looks 135 00:07:33,920 --> 00:07:37,120 Speaker 1: a little shaky. Jane. Do we see that in yuan? 136 00:07:37,680 --> 00:07:40,600 Speaker 1: Do we do we see a linkage of china economic 137 00:07:40,680 --> 00:07:45,800 Speaker 1: growth with their managed currency? I think we do. Well. Certainly, 138 00:07:46,040 --> 00:07:48,560 Speaker 1: the market has been talking about to push hiring and 139 00:07:48,600 --> 00:07:50,560 Speaker 1: dollar maybe for some time, and we've seen a lot 140 00:07:50,600 --> 00:07:53,640 Speaker 1: of stimulus from from China in recent weeks, and that 141 00:07:53,760 --> 00:07:57,040 Speaker 1: of course is consistent with the slowing growth. Officially, the 142 00:07:57,080 --> 00:07:59,440 Speaker 1: GDP data that they published a couple of weeks ago 143 00:07:59,520 --> 00:08:03,200 Speaker 1: was slower, and we've seen slower signs of growth and 144 00:08:03,400 --> 00:08:05,840 Speaker 1: then nowtherum lot of other indications to such as a 145 00:08:05,920 --> 00:08:08,320 Speaker 1: pm MY data and then that official data tools such 146 00:08:08,320 --> 00:08:11,960 Speaker 1: as air freight for instance. So there is without doubt 147 00:08:12,120 --> 00:08:15,240 Speaker 1: signs that jiner is slowing. And when you have a 148 00:08:16,040 --> 00:08:19,120 Speaker 1: such a bank that is stimulating, then it's natural for 149 00:08:19,800 --> 00:08:23,040 Speaker 1: a currency to weaken. But of course this is a 150 00:08:23,120 --> 00:08:26,520 Speaker 1: very political exchange rate. And whilst there is some pressure 151 00:08:26,520 --> 00:08:29,040 Speaker 1: and there has been pressure on the remember too weaken 152 00:08:29,120 --> 00:08:31,600 Speaker 1: against the vas Dolan. Course, the dollar has been strong 153 00:08:31,640 --> 00:08:34,800 Speaker 1: against was every other currency since around about February or March. 154 00:08:35,360 --> 00:08:39,720 Speaker 1: The Chinese are very very concerned about the political implications 155 00:08:39,720 --> 00:08:42,959 Speaker 1: and they have today been taking some measures to try 156 00:08:43,000 --> 00:08:46,000 Speaker 1: and stabilize women be to try and signal that they 157 00:08:46,040 --> 00:08:50,479 Speaker 1: don't want it to fall too fast. The headline about 158 00:08:51,160 --> 00:08:55,360 Speaker 1: China Polite Bureau says timely steps needed to counter slow Yeah. 159 00:08:55,360 --> 00:08:57,880 Speaker 1: I mean, have you seen the data China manufacturing slipping 160 00:08:57,960 --> 00:09:01,000 Speaker 1: the export sub index of a p M overnight the 161 00:09:01,040 --> 00:09:06,079 Speaker 1: lower since six non manufacturing PMR. I mean the exports 162 00:09:06,080 --> 00:09:08,280 Speaker 1: sub index would point towards the trade war. But the 163 00:09:08,360 --> 00:09:11,360 Speaker 1: manufacturing numbers just aren't great, and we're just about in 164 00:09:11,440 --> 00:09:14,920 Speaker 1: expansion territory. And Jane, I think you've touched on something important. 165 00:09:15,200 --> 00:09:17,160 Speaker 1: I would have thought off the back of that data 166 00:09:17,320 --> 00:09:19,400 Speaker 1: that might be enough to take us over. The line 167 00:09:19,720 --> 00:09:22,640 Speaker 1: seven on Dolly one is seven the line in the 168 00:09:22,679 --> 00:09:25,559 Speaker 1: sand for the Chinese authorities. Are they trying to stand 169 00:09:25,559 --> 00:09:29,000 Speaker 1: there and stop it from crossing that? And why? Well, 170 00:09:29,040 --> 00:09:31,520 Speaker 1: I think why it's because I think they fear that 171 00:09:31,600 --> 00:09:34,559 Speaker 1: it's perhaps a line in the sand for the US president. 172 00:09:34,880 --> 00:09:37,680 Speaker 1: And certainly we've had a lot of rhetoric over the 173 00:09:37,720 --> 00:09:40,719 Speaker 1: last couple of years with respect to China from from 174 00:09:40,760 --> 00:09:43,160 Speaker 1: the US. Now they haven't, of course officially accused it 175 00:09:43,200 --> 00:09:45,839 Speaker 1: a bit of being a manipulated but clearly Trump is 176 00:09:45,880 --> 00:09:49,920 Speaker 1: concerned about the strong dollar. Clearly he's concerned about trade wars. 177 00:09:49,960 --> 00:09:52,360 Speaker 1: Clearly that the US is winning the trade war, and 178 00:09:52,320 --> 00:09:54,800 Speaker 1: in terms that the US is still growing at China 179 00:09:54,960 --> 00:09:57,480 Speaker 1: is slowing, and of course the US the trade is 180 00:09:57,559 --> 00:10:00,720 Speaker 1: less important to the US, and it is China exports 181 00:10:00,720 --> 00:10:02,840 Speaker 1: to GDP in the US when you around about ten 182 00:10:02,880 --> 00:10:05,280 Speaker 1: percent or so, so the US are always going to 183 00:10:05,440 --> 00:10:08,959 Speaker 1: have a stronger hand in this trade war. So China 184 00:10:09,080 --> 00:10:12,560 Speaker 1: is slowing, and I think the Chinese authorities are fearful 185 00:10:12,840 --> 00:10:15,640 Speaker 1: that if we saw a significant move, or perhaps a 186 00:10:15,760 --> 00:10:19,480 Speaker 1: fast move above that seven level, then it might increase 187 00:10:19,600 --> 00:10:25,200 Speaker 1: the rhetoric from the US against China. Kitchen picked up 188 00:10:25,200 --> 00:10:27,240 Speaker 1: on something I think that's quite important, Jane. I'd love 189 00:10:27,280 --> 00:10:29,200 Speaker 1: your insight on it. We've got some key levels on 190 00:10:29,240 --> 00:10:32,520 Speaker 1: some key currency pairs. Dollar China is seven euro dollar 191 00:10:32,559 --> 00:10:36,120 Speaker 1: with one thirteen hand or capable trading around one twenty seven. 192 00:10:36,440 --> 00:10:38,920 Speaker 1: And Kit's point is that essentially we can pick out 193 00:10:38,920 --> 00:10:41,720 Speaker 1: different narratives to explain what's happening with different currency pairs, 194 00:10:41,720 --> 00:10:43,920 Speaker 1: but there is one key consistent here, Jane, and it's 195 00:10:43,960 --> 00:10:46,319 Speaker 1: the stronger dollar story. And I'm just wondering how much 196 00:10:46,559 --> 00:10:49,520 Speaker 1: is left in that stronger dollar story from your perspective, 197 00:10:49,559 --> 00:10:53,000 Speaker 1: from your vantage point, Well, I'll target for a while 198 00:10:53,040 --> 00:10:56,560 Speaker 1: now has been one twelve, and I think the question 199 00:10:56,679 --> 00:10:59,760 Speaker 1: is now is are actually we're going to drop below 200 00:11:00,000 --> 00:11:02,679 Speaker 1: one twelve, Because when we first put one twelve into 201 00:11:02,960 --> 00:11:05,280 Speaker 1: the picture some months ago, this was all about the 202 00:11:05,280 --> 00:11:08,480 Speaker 1: stronger dollar story. But I think actually in recent weeks 203 00:11:08,840 --> 00:11:12,280 Speaker 1: we've seen some other stories emerged. So, for instance, in 204 00:11:12,320 --> 00:11:15,320 Speaker 1: the Eurozone. I think we've seen a deterioration of the 205 00:11:15,360 --> 00:11:18,720 Speaker 1: political backdrop there, but also of the growth data. There's 206 00:11:18,720 --> 00:11:21,320 Speaker 1: someone that the the numbers coming through from Europe have 207 00:11:21,480 --> 00:11:25,160 Speaker 1: been softer, so I think we've had a worsening story there. 208 00:11:25,160 --> 00:11:27,160 Speaker 1: And of course if you look at the UK, clearly 209 00:11:27,160 --> 00:11:29,840 Speaker 1: the Brexit and there are concerns that even if a 210 00:11:29,840 --> 00:11:32,320 Speaker 1: deal has done, it may not be ratified by Parliament. 211 00:11:32,360 --> 00:11:35,800 Speaker 1: So a number of forecasters, including ourselves, are increasingly the 212 00:11:35,840 --> 00:11:39,360 Speaker 1: percentage that we're attributing to a no deal Brexit. So 213 00:11:39,400 --> 00:11:43,120 Speaker 1: there are a number of other factors here which are emerging, 214 00:11:43,400 --> 00:11:46,200 Speaker 1: which are going side by side with the story of 215 00:11:46,240 --> 00:11:49,839 Speaker 1: strong US growth and really feeling that dollar rally. Jane Fawley, 216 00:11:49,920 --> 00:11:53,120 Speaker 1: thank you so much for being today. Greatly appreciate that 217 00:12:04,520 --> 00:12:07,199 Speaker 1: on Facebook and it was a joy to have him 218 00:12:07,200 --> 00:12:10,840 Speaker 1: with us to day of the initial public offering. David Kirkpatrick, 219 00:12:10,960 --> 00:12:13,480 Speaker 1: as many know, I made my book of the Summer, 220 00:12:13,520 --> 00:12:16,480 Speaker 1: book of the year, whatever way back the Facebook effect, 221 00:12:16,960 --> 00:12:21,280 Speaker 1: the inside story of David Kirkpatrick covering Facebook for his years. 222 00:12:22,320 --> 00:12:26,080 Speaker 1: And David, there's a sentence right now. I had only 223 00:12:26,120 --> 00:12:29,360 Speaker 1: been marginally aware of Facebook until a public relations person 224 00:12:29,440 --> 00:12:32,480 Speaker 1: called me in the late summer of two thousand six 225 00:12:33,160 --> 00:12:36,800 Speaker 1: and asked if I would meet with Mark Zuckerberg. How 226 00:12:36,920 --> 00:12:40,960 Speaker 1: is Mr Zuckerberg different today? David Kirkpatrick, Then, when you 227 00:12:41,000 --> 00:12:44,560 Speaker 1: wrote that sentence in your classic book, See Tom, that's 228 00:12:44,559 --> 00:12:48,320 Speaker 1: a scary question. I wish I understood his brain well 229 00:12:48,480 --> 00:12:53,440 Speaker 1: enough to answer that. He's not a kid anymore. He 230 00:12:53,640 --> 00:12:56,080 Speaker 1: is a one of the richest people in the world, 231 00:12:56,160 --> 00:13:00,240 Speaker 1: the richest person of his age in human history. So 232 00:13:00,400 --> 00:13:03,920 Speaker 1: I think that has changed him profoundly. And he is 233 00:13:04,600 --> 00:13:07,559 Speaker 1: he you know, at the time he was generously at 234 00:13:07,600 --> 00:13:10,160 Speaker 1: Head's attitude was sort of I'm giving this thing to 235 00:13:10,200 --> 00:13:16,000 Speaker 1: the world because he did. Now defending his his wealth 236 00:13:16,760 --> 00:13:20,920 Speaker 1: by any means. Is he an executive? You're the one 237 00:13:20,960 --> 00:13:25,360 Speaker 1: guy I trust on this question. Is is he an executive? 238 00:13:25,440 --> 00:13:31,280 Speaker 1: And are there any adults around him helping? Not? Really? Unfortunately, 239 00:13:31,600 --> 00:13:35,520 Speaker 1: I don't, of course, literally, he is an executive. He 240 00:13:35,640 --> 00:13:39,080 Speaker 1: is decently. You know, he has hired Cheryl Sandburg. Cheryl 241 00:13:39,120 --> 00:13:43,640 Speaker 1: Sandberg has created this massive machine of profit which is 242 00:13:43,679 --> 00:13:46,840 Speaker 1: shifting in some interesting ways now even it's it's causing 243 00:13:46,880 --> 00:13:51,400 Speaker 1: tremendous social harm. But I don't think he has people 244 00:13:51,440 --> 00:13:55,600 Speaker 1: around him who who are anything but basically yes men. 245 00:13:55,760 --> 00:13:57,520 Speaker 1: In the end, I think that that's how we are 246 00:13:57,520 --> 00:14:00,400 Speaker 1: with John Farrell. I mean I understand that. I mean, 247 00:14:00,600 --> 00:14:04,200 Speaker 1: you know, this whole thing with hiring the Deputy Prime 248 00:14:04,240 --> 00:14:07,640 Speaker 1: Minister of the UK is an interesting recent development where 249 00:14:08,120 --> 00:14:11,079 Speaker 1: clearly they want people around him who can give him 250 00:14:11,160 --> 00:14:14,160 Speaker 1: tough messaging if necessary. But I have very little reason 251 00:14:14,200 --> 00:14:19,080 Speaker 1: to think that a relatively you know, weak politician who 252 00:14:19,160 --> 00:14:21,880 Speaker 1: didn't do that well in government is going to come 253 00:14:21,880 --> 00:14:24,680 Speaker 1: in and have a lot of sway with Zuckerberg. So 254 00:14:25,560 --> 00:14:29,120 Speaker 1: he doesn't like to really have people around him that 255 00:14:29,320 --> 00:14:33,520 Speaker 1: fundamentally disagree with him. It's happy to entertain disagreeing, just 256 00:14:33,840 --> 00:14:37,560 Speaker 1: disagreements from a moment to moment basis, but he has 257 00:14:37,840 --> 00:14:40,400 Speaker 1: his ideas and he will stick to them and he 258 00:14:40,480 --> 00:14:43,560 Speaker 1: does not think that these issues of social harm are 259 00:14:43,560 --> 00:14:45,960 Speaker 1: really that important in the end. Yeah, I have to 260 00:14:46,000 --> 00:14:49,040 Speaker 1: agree with that statement about the former Deputy Primister Nick Clegg. 261 00:14:49,480 --> 00:14:51,080 Speaker 1: He's hardly the guy that's going to walk into the 262 00:14:51,080 --> 00:14:53,040 Speaker 1: boardroom and start bully and Geffrey one and telling them 263 00:14:53,040 --> 00:14:55,320 Speaker 1: what to do. Um. So he's not exactly the strong 264 00:14:55,360 --> 00:14:57,480 Speaker 1: minded person that maybe needs to be filling that position. 265 00:14:57,560 --> 00:14:59,440 Speaker 1: The Stock though, David, let's talk about that in the 266 00:14:59,480 --> 00:15:02,040 Speaker 1: pre market it is up by just a little bit 267 00:15:02,040 --> 00:15:05,080 Speaker 1: more than five. What do we learned from the earnings, 268 00:15:05,080 --> 00:15:08,400 Speaker 1: not about the last quarter, but the guidance in the 269 00:15:08,480 --> 00:15:11,760 Speaker 1: last twenty four hours. Well, certainly we learned a few things. 270 00:15:11,800 --> 00:15:15,200 Speaker 1: I think. We learned that their expenses are going to 271 00:15:15,280 --> 00:15:17,480 Speaker 1: keep going up to try to throw money at this 272 00:15:17,560 --> 00:15:22,120 Speaker 1: problem of social harm and disinformation and privacy violations, as 273 00:15:22,160 --> 00:15:25,440 Speaker 1: they predicted in the last quarter, and that's real. We 274 00:15:25,560 --> 00:15:29,320 Speaker 1: also learned that their growth really is flowing or has 275 00:15:29,360 --> 00:15:32,000 Speaker 1: slowed or maybe stopped in the developed world like the 276 00:15:32,040 --> 00:15:36,120 Speaker 1: United States and E and EU. UM. We learned that 277 00:15:36,160 --> 00:15:39,040 Speaker 1: their news feed, this is probably the most interesting thing 278 00:15:39,640 --> 00:15:42,000 Speaker 1: I think from a business point of view, that came 279 00:15:42,000 --> 00:15:45,600 Speaker 1: out of yesterday's announcements and earnings call. You know, the 280 00:15:45,640 --> 00:15:48,400 Speaker 1: news feed may not be the future of Facebook and 281 00:15:48,440 --> 00:15:51,080 Speaker 1: the stories thing, which is really much more of interesting 282 00:15:51,160 --> 00:15:54,880 Speaker 1: young people than mature adults, and which frankly I think 283 00:15:55,000 --> 00:15:57,640 Speaker 1: is not something they've even figured out properly how to 284 00:15:57,720 --> 00:16:01,560 Speaker 1: quote unfoke monetize is to some extent, in their opinion, 285 00:16:01,680 --> 00:16:07,360 Speaker 1: their future, along with what's happened instant Messenger and Instagram. Um, 286 00:16:07,400 --> 00:16:10,400 Speaker 1: I think it. It basically points to a business that 287 00:16:10,600 --> 00:16:14,760 Speaker 1: is kind of in a major transition, even as they 288 00:16:14,800 --> 00:16:17,600 Speaker 1: haven't really figured out how to address the issues of 289 00:16:17,680 --> 00:16:20,480 Speaker 1: social harm. So do you think that the Instagram platform 290 00:16:20,560 --> 00:16:23,600 Speaker 1: essentially is just going to start cannibalizing the core platform 291 00:16:23,720 --> 00:16:27,800 Speaker 1: it is? It is doing that now, Um, for young people, 292 00:16:27,800 --> 00:16:31,160 Speaker 1: There's no question. UM. In the United States, and I 293 00:16:31,200 --> 00:16:34,400 Speaker 1: think in Europe and developed countries it has been doing 294 00:16:34,440 --> 00:16:36,560 Speaker 1: that for some time. You know, I think we see 295 00:16:36,560 --> 00:16:40,960 Speaker 1: that anecdotally, we're seeing it in the numbers. UM. But 296 00:16:41,120 --> 00:16:44,880 Speaker 1: the problem, interestingly, you know, I keep going back to 297 00:16:44,960 --> 00:16:49,600 Speaker 1: these issues of disinformation, social harm, and Facebook's moral responsibility 298 00:16:49,640 --> 00:16:52,280 Speaker 1: to address these things, because I think those are real, 299 00:16:52,480 --> 00:16:55,200 Speaker 1: real challenges they face that they can't really own up to. 300 00:16:55,880 --> 00:16:59,880 Speaker 1: And Instagram is now a source of tremendous disinformation. That 301 00:17:00,000 --> 00:17:03,240 Speaker 1: have been several articles in the last several days about 302 00:17:03,920 --> 00:17:08,280 Speaker 1: anti Semitic speech on Instagram that's gone unregulated, people who 303 00:17:08,320 --> 00:17:12,160 Speaker 1: have been kicked off Facebook, who found a haven on Instagram. UM, 304 00:17:12,560 --> 00:17:15,959 Speaker 1: that's worrisome, okay, But within this is the shift from 305 00:17:16,000 --> 00:17:19,600 Speaker 1: fate is a summary, David, everybody John and I know 306 00:17:19,760 --> 00:17:22,600 Speaker 1: is getting on Facebook okay, and every kid we see 307 00:17:22,680 --> 00:17:25,639 Speaker 1: is glued to Instagram stories and all the rest of 308 00:17:25,680 --> 00:17:30,120 Speaker 1: it as well. How do you make money on Instagram 309 00:17:30,160 --> 00:17:33,480 Speaker 1: like they have proven on Facebook? But I don't see 310 00:17:33,480 --> 00:17:36,359 Speaker 1: it educated. I actually think Instagram is a very good 311 00:17:36,440 --> 00:17:40,360 Speaker 1: profit center of potential. And they say estimate the estimates 312 00:17:40,400 --> 00:17:42,719 Speaker 1: are from the outsider, since they don't really give us 313 00:17:42,720 --> 00:17:45,640 Speaker 1: these numbers that Instagram are gonna make about nine billion 314 00:17:45,760 --> 00:17:48,399 Speaker 1: in AD revenue this year. That's pretty darn good. Okay, 315 00:17:48,520 --> 00:17:50,679 Speaker 1: but look, by eleven year old Afterthought is going as 316 00:17:50,720 --> 00:17:54,200 Speaker 1: Lindsay Graham for Halloween. Okay, fine, as a senator from 317 00:17:54,560 --> 00:17:57,400 Speaker 1: her She's going as a senator from South Carolina. Now 318 00:17:57,400 --> 00:18:00,359 Speaker 1: what do I want to know, David, is she is? 319 00:18:01,400 --> 00:18:05,239 Speaker 1: She is glued to Instagram? She's not going to use 320 00:18:05,320 --> 00:18:08,960 Speaker 1: Instagram with a bunch of ads in her face? Well, actually, 321 00:18:09,200 --> 00:18:12,200 Speaker 1: I don't know if that's so true. People are very 322 00:18:12,240 --> 00:18:15,320 Speaker 1: accepting of ads and Instagram at the moment. I think 323 00:18:15,359 --> 00:18:18,120 Speaker 1: the question is more this issue of stories, which are 324 00:18:18,480 --> 00:18:21,600 Speaker 1: Francie the storm at on Instagram. And you know, if 325 00:18:21,600 --> 00:18:24,920 Speaker 1: you're putting together a little mini video slide show for 326 00:18:25,040 --> 00:18:28,639 Speaker 1: your friends, that's ephemeral. First of all, it's ephemeral. Second 327 00:18:28,640 --> 00:18:30,920 Speaker 1: of all, you know, how many ads are you really 328 00:18:30,920 --> 00:18:33,720 Speaker 1: going to tolerate within that? I think within the feed 329 00:18:33,760 --> 00:18:38,280 Speaker 1: of Instagram ads work well, but I don't know that 330 00:18:38,320 --> 00:18:42,000 Speaker 1: they'll work in stories. Francie Laquaida stories to great effect. 331 00:18:42,040 --> 00:18:45,240 Speaker 1: Should I do stories? David Kirkpatrick, I don't think so. 332 00:18:45,720 --> 00:18:48,920 Speaker 1: I don't do them me. And can you know get 333 00:18:48,960 --> 00:18:52,240 Speaker 1: a wife from this? Your youngest is going to Halloween 334 00:18:52,359 --> 00:18:56,840 Speaker 1: as Senator Graham Senatagram from South Carolina. Why social studies. 335 00:18:57,440 --> 00:18:59,280 Speaker 1: They're in social studies and they're doing the mid term. 336 00:18:59,320 --> 00:19:01,679 Speaker 1: I'm glad you educated and you know they're doing you know, 337 00:19:01,840 --> 00:19:03,520 Speaker 1: she came in and says, who do you think the 338 00:19:03,520 --> 00:19:07,320 Speaker 1: new cabinet members will be? And essentially everyone has picked 339 00:19:07,320 --> 00:19:10,200 Speaker 1: a senator every no, some are going his house people 340 00:19:10,480 --> 00:19:14,720 Speaker 1: and you know judges, someone's going as Brett Kavanaugh, Justice Kavanaugh. 341 00:19:15,520 --> 00:19:17,840 Speaker 1: You know, I mean, you know that's what they're doing. 342 00:19:18,440 --> 00:19:20,240 Speaker 1: It's a great thing. It's a whole social studies that 343 00:19:20,359 --> 00:19:21,960 Speaker 1: you were on your own for the next two minutes 344 00:19:22,000 --> 00:19:25,000 Speaker 1: of this program. No, I mean, David, I want to 345 00:19:25,000 --> 00:19:27,280 Speaker 1: get back to Facebook, and maybe somebody's going as PC 346 00:19:28,119 --> 00:19:30,879 Speaker 1: as well. I want to get back to the executives, 347 00:19:31,400 --> 00:19:36,040 Speaker 1: the executives of Facebook, and and well what about him? 348 00:19:36,160 --> 00:19:38,600 Speaker 1: I mean, I mean John slowly came in and that 349 00:19:38,760 --> 00:19:42,560 Speaker 1: didn't work out at Apple, right, I mean, they could 350 00:19:42,640 --> 00:19:47,000 Speaker 1: use somebody, Well that's true, but you know, they could 351 00:19:47,119 --> 00:19:49,960 Speaker 1: use a satan Adela. It's what they could use. They 352 00:19:50,040 --> 00:19:53,119 Speaker 1: need a mature executive. Here's It's an interesting thing, in 353 00:19:53,240 --> 00:19:56,840 Speaker 1: my opinion, they actually have such a person inside in 354 00:19:57,000 --> 00:20:01,360 Speaker 1: David Marcus, who is probably by some their most experienced 355 00:20:01,800 --> 00:20:05,440 Speaker 1: and most you know, capable business leader in the entire company, 356 00:20:05,880 --> 00:20:08,280 Speaker 1: who was the one that took Facebook after they hired 357 00:20:08,359 --> 00:20:11,480 Speaker 1: him from being CEO of PayPal. He took Facebook Messenger 358 00:20:11,560 --> 00:20:14,239 Speaker 1: from three million to one point two billion, and then 359 00:20:14,320 --> 00:20:16,520 Speaker 1: they mysteriously pulled him off to put him on this 360 00:20:16,600 --> 00:20:21,040 Speaker 1: quote unquote blockchain project, which I think is intriguing because 361 00:20:21,119 --> 00:20:23,399 Speaker 1: they obviously are worried that somebody's going to come up 362 00:20:23,440 --> 00:20:26,800 Speaker 1: with a blockchain based alternative to Facebook or something, and 363 00:20:26,960 --> 00:20:28,760 Speaker 1: they also want to figure out how to deal with 364 00:20:28,840 --> 00:20:33,960 Speaker 1: cryptocurrencies inside Facebook. But he could be CEO actually, but 365 00:20:34,280 --> 00:20:37,000 Speaker 1: you know, even if he wasn't CEO, Zuckerberg is not 366 00:20:37,040 --> 00:20:39,000 Speaker 1: going to give up anything. We know, he doesn't have to. 367 00:20:39,840 --> 00:20:42,960 Speaker 1: He has got to be have more humility than he has. 368 00:20:43,240 --> 00:20:46,080 Speaker 1: You know what, David, are gonna run out of time, 369 00:20:46,160 --> 00:20:47,800 Speaker 1: but this is brillant. We're gonna get you back on 370 00:20:48,000 --> 00:20:52,000 Speaker 1: shortly again on Facebook. David Kirkpatrick, author of the Facebook 371 00:20:52,000 --> 00:20:55,399 Speaker 1: effected Folks. This interview will be on our podcast today 372 00:20:55,760 --> 00:20:59,200 Speaker 1: out on Apple Podcasts and Spotify. You you're laughing at me, 373 00:20:59,800 --> 00:21:02,360 Speaker 1: he did. They took the class and they said half 374 00:21:02,400 --> 00:21:05,320 Speaker 1: we're gonna be democrats, We're gonna be Republican. And I'm 375 00:21:05,359 --> 00:21:08,160 Speaker 1: having a great time listening to it. Carry on, it's great. 376 00:21:08,480 --> 00:21:12,679 Speaker 1: I think it's a great social studies exercise. Fun. It's fantastic. Right, 377 00:21:12,880 --> 00:21:17,560 Speaker 1: they're doing different Halloween costumes. Thin fantastic, the tallest kidney 378 00:21:17,600 --> 00:21:32,400 Speaker 1: classes going as Justice Ginsburg. That's not a bad thing. Okay, 379 00:21:32,520 --> 00:21:34,280 Speaker 1: let's get started, Troy, I ask you with us the 380 00:21:34,359 --> 00:21:37,240 Speaker 1: chemical engineer from m I t he is with Skybridge 381 00:21:37,800 --> 00:21:41,080 Speaker 1: where he looks at the alternative investment space and other 382 00:21:41,200 --> 00:21:45,760 Speaker 1: event driven arbitrage strategies. I have no idea what that is, Troy. Uh, 383 00:21:46,280 --> 00:21:50,240 Speaker 1: they had fun business. How have they done with the 384 00:21:50,440 --> 00:21:55,400 Speaker 1: momentary volatility of February and October? What has that done? 385 00:21:55,520 --> 00:21:59,280 Speaker 1: Two returns. Yeah, so it depends on the strategy. Time 386 00:21:59,320 --> 00:22:02,159 Speaker 1: as usual, we would say that, um, the strategies that 387 00:22:02,200 --> 00:22:04,800 Speaker 1: are getting hit the hardest would first of all be 388 00:22:04,920 --> 00:22:09,480 Speaker 1: the systematic trend followers that just like January, UM, after 389 00:22:09,600 --> 00:22:14,200 Speaker 1: the strong December January, we're basically max long equities and 390 00:22:14,320 --> 00:22:16,760 Speaker 1: then got bludgeon in that sell off, and we're one 391 00:22:16,800 --> 00:22:18,960 Speaker 1: of the causal events of it along with you know, 392 00:22:19,080 --> 00:22:22,360 Speaker 1: risk parity managers, UM that we're forcing to sell as 393 00:22:22,520 --> 00:22:25,800 Speaker 1: as their models tripped the same exact path here and 394 00:22:25,880 --> 00:22:29,320 Speaker 1: that you had strong market price action in August September. 395 00:22:29,920 --> 00:22:32,000 Speaker 1: You know, markets started to sell off because of fears 396 00:22:32,000 --> 00:22:35,359 Speaker 1: of higher interest rates than perhaps you know, margin margin 397 00:22:35,440 --> 00:22:38,160 Speaker 1: compression due to the trade war and boom boom boom 398 00:22:38,160 --> 00:22:41,840 Speaker 1: boo boom. So they're they're having horrific months. Um. Fundamental 399 00:22:41,960 --> 00:22:44,879 Speaker 1: long strequity managers are also getting hit, probably as hard 400 00:22:44,920 --> 00:22:48,160 Speaker 1: as they did in January and February of sixteen, where 401 00:22:48,280 --> 00:22:51,440 Speaker 1: where they're de leveraging. But on the positive side, you know, 402 00:22:51,520 --> 00:22:55,320 Speaker 1: managers focused on structure credit or you know, the credit 403 00:22:55,520 --> 00:22:59,639 Speaker 1: of financial service companies are doing well. Those those markets 404 00:22:59,680 --> 00:23:01,640 Speaker 1: of hell. Then you know, the wrong positions have held 405 00:23:01,720 --> 00:23:05,200 Speaker 1: in because the fundamentals are strong. Their hedges are principally 406 00:23:05,240 --> 00:23:07,200 Speaker 1: in high yield, which, as you guys just alluded to, 407 00:23:07,440 --> 00:23:09,800 Speaker 1: is largely down in the month, so that's a positive contributor, 408 00:23:10,320 --> 00:23:12,320 Speaker 1: and their rate hedges are are making a little bit 409 00:23:12,320 --> 00:23:15,560 Speaker 1: of money as well. You know, what we've seen this 410 00:23:15,720 --> 00:23:20,640 Speaker 1: month is differentiation between a fundamentally sound assets and those 411 00:23:20,720 --> 00:23:22,359 Speaker 1: that are less Troy, I want to get to this. 412 00:23:22,480 --> 00:23:24,520 Speaker 1: This is really important. I think the way the media 413 00:23:24,640 --> 00:23:27,720 Speaker 1: reports hedge funds is terrible. We make it sound like 414 00:23:27,840 --> 00:23:30,639 Speaker 1: they're all making a gazillion billion dollars as we focus 415 00:23:30,720 --> 00:23:32,840 Speaker 1: on one hedge fund, let's hit the ball out of 416 00:23:32,880 --> 00:23:35,240 Speaker 1: the park. There was who was the guy in London, 417 00:23:35,359 --> 00:23:38,080 Speaker 1: John Farrell that did Crispin Odeon or something. He did 418 00:23:38,160 --> 00:23:43,200 Speaker 1: so well, I can't remember his name. But recently, in 419 00:23:43,240 --> 00:23:46,640 Speaker 1: the last few years it's slown up. How what percentage 420 00:23:46,760 --> 00:23:50,119 Speaker 1: of hedge funds, Troy guy Asky right now are quote 421 00:23:50,200 --> 00:23:55,920 Speaker 1: unquote underperforming underperforming? It depends on the benchmark he used, 422 00:23:56,000 --> 00:24:00,680 Speaker 1: but prior to this month, we'd probably say maybe After 423 00:24:00,800 --> 00:24:03,399 Speaker 1: this month it's probably more like half. Because I remember 424 00:24:03,440 --> 00:24:05,800 Speaker 1: the vast bulk of assets are in long shirt equity 425 00:24:06,160 --> 00:24:09,160 Speaker 1: and macro strategies, which is where you the worst performance 426 00:24:09,240 --> 00:24:11,120 Speaker 1: this month. I just want to get there that half 427 00:24:11,200 --> 00:24:13,600 Speaker 1: the funds are really struggling. Yeah, Troy, if we take 428 00:24:13,680 --> 00:24:16,880 Speaker 1: stock of the month, um, I think this is pretty interesting. 429 00:24:17,080 --> 00:24:19,240 Speaker 1: And Jeff Gunlack was out on Twitter appointing us to 430 00:24:19,359 --> 00:24:21,960 Speaker 1: it as well. The thirty year Tries to re Yield 431 00:24:22,480 --> 00:24:25,600 Speaker 1: opened the month at three twenty. Now I told you 432 00:24:25,680 --> 00:24:27,480 Speaker 1: what the start of the month that the equity market 433 00:24:27,520 --> 00:24:30,159 Speaker 1: was going to be down eight, nine, perhaps even ten percent. 434 00:24:30,920 --> 00:24:32,480 Speaker 1: I don't think you would have guessed that we closed 435 00:24:32,480 --> 00:24:35,880 Speaker 1: a month at three thirty eight, which you yeah, Well, 436 00:24:35,960 --> 00:24:39,959 Speaker 1: it depends. Remember I mean this, this market sell off, right, 437 00:24:40,119 --> 00:24:43,120 Speaker 1: was partially driven from a fun amoental standpoint by rates 438 00:24:43,160 --> 00:24:46,719 Speaker 1: going higher. Right, So we have this upward bias towards 439 00:24:47,000 --> 00:24:50,000 Speaker 1: towards rates, particularly the back end the curve. After flattening 440 00:24:50,080 --> 00:24:52,640 Speaker 1: for most of the year, and only the last week 441 00:24:52,760 --> 00:24:54,399 Speaker 1: or so of the s off did you get the 442 00:24:54,440 --> 00:24:58,560 Speaker 1: classic bull flattening behavior that you you typically see. So 443 00:24:58,760 --> 00:25:01,000 Speaker 1: so that actually doesn't surprise Is this that much? And 444 00:25:01,200 --> 00:25:04,159 Speaker 1: when you're in an environment of inflation expectations rising, the 445 00:25:04,280 --> 00:25:08,119 Speaker 1: FED tightening policy, and rates going higher Um, you did 446 00:25:08,400 --> 00:25:10,440 Speaker 1: end up the last week or so with more bull 447 00:25:10,480 --> 00:25:13,399 Speaker 1: flattening behavior, but now we're back to some steepening as 448 00:25:13,440 --> 00:25:15,040 Speaker 1: you see the past few days. But Troy, this is 449 00:25:15,040 --> 00:25:16,399 Speaker 1: why I asked the question, because if you put in 450 00:25:16,440 --> 00:25:19,680 Speaker 1: together that classic fixed income portfolio, you want to be 451 00:25:19,800 --> 00:25:23,200 Speaker 1: bar bowed and have things like treasuries respond to things 452 00:25:23,280 --> 00:25:25,600 Speaker 1: like credit when credit goes south. Are we going to 453 00:25:25,640 --> 00:25:29,080 Speaker 1: have them this time around? Well? Again, that's one of 454 00:25:29,119 --> 00:25:32,040 Speaker 1: the challenges for systematic strategies like ris parity, right, that 455 00:25:32,119 --> 00:25:34,360 Speaker 1: are based on the fact that when equities sell off, 456 00:25:34,640 --> 00:25:36,960 Speaker 1: bonds do well own vice versa. Right, When when you're 457 00:25:36,960 --> 00:25:39,440 Speaker 1: in a very different market regime like we've really been 458 00:25:39,600 --> 00:25:43,840 Speaker 1: since the Trump election victory, Um, those strategies don't behave 459 00:25:43,880 --> 00:25:46,679 Speaker 1: as well. Right. There are periods of time like earlier 460 00:25:46,760 --> 00:25:49,360 Speaker 1: this year or October, where you're getting hit on both 461 00:25:49,400 --> 00:25:52,399 Speaker 1: sides of your exposures, both your long fixed income and 462 00:25:52,560 --> 00:25:55,040 Speaker 1: your long equit exposure, which is one of the reasons 463 00:25:55,119 --> 00:25:58,840 Speaker 1: why you know certain niche hetche one strategies can add value. Um, 464 00:25:59,000 --> 00:26:02,600 Speaker 1: But looking forward, is there any doubt that rates are 465 00:26:02,640 --> 00:26:05,000 Speaker 1: going to marginally go higher, at least in the front end, 466 00:26:05,119 --> 00:26:07,120 Speaker 1: You know, the back end should march higher as well. 467 00:26:07,800 --> 00:26:11,120 Speaker 1: And as you guys know, equity multiples have compressed significantly 468 00:26:11,200 --> 00:26:15,159 Speaker 1: into tighter monetary policy, so we have continued challenges in 469 00:26:15,520 --> 00:26:20,080 Speaker 1: long fixed income you know, quong equities, classic gus. Now, 470 00:26:20,400 --> 00:26:23,440 Speaker 1: as we always do with Troy, we go to Newtonian 471 00:26:23,520 --> 00:26:27,640 Speaker 1: mechanics and the miracle of chemistry with a chemical engineer. 472 00:26:31,520 --> 00:26:35,840 Speaker 1: That okay, Troy, there's potential energy, and there's kinetic energy. 473 00:26:36,400 --> 00:26:40,080 Speaker 1: It has been a wonderful kinetic energy from two thousand nine. 474 00:26:40,480 --> 00:26:44,119 Speaker 1: And there's been bouts here or there. What no one's 475 00:26:44,280 --> 00:26:47,520 Speaker 1: talking about is we go to some lethargy, some malaise, 476 00:26:47,880 --> 00:26:51,600 Speaker 1: not vector up which gets everybody fired up or vector down. 477 00:26:52,080 --> 00:26:57,040 Speaker 1: What's the likelihood of trading range forward, which John ferrell 478 00:26:57,040 --> 00:27:03,000 Speaker 1: I was just nobody ever predicts, nobody ever gift set. Yeah, well, 479 00:27:03,040 --> 00:27:05,760 Speaker 1: look at that's a reasonable outcome. That that being said, 480 00:27:05,960 --> 00:27:08,639 Speaker 1: although you know, if you think about how much multiples 481 00:27:08,720 --> 00:27:11,440 Speaker 1: have compressed in equities, I mean you're talking about going 482 00:27:11,520 --> 00:27:15,600 Speaker 1: from twenty times four earnings to sixteen times conservatively in 483 00:27:15,680 --> 00:27:19,200 Speaker 1: a relatively short period of time. Right, Um, we would 484 00:27:19,240 --> 00:27:22,520 Speaker 1: think over the next several weeks into year end, equities 485 00:27:22,680 --> 00:27:26,120 Speaker 1: will will regain some of their recent losses. Um high, 486 00:27:26,160 --> 00:27:30,080 Speaker 1: ye will stabilize, yields will work there we higher, but 487 00:27:30,280 --> 00:27:32,440 Speaker 1: over the next several years you're going to have to 488 00:27:32,560 --> 00:27:35,720 Speaker 1: push and pull of of slower economic growth but still 489 00:27:35,800 --> 00:27:39,679 Speaker 1: strong enough to drive earnings higher and tighter monetary policy, 490 00:27:39,800 --> 00:27:42,119 Speaker 1: not only in the US but overseas. So there is 491 00:27:42,240 --> 00:27:44,200 Speaker 1: a very uh you know, if you look at a 492 00:27:44,280 --> 00:27:48,520 Speaker 1: distribution of outcomes, a significant part of it or percent 493 00:27:48,600 --> 00:27:53,720 Speaker 1: of it does argue for flatish markets where better economy, 494 00:27:53,880 --> 00:27:57,440 Speaker 1: better earnings are offset by tighter monetary policy, which is 495 00:27:57,480 --> 00:27:59,920 Speaker 1: really similar to the you know, the whole fourteen fifty 496 00:28:00,040 --> 00:28:04,200 Speaker 1: in environment and into early sixteen, where the concern was 497 00:28:04,359 --> 00:28:06,240 Speaker 1: very different At that time it was more about the 498 00:28:06,280 --> 00:28:08,720 Speaker 1: collapse and energy and the potential for a hard landing 499 00:28:08,800 --> 00:28:12,320 Speaker 1: in China. So they're there there. You know, we'd probably 500 00:28:12,359 --> 00:28:16,719 Speaker 1: say a third to the outcomes very simplistically, would dictate 501 00:28:16,760 --> 00:28:20,000 Speaker 1: another flattish equity market last year. And then of course 502 00:28:20,040 --> 00:28:22,600 Speaker 1: as you move further and further through a cycle, the 503 00:28:22,640 --> 00:28:25,359 Speaker 1: tails get fatter and fatter on both extremes. Can I 504 00:28:25,400 --> 00:28:28,600 Speaker 1: ask my pointless question at the monic please, I'm already 505 00:28:28,640 --> 00:28:30,760 Speaker 1: one up on your but go ahead, Okay. If the 506 00:28:30,800 --> 00:28:34,320 Speaker 1: global economy had a central bank, would it cut, hold 507 00:28:34,880 --> 00:28:38,400 Speaker 1: or hike at its next mating? What would it do? Troy, 508 00:28:39,680 --> 00:28:42,080 Speaker 1: it's a global that's a great question. I think it 509 00:28:42,120 --> 00:28:44,000 Speaker 1: would hold right now. I mean, if you think of 510 00:28:44,080 --> 00:28:47,200 Speaker 1: what's going on in China, do you think meaning slower 511 00:28:47,240 --> 00:28:52,560 Speaker 1: economy obviously struggling with trade, struggling with transitioning from their manufacturing, 512 00:28:52,680 --> 00:28:56,280 Speaker 1: export oriented economy to a consumption economy, that would argue 513 00:28:56,320 --> 00:29:00,440 Speaker 1: for holding, maybe even cutting. Look at Europe, certainly holding. 514 00:29:00,520 --> 00:29:03,600 Speaker 1: Email on the inflation data is strong. Obviously, growth momentum 515 00:29:03,640 --> 00:29:07,120 Speaker 1: slow dramatically, and the one standout is still the US. 516 00:29:07,240 --> 00:29:10,240 Speaker 1: But the US obviously will slow down from its Q 517 00:29:10,400 --> 00:29:13,000 Speaker 1: two number it already has and we're looking more like 518 00:29:13,120 --> 00:29:15,280 Speaker 1: two and a half percent growth next year as opposed 519 00:29:15,320 --> 00:29:18,320 Speaker 1: to three plus. So I think global central bank right now, 520 00:29:18,480 --> 00:29:20,320 Speaker 1: if you if you look at all the factors, would 521 00:29:20,400 --> 00:29:23,120 Speaker 1: certainly hold going into the next meeting. But as you 522 00:29:23,160 --> 00:29:25,880 Speaker 1: guys know, the FED is the central bank of the US, 523 00:29:26,000 --> 00:29:28,040 Speaker 1: not the world truck. I ask you thank you so 524 00:29:28,160 --> 00:29:45,080 Speaker 1: much for Skybridge. Right now is the interview of the day. 525 00:29:45,600 --> 00:29:51,040 Speaker 1: If you are curious about this strange space called high 526 00:29:51,120 --> 00:29:54,120 Speaker 1: yield and what it means for the equity markets. We 527 00:29:54,240 --> 00:29:58,880 Speaker 1: are thrilled to bring you Margie Patel Wills Fargo Asset Management, 528 00:29:59,400 --> 00:30:03,120 Speaker 1: who's done us through a few cycles. Margie, where are 529 00:30:03,240 --> 00:30:06,080 Speaker 1: we in the high yields cycle right now? Are we 530 00:30:06,200 --> 00:30:10,760 Speaker 1: still issuing tons of paper? No, this has been a 531 00:30:11,600 --> 00:30:15,840 Speaker 1: unusual year. The new issue supply is down about from 532 00:30:15,880 --> 00:30:18,400 Speaker 1: where it's been for the last half dozen years, which 533 00:30:18,400 --> 00:30:21,640 Speaker 1: we're all record breaking, so it's it's unusual rather low. 534 00:30:21,720 --> 00:30:25,320 Speaker 1: A lot of that demand has gone into the loan market, well, 535 00:30:25,360 --> 00:30:28,800 Speaker 1: into the loan market, and everybody focused on loans explained 536 00:30:28,840 --> 00:30:32,640 Speaker 1: to me and explained to my listeners why loans are 537 00:30:32,800 --> 00:30:37,400 Speaker 1: different than notes or bonds that are high healed well. 538 00:30:37,560 --> 00:30:39,680 Speaker 1: Loans first of all, are not a security. It's like 539 00:30:39,800 --> 00:30:43,080 Speaker 1: buying a house effectively, so there's a lot less liquidity 540 00:30:43,880 --> 00:30:47,440 Speaker 1: than there is with bonds, and the settlement process can 541 00:30:47,520 --> 00:30:52,000 Speaker 1: take longer than a security. Instead of a couple of days, 542 00:30:52,120 --> 00:30:55,680 Speaker 1: it could take five days, or it could take several 543 00:30:55,760 --> 00:30:59,760 Speaker 1: weeks to settle. And also because there are fewer people 544 00:30:59,800 --> 00:31:02,480 Speaker 1: who are buyers of loans, the market is not as 545 00:31:02,560 --> 00:31:06,240 Speaker 1: broad as the as the bond market. If that's the case, 546 00:31:06,520 --> 00:31:09,360 Speaker 1: and we take it that it is. Do you believe 547 00:31:09,440 --> 00:31:11,960 Speaker 1: that there are many investors who have put their money 548 00:31:12,120 --> 00:31:15,680 Speaker 1: and their faith in loans and leverage loans but don't 549 00:31:15,800 --> 00:31:21,640 Speaker 1: know the consequences or potential complications that you just describe. Yes, 550 00:31:21,800 --> 00:31:24,040 Speaker 1: because I think when people think of loans, they tend 551 00:31:24,080 --> 00:31:26,520 Speaker 1: to think of bank loans, meaning they're very, very safe. 552 00:31:27,040 --> 00:31:29,440 Speaker 1: They tend to think that they are a defense against 553 00:31:29,680 --> 00:31:33,280 Speaker 1: rising interest rates because the coupon rate will adjust if 554 00:31:33,320 --> 00:31:36,280 Speaker 1: interest rates go up. But what they forget about is 555 00:31:36,440 --> 00:31:40,200 Speaker 1: the risk to principle, which is always in any bond, 556 00:31:40,480 --> 00:31:44,080 Speaker 1: it's also in any loans. With so many lower quality loans, Uh, 557 00:31:44,200 --> 00:31:46,680 Speaker 1: there's a greater risk to principle than there's been in 558 00:31:46,840 --> 00:31:51,600 Speaker 1: previous years with loans. Simply there's so many loans layered 559 00:31:51,640 --> 00:31:55,080 Speaker 1: over a capital structure. The recovery value if companies fail 560 00:31:55,120 --> 00:31:58,120 Speaker 1: will be less than what you've experienced in previous cycles. 561 00:31:58,800 --> 00:32:03,360 Speaker 1: The desire for these loans is backed by low interest 562 00:32:03,520 --> 00:32:08,800 Speaker 1: rates for bonds. Would that be accurate? Yes? And also, uh, 563 00:32:09,120 --> 00:32:12,160 Speaker 1: people who are afraid of rising rates things that loans 564 00:32:12,200 --> 00:32:17,040 Speaker 1: are very attractive. Um. Do I agree? Well? No, because 565 00:32:17,160 --> 00:32:20,120 Speaker 1: number one, a lot of the news ones of loans 566 00:32:20,840 --> 00:32:24,160 Speaker 1: has been in the lower part of the quality markets, 567 00:32:24,200 --> 00:32:27,640 Speaker 1: in other words, more marginal issues. Previously they would have 568 00:32:27,680 --> 00:32:30,160 Speaker 1: come to the high yield market and created defaults. But 569 00:32:30,880 --> 00:32:33,240 Speaker 1: so that has left high yell a little bit insulated 570 00:32:33,320 --> 00:32:36,200 Speaker 1: from some of the margie. In the first week of 571 00:32:36,280 --> 00:32:40,000 Speaker 1: November nineteen seven, this is before Margaret, you are in 572 00:32:40,040 --> 00:32:44,960 Speaker 1: the industry, we all learned about a thing called portfolio insurance. 573 00:32:45,840 --> 00:32:51,720 Speaker 1: Are these loans the new portfolio insurance? No? I think 574 00:32:51,800 --> 00:32:56,960 Speaker 1: it's just loans are responding to what the market has demanded. 575 00:32:57,040 --> 00:33:00,080 Speaker 1: The market once more loans, because people come on, are 576 00:33:00,160 --> 00:33:03,840 Speaker 1: you start the market once we're yield. It's always the same. 577 00:33:04,480 --> 00:33:07,680 Speaker 1: If I can get thirty more basis points, I'll be happy. Right. 578 00:33:08,000 --> 00:33:11,120 Speaker 1: Every cycle is like that, isn't it? Yes, But loans 579 00:33:11,200 --> 00:33:15,360 Speaker 1: pay you lussy old than bonds. That's the issue. So 580 00:33:15,600 --> 00:33:17,920 Speaker 1: you trade that off because you think your your principle 581 00:33:18,040 --> 00:33:21,760 Speaker 1: is better protected either in default or in rising rates. 582 00:33:21,960 --> 00:33:24,400 Speaker 1: And the answer as well, not necessarily depends on the 583 00:33:24,480 --> 00:33:27,880 Speaker 1: underlying quality. What you just heard, their folks write it 584 00:33:27,920 --> 00:33:31,480 Speaker 1: down tattooed to your brain, and this conversation, I don't 585 00:33:31,480 --> 00:33:34,080 Speaker 1: know when pim six months, one year two years, three 586 00:33:34,160 --> 00:33:36,719 Speaker 1: years from now, Margie Patel will look like a genius. 587 00:33:37,360 --> 00:33:39,240 Speaker 1: I think she looks like a genius now she does, 588 00:33:39,400 --> 00:33:42,360 Speaker 1: but even more so what you just heard there. The 589 00:33:42,560 --> 00:33:48,200 Speaker 1: loan market right now is growing because, as you describe, 590 00:33:48,600 --> 00:33:53,240 Speaker 1: low interest rates make it unappealing for investors to own 591 00:33:53,880 --> 00:33:59,040 Speaker 1: traditional bonds or even high yield debt. When when the 592 00:33:59,160 --> 00:34:02,840 Speaker 1: Federal Reserve continue well, I should say, the Federal Reserve 593 00:34:03,000 --> 00:34:06,200 Speaker 1: has said that it will raise interest rates, what will 594 00:34:06,320 --> 00:34:10,839 Speaker 1: happen to the value of those loans? Again, it goes 595 00:34:10,920 --> 00:34:13,720 Speaker 1: back to the quality of the issuer. Better quality loans 596 00:34:13,800 --> 00:34:16,840 Speaker 1: will hold their value near par. They always basically trade 597 00:34:17,120 --> 00:34:19,320 Speaker 1: more lessen par. You never really have a chance for 598 00:34:19,440 --> 00:34:23,640 Speaker 1: capital appreciation lower quality loans. Um will you hit the 599 00:34:23,680 --> 00:34:27,799 Speaker 1: wall and default? And what percent that will be will happen? See? 600 00:34:28,080 --> 00:34:30,480 Speaker 1: How do you respond? Markie? One final question? How do 601 00:34:30,520 --> 00:34:36,280 Speaker 1: you respond to this idea that equity guys should follow 602 00:34:36,480 --> 00:34:40,400 Speaker 1: your world of high yield and they will glean signals 603 00:34:40,480 --> 00:34:43,520 Speaker 1: from high yield that will help them with their belief 604 00:34:43,680 --> 00:34:47,640 Speaker 1: in equities. Do you buy the linkage It used to prevail. 605 00:34:47,760 --> 00:34:51,240 Speaker 1: It doesn't anymore. I don't look for any class signaling. 606 00:34:53,080 --> 00:34:56,040 Speaker 1: I think high yield reflects a good economy. Low default 607 00:34:56,600 --> 00:35:00,640 Speaker 1: said that's on path for gradual increases. Hugely valuable. Margot Pitel, 608 00:35:00,760 --> 00:35:04,120 Speaker 1: thank you so much today with Alls Fargo. As I mentioned, 609 00:35:08,520 --> 00:35:12,600 Speaker 1: thanks for listening to the Bloomberg Surveillance podcast. Subscribe and 610 00:35:12,760 --> 00:35:18,040 Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast 611 00:35:18,160 --> 00:35:22,360 Speaker 1: platform you prefer. I'm on Twitter at Tom Keene before 612 00:35:22,400 --> 00:35:26,239 Speaker 1: the podcast. You can always catch us worldwide. I'm Bloomberg 613 00:35:26,320 --> 00:35:26,600 Speaker 1: Radio